<PAGE>
 
                      SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, DC 20549

                                  FORM 10-KSB

                                   ---------
(Mark One)
 
     [X]  Annual report under Section 13 or 15(d) of the Securities Exchange 
          Act of 1934
 
          For the fiscal year ended September 30, 1997.
 
     [_]  Transition report under Section 13 or 15(d) of the Securities 
          Exchange Act of 1934
 
          For the transition period from          to          .

                        Commission File Number: 0-9774

                      HOMECAPITAL INVESTMENT CORPORATION
                (Name of Small Business Issuer in Its Charter)


                NEVADA                                 95-3614463
    (State or Other Jurisdiction of                  (IRS Employer
    Incorporation or Organization)                   Identification No.)


       6836 AUSTIN CENTER BLVD.
              SUITE 280
            AUSTIN, TEXAS                                  78731
(Address of Principal Executive Offices)                 (Zip Code)


                                (512) 427-5200
               (Issuer's Telephone Number, Including Area Code)


        Securities registered under Section 12(b) of the Exchange Act:
                                     None

        Securities registered under Section 12(g) of the Exchange Act:
                         Common Stock ($.01 par value)
                               (Title of Class)

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

     Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will 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-KSB
or any amendment to this Form 10-KSB. [X]
<PAGE>
 
     The issuer's revenues for the fiscal year ended September 30, 1997 were
$23,968,818.

     As of December 15, 1997, there were 8,268,485 shares of Common Stock of the
Registrant outstanding.  The aggregate market value of the outstanding Common
Stock of the Registrant held by non-affiliates on December 15, 1997, was
$19,899,813 based upon the average bid and asked price of $5.063 per share on
the Nasdaq SmallCap Market of the National Association of Securities Dealers,
Inc. on December 15, 1997.

     The text of Items 9, 10, 11 and 12 of Part III of this Form 10-KSB
incorporate by reference the corresponding information from the Proxy Statement
of the Registrant on Schedule A pursuant to Rule 14a-101 to be filed with the
Securities and Exchange Commission in connection with the 1998 annual meeting of
stockholders of the Registrant.

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

     Exhibit Index appears on page 35.

                                       2
<PAGE>
 
                                    PART I

Item 1.   Description of Business

          HomeCapital Investment Corporation, a Nevada corporation (the
"Company" or "Registrant"), is a holding company, which conducts its business
entirely through a wholly-owned subsidiary, HomeOwners Mortgage & Equity, Inc.,
a Delaware corporation ("Home").  All references herein to the Company include
Home, unless the context otherwise requires.  See Note 1 to Notes to Financial
Statements.

          Home is a specialized consumer finance company organized in 1993 to
originate, purchase, sell and service home improvement loans and other second
mortgage loans secured by residential property.  Home primarily finances Title I
home improvement loans ("Title I Loans") and conventional consumer and home
equity loans that may fund a variety of borrower needs ("Conventional Loans").
Loans originated or purchased by Home are financed through warehouse credit
lines and then sold to the Federal National Mortgage Association ("Fannie Mae"),
secondary market mortgage investors and other financial institutions or
exchanged for Fannie Mae Mortgage-backed securities.  Home originates and
purchases its loans through two primary sources: wholesale (i.e., "Correspondent
Loans"), and retail (i.e., "Direct Loans").  Home purchases Correspondent Loans
through a national network of mortgage company loan correspondents
("Correspondents").  Home originates Direct Loans through direct mail
solicitation of individual homeowners, through referrals from home improvement
contractors, located principally in the Southwestern and Western regions of the
United States, and through special marketing arrangements with home improvement
supply and installation firms ("Corporate Alliances") to provide loans to
customers of these firms.

          SIGNIFICANT EVENTS IN FISCAL 1997.    During fiscal 1997, the Company
completed several significant transactions and achieved several milestones.  The
most notable of those events are summarized as follows:

             . In July 1997, the Company received approval for listing of its
Common Stock on the NASDAQ SmallCap Market;

             . On August 6, 1997, the Company, through its wholly-owned
subsidiary Home, completed a bulk acquisition of approximately $15.9 million in
principal amount of Title I Loans;

             . In September 1997, the Company received approval for listing
of its Common Stock on the Pacific Exchange;

             . In September 1997, the Company and its affiliates completed their
first securitization transaction with the private placement of $47 million of
Asset Backed Bonds, Series 1997-1.  The bonds were collateralized by $48 million
of Fannie Mae Mortgage-backed securities.

                                       3
<PAGE>
 
             . For the 1997 fiscal year, the Company produced home improvement
loans and other second mortgage loans totaling approximately $182 million, which
was an increase of 81% over the 1996 fiscal year production of approximately
$100 million.

             . In September 1997, the Company completed an amended warehouse
line of credit facility and an amended working capital line of credit for
increased commitments from its lender of up to $20,000,000 and $16,666,600,
respectively; and

             . During fiscal 1997, the Company commenced participation in the
Fannie Mae Title I Mortgage-backed securities program whereby the Company is
allowed to swap Title I Loans to Fannie Mae for Mortgage-backed securities
issued by Fannie Mae.  These Mortgage-backed securities are accumulated and sold
for cash or included in securitization transactions.  In connection with these
transactions, Fannie Mae has provided uncommitted funding facilities for the
Title I Loans and the Mortgage-backed securities.

          Each of these accomplishments reflect the ongoing growth of the
Company and its evolution from an originator of loans which were sold for cash
with servicing released to a larger producer of Title I and conventional second
mortgage loans which are sold for cash, sold with a retained interest, or
converted to Mortgage-backed securities for inclusion in  securitizations.  The
following discussions expand upon the Company's development and strategies in
Loan Products, Loan Production, Loan Funding, Loan Sales and Disposition, Loan
Underwriting and Loan Servicing.

          BUSINESS STRATEGY.  The Company seeks to become a leading consumer
finance company with particular emphasis on the home remodeling and home equity
financing markets.  The Company's primary strategy is to increase loan volume
while maintaining overall loan credit quality.  The Company's strategies
include: (i) offering new loan products; (ii) expanding its existing network of
Correspondents, Corporate Alliances and direct marketing sales offices; (iii)
expanding its retail originations by utilizing direct sales marketing to
generate leads in support of four retail branches; (iv) realizing operational
efficiencies through economies of scale; (v) using loan sales to Fannie Mae and
asset-backed securitizations to sell higher volumes of loans on more favorable
terms; and (vi) pursuing community development lending opportunities with local
and State units of government, housing finance agencies, and community based
non-profit housing organizations.  During fiscal 1997, the Company continued the
sale of a significant volume of its Title I Loans to Fannie Mae.

          During fiscal 1997, the Company increased its origination of
conventional second mortgage loans through utilization of a direct marketing
sales office.  The Company intends to expand the capabilities of that office in
fiscal 1998.  It is anticipated that through the utilization of direct marketing
sales offices, the level of overall production will be increased and the
proportion of conventional loans to Title I Loans will also increase.

          With the passage of home equity lending in Texas in November 1997, the
Company expects to devote significant resources to this new market beginning
early in 1998.  With offices already established in Austin, Dallas, and Houston,
the Company believes it is well positioned to participate in this new lending
opportunity in Texas in 1998.

                                       4
<PAGE>
 
          The Company intends to consider additional bulk acquisitions of Title
I Loans in fiscal 1998.

          However, loan production is subject to a number of economic and social
risks, including consumer needs and trends, alternative and competitive
financing sources, fluctuations in interest rates and the availability of
funding sources.  Therefore, there is no assurance that these objectives will be
achieved.

          LOAN PRODUCTS.  Home originates and purchases Title I and Conventional
Loans which are typically secured by a second mortgage lien on a one-to-four-
family residence.  Home occasionally originates and purchases unsecured Title I
Loans for its most creditworthy customers.  Loans under Title I of the National
Housing Act of 1934, administered by the U.S. Department of Housing and Urban
Development ("HUD") are eligible to be insured by the Federal Housing
Administration ("FHA") for 90% of the loan principal and certain other costs.
Among other things, Title I provides a credit insurance program enabling
homeowners to borrow 100% of home improvement costs up to $25,000 with a maximum
term of 20 years on a single family unit.  The holder of a Title I Loan has the
risk of a potential loss of up to 10% of the principal balance plus certain
expenses and a portion of the interest on the loan.  However, the FHA insures
the remaining 90% of the principal balance of each Title I Loan and certain
other costs, provided that the loan was originated within HUD guidelines and the
holder of the loan has maintained a loss reserve account required to be
established with HUD.  The borrowers of Title I Loans are typically classified
as "A" through "D" credits, many of which typically have less access to
alternative forms of consumer financing due to unfavorable credit experience,
insufficient home equity, limited credit history or high levels of debt service.
Because of the additional credit risk, Title I Loans originated or purchased by
Home bear a higher  interest rate than rates charged by financial institutions
to consumers with better credit ratings, but may have lower monthly payments due
to the longer term.

          For Title I Loans sold to Fannie Mae or Title I Loans exchanged with
Fannie Mae for Mortgage-backed securities, Home pays a guaranty fee for Fannie
Mae to assume the 10% uninsured portion under the FHA credit insurance programs.
This feature of the Fannie Mae FHA Title I Loan Program assists in mitigating
future loss exposure for the uninsured portion of the Title I Loans.

          In addition to Title I Loans, Home originates or purchases a variety
of Conventional Loans for home improvement, combination home improvement and
debt consolidation, equity recovery and tax lien refinancing.  Conventional
Loans are non-insured consumer loans and therefore generally require borrower
equity.  The borrower credit characteristics of Conventional Loans are similar
to that of Title I Loans;  however, Conventional Loans may be larger with
shorter financing terms and slightly lower rates than Title I Loans.  Generally,
Home originates these loans under a pre-approval agreement and purchase
commitment from an investor.  Conventional Loans are sold with limited recourse.
In the event that the borrower defaults on the first payment, the Company is
committed to repurchase the loan.

          LOAN PRODUCTION.   Home originates loans principally through (i)
wholesale purchase transactions with regional Correspondent lenders, (ii) a
network of independent home 

                                       5
<PAGE>
 
improvement contractors, (iii) direct mail solicitation of individual
homeowners, (iv) Corporate Alliances with national home improvement supply and
installation companies, and (v) participation in community development lending
with state/local housing finance agencies.

          Correspondent Lending. The Company currently maintains a correspondent
relationship with 207 Correspondents operating in 26 states. Loans generated by
Correspondents ("Correspondent Loans") are originated, documented and closed by
the Correspondent lenders, usually small mortgage companies, commercial banks or
finance companies. These loans are pre-approved and priced by Home's
underwriting staff and subsequently purchased by Home at a premium ranging from
2% to 9% depending on the coupon rate and maturity of the loans. The Company is
seeking to expand and geographically diversify its Correspondent Loans by
development of new Correspondent lender relationships through an on-going
marketing campaign and through the addition of regional marketing managers in
existing and new offices proposed for fiscal 1998.

          During fiscal 1997, the Company established 138 new correspondent,
relationships and purchased loans from 160 Correspondents.  As a percentage of
total 1997 Title I Loan production, 31 Correspondents accounted for 82% of the
Company's loans, including a bulk loan acquisition.  Except for the single bulk
loan acquisition in fiscal 1997, no Correspondent accounted for more than 10% of
production, three Correspondents each accounted for 5% to 10% and an additional
12 Correspondents each accounted for 2% to 5% of total production of Title I
Loans. Home is not required to establish offices and obtain territorial
operating approval from HUD to originate Correspondent Loans, but can originate
all such loans from its executive office.

          Home Improvement Contractor Lending. The Company originates either
indirect or direct loans through its established network of home improvement
contractors. Under HUD's indirect or "Dealer" program, the contractor is
approved and supervised by Home. The "Dealer" facilitates the loan by taking the
customer application, transmitting the application to Home for pre-approval,
gathering the necessary loan stipulations from the borrower, performing the work
on the property, and closing the loan transaction. When Home has verified that
the remodeling project has been completed to the satisfaction of the borrower,
Home funds the pre-approved loan at face or par value. Home receives any
origination fees from the transaction. Home also funds loans on a direct basis
for borrowers that have been referred by contractors. These "Direct Contractors"
refer the customer to Home and perform the work on the homeowner's property.
Home funds the loan proceeds, either payable directly to the customer or jointly
to the customer and the contractor prior to the initiation of the home
improvement work. Home receives any origination fee resulting from the
transaction.  See "Regulation" herein.

          Home is required to obtain territorial operating approval from HUD
prior to funding indirect or direct Dealer home improvement loans. As of
December 15, 1997, Home held HUD lending approval in 37 states. In addition to
HUD approval, the origination of indirect and direct loans requires Home to be
approved or exempt from approval by state lending authorities for loan
origination in the respective states. As of December 15, 1997, Home was approved
or exempt in 44 states and the District of Columbia, had submitted applications
for lending authority 

                                       6
<PAGE>
 
in three states and anticipates applying in fiscal 1998 in an additional three
states, one of which requires the establishment of an office in that state prior
to application.
 
          Direct Mail Lending.  Home also makes direct loans through direct mail
solicitation. This effort is primarily conducted by the Company's Phoenix office
by mailing to homeowners in three states. This effort generates Title I Loans,
as well as Conventional Loans.  The Company is seeking to expand this type of
loan origination to eight states in the coming fiscal year.
 
          Corporate Alliance Lending.  Home has originated three initial
"Corporate Alliance" relationships with home improvement supply and installation
companies. Under these relationships the various home improvement stores and
installation franchisees facilitate loan originations by offering home
improvement financing at the point of sale to their home improvement customers.
Store personnel trained by the Company obtain loan applications that are
processed by Home for Direct Loans to the customers. This method of origination
has particular benefit for "installed sales" by which a customer makes an
overall choice for a home improvement (such as a new kitchen, bathroom, windows
or other particular home improvement), and the entire project is installed on a
turnkey basis by the Corporate Alliance company. The Corporate Alliance company
may benefit from increased sales by accessing financing, through Home, for its
customers. The loan applications are underwritten, processed and closed as
Direct Loans to the customers who utilize the loan proceeds in payment of the
materials and services provided by the Corporate Alliance company.
 
          In November 1996, Home entered into a Corporate Alliance with Builders
Square, Inc. This agreement provides for Home to market, on an exclusive basis,
its loan products through Builders Square stores. The agreement provided for the
initial implementation of Home's marketing efforts in a limited number of
Builders Square stores during a test period of nine months. Effective May 31,
1997, Home and Builders Square agreed to an early conclusion of the test period
and to proceed under the marketing agreement with a 3-year term and the
implementation of Home's marketing efforts on a national basis to all of
Builders Square's 162 stores. During calendar year 1997, Builders Square entered
into a merger agreement with Hechinger's, a similar home improvement
retail/wholesale firm based in the Washington, D.C. area. Home expects to
consult with the new management of the merged entity during the first quarter of
calendar year 1998 to expand it marketing effort to the 271 stores represented
in the merger of these two retailers.
 
          Community Development Lending. Home has pursued use of the Title I
Loan as the basis for public/private partnership opportunities with local units
of government, state governments, housing finance agencies, and community based
non-profit housing providers. The use of the Title I Loan in conjunction with
subsidy dollars from HUD allows affordable payments for low and moderate income
homeowners. The Company has entered into a pilot project for development of this
type of loan product with the Texas State Affordable Housing Corporation, a non-
profit mortgage subsidiary of the Texas Department of Housing and Community
Affairs. The Company plans geographic diversification of this type of lending
program in the next fiscal year through a network of Fannie Mae Partnership
Offices throughout the nation. This effort will target rural as well as inner
city underserved credit need areas.

                                       7
<PAGE>
 
          The following table sets forth a summary of Title I Loan production
for the fiscal years ended September 30, 1997 and 1996:
<TABLE>
<CAPTION>
                                                       Title I Loans Funded
                                                      (dollars in thousands)
------------------------------------------------------------------------------------------------------------------------------------
                                                                      1997                                                    1996
                            -----------------------------------------------------------------------------------------        -------
                                                                                                             % of             % of 
                            Correspondent        Dealer              Direct             Total               Total             Total
State of Origination          Loans (1)          Loans               Loans              Loans               Loans             Loans 
--------------------        -------------       ------              --------           --------            -------           -------
<S>                        <C>                 <C>                 <C>                <C>                 <C>              <C>
Alabama                     $     17            $                   $                  $     17                 *                  -

Arizona                          831                 4                 1,813              2,648               1.8%                 *

Arkansas                                            61                   169                230                 *                  *

California                   101,364                18                 2,758            104,140              70.7%             67.3%

Colorado                         773                 8                    19                800                 *                  *

Florida                       16,136                 4                   265             16,405              11.1%              4.0%

Georgia                          138                 4                   593                735                 *                  *

Hawaii                            88                                                         88                 *                  *

Idaho                             25                10                                       35                 *                  *

Illinois                       1,315                                      62              1,377                 *                  *

Indiana                                                                   20                 20                 *                  -

Kansas                                               5                     3                  8                 *                  -

Kentucky                                                                  81                 81                 *                  -

Louisiana                                           37                    46                 83                 *                  *

Maryland                         362                                                        362                 *                  -

Michigan                          25                                      98                123                 *                  -

Missouri                          15                                      52                 67                 *                  -

Mississippi                                                               14                 14                 *                  -

Montana                           42                                                         42                 *                  -

Nevada                         2,442                                      98              2,540               1.7%              4.3%

New Jersey                       138                                                        138                 *                  *

New Mexico                       153                                      49                202                 *                  *

New York                       1,744                                                      1,744               1.2%              2.3%

North Carolina                   565                                                        565                 *                  *

Ohio                             209                52                                      261                 *                  *

Oklahoma                         185               327                   382                894                 *                  *

Oregon                           103                                       4                107                 *                  *

Pennsylvania                      65                80                   985              1,130                 *                  -

South Dakota                                                               4                  4                 *                  -

Texas                          2,848             4,273                 4,415             11,536               7.8%             17.9%

Utah                             344                                                        344                 *                  *

Virginia                         100                                       8                108                 *                  -

Washington                       351                                                        351                 *                  *

Wisconsin                                                                 16                 16                 *                  -

Wyoming                                                                   25                 25                 *                  -
                            --------            ------              --------           --------            -------           -------
Total Title I Loans         $130,376            $4,883              $ 11,979           $147,240            100.00%           100.00%
                            ========            ======              ========           ========            =======           =======
</TABLE>
__________________
*Less than one percent.
(1) Excludes bulk purchase of $15.9 million

                                       8
<PAGE>
 
          In addition to Title I Loan production, total Conventional Loan
production in fiscal 1997 of $18,718,072 was originated as follows:  $6,240,502
in Arizona; $1,658,900 in Georgia; and $7,748,800 in Pennsylvania.  Conventional
Loan production increased from $3,105,374 in fiscal 1996 to $18,718,072 in
fiscal 1997, with substantially all of the fiscal 1997 production coming from
the direct marketing sales office in Arizona.  The Company intends to continue
the emphasis on Conventional Loans in fiscal 1998.

          LOAN FUNDING.  Home funds its origination and purchase of loans
through a commercial bank credit line or through an arrangement with Fannie Mae,
until loans in sufficient aggregate dollar amounts have been accumulated for
sale to Fannie Mae or to the secondary market.  Presently, Home funds its
borrowings under a Warehouse Loan Agreement with Guaranty Federal Bank, F.S.B.
("Guaranty Bank") that allows borrowings of up to a maximum of $20,000,000
secured by loans having a face amount equal to approximately 98% of the purchase
price of each loan, up to 100% of the principal balance of each Title I Loan it
originates.  Up to $10,000,000 of the Guaranty Bank line may be used for
Conventional Loans.  The advance rate for Conventional Loans is equal to
approximately 97% of the purchase price of each loan.  Advances under the loan
agreement bear interest at the Federal Funds Rate plus three percent  per annum,
payable monthly.  This warehouse credit line expires June 30, 1998.  Home
expects, however, that it will be reviewed upon substantially the same terms by
Guaranty Bank.  In the event that the credit facility is not extended, and Home
is unsuccessful in obtaining a comparable warehouse facility, the ability of
Home to purchase and originate loans would be significantly impaired.

          As part of the arrangement with Fannie Mae to exchange Title I Loans
for Mortgage-backed securities, Fannie Mae has provided short-term warehouse
funding to Home, on an uncommitted basis, for Title I Loans and Mortgage-backed
securities exchanged for such Title I Loans. Generally the funding facilities
require repayment with a cost of funds based on a 30 day LIBOR rate plus 30 to
90 basis points, depending upon whether the funding is provided for Title I
Loans or Mortgage-backed securities.  At September 30, 1997, the principal
amount of the Company's obligations to Fannie Mae under these funding facilities
was approximately $7.7 million for Mortgage-backed securities that have been
issued by Fannie Mae and registered under the Federal Reserve book entry system
and was approximately $14.9 million for Mortgage-backed securities that have
been issued with Fannie Mae but not registered under the Federal Reserve book
entry system.  These repayment obligations of the Company are secured by
Mortgage-backed securities with a fair value of approximately $23.3 million at
September 30, 1997. Fannie Mae also has provided warehouse funding to the
Company for its Title I Loans held for sale.  At September 30, 1997, the
principal amount of the Company's obligations under this funding facility was
approximately $4.9 million for Title I Loans delivered and available for sale to
Fannie Mae.

          Home will continue to seek to increase its warehouse credit line or
secure additional warehouse credit lines, so that it will be able to finance
increased loan production. No assurance can be given that the necessary
warehouse lines will be obtained.

          LOAN SALES AND DISPOSITION.  Until October 1995, the Company's
principal source of liquidity was the sale of whole loans on a servicing
released basis.  While this enabled the Company to meet its operating cash
requirements, it limited the Company's growth potential and 

                                       9
<PAGE>
 
the revenue generated from its loan originations. To remedy this situation, the
Company embarked on a strategy in fiscal 1996 that enabled the Company to retain
the excess interest spread from its loan originations and to consider other
disposition strategies for its loan production, such as sales to Fannie Mae
under the Title I Loan program and the securitized sale of loan pools in the
secondary market. The Company was approved as a Seller/Servicer under the Fannie
Mae Title I Loan purchase program in March 1996 and expanded its warehouse
financing and raised additional capital in fiscal 1996 to support loan sales to
Fannie Mae.

         In March 1997, the Company began selling Title I Loans to Fannie Mae
under the Fannie Mae Title I Mortgage-backed securities program.  Under the
program, the Company exchanged its Title I Loans for Mortgage-backed securities
and simultaneously sold these Mortgage-backed securities for a premium through
Fannie Mae.  In addition to the cash premium on sale, the Company also recorded
an Interest-only strip receivable derived from the excess interest spread that
ranged  from 125 basis points to 250 basis points.  While these "swap and sell"
transactions generated cash proceeds that in certain instances may be sufficient
to satisfy the current liquidity demands for the Company, these transactions
also generate current tax liability for federal income tax purposes attributable
to the net gain recognized from the sale of the related Title I Loans.
 
          In May 1997, the Company modified its disposition strategy in
anticipation of a securitization of the Fannie Mae Mortgage-backed securities.
Rather than "swap and sell" transactions, the Company began to exchange its
Title I Loans for Fannie Mae Mortgage-backed securities and to hold the
Mortgage-backed securities for future securitization in "swap and hold"
transactions.  The Company planned to securitize the majority of its Fannie Mae
Mortgage-backed securities in a transaction that would not be treated as a sale
for federal income tax purposes, and, therefore, would cause the deferral of
federal and state income tax liabilities, until the cash interest income
attributable to the retained interest in the Mortgage-backed securities is
received over the term of the securitization transaction.
 
          During the fourth quarter of fiscal 1997, the Company completed its
first securitization of Fannie Mae Mortgage-backed securities. HOME
Securitization Trust I, a Delaware business trust organized by Home, issued and
sold $47,154,000 of Asset Backed Bonds at 7.335% directly to an investor. The
Bonds are collateralized by $48,116,652 of Fannie Mae Mortgage-backed securities
with an average pass-through rate of 12.25%. The Company retained a residual
interest from the securitization which entitles it to the excess spread from the
interest received on the Fannie Mae Mortgage-backed securities over the interest
paid on the Bonds, as well as to any remaining balances in the Mortgage-backed
securities after the Bonds are paid in full. In addition, the Company earns an
interest spread from the FHA Title I Loans underlying these Mortgage-backed
securities. At September 30, 1997, Mortgage-backed securities with a fair value
of approximately $23.3 million are being held primarily for future
securitizations.
 
          During the first quarter of fiscal 1998, the Company completed its
second securitization of Fannie Mae Mortgage-backed securities.  HOME
Securitization Trust I issued and sold $39,193,258 of Asset Backed Bonds at
7.261% directly to an investor.  The Bonds are collateralized by $39,589,150 of
Fannie Mae Mortgage-backed securities with an average pass-through rate of
12.24%.  The Company retained the residual interest from the securitization and
is entitled to the excess spread from the interest received on the Fannie Mae
Mortgage-backed

                                       10
<PAGE>
 
securities over the interest paid on the Bonds, as well as any remaining
Mortgage-backed securities after the Bonds are paid in full. In addition, the
Company earns an interest spread from the FHA Title I Loans underlying these
Mortgage-backed securities. Also during the first quarter of fiscal year 1998,
the Company sold $6.9 million of Fannie Mae Mortgage-backed securities with an
average interest rate of approximately 9.7% for total sales proceeds of
approximately $7.5 million.

          In summary, the Company disposes of its funded Title I Loans by whole
loan cash sales to investors, servicing released, whole loan sales to Fannie
Mae, servicing retained, and conversion of loans to Mortgage-backed securities
for securitization or for sale for cash.  Conventional loans are sold servicing
released to specific investors for cash.

          LOAN UNDERWRITING.  With respect to the Title I Loans, the
underwriting standards of the Company generally place a greater emphasis on the
creditworthiness of the borrower than on the underlying collateral in evaluating
the likelihood that a borrower will be able to repay a Title I Loan.  In
general, the Title I Loans originated or purchased by the Company will have been
made to borrowers that typically have limited access to consumer financing for a
variety of reasons, such as high levels of debt service-to-income, unfavorable
past credit experience, insufficient home equity value, lower income or a
limited credit history.  The Company uses its own credit evaluation criteria to
classify the borrowers of loans by risk class as "A" through "D" grade credits.
These criteria include, as a significant component, the credit evaluation score
methodology (the "FICO Score") developed by Fair, Isaac and Company, a
consulting firm specializing in creating default predictive models through
scoring mechanisms.  Additional criteria include the borrower's debt-to-income
ratio, mortgage credit history, consumer credit history, bankruptcies,
foreclosures, notice of defaults, deeds in lieu of foreclosure and
repossessions.

          The Company's underwriting and credit policies include a number of
guidelines to assist underwriters in the credit review and decision process.
These underwriting guidelines provide for the evaluation of a loan applicant's
creditworthiness through the use of a consumer credit report, verification of
employment and a review of the debt service-to-income ratio of the applicant.
Income is verified through various means, including without limitation loan
applicant interview, written verifications with employers, review of pay stubs
or tax returns.  The borrower must demonstrate sufficient levels of disposable
income to satisfy debt repayment requirements.

          In response to changes and developments in the consumer finance area
and the secondary mortgage market, the Company's underwriting requirements for
certain types of Title I Loans may change from time to time, which in certain
instances may result in more stringent, and in other instances less stringent,
underwriting requirements.  Depending upon when and the manner in which the
Title I Loans were produced by the Company, such Title I Loans may have been
originated or purchased by the Company under different underwriting
requirements, and, accordingly, certain Title I Loans may be of a different
credit quality and have different loan characteristics from other Title I Loans.
Furthermore, to the extent that certain Title I Loans were originated or
purchased by the Company under less stringent underwriting requirements, such
Title I Loans may be more likely to experience higher rates of delinquencies,
defaults and losses than those Title I Loans originated or purchased under more
stringent underwriting requirements.

                                       11
<PAGE>
 
          LOAN SERVICING.  Home initiated Title I Loan servicing in October
1995.  In March 1996, Home was approved as a Seller/Servicer by Fannie Mae and
initiated Title I Loan sales to Fannie Mae in June 1996.  At September 30, 1997,
Home had a total loan servicing portfolio of  approximately $234,748,000 of
which $174,265,000 was serviced for Fannie Mae and $60,483,000 for others.  It
is the Company's strategy to retain interest-only residuals from future loan
sales which, accordingly, are expected to become an increasingly larger
component of  earnings.

          During fiscal 1997, the loan servicing portfolio increased by 153%
from $92,743,000 at September 30, 1996, to $234,748,000 at September 30, 1997.
The Company expects to increase the size of its servicing portfolio through
continuing increases in its loan production and loan sales, servicing retained.

          The Company is a servicer of Title I Loans, including all of the Title
I Loans underlying Mortgage-backed securities created with Fannie Mae.  As the
servicer, the Company is required to service the Title I Loans in conformity
with the applicable requirements and guidelines in the Fannie Mae Servicer
Guide, including the requirement that the Company remit on the Mortgage-backed
securities, the scheduled principal and interest payments and actual principal
and interest payments on Title I Loans, together with any principal prepayments.
The collection and remittance of scheduled loan payments on Title I Loans is
subject to various risks from the related borrowers, including without
limitation, the risk that a borrower will not satisfy the debt service payments,
including payments of interest and principal on the loan, and that the
realizable value of the related mortgaged property will not be sufficient to
repay the outstanding interest and principal owed on the loan.  If the Company
fails to service its Title I Loans in conformity with the Fannie Mae Servicer
Guide, then Fannie Mae will have the right to terminate the Company's servicing
rights and transfer the servicing for these loans to another eligible servicer.
With respect to the Title I Loans underlying the Mortgage-backed securities, the
Company is entitled to receive an excess interest spread of at least 1.25% (125
basis points), but not more than 2.50% (250 basis points).  Home has
subcontracted most of its servicing functions for the Title I Loans to third
parties who perform these functions for negotiated fees.

          Since June 1996, the Company has substantially increased the volume of
the Title I Loans that it services.  The Company has limited historical data
with respect to the delinquency, default and prepayment experience of the Title
I Loans included in its loan servicing portfolio.  Accordingly, the delinquency
experience set forth below may not be indicative of the future performance of
the Title I Loans.

          As of September 30, 1997, the aggregate outstanding principal balance
of all Title I Loans serviced by HOME totaled approximately $234,748,000,
representing 11,363 loans.  The delinquency experience of the Company's loan
servicing portfolio at the respective dates is set forth below.

                                       12
<PAGE>
 
<TABLE>
<CAPTION>
                                                                                1997
                                                Dec. 31     -------------------------------------------
DELINQUENCY DATA:                                 1996         March 31       June 30      September 30
                                                --------    -------------------------------------------
<S>                                            <C>            <C>            <C>           <C>
Delinquencies in Serviced Loan Portfolio
     (At period end):
     31-60 days............................       2.23%           2.89%         3.26%           5.52%
     61-90 days............................       1.21            1.22          1.36            2.58
     91 days and over......................       1.88            1.71          2.00            4.67
                                                  ----            ----          ----           -----
     Total                                        5.32%           5.82%         6.62%          12.77%
                                                  ====            ====          ====           ===== 
Serviced Loan Portfolio
at period end (dollars in thousands)           $126,194        $158,259      $186,889        $234,748
</TABLE>

          The above delinquency data excludes loans that were pending the
submission of claims for reimbursement under the FHA Title I program, which at
September 30, 1997 included 361 loans with a principal balance of $7,826,900.
The Company calculates its delinquency rates by dividing the amount of
delinquent loans included in the loan servicing portfolio by the aggregate
outstanding principal of the loans in the servicing portfolio.  The calculation
excludes the pending claims from the numerator and denominator.

          Because the Company has been producing increasing volumes of new Title
I Loans that, due to their lack of seasoning, tend to have lower delinquency,
default and prepayment rates, the Company's overall delinquency, default and
prepayment rates may have remained lower than otherwise would have been
experienced with a static loan servicing portfolio. Because delinquencies and
defaults typically occur months or years after a loan is originated, data
relating to delinquencies and defaults as a percentage of the current loan
servicing portfolio can underestimate the risk of future delinquencies and
defaults.  There is no assurance that the delinquency, default and prepayment
experience with respect to the Title I Loans will be comparable to the previous
experience for the loans serviced by the Company (including the delinquency
rates set forth above) or for the same type of loans serviced by any other
finance company.  In addition, the rate of delinquencies and defaults with
respect to the Title I Loans will be affected by, among other things, interest
rate fluctuations and general and regional economic conditions.

          Since the initiation of Title I Loan servicing in October 1995, the
Company has subcontracted with a non-affiliated company to provide all servicing
related activities such as payment collection and processing, investor
reporting, FHA claims filing administration, and workmanship complaint
monitoring.  During fiscal 1997, the Company experienced an increase in
delinquencies of its loan portfolio, particularly in the fourth quarter, and
effective December 1, 1997, the Title I Loan servicing portfolio was transferred
to a new subservicer in an effort to improve the payment processing and
delinquent collection functions of its loans.  See "Item 6.  Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Summary."

                                       13
<PAGE>
 
          MARKETS.  The principal market for Home is the large and highly
fragmented home remodeling industry.  According to the National Association of
Home Builders, the industry is expected to grow to approximately $181 billion in
the year 2000.  Total loans insured under Title I aggregated approximately
$1.396 billion during the last HUD fiscal year. The home improvement market is
directly affected by the number of people choosing to purchase existing rather
than new homes.  Currently, in excess of 80% of home purchases nationally are of
existing homes.  This trend, together with the overall aging of the national
housing stock, among other factors, has contributed to substantial growth in the
home improvement lending market in recent years.

          COMPETITION.  Home competes with numerous well-known and established
companies in the consumer finance market with vastly greater capital resources,
more established loan production and marketing staffs, and better access to
capital markets. However, by focusing primarily on home improvement loans to
individuals who cannot qualify for traditional financing, Home believes that it
will be able to enhance its position in the market place. Competition for
Correspondent Loans is primarily a function of price, available products and
service. The Company believes that it will be able to expand its Correspondent
Loan business by increasing the number of Correspondent lenders through
automated loan documentation preparation services and "on-line" access to the
Company's loan approval process. Home will also continue to pursue lending
opportunities through Direct Loans from home improvement contractors, corporate
alliances, and community development lending. Through both Correspondents and
Contractors the Company will offer Title I and Conventional Loan products.

          REGULATION.  All aspects of the operations of Home are subject to
federal and state government regulation, supervision and licensing, including
without limitation, loan origination, credit activity, interest rates and
finance charges, disclosure to customers, the terms of secured transactions and
the collection and handling of defaulted loans. Home is an approved lender under
the Federal Housing Administration's Title I and Title II Programs. These
approvals are evidenced by the Company's Contract of Insurance issued by FHA,
which qualifies the Company for the origination, purchase and servicing of Title
I Property Improvement loans and Title I Manufactured Housing loans. Even though
Home has not chosen to do so as of yet, the Company is approved to originate and
service home purchase and purchase/rehab loans under the Title II Program.
Additionally, each of the Correspondents approved by Home must be sponsored by
the Company and approved by HUD to participate in FHA programs. Each contractor
that is approved by Home on an indirect basis must go through an approval
process specified by federal regulation and supervised on a continuing basis by
the Company.

          Home is required to be licensed to conduct business in each state in
which it originates loans. As of December 15, 1997, Home was approved to do
business in 45 states.

          In addition to state lending requirements, Home also operates under
laws and regulations such as the Truth In Lending Act, the Real Estate
Settlement Procedures Act, the Equal Credit Opportunity Act, the Home Mortgage
Disclosure Act, the Fair Credit Reporting Act, and the Fair Debt Collection Act.

                                       14
<PAGE>
 
          All of the laws and regulations applicable to the Company are subject
to frequent amendment and change. There can be no assurance that these laws,
rules and regulations will not be amended or changed, or other laws, rules and
regulations will not be adopted in the future in a form that could make
compliance much more difficult or expensive, restrict Home's ability to
originate, broker, purchase or sell loans, further limit or restrict the amount
of commissions, interest or other charges earned on loans originated, brokered,
purchased or sold by Home or otherwise affect the business or prospects of the
Company. In particular, the ability of Home to participate in the Title I Loan
program is dependent upon the continuation of the Title I program in
substantially its present form. Should the Title I program be suspended,
discontinued or substantially altered as a result of actions by the Congress of
the United States of the Administration, the ability of Home to participate in
Title I Loans could be substantially and adversely affected.

          The Administration of the U.S. Department of Housing and Urban
Development proposed a change to the "Dealer" portion of the Title I program.
The proposed change would eliminate the indirect origination and funding of
loans through contractors. This proposal would not affect direct loan fundings
under the program. Home has very little loan volume from the "dealer/indirect"
loan program. Additionally, HUD has not continued with implementation of the
"dealer rule" and gives no indication of pursuing the effort to change the
"dealer/indirect" portion of the Title I program. Home believes the proposed
rule, if eventually implemented, would have no material adverse effect on its
ability to originate loans on a Correspondent or Direct basis.

          FACILITIES AND EMPLOYEES.  Home operates out of leased facilities in
its 12 branch offices and its home and executive offices at 6836 Austin Center
Blvd., Suite 280 in Austin, Texas 78731, telephone (512) 427-5200 and telefax
(512) 795-9815, which are shared with the Company.  At December 15, 1997, Home
had 112 full-time employees, 2 part-time employees and 27 commissioned loan
officers.  None of Home's employees is a member of a labor union, and the
Company believes that Home's relationships with its employees are good.  The
Company has no full time employees, and the various executive and administrative
functions are performed on a part time basis by its directors and the employees
of Home.

ITEM 2.   DESCRIPTION OF PROPERTIES.

          The Company maintains its offices jointly with Home in leased space at
6836 Austin Center Blvd., Suite 280, Austin, Texas 78731.  Home also leases
space for its 13  branch offices.  The Company believes that its office
facilities are suitable and adequate for its current needs and that additional
space is available for future expansion.

ITEM 3.   LEGAL PROCEEDINGS.

          Except for routine litigation that is incidental to its business (none
of which is material), the Company is not a party to, nor is any of its property
subject to, any material pending legal proceedings.

                                       15
<PAGE>
 
ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

          The annual meeting of  stockholders of the Company was duly called and
held on September 25, 1997 ("1997 Annual Meeting").  In connection with the
Annual Meeting, the Company filed and distributed to its stockholders a Proxy
Statement pursuant to Section 14(a) of the Securities Exchange Act of 1934, as
amended (the "1997 Proxy Statement").  The following matters were voted upon at
the Annual Meeting:

          (a)  The election of the following persons to serve on the Board of
Directors of the Company:  John W. Ballard, E. Jeff Bomer, J. Rolfe Johnson,
Larry D. Meyers, Robert R. Neyland, Peter A. Pyhrr and Walter W. Stoepplewerth.

          (b) The approval of an amendment to the HomeCapital Investment
Corporation 1996 Stock Option Plan ("Stock Option Plan") to increase from
500,000 to 1,000,000 the number of shares of Common Stock that may be issued
upon exercise of  options  granted  under the Stock Option Plan.

          (c) The approval of the HomeCapital Investment Corporation  
Non-Employee Director Compensation Plan ("Director Plan") providing a $10,000
annual retainer and $1,000 per meeting cash compensation, and an option to
purchase 15,000 shares of Common Stock upon initial election as a director and
an additional option to purchase 3,000 shares of Common Stock upon reelection as
a director for each non-employee director of the Company and Home. All stock
options under the Director Plan are exerciseable at the market price of the
Common Stock on the date of grant and vest 20% per year.

          (d) The approval of an amendment to the Articles of Incorporation of
the Company to adopt a provision eliminating the personal liability of directors
and officers to the Company and its stockholders under certain circumstances in
accordance with the corporate law of Nevada.

          (e) The approval of an amendment to the By-Laws of the Company to
provide for indemnification of officers, directors and other agents of the
Company and its subsidiaries against certain litigation costs under certain
circumstances.

          (f) The ratification of the appointment of Coopers & Lybrand L.L.P. as
independent accountants and auditors of the Company for the 1997 fiscal year.

                                       16
<PAGE>
 
          Each of the nominees was elected to the Board of Directors, and each
of the other propositions was approved and passed by the necessary vote at the
1997 Annual Meeting.  The following table sets forth the number of votes cast
for, against or withheld, and abstentions and broker non-votes in the election
of each director and each of the other propositions:


<TABLE>
<CAPTION>
                                                    For          Against        Abstain/1/
Directors
<S>                                            <C>            <C>             <C>
     Mr. Ballard                                   7,682,591        __             1,490,227
     Mr. Bomer                                     7,686,218        __             1,486,600
     Mr. Johnson                                   7,361,516        __             1,810,653
     Mr. Meyers                                    7,686,217        __             1,489,934
     Mr. Neyland                                   7,686,218        __             1,486,600
     Mr. Pyhrr                                     7,682,591        __             1,490,227
     Mr. Stoeppelwerth                             7,686,217        __             1,486,601
 
Stock Option Plan                                  6,148,883       2,153,700       42,967/2/
 
Director Plan                                      7,139,970       2,131,359           4,746
 
Articles Amendment                                 7,462,160       1,680,825         133,090
 
By-Laws Amendment                                  7,419,723       1,810,053       46,300/2/
 
Accountants                                        9,272,328               8           3,739
</TABLE>

-----------------------------
/1/ Votes withheld in Election of Directors
/2/ Includes 41,556 broker non-votes

                                       17
<PAGE>
 
                                    PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

          (a)  Market Information.  Prior to December 8, 1994, there was no
active public trading market in the Company's Common Stock.  The Company's
Common Stock was listed and began trading on the NASDAQ Bulletin Board on
December 8, 1994 under the symbol ADRM.  Effective November 29, 1994, the
Company changed its name to HomeCapital Investment Corporation, and the
Company's trading symbol was changed to HCAP on December 20, 1994.  The
Company's Common Stock were approved for listing on the NASDAQ SmallCap Market
and began trading on this market on July 17, 1997.  On September 18, 1997, the
Common Stock of the Company was also listed for trading on the Pacific Exchange
under the symbol HCI.

          The following tables set forth the range of high and low bid prices
per share for the Company's Common Stock for the periods indicated as reported
by the National Association of Securities Dealers, Inc. ("NASD").  The
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not represent actual transactions.

        Year ended September 30, 1996                 High                Low
                                                      ----                ---
           First Quarter                            $ 1.13               $0.65
           Second Quarter                             3.69                1.13
           Third Quarter                              4.38                3.38
           Fourth Quarter                             5.75                3.63


        Year ended September 30, 1997                 High                Low
                                                      ----                ---
           First Quarter                            $ 8.25               $5.00
           Second Quarter                            13.25                7.25
           Third Quarter                             11.25                8.00
           Fourth Quarter                            9.375                6.50


     On December 15, 1997, the bid price per share for the Company's Common
Stock as reported by the NASD was $4.625.

          (b)  Stockholders.  As of December 15, 1997, the approximate number of
holders of record of the Company's Common Stock was 985, not including
beneficial holders of shares held in street name.

          (c)  Dividends.  The Company has never paid a cash dividend on its
Common Stock.  It is not anticipated that any cash dividends will be paid in the
near future. Pursuant to the terms of the Company's Series A Preferred Stock, no
dividends may be paid on the Common 

                                       18
<PAGE>
 
Stock until all accrued dividends on the Series A Preferred Stock have been paid
or funds set aside therefor. At September 30, 1997, the Company had accrued and
unpaid dividends on its Series A Preferred Stock of $76,932. During fiscal 1997,
cash dividends totaling $270,000 were paid on the Series A Preferred Stock.
Certain covenants contained in the Company's loan agreements also restrict the
payment of dividends on the Company's Common Stock.

ITEM 6.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
          RESULTS OF OPERATIONS.

          The following discussion and analysis should be read in conjunction
with the Company's Consolidated Financial Statements, including the notes
thereto, contained elsewhere herein.

SUMMARY

          The Company, through its operating subsidiary, Home, is a specialized
consumer finance company.  Home was organized in 1993 to originate, purchase,
sell and service home improvement loans and other second mortgage loans secured
by residential property.  Home primarily finances Title I home improvement loans
and conventional consumer and home equity loans that fund a variety of borrower
needs.  Loans originated or purchased by Home are financed through warehouse
credit lines and then sold to or exchanged with Fannie Mae, secondary market
mortgage investors and other financial institutions or exchanged for Mortgage-
backed securities.  Home originates and purchases its loans through two primary
sources: wholesale (i.e. "Correspondent Loans"), and retail (i.e. "Direct
Loans").  Home purchases Correspondent Loans through a national network of
mortgage loan correspondents ("Correspondents").  Home originates Direct Loans
through direct mail solicitation of individual homeowners, through referrals
from home improvement contractors, located principally in the Southwestern and
Western regions of the United States, and through special marketing efforts such
as Corporate Alliances and Community Development initiatives.
 
          During the fiscal year ended September 30, 1997, the Company
originated or purchased in excess of $181,800,000 in loans, resulting in net
income of $5,178,737 on revenues of $23,968,818.  The Company experienced
negative cash flow from operations of approximately $40.7 million during fiscal
1997 principally due to retaining interest-only strip receivables on the sale of
loans and Mortgage-backed securities and retaining a residual interest of
$962,652 in a securitization transaction.  However, the Company expects to
continue funding its increased loan production and operational needs by
obtaining additional financing through continued asset-backed securitization
transactions and increased warehouse lines of credit and working capital lines
of credit.

          The Company recognizes revenue primarily from the gain on sale of
loans and Mortgage-backed securities, net unrealized gain on valuation of
investment securities, loan interest income, and investment interest income.
Prior to October 1995, the Company sold all of its loans held for sale on a
servicing released basis.  In October 1995, the Company commenced selling the
majority of its loan production to its then warehouse lender on a servicing
retained basis.  Subsequently, the Company was approved as a Seller/Servicer
with Fannie Mae to sell 

                                       19
<PAGE>
 
Title I Loans to Fannie Mae, and in June 1996, began selling the majority of its
Title I Loans to Fannie Mae for cash on a servicing retained basis. In March
1997, the Company began exchanging the majority of its Title I Loans for Fannie
Mae Mortgage-backed securities and, until May 1997, the Company simultaneously
sold these Mortgage-backed securities through Fannie Mae to secondary market
investors. In May 1997, the Company began to retain these Fannie Mae Mortgage-
backed securities for planned securitization transactions.

          During the fourth quarter of fiscal 1997, the Company completed its
first securitization of Fannie Mae Mortgage-backed securities.  HOME
Securitization Trust I, a Delaware business trust, issued and sold $47,154,000
of Asset Backed Bonds, Series 1997-1, at 7.335% directly to an investor.  The
Bonds are collateralized by $48,116,652 of Fannie Mae Mortgage-backed securities
with an average pass-through rate of 12.25%.  The Company retained and recorded
an interest-only strip receivable from the securitization which entitles it to
the excess spread from the interest received on the Fannie Mae Mortgage-backed
securities over the interest paid on the Bonds, as well as a residual interest
that entitles it to any remaining balances in the Mortgage-backed securities
after the Bonds are paid in full.  In addition, the Company recorded an
interest-only strip receivable from the excess servicing fee interest spread
from the Title I Loans underlying these Mortgage-backed securities.
 
          The following is a summary of Title I Loans and Mortgage-backed
securities sold or created during the fiscal years ended September 30, 1997 and
1996:

<TABLE>
<CAPTION>
       Title I Loans Sold:                                 1997                 1996
       ------------------------------------------------------------         -------------
 
<S>    <C>                                            <C>                   <C>
       Servicing released                             $   5,215,068         $   3,411,890
       Servicing retained:
         Financial institutions                                                61,318,895
         Fannie Mae - Whole loan sales                   57,349,489            29,711,453
         Fannie Mae - Mortgage-backed
          securities sold                                26,988,493            --
         Fannie Mae - Loans exchanged
          for Mortgage-backed securities                 21,021,928            --
       Asset-backed Securitizations                      48,116,662            --
                                                      -------------         -------------
                                                        153,476,572            91,030,348
                                                      -------------         -------------
             Total Title I Loans Sold                 $ 158,691,640         $  94,442,238
                                                      =============         ============= 
</TABLE>
                                                                               
          Gain on sale of loans and Mortgage-backed securities are recognized
upon the sale of loans or Mortgage-backed securities to investors. Loans are
deemed not to have been sold if they have been exchanged for Fannie Mae
Mortgage-backed securities, which have been retained by the Company.  The gain
on sale of loans and Mortgage-backed securities is calculated based upon the
difference between the net proceeds from the sale, including the value of an
Interest-only strip receivable derived from the excess interest spread on the
loans, and the allocated carrying values of loans or Mortgage-backed securities
sold.  The allocated carrying values are based upon the relative fair value of
loans or Mortgage-backed securities sold and the Interest-only strip
receivables.
 
          Net unrealized gain on valuation of investment securities includes the
unrealized gain on the outstanding Fannie Mae Mortgage-backed securities and
Interest-only strip receivables that are classified as trading securities.  The
unrealized gain on Mortgage-backed 

                                       20
<PAGE>
 
securities and Interest-only strip receivables represents the excess of fair
value over the net carrying value of the securities. The fair value of the
Mortgage-backed securities is determined based upon independent market quotes.
The fair value of the Interest-only strip receivables is calculated based upon
the present value of the estimated future excess interest spread after
considering the effects of estimated prepayments, defaults and future expenses.
The discount rate utilized is based upon assumptions that market participants
would use for similar financial instruments subject to prepayments, defaults,
collateral value and interest rate risks. As of September 30, 1997, the 
Interest-only strip receivable totaled $21.7 million.
 
          The Company adopted SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" (SFAS No. 125)
as of January 1, 1997.  SFAS No. 125 provides new accounting and reporting
standards for transfers and servicing of financial assets and extinguishments of
liabilities.  This statement also provides consistent standards for
distinguishing transfers of financial assets that are sales from transfers that
are secured borrowings and requires that liabilities and derivatives incurred or
obtained by transferors as part of a transfer of financial assets be initially
measured at fair value.

          As a result of adopting the SFAS No. 125, the Excess servicing
receivables previously shown on the Balance Sheet as of December 31, 1996, have
been renamed as Interest-only strip receivables, and are classified as available
for sale securities.  In addition, in the event of a securitization, the
resultant Interest-only strip receivable is divided into two components.  The
first component is related to the excess servicing fee on the loans, is
classified as available for sale and is derived from the excess of the weighted
average interest rate on the underlying loans over the interest rate on the
Mortgage-backed securities, plus the quarterly fee and net costs of servicing.
The second component is represented by a certificated residual interest in the
Mortgage-backed securities, is classified as a trading security and is derived
from the excess of the weighted average interest rate on the Mortgage-backed
securities over the interest rate on the related series of Asset Backed Bonds
plus the trustee and bond administration fees.  The Company periodically reviews
the fair value of the Interest-only strip receivables.  The difference between
the fair value and allocated carrying values for securities classified as
available for sale is included as a component of stockholders' equity, while
such differences for Interest-only strip receivables accounted for as trading
securities are included as a component of net income.

          For loans and Mortgage-backed securities sold during fiscal 1997, the
estimated fair value of cash flows were discounted using rates ranging from 11%
to 12 1/2% and were determined using annual prepayment assumptions (inclusive of
principal reductions from loan defaults) that included constant prepayment rates
("CPR") at either a level rate of 5% CPR for the first year and 15% CPR
thereafter or a ramp up rate starting at 3% CPR in month one and increasing to
15% in month thirteen and 15% CPR thereafter.  The Company has developed its
prepayment and default assumptions based on experience with its own portfolio,
available market data and information from regulatory agencies.  In determining
fair value of expected cash flows, management considers economic conditions at
the date of sale.

          The Company periodically reviews the Interest-only strip receivables,
classified as available for sale, for impairment.  This review is performed on a
disaggregated, pool-by-pool basis to determine whether a decline in fair value
below the carrying value of these assets is other than temporary. The loans
underlying the Interest-only strip receivables are affected primarily by the
related prepayment speeds of the loans and the actual default and delinquency
rates.  Impairment in the carrying value of Interest-only strip receivables is
charged to operations for the period of impairment.

                                       21
<PAGE>
 
          The Company records a Retained interest in securitization transactions
in which the Company transfers to the indenture trustee Mortgage-backed
securities having a principal balance in excess of the principal amount of the
related series of Asset Backed Bonds issued and sold by the Company.  This
overcapitalization is realized by the Company in the form of principal and
interest payments subsequent to the full repayment of principal to the
bondholders.  The Retained interest also is represented by the certificated
residual interest in the Mortgage-backed securities and is classified as a
trading security.

          There can be no assurance that the Company's estimates used to
determine the fair value of Interest-only strip receivables will remain
appropriate for the life of the loans.  If based on actual rates of loan
prepayments and defaults, or in the case of Interest-only strip receivables
derived from loan excess servicing fee spread, loan delinquencies, the Company
determines that its current expectation of future rates of loan prepayments or
defaults, or in those cases, loan delinquencies, exceed the Company's previous
estimates of such rates, then the carrying value of the Company's Interest-only
strip receivable, classified as available for sale, may have to be written down
through a charge to earnings.  The Company will not write up such assets to
reflect slower than expected prepayments, although slower prepayments may
increase future earnings, as the Company will receive cash flows in excess of
those anticipated.

          Net income for fiscal 1997 includes a pre-tax charge of $508,021
relating to an impairment loss on Interest-only strip receivables.  The
impairment loss on Interest-only strip receivables resulted from increased rates
of principal prepayments and defaults on certain loan pools serviced by the
Company.

          The principal balance of loans and Mortgage-backed securities serviced
at September 30, 1997 totaled approximately $234,748,000, representing 11,363
underlying Title I Loans.  The Company began servicing loans in October 1995.
The servicing function is performed by a non-affiliate of Home at a negotiated
fee.  The following table summarizes the delinquency experience of the Title I
Loan portfolio serviced by Home:

<TABLE>
<CAPTION>
                                                Dec. 31           Mar. 31           June 30           Sep. 30
       Delinquency Data:                         1996              1997              1997              1997
                                             ----------        ----------        ----------        ----------
<S>    <C>                                     <C>               <C>               <C>               <C>
       Delinquencies in Serviced Loan
         Portfolio (at period end):
         31-60 days........................     2.23%             2.89%             3.26%             5.52%
         61-90 days........................     1.21              1.22              1.36              2.58
         91 days and over..................     1.88              1.71              2.00              4.67
                                                ----              ----              ----             -----
             Total                              5.32%             5.82%             6.62%            12.77%
                                                ====              ====              ====             =====
 
       Serviced Loan Portfolio at period
       end (dollars in thousands)           $126,194          $158,259          $186,889          $234,748
       
</TABLE>

          The above delinquency information excludes loans that are in the
claims pending status.  At September 30, 1997, claims were pending on 361 loans
with an approximate balance of $7,826,900.

                                       22
<PAGE>
 
          During fiscal 1997 the Company has been experiencing an increase in
the delinquencies of its serviced loan portfolio, while this loan portfolio has
been increasing.  In particular, there was a significant increase in the
delinquencies at the end of the fourth quarter in comparison to the third
quarter.  Accordingly, the Company considered various options to improve the
servicing of its loan portfolio, including the delinquency performance, and
decided to assume the FHA claims filing administration and workmanship complaint
monitoring activities in house.  A loan servicing department of the Company has
been established for these activities.  In addition, the Company decided to
engage a collection agency to separately perform the delinquent collection
services for all loans that are five days or more delinquent, and during August
the Company transferred these collection services from its existing subservicer
to the collection agency.  Management believes that the complexity of
transferring these collection services from the existing subservicer to the
collection agency, including the transfer of relevant computer data for
borrowers, contributed to an increase in delinquencies during the forth quarter
of fiscal 1997.  In addition, management believes that the separation of the
normal payment collection and processing functions from the delinquent
collection functions also contributed to an increase in delinquencies during the
forth quarter of fiscal 1997.

          During the first quarter of fiscal 1998, the Company reevaluated the
separation of the payment processing and delinquent collection functions and
concluded that a new subservicer should be located to perform both these
functions to improve the delinquency performance of the loan portfolio.
Effective December 1, 1997, the Company transferred a majority of its serviced
loan portfolio to a new subservicer to perform these loan servicing functions.
The Company believes that because this new subservicer has significant
experience in collecting delinquent loans, as well as a sophisticated and
automated collection process, improvement in collection results should begin to
occur during the second quarter of fiscal 1998.

          Because delinquencies and losses typically occur months or years after
a loan is originated, data relating to delinquencies and losses as a percentage
of the current portfolio can understate the risk of future delinquencies, losses
or defaults.  There is no assurance that the delinquency, default and loss
experience with respect to any of the loans serviced will be comparable to the
experience reflected above for assets originated and serviced by Home.  The rate
of delinquencies, defaults and losses with respect to the loans will also be
affected by, among other things, interest rate fluctuations and national and
regional economic conditions.

          Interest-loans represents interest received on loans in the Company's
portfolio prior to their sale. Interest-investments represents the excess
interest spread from Interest-only strip receivables and other ancillary fees
received for servicing loans.  Servicing costs consist of fees paid to an
unaffiliated company to perform the functions of loan servicing.

          Total costs and expenses consist primarily of salaries and employee
benefits, servicing costs, loan costs, including provision for credit losses,
general and administrative expenses, occupancy costs and interest.  These costs
have increased in fiscal 1997 with the increase in the loan production, increase
in personnel, and increase in the costs related to opening new branch locations.

                                       23
<PAGE>
 
          The Company continues to implement its business growth strategy
through both product line and geographic diversification.  Home continues to
expand its Correspondent operation, its direct sales marketing operations,
Corporate Alliance relationships and pursue Community Development Lending
initiatives, in an effort to increase both loan production volume and loan
servicing volume.  See "Item 1 - Description of Business - Business Strategy."
Implementation of this strategy has increased the Company's total assets through
growth in the Interest-only strip receivables, and has been funded primarily
through increased borrowings.  While this growth has increased the Company's
revenues through increased gain on sale of loans, interest income and net
interest income, it has also increased the general and administrative expense
and provision for credit losses associated with the growth in loans produced and
serviced.  Increases in the Company's servicing portfolio and earnings are
contingent upon production volumes continuing to exceed pay downs of loans
serviced.  Additionally, the fair value of Interest-only strip receivables owned
by the Company may be adversely affected by changes in delinquency rates and the
interest rate environment, which could affect the prepayment assumptions used to
value the asset, as well as reduce the gains from the sale of those loans which
the Company is committed to purchase or has in inventory. Any such adverse
change in assumptions could have a material adverse effect on the Company's
financial condition and results of operations.

RESULTS OF OPERATIONS

Fiscal 1997 Compared to Fiscal 1996

          The Company originated or purchased $181.8 million of loans during
fiscal 1997 compared to $100.2 million of loans during fiscal 1996, an increase
of 81%.  The increase is a result of the overall growth in the Company's
business, including an increase in the number of active Correspondents and an
increase in the number of Conventional Loans originated through direct sales
marketing.  At September 30, 1997, the Company had approximately 128 active
Correspondents compared to approximately 80 active Correspondents at September
30, 1996.  Of the $181.8 million of loans originated in fiscal 1997, $163.1
million were Title I Loans and $18.7 were Conventional Loans.

                                       24
<PAGE>
 
          The following table sets forth certain data regarding loans originated
and purchased by the Company during fiscal 1997 and 1996:

<TABLE>
<CAPTION>
                                                                   Year Ended September 30,
                                                        1997                                         1996
                                        ----------------------------------             -------------------------------
<S>                                    <C>                        <C>                 <C>                      <C>
Principal amount of loans:
Correspondents - Title I                $ 146,229,810/1/             80.4%             $  76,020,078             75.9%
 
Dealers - Title I                           4,882,974                 2.7%                15,440,132             15.4%
 
Direct - Title I                           11,979,462                 6.6%                 5,606,397              5.6%
 
Conventional                               18,718,072                10.3%                 3,105,374              3.1%
                                        -------------               ------             -------------            ------
  Total                                 $ 181,810,318               100.0%             $ 100,171,981            100.0%
                                        =============               ======             =============            ====== 
Number of loans:
Correspondents - Title I                        6,307                78.5%                     3,399             68.2%
 
Dealers - Title I                                 378                 4.7%                     1,124             22.5%
 
Direct - Title I                                  684                 8.5%                       312              6.3%
 
 Conventional                                     665                 8.3%                       152              3.0%
                                        -------------               ------             -------------            ------ 
  Total                                         8,034               100.0%                     4,987            100.0%
                                        =============               ======             =============            ====== 
</TABLE>

          Total revenues increased 169% to $23,968,818 for fiscal 1997 from
$8,913,603 for fiscal 1996.  The increase was primarily the result of the
increased volume of loans originated and the sale of such loans.





------------
/1/Included bulk purchases of $15,852,112.

                                       25
<PAGE>
 
          The following table sets forth the principal balance of loans sold and
related gain on sale data for fiscal 1997 and 1996.

                                                   Year Ended September 30
                                                   1997              1996
                                              -------------      ------------
 
Principal amount of loans sold:
 Title I                                      $ 158,691,640      $ 94,442,238
 
 Conventional                                    17,960,979         3,053,912
                                              -------------      ------------ 
  Total                                       $ 176,652,619      $ 97,495,150
                                              =============      ============  
Gain on sale of Loans and
 Mortgage-backed securities:
Cash                                          $   3,239,290      $  4,475,183
Interest-only strip gain                         16,382,185         5,169,521
                                              -------------      ------------
  Sub Total                                      19,621,475         9,644,704
 
Premiums, net                                    (7,184,567)       (2,424,552)
Origination fees                                  2,706,391           556,024
Transaction costs                                   (15,128)          (22,669)
                                              -------------      ------------ 
Gain on sale of Loans and
 Mortgage-backed securities                   $  15,128,171      $  7,753,507
                                              =============      ============ 
 
Gain on sale of Loans and
 Mortgage-backed securities as a
 percentage of principal balance of                    8.6%              8.0%
 loans sold

          Gain on sale of loans, as a percentage of the principal balance of
loans sold, increased in fiscal 1997 over fiscal 1996, primarily due to increase
in the interest-only strip receivable component of the gain in fiscal 1997.  The
gain on sale of loans increased from $7,753,507 in fiscal 1996 to $15,128,171 in
fiscal 1997 or 95%.  The Interest-only strip component of the gain totaled
$16,382,185 in fiscal 1997 to $5,169,521 in fiscal 1997.

          Net unrealized gain on valuation of investment securities increased
form zero in fiscal 1996 to $3,829,945 in fiscal 1997.  The amount for fiscal
1997 represents the mark to market gain related to Mortgage-backed securities
and certain Interest-only strip receivables, classified as trading securities as
of September 30, 1997.  Also included in the net unrealized gain is a $508,021
charge for an impairment loss on Interest-only strip receivables.

          As a result of the adoption of SFAS No. 125, amounts previously
reported as loan servicing income were reported as Interest-investments
beginning January 1, 1997.  The investment interest income reflects the accrued
income associated with the Interest-only strip receivable and the interest
income associated with Mortgage-backed securities owned during fiscal 1997.
Interest-investments increased to $2,626,882 in the fiscal 1997 primarily due to
the increase in Interest-only strip receivables and Mortgage-backed securities.

                                       26
<PAGE>
 
          Interest income on loans held for sale increased 164% to $1,656,978
during fiscal 1997 from $627,365 during fiscal 1996.  The increase was primarily
the result of the increase in the average size of the portfolio of loans held
for sale.

          The provision for credit losses increased from $220,000 in fiscal 1996
to $1,075,000 in fiscal 1997.  The provision for credit losses is based upon
periodic analysis of the portfolio, economic conditions and trends, historical
credit loss experience, the borrowers' ability to repay, collateral values, and
estimated FHA insurance recoveries on loans originated and sold. The increase in
the provision for credit losses was due primarily to the increase in loan
production in fiscal 1997.   Presently, upon sale of loans by Home, the
purchaser assumes all credit risk except for first payment defaults, fraud and
certain other limited exceptions.  If Home changes its loan disposition strategy
in ways that increase its credit risk by securitizing or otherwise holding loans
longer in the portfolio, then the provision for credit losses as a percentage of
loans originated can be expected to increase.  For example, future changes to
its loan disposition strategy that my subsequently increase Home's credit risk
could include the following possibilities:  Home may elect or may be required to
retain the risk of loss on the uninsured portion of Title I Loans exchanged for
Fannie Mae Mortgage-backed securities; Home may securitize its loans other than
through the exchange of loans for Fannie Mae Mortgage-backed securities; or Home
may retain its loans in portfolio for a longer period prior to their
securitization.

          Salaries and employee benefits increased 174% to $6,061,278 for the
1997 fiscal from $2,211,579 for the fiscal 1996, primarily as a result of an
increase in the pay rates of employees and the increase in hiring professionals
required for growth.  During the fiscal 1997, in order to provide adequate
infrastructure for anticipated future growth, the Company increased the number
of new hire professional staff relative to clerical staff hirings.  This
decision to increase the hiring of senior professionals resulted in increased
employment costs as compared to fiscal 1996 when new hires were predominately
clerical personnel.  At the end of 1997, the Company had 117 employees as
compared to 48 at the end of 1996.

          Servicing costs consists primarily of the costs related to servicing
the portfolio of Loans sold on a servicing retained basis.  The servicing
function is performed by a no-affiliate of the Company at a negotiated fee.
Servicing costs increased 298% from $265,546 in the fiscal 1996 to $1,056,307 in
the 1997.  The increase was a result of increased loans serviced from 4,659 at
September 30, 1996 to 11,363 at September 30, 1997.

          Loan costs, consisting primarily of costs for credit reports, flood
reports, title reports, inspection fees, and the provision for credit losses,
increased 231% to 1,699,285 for the 1997 fiscal from $513,404 for the fiscal
1996 due primarily to the provision for credit losses of $1,075,000, as well as
the increase in loan production of $81.6 million for fiscal 1997.

          Total general and administrative expenses increased 145% to $4,023,523
for the fiscal 1997 from $1,643,852 for fiscal 1996.  The increase was primarily
as a result of increases in postage and courier costs, telecommunication costs,
stationary and office supplies expenses, travel costs, advertising expenses, and
depreciation expense.  The increase in these costs was 

                                       27
<PAGE>
 
primarily attributable to the increased volume of loan originations, loans
serviced, and the new offices opened.

          Occupancy costs increased to $637,758 in fiscal 1997 from $336,894 in
the fiscal 1996 period, or 89.3%, due primarily to the expansion of lease space
at the corporate offices, opening of the new branch offices, and the expansion
of the office space related to the direct mail marketing operations.

          Interest expense increased 317% to $1,925,434 for the fiscal 1997 from
$462,064 for fiscal 1996.  The increase was the direct result of increased loan
originations, the corresponding increase in the average outstanding balance of
the warehouse credit lines, and the financing of the Interest-only strip
receivables and Mortgage-backed securities.

          Other expense increased from zero in fiscal 1996 to $391,500 in fiscal
1997.  The amount represents the fair value of stock warrants issued to non-
employees during fiscal 1997.

          The provision for income taxes in fiscal 1997 was $2,994,996 as
compared to $914,041 for fiscal 1996.  For the year ended September 30, 1997,
the Company had income before income taxes of $8,173,733 as compared to
$3,480,264 for the year ended September 30, 1996.

          The effective income tax provision for the fiscal 1997 was 37%.  This
percentage differs from the federal statutory rate of 34% due primarily to the
effect of state income taxes.

          As a result of the foregoing, net income increased to $5,178,737, $.57
per common share for fiscal 1997, from $2,566,223, ($.073) per common share for
fiscal 1996.

FINANCIAL CONDITION

SEPTEMBER 30, 1997 COMPARED TO SEPTEMBER 30, 1996

          Cash decreased to $4,202 at September 30, 1997 from $343,484 at
September 30, 1996, primarily as a result of the timing of loan originations,
loan sales, borrowings and proceeds from the exercise of common stock warrants
and investment in furniture fixtures and equipment.  As a result of a bank
overdraft of $543,522 at September 30, 1997, cash decreased by $339,282 for the
year ended September 30, 1997.

          Restricted cash deposits increased 130% to $1,623,782 at September 30,
1997 from $705,754 at September 30, 1996, due to the increase in loan servicing
activities during fiscal 1997.

          Loans held for sale, net, increased 107% to $9,254,970 at September
30, 1997 from $4,479,550 at September 30, 1996 primarily as a result of
increased loan origination's from $100.2 million for fiscal 1996 to $181.8
million for fiscal 1997, and the timing of loan sales.

                                       28
<PAGE>
 
          Mortgage-backed securities increased to $23,279,895 at September 30,
1997, from zero at September 30, 1996, due to the commencement of participation
in the Fannie Mae FHA Title I Mortgage-backed securities program in March 1997.

          Interest-only strip receivables increased 328% to $21,720,249 at
September 30, 1997 from $5,078,584 at September 30, 1996, due to the Company
increasing the disposition of loans with the retention of residual interests.

          Retained interest in securitized assets increased 100% to $962,652 at
September 30, 1997, due to the Company commencing the securitization of
Mortgage-backed securities in the fourth quarter of fiscal 1997.

          Prepaid expenses and other assets increased 947% to $2,520,567 at
September 30, 1997, from $240,681 at September 30, 1996, primarily due to
increases in prepaid FHA insurance premiums and amounts due from investors
related to loan sales and loan servicing.

          Furniture, fixtures and equipment, net, increased 111% to $1,365,686
at September 30, 1997 from $646,082 at September 30, 1996 due to increased
purchases of office equipment related to facility expansion, and the expenditure
of $180,000 for the continued development of the Company's proprietary loan
system.

          Revolving lines of credit increased 746% to $34,392,583 at September
30, 1997 from $4,064,180 at September 30, 1996 due to the increase in loans held
for sale, Mortgage-backed securities, Interest-only strip receivables and
retained interest in securitized assets at the end of fiscal 1997.

          Amounts payable under securities loan agreement increased 100% to
$7,673,000 at September 30, 1997, due to the financing of Mortgage-backed
securities at the end of fiscal 1997.

          Accrued expenses and other liabilities increased to $3,310,943 at
September 30, 1997 from $1,264,766 at September 30, 1996, primarily as a result
of increases in accrued interest and other accrued operating costs, and the
increase in the liability for unremitted funds relating to restricted cash
deposits.

          The allowance for credit losses on loans sold increased 425% to
$919,315 at September 30, 1997, from $175,000 at September 30, 1996, due
primarily to the increase in estimated losses for future loan repurchases from
the increase in loan production and loan sales.

          Income taxes payable decreased 63% to $410,694 at September 30, 1997,
from $1,104,543 at September 30, 1996, due primarily to the payment of state and
federal income taxes of $1,204,563 during fiscal 1997, and the deferral of
taxable income during fiscal 1997 related to unrealized gains from
securitization  transactions.

          Deferred tax liabilities increased 100% to $1,903,102 at September 30,
1997, in connection with the unrealized gains from the securitization
transaction.

                                       29
<PAGE>
 
          Stockholders' equity increased to $11,488,831 at September 30, 1997,
from $4,903,457 at September 30, 1996, primarily due to net income of $5,178,737
and the exercise of Series A warrants for $1,911,918.

LIQUIDITY AND CAPITAL RESOURCES
 
          The Company's operations require continued access to financing
sources.  The Company's primary operating cash requirements arise from the cost
of loan originations and payments of operating expenses, interest and income
taxes.  Loan originations are initially funded principally through the Company's
warehouse lines of credit or repurchase facilities pending the sale of loans in
the secondary market or pending the securitization of Mortgage-backed
securities.  Substantially all of the loans originated by the Company are sold.
Net cash used in the Company's operating activities for the year ended September
30, 1997 and 1996 was approximately $40,700,000 and $3,900,000, respectively.
The net cash from the Company's operating activities resulted primarily from the
proceeds from the sale of loans totaling $152.4 million and $100.0 million for
the years ended September 30, 1997 and 1996, respectively.

          Adequate credit facilities and other sources of funding, including the
ability of the Company to sell loans or Mortgage-backed securities in the
secondary market, are essential for the continuation of the Company's loan
origination operations.  At September 30, 1997, the Company had a $20 million
warehouse line of credit with a commercial bank (the "Warehouse Line").  The
Warehouse Line matures June 30, 1998.  At September 30, 1997, approximately $2.9
million was outstanding under the Warehouse Line and $17.1 million was
available.  The Warehouse Line bears interest at 300 base points over the
federal funds rate and is collateralized by loans pledged under the Warehouse
Line.  The agreement with the lender requires the Company to maintain a minimum
adjusted tangible net worth of $7.4 million.  The Company also has a working
capital line of credit with the same lender for up to $16.7 million, which
matures June 30, 1998, and had an outstanding balance of $11.7 million at
September 30, 1997.  At September 30, 1997, the interest rates on the two
components of the working capital line ranged from 9.375% (30 day LIBOR plus 375
basis points) to 10.125% (30 day LIBOR plus 450 basis points).  The weighted
average interest rate for this facility at September 30, 1997, was 9.53%.  While
the Company believes that it will be able to maintain its existing credit
facilities and renew or obtain replacement financing as its credit arrangements
mature and obtain additional financing for its operations, if necessary, there
can be no assurance that such financing will be available on favorable terms, or
at all.

          In connection with the arrangement with Fannie Mae to exchange Title I
Loans for Mortgage-backed securities, Fannie Mae has provided short-term
repurchase funding to Home, on an uncommitted basis, for Title I Loans and
Mortgage-backed securities exchanged for such loans.  Generally the repurchase
facilities with Fannie Mae require repayment with a cost of funds based on a 30-
day LIBOR rate plus 30 to 90 basis points, depending upon whether the funding is
provided for Title I Loans or Mortgage-backed securities.  At September 30,
1997, the principal amount of the Company's obligations to Fannie Mae under
these repurchase facilities was approximately $7.7 million for Mortgage-backed
securities that have been issued by Fannie Mae and registered under 

                                       30
<PAGE>
 
the Federal Reserve book entry system and was approximately $14.9 million for
Mortgage-backed securities that have been issued with Fannie Mae but not
registered under the Federal Reserve book entry system. These repayment
obligations of the Company are secured by Mortgage-backed securities with a fair
value of approximately $23.3 million at September 30, 1997. Fannie Mae also has
provided repurchase funding to the Company for its Title I Loans that are held
for sale and intended for sale to Fannie Mae. At September 30, 1997, the
principal amount of the Company's obligations under this repurchase facility was
approximately $4.9 million for Title I Loans delivered and available for sale to
Fannie Mae.

          Until October 1995, the Company's principal source of liquidity was
the sale of whole loans on a servicing released basis.  While this enabled the
Company to meet its operating cash requirements, it limited the Company's growth
potential and the revenue generated from its loan originations.  To remedy this
situation, the Company embarked on a strategy in fiscal 1996 that enabled the
Company to retain the servicing rights and the related servicing fee interest-
only spread from its Title I Loans produced and to consider other disposition
strategies for its loan production, such as sales to Fannie Mae under the Title
I Loan program and the securitized sale of loan pools in the secondary market.
The Company was approved as a Seller/Servicer under the Fannie Mae Title I Loan
purchase program in March 1996 and expanded its warehouse financing and raised
additional capital to support loan sales to Fannie Mae.

          In March 1997, the Company began selling Title I Loans to Fannie Mae
under the Fannie Mae Title I Mortgage-backed securities program.  Under the
program, the Company sold its Title I Loans to Fannie Mae in exchange for
Mortgage-backed securities and simultaneously sold these Mortgage-backed
securities for a premium through Fannie Mae.  In addition to the cash premium on
sale, the Company also recorded an Interest-only strip receivable derived from
the excess interest spread from the loan servicing fee that ranged from 125
basis points to 250 basis points.  While these "swap and sell" transactions
generated cash proceeds that in certain instances may be sufficient to satisfy
the current liquidity demands for the Company, these transactions also generated
current tax liability for federal income tax purposes attributable to the net
gain recognized from the sale of the related Title I Loans.

          In May 1997, the Company changed its disposition strategy in
anticipation of a resecuritization of the Fannie Mae Mortgage-backed securities.
Rather than "swap and sell" transactions, the Company began to exchange its
Title I Loans for Fannie Mae Mortgage-backed securities and hold the Mortgage-
backed securities for future resecuritization transactions.  The Company planned
to resecuritize the majority of its Fannie Mae Mortgage-backed securities in a
transaction that would not be treated as a sale for federal income tax purposes,
and therefore, would cause the deferral of federal and state income tax
liability, until the cash interest income attributable to the retained interest
in the Mortgage-backed securities is received over the term of the
resecuritization transaction.

          During the fourth quarter of fiscal 1997, the Company completed its
first securitization of Fannie Mae Mortgage-backed securities.  HOME
Securitization Trust I, a Delaware business trust, issued and sold $47,154,000
of Asset Backed Bonds, Series 1997-1, at 7.335% directly to an investor.   The
Bonds are collateralized by $48,116,652 of Fannie Mae Mortgage-backed securities
with an average pass-through rate of 12.25%.  The Company retained and recorded
an interest-only strip receivable from the securitization which entitles it to
the excess spread from the interest received on the Fannie Mae Mortgage-backed
securities over the interest 

                                       31
<PAGE>
 
paid on the Bonds, as well as a retained interest that entitles it to any
remaining balances in the Mortgage-backed securities after the Bonds are paid in
full. In addition, the Company recorded an interest-only strip receivable from
the excess servicing fee interest spread from the Title I Loans underlying these
Mortgage-backed securities. At September 30, 1997, Mortgage-backed securities
with a fair value of approximately $23.3 million are being held primarily for
future securitizations.

          During the first quarter of fiscal 1998, the Company completed its
second securitization of Fannie Mae Mortgage-backed securities.  HOME
Securitization Trust I issued and sold $39,193,258 of Asset Backed Bonds, Series
1997-2, at 7.261% directly to an investor.  The bonds are collateralized by
$39,589,150 of Fannie Mae Mortgage-backed securities with an average pass-
through rate of 12.24%.  The Company retained and recorded an interest-only
strip receivable from the securitization which entitles it to the excess spread
from the interest received on the Fannie Mae Mortgage-backed securities over the
interest paid on the Bonds, as well as a retained interest that entitles it to
any remaining balances in the Mortgage-backed securities after the Bonds are
paid in full.  In addition, the Company recorded an Interest-only strip
receivable from the excess servicing fee interest spread from the Title I Loans
underlying these Mortgage-backed securities.

          Also during the first quarter of fiscal year 1998, the Company sold
$6.9 million of Fannie Mae Mortgage-backed securities with an average interest
rate of approximately 9.7% for total sales proceeds of approximately $7.5
million.

          While the increase in its Warehouse Line, Working Capital Line, Fannie
Mae funding facilities, and additional capital have enabled the Company to
significantly increase its loan production and loan sales and Mortgage-backed
securities transactions to Fannie Mae, such transactions, with the retention of
the Interest-only strip receivable, create additional short-term cash
requirements.  Loan sales and "swap and sell" Mortgage-backed securities
transactions, as described above, generate current federal and state tax
liability from the net gain on sale for income tax purposes, even though the
cash interest income from the related Interest-only strip receivable will be
received over the life of the Loans.  Accordingly, in order for the Company to
continue the growth of its loan production and servicing portfolio, the Company
may require additional capital through the sale of debt and/or equity securities
to fund its operating cash requirements.

          Although the Mortgage-backed securities currently held by the Company
represent readily marketable securities, the retention of these securities until
they can be resecuritized will increase the short-term liquidity demands on the
Company.  The Company is receiving funding under its repurchase facilities with
Fannie Mae that generally exceeds the par value of the Mortgage-backed
securities, but these financing proceeds are less than the total value that
would otherwise be received from the current sale of these Mortgage-backed
securities.  In addition, it retains interest-rate risk which may affect the
ultimate gain on disposition from a resecuritization transaction, as well as the
risk associated with a potential margin call on the financing of the Mortgage-
backed securities.

                                       32
<PAGE>
 
          During the year ended September 30, 1997, the Company used $963,830 in
funds for investing activities for furniture, fixtures and equipment, including
180,000 for the further development of the Company's proprietary computer
software and provided funds from investing activities of $1,193,982 from
payments received on Interest-only strip receivables and provided $40.2 million
in funds from its financing activities through increased usage of its revolving
lines of credit payables under securities loan agreements, and the issuance of
Common Stock through the exercise of warrants.  The Company expects to spend
approximately $1,000,000 for furniture, fixtures and equipment for fiscal 1998
for the expansion of its lending network, and approximately $100,000 for
additional upgrades and enhancements to its computer system.

          There can be no assurance that the Company will continue to have
access to current and future financing facilities and other sources of funding
that will provide the Company with sufficient funding to continue its loan
origination operations and loan disposition strategies.  The failure of the
Company to have access to, or to obtain sufficient funding from, these financing
and other funding sources will in all likelihood impair the Company's ability to
grow its business and implement its business strategy, and may have a material
adverse effect on the financial condition, results of operations and liquidity
of the Company.

EFFECTS OF CHANGING PRICES AND INFLATION

          The Company's operations are sensitive to increases in interest rates
and to inflation.  Increased borrowing costs resulting from increases in
interest rates may not be immediately recoverable from prospective purchasers.
The Company's loans held for sale consist primarily of fixed-rate long term
loans that do not increase or decrease as a result of changes in interest rates
charged to the Company.  In addition, delinquency and loss exposure may be
affected by changes in various regional economies, such as California and Texas,
where the Company has significant loan concentrations, or in the national
economy.

RECENT ACCOUNTING PRONOUNCEMENTS

          In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share."
SFAS No. 128 specifies the computation, presentation, and disclosure
requirements for earnings per share.  SFAS No. 128 is effective for periods
ending after December 15, 1997 thus the Company will adopt SFAS No. 128 in the
first quarter of fiscal 1998.  Previously reported earnings per share will be
restated at that time to conform to SFAS No. 128.  This adoption is not expected
to have a material impact on earnings per share as currently presented by the
Company.
 
          In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" ("SFAS No. 130").  SFAS NO. 130, which is effective for fiscal years
beginning after December 15, 1997, establishes disclosure standards for
reporting comprehensive income in a full set of general-purpose financial
statements.  As SFAS No. 130 contains disclosure requirements only, its adoption
is not expected to have an impact on the Company's financial position or results
of operations.
 
          In June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS No. 131") which is
effective for periods beginning 

                                       33
<PAGE>
 
after December 15, 1997. SFAS No. 131 establishes standards for the way that
public business enterprises report selected information about operating segments
in interim financial reports issued to stockholders. It also establishes
standards for related disclosures about products and services, geographic areas
and major customers. As SFAS No. 131 contains disclosure requirements only, its
adoption is not expected to have an impact on the Company's financial position
or results of operations.
 
SEASONALITY

          Home improvement loan volume tracks the seasonality of home
improvement contract work.  Volume tends to build during the spring and early
summer months, particularly with regard to external improvements.  A decline is
typically experienced in late summer and early fall until temperatures begin to
drop.  This change in seasons precipitates the need for new siding, window and
insulation contracts.  Peak volume is experienced in November and early December
and declines dramatically from the holiday season through the winter months.
Debt consolidation and home equity loan volumes are not impacted by seasonal
climate changes and, with the exclusion of the holiday season, tend to be stable
throughout the year.

SAFE HARBOR STATEMENT

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

ITEM 7.  FINANCIAL STATEMENTS.

         The financial statements and exhibits are listed at Item 13 "Exhibits
and Reports on Form 8-K."

ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE.

         None.

                                       34
<PAGE>
 
                                   PART III

ITEM 9.   DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
          COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.

          The information required to be furnished by this Item is hereby
incorporated by reference to the same information provided under the caption
"ELECTION OF DIRECTORS," in the proxy statement of the Company prepared in
accordance with Schedule A pursuant to Rule 14a-101 under the Securities
Exchange Act of 1934 to be filed with the Securities and Exchange Commission
("SEC") in connection with the 1998 annual meeting of stockholders of the
Company, and which shall be distributed to stockholders of the Company
accompanied by a copy of this report ("Proxy Statement").

ITEM 10.  EXECUTIVE COMPENSATION.

          The information required to be furnished by this Item is hereby
incorporated by reference to the same information provided under the caption,
"ELECTION OF DIRECTORS," in the Proxy Statement.

ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

          The information required to be furnished by this Item is hereby
incorporated by reference to the same information provided under the caption,
"ELECTION OF DIRECTORS," in the Proxy Statement.
 
ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

          The information required to be furnished by this Item is hereby
incorporated by reference to the same information provided under the caption,
"ELECTION OF DIRECTORS," in the Proxy Statement.
 
ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K.

          (a) The following financial statements and exhibits are filed with and
              as a part of this Annual Report:
 
              (1)   Financial Statements
 
                                                                      Page No.
 
              Index to Consolidated Financial Statements                 F-1
 
              Report of Independent Accountants                          F-2
 
              Consolidated Balance Sheets at                             F-3
              September 30, 1997 and September 30, 1996
 

                                       35
<PAGE>
 
              Consolidated Statements of Operations                          F-4
              for the Years Ended September 30, 1997 and 1996
 
              Consolidated Statements of Changes in Stockholders'            F-5
              Equity for the Years Ended September 30, 1997 and 1996
 
              Consolidated Statements of Cash Flows                          F-6
              for the Years Ended September 30, 1997 and 1996
 
              Notes to Financial Statements                                  F-7
 
 
              (2)  Exhibits
 
Exhibit No.   Description of Document                                (Reference)
--------------------------------------------------------------------------------
3.1           Restated Articles of Incorporation of the Company, Inc.,        *
              filed with the State of Nevada on September 30, 1997.
 
3.1a          Certificate of Designations, Preferences and Rights of         (5)
              Preferred Stock, Series A, of the Company, filed with
              the State of Nevada on June 14, 1996.
 
3.1b          Amendments to Certificate of Designation of Preferred          (4)
              Stock, Series A, of the Company, filed with the
              State of Nevada on December 19, 1996.
 
3.2           Bylaws of the Company (Restated)                                *
 
 
10.1          Option Agreement, dated August 26, 1994,                       (1)
              between the Company and John W. Ballard.
 
10.2          Employment Agreement, dated June 21, 1993,                     (1)
              between John W. Ballard and Home.
 
10.3          Loan Agreement, dated October 5, 1994,                         (1)
              between the Company and Horizon Bank
              and Trust, SSB.
 
10.4          Adoption Agreement, effective January 1, 1995,                 (2)
              as amended, between Home and the trustees,
              John W. Ballard and Anna Walker, of the 401(k)
              Profit Sharing Plan of Home.

                                       36
<PAGE>
 
Exhibit No.   Description of Document                                (Reference)
--------------------------------------------------------------------------------
10.5          Mortgage Selling and Servicing Contract, dated                 (3)
              March 1, 1996, between Home and the Federal
              National Mortgage Association.
 
10.6          Master Agreement No. MD01694, effective as of                   *
              February 11, 1997, between Home and the Federal National
              Mortgage Association.

10.6a         First Amendment to Master Agreement No. MD01694,                *
              effective as of April 11 , 1997, between Home and the
              Federal National Mortgage Association.
 
10.6b         Second Amendment to Master Agreement No. MD01694,               *
              effective as of September 23, 1997, between Home and the
              Federal National Mortgage Association.
 
10.7          Employment Agreement, dated as of June 1, 1996, between        (4)
              Home and Tommy M. Parker                    .
 
10.8          HomeCapital Investment Corporation 1996  Stock                 (4)
              Option Plan.
 
10.9          First Amended and Restated Warehouse Loan Agreement,            *
              dated as of September 24, 1997, among Home, the Company
              and Guaranty Federal Bank, F.S.B ("Guaranty Federal").
 
10.9a         Warehouse Promissory Note of Home, dated as of                  *
              September 24, 1997, payable to Guaranty Federal
              In the amount of $20,000,000.
 
10.9b         Unconditional Guaranty of the Company, dated as of              *
              September 24, 1997, in favor of Guaranty Federal.
 
10.9c         Security Agreement, dated as of June 1, 1996, between           *
              Home and Guaranty Federal.
 
10.9d         Pledge Agreement, dated as of April 2, 1997, between Home       *
              and Guaranty Federal.
 
10.9e         Bailment Agreement, dated as of  April 2, 1997, among Home,     *
              Guaranty Federal and Frost National Bank.

                                       37
<PAGE>
 
Exhibit No.   Description of Document                                (Reference)
--------------------------------------------------------------------------------

10.10         First Amended and Restated Working Capital Line of Credit       *
              and Security Agreement, dated as of September 24, 1997,
              between Home and Guaranty Federal.

10.10a        Promissory Note of Home, dated as of  September 24,1997,        *
              payable to Guaranty Federal in the amount of $16,666,600.
 
10.10b        Unconditional Guaranty of the Company, dated as of              *
              September 24, 1997, in favor of Guaranty Federal.
 
10.11         Preferred Stock Purchase Agreement, dated May 3, 1996,         (5)
              between the Company and HCI Equity Partners, L.P.,
              including form of Registration Agreement.
 
10.12         Form of Subscription Agreement for Preferred Stock             (4)
              Series A.
 
10.13         License Agreement, dated November 27, 1996, between            (4)
              Home and Builders Square, Inc.
 
10.14         HomeCapital Investment Corporation Non-Employee                (6)
              Compensation Plan effective September 25, 1997.
 
10.15         Employment Agreement, dated as of April 8, 1997,                *
              between Home and Michael B. Thimmig.
 
10.16         Employment Agreement, dated as of July 1, 1997,                 *
              between Home and Thomas L. Perritte.
 
10.17         Employment Agreement, dated April 1, 1997, between              *
              Home and Gene V. Morrison.
 
10.18         Master Agreement No. MD01724, effective as of                   *
              April 1, 1997, between Home and the Federal
              National Mortgage Association.
 
10.18a        First Amendment to Master Agreement No.                         * 
              MD01724, effective as of August 5, 1997,
              between Home and the Federal National
              Mortgage Association.
 
10.18b        Second Amendment to Master Agreement                            *
              No. MD01724, effective as of September 17,
              1997, between Home and the Federal National
              Mortgage Association.

                                       38
<PAGE>
 
Exhibit No.   Description of Document                                (Reference)
--------------------------------------------------------------------------------
11            Statement of  Computation of Earnings Per Share                 *
                                                                              
21            Subsidiaries of the Company                                     *
                                                                              
27            Financial Data Schedule (Electronic Filing Only)                *

__________________
Reference Notes:
     *    Filed herewith.

          (1) Exhibits 10.1, 10.2 and 10.3 were filed as Exhibits to
Registrant's Annual Report on Form 10-KSB for the fiscal year ended September
30, 1994, and each is hereby incorporated herein by this reference.

          (2) Exhibit 10.4 was filed as an Exhibit to Registrant's Annual Report
on Form 10-KSB for the fiscal year ended September 30, 1995, and is hereby
incorporated herein by this reference.

          (3) Exhibit 10.5 was filed as an Exhibit to Registrant's Quarterly
Report on Form 10-QSB for the three months ended March 31, 1996, and is hereby
incorporated herein by this reference.

          (4) Exhibits 3.1b, 10.7, 10.8, 10.12 and 10.13 were filed with
Registrant's Annual Report on Form 10-KSB for the fiscal year ended September
30, 1996, and each is hereby incorporated herein by this reference.

          (5) Exhibits 3.1a and 10.11 were filed as Exhibits to Registrant's
Quarterly Report on Form 10-QSB for the three months ended June 30, 1996, and
each is hereby incorporated herein by this reference.

          (6) Exhibit 10.14 was filed as an Exhibit to Registrant's Proxy
Statement on Schedule 14A, dated September 3, 1997, and is hereby incorporated
herein by this reference.


              (b) No Current Reports on Form 8-K were filed by the Company
                  during the last quarter of the fiscal year ended September 30,
                  1997.

                                       39
<PAGE>
 
                                  SIGNATURES
                                  ----------


     In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

                                    HOMECAPITAL INVESTMENT CORPORATION
                                    (Registrant)


Date:  December 29, 1997            By: /s/  JOHN W. BALLARD
                                       -----------------------------------
                                        JOHN W. BALLARD, President

     In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.


Date:  December 29, 1997            By: /s/ JOHN W. BALLARD
                                       -----------------------------------
                                        JOHN W. BALLARD, President,
                                        Chief Executive Officer,
                                        Chief Financial Officer and
                                        Chairman of the Board of Directors


Date:  December 29, 1997            By: /s/ TOMMY M. PARKER
                                       -----------------------------------
                                        TOMMY M. PARKER,
                                        Principal Accounting Officer


Date:  December 29, 1997            By: /s/ E. JEFF BOMER
                                       -----------------------------------
                                        E. JEFF BOMER, Secretary
                                        and Director


Date:  December 29, 1997            By: /s/ PETER A. PYHRR
                                       -----------------------------------
                                        PETER A. PYHRR, Director


Date:  December 29, 1997            By: /s/ LARRY MEYERS
                                       -----------------------------------
                                        LARRY MEYERS, Director


Date:  December 29, 1997            By: /s/ ROBERT R. NEYLAND
                                       -----------------------------------
                                        ROBERT R. NEYLAND, Director

                                       40
<PAGE>
 
Date:  December 29, 1997            By: /s/ WALTER W. STOEPPELWERTH
                                       -----------------------------------
                                        WALTER W. STOEPPELWERTH, Director


Date:  December 29, 1997            By: /s/ J. ROLFE JOHNSON
                                       -----------------------------------
                                        J. ROLFE JOHNSON, General Counsel
                                        and Director

                                       41
<PAGE>
 
               HOMECAPITAL INVESTMENT CORPORATION AND SUBSIDIARY

                       CONSOLIDATED FINANCIAL STATEMENTS

                          SEPTEMBER 30, 1997 AND 1996
                                        
<PAGE>
 
               HOMECAPITAL INVESTMENT CORPORATION AND SUBSIDIARY

                  INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



                                                                     PAGE
                                                                     ----
                                        

Report of Independent Accountants                                     F-2

Consolidated Financial Statements

     Consolidated Balance Sheets at September 30, 1997 and 1996       F-3

     Consolidated Statements of Operations for the Years Ended
     September 30, 1997 and 1996                                      F-4

     Consolidated Statements of Changes in Stockholders' Equity
     for the Years Ended September 30, 1997 and 1996                  F-5

     Consolidated Statements of Cash Flows for the Years Ended
     September 30, 1997 and 1996                                      F-6

     Notes to Financial Statements                                    F-7

                                      F-1
<PAGE>
 
                       REPORT OF INDEPENDENT ACCOUNTANTS
                                        

To the Board of Directors
HomeCapital Investment Corporation

We have audited the accompanying consolidated balance sheets of HomeCapital
Investment Corporation and Subsidiary as of September 30, 1997 and 1996 and the
related consolidated statements of operations, changes in 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 audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
HomeCapital Investment Corporation and Subsidiary as of September 30, 1997 and
1996 and the consolidated results of their operations and their cash flows for
the years then ended, in conformity with generally accepted accounting
principles.

As described in Note 2, the Company implemented Statement of Financial
Accounting Standards No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" as of January 1, 1997.



Coopers & Lybrand L.L.P.

Austin, Texas
December 12, 1997

                                      F-2
<PAGE>
 
               HOMECAPITAL INVESTMENT CORPORATION AND SUBSIDIARY
                          CONSOLIDATED BALANCE SHEETS
                          September 30, 1997 and 1996



<TABLE>
<CAPTION>
                                    ASSETS                                        1997                1996 
                                                                            --------------       ------------- 
    <S>                                                                     <C>                  <C>               
    Cash                                                                    $        4,202       $     343,484           
    Cash deposits, restricted                                                    1,623,782             705,754  
    Loans held for sale, net                                                     9,254,970           4,479,550  
    Mortgage-backed securities                                                  23,279,895                  -- 
    Interest-only strip receivables                                             21,720,249           5,078,584   
    Retained interest in securitized assets                                        962,652                  --
    Prepaid expenses and other assets                                            2,520,567             240,681 
    Furniture, fixtures and equipment, net                                       1,365,686             646,082        
    Deferred tax assets                                                                 --             190,502
                                                                            --------------       -------------                      

                        Total assets                                        $   60,732,003       $  11,684,637
                                                                            ==============       =============           

     LIABILITIES AND STOCKHOLDERS' EQUITY
    Bank overdraft                                                          $      543,522       $          --
    Note payable                                                                    50,010             158,339
    Revolving lines of credit                                                   34,392,583           4,064,180
    Payable under securities loan agreements                                     7,673,000                  --
    Capital lease obligations                                                       40,453              14,352  
    Accrued expenses and other liabilities                                       3,310,493           1,264,766 
    Allowance for credit losses on loans sold                                      919,315             175,000 
    Income taxes payable                                                           410,694           1,104,543 
    Deferred tax liabilities                                                     1,903,102                  --
                                                                            --------------       -------------           
                        Total liabilities                                       49,243,172           6,781,180
                                                                            --------------       -------------           
Commitments and contingencies

Stockholders' equity:
    Preferred stock, $.01 par value; 10,000,000 shares 
      authorized; 1,500,000 shares of cumulative convertible 
      Series A stock issued and outstanding(liquidation value
      of $2,250,000)                                                                15,000              15,000
    Common stock, $.01 par value; 100,000,000 shares
      authorized;  8,226,860 and 7,292,711 shares issued and
      outstanding                                                                   82,269              72,927
    Additional paid-in capital                                                   6,133,709           3,688,433
    Retained earnings                                                            6,093,085           1,184,348
    Valuation of securities available for sale, net of tax                        (779,732)                 --
    Notes receivable for stock issued                                              (55,500)            (57,251)
                                                                            --------------       -------------           
           Total stockholders' equity                                           11,488,831           4,903,457
                                                                            --------------       -------------           
           Total liabilities and stockholders' equity                       $   60,732,003       $  11,684,637
                                                                            ==============       =============           


                       The accompanying notes are an integral part of the consolidated financial statements.
</TABLE> 

                                      F-3
<PAGE>
 
               HOMECAPITAL INVESTMENT CORPORATION AND SUBSIDIARY
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                For the Years Ended September 30, 1997 and 1996


<TABLE>
<CAPTION>
                                                                                  1997                1996 
                                                                            --------------       ------------- 
    <S>                                                                     <C>                  <C>               
Revenues:
    Gain on sale of loans and mortgage-backed securities                    $   15,128,171       $   7,753,507
    Net unrealized gain on valuation of investment
       securities                                                                3,829,945                  --
    Interest - loans                                                             1,656,978             627,365
    Interest - investments                                                       2,626,882               6,827
    Loan servicing income                                                          422,483             390,571
    Other income                                                                   304,359             135,333
                                                                            --------------       ------------- 
                        Total revenues                                          23,968,818           8,913,603
                                                                            --------------       ------------- 
Costs and Expenses:
    Salaries and employee benefits                                               6,061,278           2,211,579
    Servicing costs                                                              1,056,307             265,546
    Loan costs                                                                   1,699,285             513,404
    General and administrative                                                   4,023,523           1,643,852
    Occupancy                                                                      637,758             336,894
    Interest                                                                     1,925,434             462,064
    Other expense                                                                  391,500                  --
                                                                            --------------       ------------- 
                        Total costs and expenses                                15,795,085           5,433,339
                                                                            --------------       -------------  
Income before income taxes                                                       8,173,733           3,480,264
Provision for income taxes                                                       2,994,996             914,041
                                                                            --------------       -------------  
                        Net income                                          $    5,178,737       $   2,566,223
                                                                            ==============       ============= 
Income (loss) per common and common equivalent share:
   Primary:
        Earnings (loss) per common share                                    $          .57       $       (.073)
                                                                            ==============       ============= 
        Weighted average number of common and common
            equivalent shares outstanding                                        8,655,251           7,010,884
                                                                            ==============       =============  
Fully diluted:
        Earnings (loss) per common share                                 $             .51       $       (.073)
                                                                            ==============       ============= 
        Weighted average number of  fully diluted common
            shares outstanding                                                  10,153,639           7,010,884
                                                                            ==============       =============  

                       The accompanying notes are an integral part of the consolidated financial statements.
</TABLE> 

                                      F-4
<PAGE>
 
<TABLE> 
<CAPTION> 

                                         HOMECAPITAL INVESTMENT CORPORATION AND SUBSIDIARY
                                    CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                                          For the Years Ended September 30, 1997 and 1996

                                                                                                 Valuation
                                                                                                    of
                                   Common Stock       Preferred Stock  Additional   Retained    Securities   Notes
                                 -----------------    ----------------   Paid-In    Earnings     Available Receivables Stockholders'
                                 Shares    Dollars    Shares   Dollars   Capital    (Deficit)    for Sale   For Stock     Equity
                                 -------   -------    ------   -------   -------    ---------    --------   ---------   ------------
<S>                             <C>         <C>      <C>        <C>      <C>         <C>        <C>        <C>          <C> 
Balance, October 1, 1995        6,887,975   $68,879      2,000  $    20  $1,325,201  $(1,301,585)   --     $ (64,256)   $    28,259

Conversion of preferred stock     337,708     3,378     (2,000)     (20)     --           (3,358)   --        --             --

Sale of preferred stock            --        --      1,500,000   15,000   2,095,790       --        --        --          2,110,790

Exercise of Series A warrants      67,028       670     --       --         267,442       --        --        --            268,112

Write-off of notes receivable      --        --         --       --          --           --        --         7,005          7,005
 
Preferred stock dividends          --        --         --       --          --          (76,932)   --        --            (76,932)

Net Income                         --        --         --       --          --        2,566,223    --        --          2,566,223
                                ---------   -------  ---------  -------  ----------   ---------- ---------  --------    -----------
Balance, September 30, 1996     7,292,711    72,927  1,500,000   15,000   3,688,433    1,184,348    --       (57,251)     4,903,457
                                ---------   -------  ---------  -------  ----------   ---------- ---------  --------    -----------
Exercise of Series A warrants     477,979     4,780     --       --       1,907,138       --        --        --          1,911,918

Exercise of other warrants        456,170     4,562     --       --          88,138       --        --        --             92,700

Issuance of warrants and options   --        --         --       --         450,000       --        --        --            450,000

Repayment of Notes                 --        --         --       --          --           --        --         1,751          1,751

Preferred stock dividends          --        --         --       --          --         (270,000)   --        --           (270,000)

Change in value of investment      --        --         --       --          --           --      (779,732)   --           (779,732)
    securities,  net of tax 

Net Income                         --        --         --       --          --        5,178,737    --        --          5,178,737
                                ---------   -------  ---------  -------  ----------   ---------- ---------  --------    -----------
Balance, September 30, 1997     8,226,860   $82,269  1,500,000  $15,000  $6,133,709   $6,093,085 $(779,732) $(55,500)   $11,488,831
                                =========   =======  =========  =======  ==========   ========== =========  ========    ===========

                       The accompanying notes are an integral part of the consolidated financial statements.
</TABLE> 

                                      F-5
<PAGE>
 
               HOMECAPITAL INVESTMENT CORPORATION AND SUBSIDIARY
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                For the Years Ended September 30, 1997 and 1996


<TABLE>
<CAPTION>
                                                                                  1997                1996 
                                                                            --------------       ------------- 
    <S>                                                                     <C>                  <C>               
Cash flows from operating activities:                                       
   Net income                                                               $    5,178,737       $   2,566,223
   Adjustments to reconcile net income to net cash
      Provided by (used in) operating activities:
   Depreciation and amortization                                                   356,705             210,796
   Deferred tax (benefit) provision                                              2,495,284            (190,502)
   Provision for credit losses                                                   1,075,000             220,000
   Write-off of notes receivable                                                        --               7,005
   Issuance of warrants and options                                                450,000                  --
   Gain on sales of loans and mortgage-backed  securities                      (15,128,171)         (7,753,507)
   Unrealized gain from valuation of trading account securities                 (4,337,945)                 --
   Loss on impairment of interest-only strip receivables                           508,021                  --
   Proceeds from sales of loans and mortgage-backed securities                 152,402,702          99,981,699
   Purchase and origination of loans                                          (181,810,318)       (100,304,528)
   Change in operating assets and liabilities:
      Increase in cash deposits, restricted                                       (918,028)           (705,754)
      Increase in accrued interest receivable                                     (192,601)                 --
      Increase in prepaid and other assets                                      (2,154,324)           (189,088)
      Increase in accrued expenses and other liabilities                         1,351,876           2,247,196
                                                                            --------------       ------------- 
      Net cash used in operating activities                                    (40,723,062)         (3,910,460)
                                                                            --------------       ------------- 
Cash flows from investing activities:
   Purchase of furniture, fixtures and equipment                                  (963,830)           (387,408)
   Payments received on interest-only strip receivables                          1,193,982                  --
                                                                            --------------       ------------- 
      Net cash provided (used) in investing activities                             230,152            (387,408)
                                                                            --------------       ------------- 
Cash flows from financing activities:
   Increase in revolving lines of credit                                        30,328,403           2,566,123
   Increase in payable under securities loan agreements                          7,673,000                  --
   Proceeds from note payable                                                           --             200,000
   Payments on note payable                                                       (108,329)           (174,995)
   Proceeds from exercise of Series A warrants                                   1,911,918             268,112
   Proceeds from exercise of other warrants                                         92,700                  --
   Bank overdraft                                                                  543,522                  --
   Proceeds from sale of preferred stock                                                --           1,860,790
   Payments on capital lease obligations                                           (17,586)            (27,462)
   Preferred stock dividends                                                      (270,000)            (76,932)
                                                                            --------------       ------------- 
      Net cash provided by financing activities                                 40,153,628           4,615,636
                                                                            --------------       ------------- 
Increase (decrease) in cash                                                       (339,282)            317,768
Cash, beginning of year                                                            343,484              25,716
                                                                            --------------       ------------- 
Cash, end of year                                                           $        4,202       $     343,484
                                                                            ==============       ============= 

                       The accompanying notes are an integral part of the consolidated financial statements.
                                        
</TABLE> 

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


1.  NATURE OF OPERATIONS

     THE COMPANY AND SUBSIDIARY

     The consolidated financial statements include the accounts of HomeCapital
     Investment Corporation, a public holding company, ("HomeCapital"),
     incorporated in the state of Nevada on October 8, 1980 and its wholly owned
     subsidiary HomeOwners Mortgage & Equity, Inc. ("Home"), collectively, the
     "Company".

     DESCRIPTION OF OPERATIONS

     The Company, through wholesale and retail sources, originates and purchases
     home improvement loans, and other second lien mortgage loans ("Loans") and
     disposes of such Loans through direct sale, securitization or conversion to
     Mortgage-backed securities.  The Company is an approved lender under the
     Department of Housing and Urban Development ("HUD") Federal Housing
     Administration ("FHA") Title I Program, which provides FHA insurance
     against losses on eligible property improvement and manufactured housing
     loans ("Title I Loans").  As an FHA approved lender, the Company is subject
     to regulation and examination by HUD. Under the program, the FHA insures
     90% of the principal balance of each Title I Loan and certain interest
     costs, subject to the amount of insurance available in the Company's
     reserve account maintained by the FHA.  The Company also holds approval
     from HUD under the FHA Title II Program; however the Company had not
     originated any Loans pursuant to that Program as of September 30, 1997.

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     CASH DEPOSITS, RESTRICTED

     Restricted cash represents funds received in connection with the servicing
     of Loans sold on a servicing retained basis that have not been remitted to
     the purchasers of such Loans as of September 30, 1997.  The liability for
     these unremitted funds is included in the Balance Sheets under the caption
     of accrued expenses and other liabilities.

     LOANS HELD FOR SALE, NET

     Loans held for sale are carried at the lower of aggregated cost or market
     value. Purchase premiums, discounts, loan origination fees and related
     direct origination costs are included in the carrying value of Loans held
     for sale, and are deferred until the related Loans are sold.

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


2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED

     MORTGAGE-BACKED SECURITIES

     Mortgage-backed securities consist entirely of Federal National Mortgage
     Association ("Fannie Mae") Mortgage-backed securities that have been
     created and issued by Fannie Mae in exchange for Home's Title I Loans.
     These Mortgage-backed securities represent interest-bearing, marketable
     obligations of Fannie Mae, which are carried at market value and accounted
     for as trading securities pursuant to Statement of Financial Accounting
     Standards ("SFAS") No. 65, "Accounting for Certain Mortgage Banking
     Activities."

     REVENUE RECOGNITION

     Gain on sale of Loans and Mortgage-backed securities is recognized upon
     the sale of Loans or Mortgage-backed securities to investors. Loans are
     deemed not to have been sold if they have been exchanged for Fannie Mae
     Mortgage-backed securities which have been retained by the Company.  The
     gain on sale of Loans and Mortgage-backed securities is calculated based
     upon the difference between the net proceeds from the sale, including the
     value of an Interest-only strip receivable derived from the excess interest
     spread on the Loans, and the allocated carrying values of Loans or
     Mortgage-backed securities sold.  The allocated carrying values are based
     upon the relative fair value of Loans or Mortgage-backed securities sold
     and the Interest-only strip receivables.

     Net unrealized gain on valuation of investment securities in the statement
     of operations includes the unrealized gain on the outstanding Fannie Mae
     Mortgage-backed securities and Interest-only strip receivables that are
     classified as trading securities.  The unrealized gain on Mortgage-backed
     securities held for sale and Interest-only strip receivables represents the
     excess of fair value over the net carrying value of the securities.  The
     fair value of the Mortgage-backed securities is determined based upon
     independent market quotes. The fair value of the Interest-only strip
     receivables is calculated based upon the present value of the estimated
     future excess interest spread after considering the effects of estimated
     prepayments, defaults and future expenses.  The discount rate utilized is
     based upon assumptions that market participants would use for similar
     financial instruments subject to prepayments, defaults, collateral value
     and interest rate risks.

     INTEREST-ONLY STRIP RECEIVABLES

     The Company adopted SFAS No. 125, "Accounting for Transfers and Servicing
     of Financial Assets and Extinguishments of Liabilities" (SFAS No. 125) as
     of January 1, 1997.  SFAS No. 125 provides new accounting and reporting
     standards for transfers and servicing of financial assets and
     extinguishments of liabilities.  This statement also provides consistent
     standards for distinguishing transfers of financial assets that are sales
     from transfers that are secured borrowings and requires that liabilities
     and derivatives incurred or obtained by transferors as part of a transfer
     of financial assets be initially measured at fair value.

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

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED

     INTEREST-ONLY STRIP RECEIVABLES, CONTINUED

     As a result of adopting the SFAS No. 125, the Excess servicing receivables
     previously shown on the Balance Sheet as of December 31, 1996, have been
     renamed as Interest-only strip receivables, and are classified as available
     for sale securities.  In addition, in the event of a securitization, the
     resultant Interest-only strip receivable is divided into two components.
     The component related to the difference between the weighted average
     interest rate on the underlying Loans and the Mortgage-backed securities is
     classified as available for sale, while the remaining portion of the
     Interest-only strip receivable represents a certificated debt security and
     is classified as a trading security. The Company periodically reviews the
     fair value of the Interest-only strip receivables.  The difference between
     the fair value and allocated carrying values for securities classified as
     available for sale is included as a component of stockholders' equity,
     while such differences for Interest-only strip receivables accounted for as
     trading securities are included as a component of net income.

     For Loans and Mortgage-backed securities sold during fiscal 1997, the
     estimated fair value of cash flows were discounted using rates ranging from
     11% to 12 1/2%.  The Company has developed its prepayment and default
     assumptions based on experience with its own portfolio, available market
     data and information from regulatory agencies.  In determining fair value
     of expected cash flows, management considers economic conditions at the
     date of sale.

     The Company periodically reviews the Interest-only strip receivables
     classified as available for sale for impairment.  This review is performed
     on a disaggregated, pool by pool basis to determine whether a decline in
     fair value below the carrying value of these assets is other than
     temporary. The Loans underlying the Interest-only strip receivables are
     affected primarily by the related prepayment speeds of the Loans and the
     actual default and delinquency rates.  Impairment in the carrying value of
     Interest-only strip receivables is charged to operations for the period of
     impairment.  See Note 5.

     RETAINED INTEREST

     The Company records a Retained interest in securitization transactions in
     which the Company transfers loans to the trustee in excess of the bond
     proceeds received.  This overcapitalization is realized by the Company in
     the form of principal and interest payments subsequent to the full
     repayment of principal to the bondholders.  The Retained interest is
     classified as a trading security.

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


2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED

     ALLOWANCE FOR CREDIT LOSSES ON LOANS SOLD

     Loans sold by the Company are sold with limited recourse, generally related
     to normal representations and warranties. The Company provides an estimate
     for credit losses related to this recourse provision.  Such amounts are
     incurred over the period subject to recourse.  Recourse to the Company on
     sales of Loans is governed by the agreements between the purchasers and the
     Company.  The allowance for credit losses on Loans sold with recourse
     represents the Company's best estimate of its probable future credit losses
     to be incurred over the life of the Loans, giving effect to estimated FHA
     insurance recoveries on Title I Loans and is shown separately as a
     liability on the Company's Balance Sheet.

     Certain of the Company's Loans are held for sale in its portfolio as such
     loans may not qualify for sale to Fannie Mae or other investors.  Provision
     for credit losses relating to such Loans held for sale is charged to income
     in amounts sufficient to maintain the allowance at a level considered
     adequate to provide for anticipated losses resulting from liquidation of
     outstanding Loans.  The provision for credit losses is based upon periodic
     analysis of the portfolio, economic conditions and trends, historical
     credit loss experience, borrowers' ability to repay, collateral values and
     gives effect to estimated FHA insurance recoveries on Title I Loans.

     FURNITURE, FIXTURES AND EQUIPMENT, NET

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

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

     FEDERAL AND STATE INCOME TAXES

     Prior to fiscal 1997, the Company and Home filed separate Federal and State
     income tax returns.  For the year ended September 30, 1997, the Company and
     Home will file consolidated Federal and State income tax returns.  The
     liability method is used in accounting for income taxes.  Under this
     method, deferred tax assets and liabilities are determined based on
     differences between the financial reporting and tax basis of assets and
     liabilities and measured using the enacted tax rates and laws.

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


2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED

     ADVERTISING

     Advertising costs are expensed as incurred.  Costs related to prepaid
     supplies are capitalized, then expensed as used.  During the years ended
     September 30, 1997 and 1996, the Company recorded advertising expenses of
     $1,031,152 and $355,197, respectively.

     CREDIT CONCENTRATIONS

     Financial instruments that potentially subject the Company to
     concentrations of credit risk consist principally of cash, Loans held for
     sale, Mortgage-backed securities, Retained interest, and Interest-only
     strip receivables.  Concentration of credit risk and mitigating factors
     regarding Loans, Mortgage-backed securities, Retained interest, and
     Interest-only strip receivables are described above.  The Company places
     its cash in various major financial institutions thereby limiting the
     exposure of the Company's cash to concentrations of credit risk. See Note
     21.

     The Company is party to financial instruments with off-balance sheet credit
     risk in the normal course of business.  These financial instruments include
     commitments to extend credit to borrowers and commitments to purchase loans
     from others.  As of September 30, 1997, the Company had outstanding
     commitments to extend credit or purchase loans in the amounts of
     approximately $37,313,000.

     Credit concentrations of the Company's loans serviced which give rise to
     Interest-only strip receivables are discussed in Note 21.

     IMPAIRMENT OF LONG-LIVED ASSETS

     Effective October 1, 1996 the Company adopted SFAS No. 121, "Accounting for
     the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed
     Of".  SFAS No. 121 prescribes that an impairment loss is recognized in the
     event that facts and circumstances indicate that the carrying amount of an
     asset may not be recoverable, and an estimate of future undiscounted cash
     flows is less than the carrying amount of the asset. Impairment is recorded
     based on an estimate of future discounted cash flows as identified at the
     lowest level for which there are identifiable cash flows for a particular
     group of assets. No impairment of long-lived assets was recorded on the
     financial statements for the year ended September 30, 1997.

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


2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED

     STOCK-BASED COMPENSATION

     In October 1995, the Financial Accounting Standards Board ("FASB") issued
     SFAS No. 123, "Accounting for Stock-Based Compensation."  SFAS No. 123
     establishes fair value-based financial accounting and reporting standards
     for all transactions in which a company acquires goods or services by
     issuing its equity instruments or by incurring a liability to suppliers in
     amounts based on the price of its common stock or other equity instruments.
     The Company continues to account for stock-based compensation to employees
     as prescribed by Accounting Principles Board Opinion No. 25, "Accounting
     for Stock Issued to Employees".  Required disclosures prescribed by SFAS
     No. 123 for the proforma effect on the results of operations for fiscal
     1997 are included in Note 16.

     EARNINGS (LOSS) PER SHARE

     The computation of primary earnings (loss) per share is based on the
     weighted average number of common shares outstanding during the period
     plus, when dilutive, common equivalent shares, which includes stock options
     and stock warrants (see Notes 15 and 16) using the treasury stock method.
     Net earnings used in the computation of primary earnings per share are
     reduced by preferred stock dividend requirements.  Fully diluted earnings
     per share assumes conversion of the Company's 1,500,000 outstanding shares
     of Preferred Stock,  Series A.

     Net earnings used in the computation of earnings (loss) per share for the
     year ended September 30, 1996, have been reduced by the intrinsic value of
     the beneficial conversion feature on Preferred Stock, which is defined as
     the difference between the conversion price and the market value of the
     common shares on the date of issuance.  On June 18, 1996, the issuance date
     of the preferred stock, the market value of the Company's common stock was
     $3.50 per share.  The conversion price of the Preferred Stock is $1.50 per
     share.  The Preferred Stock was convertible into the Company's common stock
     at the date of issuance. Thus the intrinsic value of the beneficial
     conversion feature on the 1,500,000 shares of Preferred Stock, which
     amounts to $3,000,000 in total, has been deducted from net earnings
     available for common shareholders in the calculation of earnings (loss) per
     common share for the year ended September 30, 1996.

     RECENTLY ISSUED ACCOUNTING STANDARDS

     In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share." SFAS
     No. 128 specifies the computation, presentation, and disclosure
     requirements for earnings per share.  SFAS No. 128 is effective for periods
     ending after December 15, 1997, thus the Company will adopt SFAS No. 128 in
     the first quarter of fiscal 1998.  Previously reported earnings per share
     will be restated at that time to conform to SFAS No. 128.  This adoption is
     not expected to have a material impact on earnings per share as currently
     presented by the Company.

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


2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED

     RECENTLY ISSUED ACCOUNTING STANDARDS, CONTINUED

     In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
     Income" ("SFAS No. 130").  SFAS No. 130, which is effective for fiscal
     years beginning after December 15, 1997, establishes disclosure standards
     for reporting comprehensive income in a full set of general-purpose
     financial statements.  As SFAS No. 130 contains disclosure requirements
     only, its adoption is not expected to have an impact on the Company's
     financial position or results of operations.

     In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
     an Enterprise and Related Information" ("SFAS No. 131") which is effective
     for periods beginning after December 15, 1997.  SFAS No. 131 establishes
     standards for the way that public business enterprises report selected
     information about operating segments in interim financial reports issued to
     stockholders.  It also establishes standards for related disclosures about
     products and services, geographic areas and major customers.  As SFAS No.
     131 contains disclosure requirements only, its adoption is not expected to
     have an impact on the Company's financial position or results of
     operations.

     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.

     RISKS AND UNCERTAINTIES

     The Company's Interest-only strip receivables are based upon estimates of
     future cash flows, which consider assumptions as to rates of prepayment and
     defaults of Title I Loans.  It is at least reasonably possible that changes
     in the value of the Interest-only strip receivables could occur in the
     short-term and that the changes could be material to the Company's
     financial statements.

                                      F-13
<PAGE>
 
               HOMECAPITAL INVESTMENT CORPORATION AND SUBSIDIARY
                   NOTES TO FINANCIAL STATEMENTS, CONTINUED


2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED

     RECLASSIFICATIONS

     Certain accounts and balances in the financial statements for the year
     ended September 30, 1996, have been reclassified to be consistent with the
     1997 account classifications.

3.   LOANS HELD FOR SALE

     Loans held for sale consisted of the following at September 30:


                                                      1997             1996
                                                  -----------      -----------
        Title I Loans                             $ 8,264,335      $ 4,387,460
        Conventional loans                            800,545           52,462
        Commercial loans                                   --           51,620
        Capitalized loan origination fees and
          costs, net                                  440,090          113,008
                                                  -----------      -----------
                                                    9,504,970        4,604,550
        Allowance for credit losses                  (250,000)        (125,000)
                                                  -----------      -----------
                        Total                     $ 9,254,970      $ 4,479,550
                                                  ===========      ===========


4.   ALLOWANCE FOR CREDIT LOSSES

     Combined changes in the allowance for credit losses for Loans held for sale
     and Loans sold consisted of the following:

                                                      1997             1996
                                                  -----------      -----------

        Balance at beginning of year              $   300,000      $    80,000
        Provisions for credit losses                1,075,000          220,000
        Charge-offs                                  (205,685)              --
                                                  -----------      -----------
        Balance at end of year                    $ 1,169,315      $   300,000
                                                  ===========      ===========
        Components of the allowance at 
          September 30:
        Allowance for credit losses on Loans 
          held for sale                           $   250,000      $   125,000
        Allowance for credit losses on Loans 
          sold                                        919,315          175,000
                                                  -----------      -----------
                                                  $ 1,169,315      $   300,000
                                                  ===========      ===========

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


5.   INTEREST-ONLY STRIP RECEIVABLES

     The activity in Interest-only strip receivables is summarized as follows
     for the years ended September 30:

 
                                                1997                  1996
                                             -----------        -----------
Balance, October 1                           $ 5,078,584        $        --
Additions                                     16,382,185          5,169,521
Amortization and payments                     (1,193,984)           (90,937)
Unrealized gains on trading securities         3,142,898                 --
Write-down for impairment                       (508,021)                --
Valuation allowance on available for
    sale securities                           (1,181,413)                --
                                             -----------        -----------
Balance, September 30                        $21,720,249        $ 5,078,584
                                             ===========        ===========

     The components of Interest-only strip receivables at September 30, 1997,
     are classified as follows:

 
                                                      1997
                                                ---------------
        Available for sale securities           $    13,670,755
        Trading securities                            8,049,494
                                                ---------------
        Total                                   $    21,720,249
                                                ===============


     Net income for fiscal 1997 includes a pre-tax charge of $508,021 relating
     to an impairment loss on Interest-only strip receivables.  The impairment
     loss on Interest-only strip receivables resulted from increased rates of
     principal prepayments and defaults on certain loan pools serviced by the
     Company.

     Upon implementation of SFAS No. 125, the Company initially classified the
     Interest-only strip receivables arising from sale of Loans, including Loans
     sold on a whole loan basis or through the sale of Mortgage-backed
     securities, as trading securities. The Company has reclassified these
     Interest-only strip receivables at September 30, 1997, from trading to
     available for sale. The Company intended to resecuritize the Interest-only
     strip receivables during the third and fourth quarters of fiscal 1997;
     however, the Company elected to securitize only Mortgage-backed securities
     in the fourth quarter of fiscal 1997 and has deemed it impracticable to
     resecuritize the Interest-only strip receivables in the short term.
     Accordingly, securities totaling $2,889,152 have been transferred to the
     available for sale category at September 30, 1997. The Company had
     recognized a net unrealized gain of $83,087 prior to the transfer.

     The serviced Loan portfolio, which includes Loans sold to investors on a
     servicing retained basis and Loans retained by the Company, aggregated
     approximately $234,748,000 at September 30, 1997.

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


6.   FURNITURE, FIXTURES AND EQUIPMENT

     Furniture, fixtures and equipment consisted of the following at September
     30:

            
                                                  1997                1996  
                                              ----------          ----------
     Furniture and fixtures                   $  494,085          $  207,704
     Equipment                                   816,406             324,886
     Leasehold improvements                       58,588              12,569
     Software cost                               473,395             293,395
                                              ----------          ----------
                                               1,842,474             838,554
     Accumulated depreciation                   (476,788)           (192,472)
                                              ----------          ----------
                                              $1,365,686          $  646,082
                                              ==========          ==========
                                                                                
     At September 30, 1997, and 1996, furniture and fixtures includes $101,345
     and $55,523, respectively, of assets under capital lease with an associated
     accumulated depreciation of $34,614 and $23,656, respectively.

7.   NOTE PAYABLE

     Note payable consisted of the following at September 30:

<TABLE> 
<CAPTION> 
     
                                                                           1997                 1996
                                                                    ---------------        -------------
     <S>                                                            <C>                    <C>             
     Note payable to bank, guaranteed by certain stockholders of
       the Company, due on demand, or if no demand is made,
       due April 5, 1998, accruing interest at prime (8.50% at
       September 30, 1997) plus 2%;  monthly payments of 
       $8,333 thereafter                                           $         50,010       $      158,339
                                                                  =================       ===============

</TABLE> 
                                        

                                      F-16
<PAGE>
 
               HOMECAPITAL INVESTMENT CORPORATION AND SUBSIDIARY
                   NOTES TO FINANCIAL STATEMENTS, CONTINUED


8.   REVOLVING LINES OF CREDIT

     The Company finances certain of its Loans held for sale through a
     $20,000,000 revolving line of credit agreement, which matures June 30,
     1998, and had an outstanding balance of $2,861,304 at September 30, 1997.
     The Company receives funding for approximately 98% of the principal on each
     Loan it originates or purchases through the warehouse line.  The
     outstanding principal is collateralized by the original notes and mortgages
     and repaid upon their sale.  Interest accrues at 300 basis points over the
     Federal Funds rate (5.81% at September 30, 1997) and is due monthly.  The
     agreement stipulates that the bank will hold the original notes and
     mortgages for all loans funded under the line as collateral.  Upon sale of
     the loans, the purchaser funds the bank directly and the collateral is
     released.

     The Company also has a working capital line of credit (servicing
     collateralized) for up to $16,666,600 which matures June 30, 1998, and had
     an outstanding balance of $11,674,181 at September 30, 1997.  At September
     30, 1997, the interest rates on the two components of the working capital
     line ranged from 9.375% (30 day LIBOR plus 375 basis points) to 10.125% (30
     day LIBOR plus 450 basis points).  The weighted average interest rate for
     this facility at September 30, 1997, was 9.53%.

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

     As part of the arrangement to exchange Title I Loans for Fannie Mae
     Mortgage-backed securities, Fannie Mae has provided short-term warehouse
     funding to Home, on an uncommitted basis, for its Title I Loans and
     Mortgage-backed securities exchanged for such Loans.  Generally the funding
     facilities require repayment with a cost of funds based on 30 day LIBOR
     rate, plus 30 basis points to 90 basis points, depending upon whether the
     funding is provided for Title I Loans or Mortgage-backed securities.

     The composition of the revolving lines of credit was as follows at
     September 30, 1997:

        Payable to financial institution, warehouse line         $    2,861,304
        Payable to Fannie Mae, funding facilities                    19,857,098
        Payable to financial institution, working capital line       11,674,181
                                                                 --------------
                                                                 $   34,392,583
                                                                 ==============

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


9.   LOANS SOLD UNDER AGREEMENTS TO REPURCHASE

     Amounts payable under repurchase agreements represent secured borrowings
     used to finance certain Fannie Mae Mortgage-backed securities held by the
     Company.  At September 30, 1997, the agreements were scheduled to mature in
     24 days with the ability to renew for another 30 days at the option of the
     secured lender.  The interest rate for the financing is variable based upon
     LIBOR.  At September 30, 1997 the borrowing rate was 5.93%.  These
     borrowings were collateralized by Mortgage-backed securities having an
     aggregate market value of $23,279,895 as of September 30, 1997.


10.  PREFERRED STOCK

     On June 18, 1996, the Company issued 1,500,000 shares of Preferred Stock,
     Series A, par value $.01 per share ("Series A Preferred Stock), for the
     purchase price of $1.50 per share or an aggregate of $2,250,000.  A total
     of 1,000,000 shares of the Series A Preferred Stock was purchased by an
     unaffiliated entity pursuant to a Preferred Stock Purchase Agreement, dated
     May 3, 1996, as amended. A total of 166,667 shares of the Series A
     Preferred Stock were issued in 1996 in payment and discharge of an
     aggregate $250,000 principal amount of loans payable to certain
     stockholders of the Company.

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

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

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



11.  INCOME TAXES

     The provision for income taxes for the years ended September 30, 1997 and
     1996 is comprised of the following:

 
                                                  1997               1996
                                              -----------        ----------- 
          Current:
            Federal                          $     81,375       $  1,080,832
            State                                 418,337             23,711
                                              -----------        ----------- 
                                                  499,712          1,104,543

          Deferred (benefit) provision          2,495,284           (190,502)
                                              -----------        ----------- 
          Provision for income taxes         $  2,994,996       $    914,041
                                              ===========        ===========

     The components of deferred tax assets and liabilities were as follows at
     September 30:


 
                                                  1997               1996
                                              -----------        ----------- 
          Deferred tax liabilities:
            Unrealized gains                 $ (2,461,264)      $         --
            Depreciation and amortization         (64,309)           (39,075)
                                              -----------        ----------- 
            Total deferred tax liabilities     (2,525,573)           (39,075)
                                              -----------        ----------- 
         Deferred tax assets:
            Net operating loss carryforwards       73,230             73,230
            Allowance for credit losses           397,567            102,000
            Deferred compensation                 151,674                 --
            Unrealized gains                           --            127,577
                                              -----------        ----------- 
            Total deferred tax assets             622,471            302,807
  
            Valuation allowance                        --            (73,230)
                                              -----------        ----------- 
                                                  622,471            229,577
                                              -----------        -----------  

            Net deferred tax assets 
             (liabilities)                     (1,903,102)           190,502
                                              -----------        -----------  
            Less amount related to equity        (401,685)                --
                                              -----------        ----------- 
                                             $ (2,304,787)      $    190,502
                                              ===========        ===========

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



11.  INCOME TAXES, CONTINUED

     The reconciliation between the income tax provision and the income tax
     expense using the Federal statutory rate is as follows for the years ended
     September 30:

        
                                                           1997        1996
                                                        -----------  ----------
        Federal tax at statutory rate of 34%            $ 2,779,069 $ 1,183,290
        State income taxes, net of federal tax benefit      276,102      15,649
        Expenses not deductible for tax purposes             13,055       9,003
                                                        -----------  ----------
        Tax expense (benefit) before change in 
         valuation allowance                              3,068,226   1,207,942
                                                        -----------  ----------
        Decrease in valuation allowance                     (73,230)   (293,901)
                                                        -----------  ----------
        Total income tax provision                      $ 2,994,996  $  914,041
                                                        ===========  ==========

     During the year ended September 30, 1996, the Company reversed a
     substantial portion of the valuation allowance recorded in prior years, as
     management believes that it is more likely than not that the Company will
     realize the deferred tax asset.

12.  GAIN ON SALE OF LOANS

     Gain on sale of Loans, as defined in Note 2, and the related cost is as
     follows for the years ended September 30:

                                                           1997        1996
                                                        -----------  ----------
     Gain on sale of Loans and Mortgage-backed 
      securities:
       Cash                                             $ 3,239,290 $ 4,475,183
       Interest-only strip gains                         16,382,185   5,169,521
                                                        ----------- -----------
                                                         19,621,475   9,644,704

       Premiums, net                                     (7,184,567) (2,424,552)
       Origination fees                                   2,706,391     556,024
       Transaction costs                                    (15,128)    (22,669)
                                                        -----------  ----------
       Gain on sale of Loans and Mortgage-backed 
        securities                                      $15,128,171 $ 7,753,507
                                                        =========== ===========

                                      F-20
<PAGE>
 
               HOMECAPITAL INVESTMENT CORPORATION AND SUBSIDIARY
                   NOTES TO FINANCIAL STATEMENTS, CONTINUED



12.  GAIN ON SALE OF LOANS, CONTINUED

     During the fourth quarter of fiscal 1997, the Company completed its first
     securitization of Fannie Mae Mortgage-backed securities.  HOME
     Securitization Trust I, a Delaware business trust, issued and sold
     $47,154,000 of Asset Backed Bonds at 7.335% directly to an investor.  The
     Bonds are collateralized by $48,116,652 of Fannie Mae Mortgage-backed
     securities with an average pass-through rate of 12.25%.  The Company
     retained a residual interest from the securitization which entitles it to
     the excess spread from the interest received on the Fannie Mae Mortgage-
     backed securities over the interest paid on the Bonds, as well as to any
     remaining balances in the Mortgage-backed securities after the Bonds are
     paid in full.  In addition, the Company earns an interest spread from the
     FHA Title I loans underlying these Mortgage-backed securities.


13.  SUPPLEMENTAL CASH FLOW DISCLOSURE

                                                            1997        1996
                                                        -----------  ----------
                                                         
     Cash paid for interest                             $ 1,888,001  $  419,491
     Cash dividends paid                                    270,000          --
     Income taxes paid                                    1,204,563          --
     Noncash financing and investing activities:
          Change in Preferred stock dividend accrual             --      76,932
          Conversion of debt to equity                           --     250,000
          Issuance of options and warrants                  450,000          --
          Retention of interest in Mortgage-backed 
           securities                                       962,652          --
          Issuance of Mortgage-backed securities         20,059,276          --
          Creation of Interest-only strip receivables    16,382,185          --


14.  COMMITMENTS AND CONTINGENCIES

     The Company leases its office space at its corporate headquarters and 13
     branch offices through operating leases expiring through 2001.  Rent
     expense for the years ended September 30, 1997 and 1996 totaled $466,542
     and $270,670, respectively.

                                      F-21
<PAGE>
 
               HOMECAPITAL INVESTMENT CORPORATION AND SUBSIDIARY
                   NOTES TO FINANCIAL STATEMENTS, CONTINUED


14.  COMMITMENTS AND CONTINGENCIES, CONTINUED

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


     Years Ending                           Capital Leases    Operating Leases
     ------------                           --------------    ----------------
       1998                                 $        32,376   $        575,045
       1999                                          12,393            541,708  
       2000                                              --            538,500  
       2001                                              --            410,001  
       2002                                              --            164,351  
       Less amount representing interest             (4,316)                --  
                                             --------------    ---------------  
                                            $        40,453    $     2,229,605  
                                             ==============    ===============  

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

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

     Home is required to maintain adjusted net worth, as defined by HUD,
     amounting to $250,000.  At September 30, 1997, Home had adjusted net worth
     of $11,176,542.

     The Company and its subsidiary are taking actions to provide that their
     computer systems are capable of processing for the periods in the year 2000
     and beyond.  The costs associated with this are not expected to
     significantly affect operating cash flow; however, there is no assurance
     that the Company's actions in this regard will be successful.

                                      F-22
<PAGE>
 
               HOMECAPITAL INVESTMENT CORPORATION AND SUBSIDIARY
                   NOTES TO FINANCIAL STATEMENTS, CONTINUED



15.  STOCK WARRANTS

     In May 1997, the Board of Directors authorized the issuance of warrants to
     acquire 150,000 shares of common stock of the Company at a price of $9.50
     per share. The stock warrants were issued to affiliates of an investment-
     banking firm in connection with the termination by the Company of its
     service relationship with the investment-banking firm. The warrants are
     exercisable upon issuance and expire in May 2002. The fair value of these
     stock warrants was determined by application of the Black-Scholes option-
     pricing model. The fair value of these stock warrants, $391,500, was
     charged to operations for fiscal 1997, and classified as Other expense in
     the accompanying Consolidated Statements of Operations.


16.  STOCK OPTIONS

     HomeCapital issued options to an employee in June 1993 to purchase 409,668
     shares of HomeCapital stock at $0.16 per share. The options, which are
     fully exercisable as of September 30, 1997, expire in the year 2001.  None
     of these options have been exercised.

     Effective March 21, 1996, the Board of Directors of the Company adopted the
     HomeCapital Investment Corporation 1996 Stock Option Plan, which was
     ratified by stockholder vote on August 16, 1996. The 1996 Stock Option Plan
     was amended in September 1997, to increase the number of shares reserved
     for issuance under the Plan. The Stock Option Plan provides that up to
     1,000,000 shares of Common Stock may be issued upon exercise of options
     granted under the Stock Option Plan, subject to adjustment to reflect stock
     splits, stock dividends, mergers and similar transactions. At September 30,
     1997, options to purchase an aggregate of 475,000 shares of Common Stock
     had been granted and are outstanding under the Stock Option Plan. Exercise
     prices per share range from $3.50 to $11.00. No options have been
     exercised. Subsequent to September 30, 1997, options to purchase an
     aggregate 404,500 shares of Common Stock were granted to certain officers
     and employees of the Company.

                                      F-23
<PAGE>
 
               HOMECAPITAL INVESTMENT CORPORATION AND SUBSIDIARY
                   NOTES TO FINANCIAL STATEMENTS, CONTINUED


16.  STOCK OPTIONS

     Under the 1996 Stock Option Plan, the Company may grant incentive and non-
     qualified options to eligible participants that vest in accordance with a
     vesting schedule, as determined in the sole discretion of the Compensation
     Committee of the Company's Board of Directors.  The 1996 Stock Option Plan
     provides for a term of 10 years.  All of the options have an exercise price
     equal to or greater than the fair market value of the stock at grant date.
     The options granted in fiscal 1996 and 1997 vest ratably over a period of
     either three or four years beginning on the first anniversary of the date
     of grant.  A summary of the Company's 1996 Stock Option Plan as of
     September 30, 1997 and 1996, and changes during the years then ended are as
     follows:


 
                                                 Option             Option
                                                 Shares           Price Range
                                              ------------      --------------
        1996
        Outstanding at beginning of year           --           $     --
        Granted                                  200,000             3.50   
        Exercised                                  --                 --  
        Forfeited                                  --                 --
                                              ------------      --------------
        Outstanding at end of year               200,000        $    3.50
                                              ============      ==============
                                        
        1997
        Outstanding at beginning of year        200,000              3.50
        Granted                                 302,500          5.625 - 11.00
        Exercised                                  --                  -- 
        Forfeited                               (27,500)         5.625 - 6.125
                                              ------------      --------------
        Outstanding at end of year              475,000         $ 3.50 - 11.00
                                              ============      ==============

     The number of options exercisable at September 30, 1997 and 1996, was
     66,667 and zero, respectively.  The weighted-average fair value of options
     granted during 1997 and 1996 was $2.39 and $1.35, respectively.

                                      F-24
<PAGE>
 
               HOMECAPITAL INVESTMENT CORPORATION AND SUBSIDIARY
                   NOTES TO FINANCIAL STATEMENTS, CONTINUED



16.  STOCK OPTIONS, CONTINUED

     The fair value of each stock option granted is estimated on the date of
     grant using the Black-Scholes option-pricing model with the following
     assumptions for grants in fiscal 1996 and 1997: a dividend yield of 0%; a
     risk-free interest rate range of 6.16% to 6.79%; an expected life of 10
     years for all grants; and a volatility range of 44% to 53%.

     Options outstanding as of September 30, 1997 are summarized below:


<TABLE>
<CAPTION>

                        Options Outstanding                                   Options Exercisable
-----------------------------------------------------------------------   --------------------------
       Range                                Weighted         Weighted                    Weighted
        of                 Number            Average          Average       Number        Average
     Exercise               Out-            Remaining        Exercise        Exer-        Exercise
      Prices              standing      Contractual Life       Price       cisable         Price
--------------------   --------------   ----------------   ------------   ---------      ---------
<S>                    <C>              <C>                 <C>           <C>            <C>  
$3.50 to $5.63             397,500             8.84            $4.56        66,667         $3.50

$6.13 to $11.00             77,500             9.56            $9.65             0           NA
---------------            -------            -----            -----       -------         -----
 
$3.50 to $11.00            475,000             8.95            $5.39        66,667         $3.50
===============            =======            =====            =====       =======         =====
</TABLE>


     The Company applies APB Opinion 25 and related Interpretations in
     accounting for the Plans.



     Had the compensation cost for the Company's stock-based compensation plans
     been determined consistent with SFAS 123, the Company's pro forma net
     income and pro forma net income per common share for the years ended
     September 30, 1997 and 1996 would approximate the amounts below:



<TABLE>
<CAPTION>
                              September 30, 1997               September 30, 1996
                         ----------------------------     ----------------------------
                           As Reported     Pro Forma       As Reported      Pro Forma
                         ----------------  -----------    ----------------  -----------
<S>                      <C>               <C>            <C>               <C>
Net income                   $5,178,737     $4,720,672       $2,566,223      $2,395,156
Net income (loss)
  per common share                 $.57           $.51           $(0.07)         $(0.10)
</TABLE>


     The effects of applying SFAS 123 in this pro forma disclosure are not
     indicative of future amounts.  SFAS 123 does not apply to awards granted
     prior to the 1996 fiscal year.

                                      F-25
<PAGE>
 
               HOMECAPITAL INVESTMENT CORPORATION AND SUBSIDIARY
                   NOTES TO FINANCIAL STATEMENTS, CONTINUED


16.  STOCK OPTIONS, CONTINUED

     In addition to the employee stock options described above, the Company
     granted 250,000 stock options to nonemployees rendering financial advisory
     services to the Company.  The options vested upon issuance, have a five-
     year term, an exercise price of $8.125, and are outstanding as of September
     30, 1997.  The fair value of the stock options of $655,000 was determined
     under the Black-Scholes option-pricing model and will be amortized into
     expense in equal monthly installments over a two-year period.  During
     fiscal 1997, a total of $58,500 was charged to operations.

     In addition to the 1996 Stock Option Plan, in September 1997, the Company
     established the Non-Employee Director Compensation Plan ("Director Plan").
     The Director Plan provides cash compensation and options to purchase Common
     Stock of the Company for persons who serve as members of the Board of
     Directors of either or both of the Company and HOME ("Directors") and who
     are not otherwise employed by the Company or HOME ("Participants").  The
     Director Plan provides for an annual retainer of $10,000 payable each year
     immediately following the annual election of a Participant as a Director,
     or upon the initial election of the Participant as a Director, if not at an
     annual meeting of stockholders.  Participants will also receive a fee of
     $1,000 and reimbursement for accountable expenses in connection with each
     meeting of the board of directors attended.

     The Director Plan also provides for the granting of non-qualified stock
     options to each Participant.  The Director Plan authorizes the issuance of
     options to purchase 15,000 shares of Common Stock of the Company to each
     Participant as of the date of election to the Board of Directors and an
     annual award of options to purchase 3,000 shares of Common Stock
     immediately following the election of each Participant as a Director on the
     date of the annual meeting of stockholders.

     Options granted under the Director Plan have an exercise price equal to the
     fair market value of the Common Stock on the date that the options are
     granted.  The Director Plan contains provisions for adjustment of the
     number of shares available for options and subject to unexercised options
     under the Director Plan in the event of stock splits, dividends payable in
     Common Stock, business combinations or certain other events.  The Board of
     Directors has initially reserved up to 250,000 shares of Common Stock for
     issuance under the Director Plan.

     Each option granted under the Director Plan is exercisable as to 20% of the
     shares subject to the option each year for five (5) consecutive years
     following the date of grant.  Unexercised options shall expire ten (10)
     years after the date of grant, and within 180 days after termination of
     service as a Director, disability or death of the Participant.

     At September 30, 1997, no options have been granted under this Plan.

                                      F-26
<PAGE>
 
               HOMECAPITAL INVESTMENT CORPORATION AND SUBSIDIARY
                   NOTES TO FINANCIAL STATEMENTS, CONTINUED



17.  RELATED PARTY TRANSACTIONS

     The Company paid consulting fees and expenses of approximately $377,744 and
     $74,252 to certain directors of the Company for the years ended September
     30, 1997 and 1996, respectively.  In addition, the Company incurred $90,000
     related to legal services provided by a board member.

     During the years ended September 30, 1997 and 1996, the Company paid
     inspection fees totaling $145,380 and $69,715, respectively, to a company
     controlled by a relative of the President of the Company.

18.  401(K) PROFIT SHARING PLAN

     Home sponsors a savings and investment plan (the "Plan") intended to
     qualify under Section 401(k) of the Internal Revenue Code of 1986, as
     amended (the "Code").  All full-time employees of Home who are at least
     20.5 years of age may participate in the Plan.  Participating employees may
     make pre-tax contributions, subject to limitations under the Code, not to
     exceed 18% of their total compensation. Home, in its sole discretion, may
     make matching contributions for the benefit of all participants who make
     pre-tax contributions, as well as discretionary contributions for the
     benefit of all participants regardless of whether they elect to make pre-
     tax contributions to the Plan.  All employee contributions are fully
     vested. Matching and discretionary contributions will vest 20% after two
     years of service and an additional 20% per year of service thereafter,
     provided that such contributions become 100% vested upon an employee's
     death, disability or retirement.  The Plan was adopted January 1, 1995, and
     Home has not made any contributions to the Plan through September 30, 1997.

19.  FAIR VALUES OF FINANCIAL INSTRUMENTS

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

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

                                      F-27
<PAGE>
 
               HOMECAPITAL INVESTMENT CORPORATION AND SUBSIDIARY
                   NOTES TO FINANCIAL STATEMENTS, CONTINUED


19.  FAIR VALUE OF FINANCIAL INSTRUMENTS, CONTINUED

     Estimated fair values, carrying values and various methods and assumptions
     used in valuing the Company's financial instruments at September 30, 1997
     are set forth below.

                                                  Carrying     Estimated Fair
                                                   Value           Value
                                                ------------    ------------
     Financial Assets:
       Cash Overdraft (a)                       $   (543,522)   $   (543,522)
       Loans held for sale (b)                     9,254,970       9,475,271
       Mortgage-backed securities (c)             23,279,895      23,279,895
       Interest-only strip  receivables (d):
         Trading securities                        8,049,494       8,049,494
         Available for sale securities            13,670,755      13,670,755
       Retained interest                             962,652         962,652
     Financial Liabilities: 
       Debt obligations (e)                       42,156,046      42,156,046

     ___________
     (a) The carrying value of cash is considered to be a reasonable estimate of
         fair value.
     (b) The fair value is estimated by using current investor yields or
         outstanding commitments from investors after consideration of non-
         qualified loans and the collateral securing such Loans.
     (c) The fair value is based on quotes from independent market sources.
     (d) The fair value is estimated by discounting expected future cash flows
         (as adjusted for Loan delinquencies, defaults and prepayments) using
         rates available for instruments with similar risks, terms and remaining
         maturities.
     (e) The debt obligations are primarily adjustable rate instruments and
         indexed to the prime rate, LIBOR or Federal Funds rate; therefore,
         carrying value is a reasonable estimate of fair value.  Capitalized
         equipment leases have implicit fixed interest rates ranging from 12.4%
         to 18.9%, which approximate fair value in the aggregate.

     The fair value estimates made at September 30, 1997 were based upon
     pertinent market data and relevant information on the financial instruments
     at that time.  These estimates do not reflect any premium or discount that
     could result from a single sale of the entire portion of the financial
     instrument.  Because no market exists for a portion of the financial
     instruments, fair value estimates may be based on judgments regarding
     future expected loss experience, current economic conditions, risk
     characteristics of various financial instruments and other factors.  These
     estimates are subjective in nature and involve uncertainties and matters of
     significant judgment and therefore cannot be determined with precision.
     Changes in assumptions could significantly affect the estimates.

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

                                      F-28
<PAGE>
 
               HOMECAPITAL INVESTMENT CORPORATION AND SUBSIDIARY
                   NOTES TO FINANCIAL STATEMENTS, CONTINUED


20.  SELECTED QUARTERLY DATA (UNAUDITED)

     The following financial data summarizes quarterly results for the Company
     for the years ended September 30, 1997 and 1996:

<TABLE>
<CAPTION>
                                                              Three Months Ended
                                     ------------------------------------------------------------------
                                     December 31         March 31          June 30         September 30
                                     ------------      ------------      ------------      ------------
<S>                                  <C>               <C>               <C>               <C> 
Fiscal 1997
  Revenues                           $  5,612,349      $  5,189,962      $  4,390,356      $  8,776,151
  Net income                            2,244,160         1,544,693           210,352         1,179,532 
  Income per common share
  - fully diluted                             .23               .15               .02               .11               

Fiscal 1996
  Revenues                              1,526,098         1,345,414         1,803,760         4,238,331     
  Net income                              443,862           201,680           166,876         1,753,805 
  Income (loss) per common share              
  - fully diluted                             .059             .025             (.397)              .21
</TABLE> 

21.  CONCENTRATIONS

     For the years ended September 30,1997 and 1996, the Company recognized gain
     on sale of loans and Mortgage-based securities to Fannie Mae in the amount
     of approximately $11,700,000 and $13,100,000, respectively, which
     represents 77.6% and 86.6%, respectively, of total gain on sale of loans
     and Mortgage-backed securities.

     For the years ended September 30, 1997 and 1996, Title I Loan origination
     and production (exclusive of paydowns and repurchases) is summarized as
     follows:

<TABLE> 
<CAPTION> 
                                               1997                    1996
                                      ----------------------  ------------------------
       Source of Loan Production         Amount         %         Amount          %
     -----------------------------   --------------  -------  --------------   -------
<S>                                  <C>             <C>      <C>              <C> 
     Correspondent Loans             $ 130,377,698    79.9%   $  76,020,078     78.3%
     Dealer Loans                        4,882,974     3.0       15,440,132     15.9
     Direct Loans                       11,979,462     7.4        5,606,397      5.8
     Bulk Purchases                     15,852,112     9.7          --           0.0
                                     -------------    ----    -------------     ----
                                     $ 163,092,246     100%   $  97,066,607      100%
            Total Title I Loans      =============    ====    =============     ====
</TABLE>


     Of the Title I Loans originated in fiscal 1997 and 1996, seven Loan
     Correspondents and five Loan Correspondents accounted for 39.3% and 36.8%,
     respectively, of total Title I Loan production.  Each of these Loan
     Correspondents individually accounted for more than 3.7% of total Title I
     Loan production.

                                      F-29
<PAGE>
 
21.  CONCENTRATIONS, CONTINUED

     The following table sets forth the states that represent the geographic
     location of Loan originations greater than 2.0% of total Title I Loans for
     the years ended September 30, 1997 and 1996:


                  State            1997       1996
                  -----            ----       ----

                 California       71.5%      67.3%
                 Texas             7.0       17.9
                 Florida          10.5        4.0
                 Arizona           2.0         --
                 Nevada             --        4.3
                                  ----       ----
                                  91.0%      93.5%
                                  ====       ==== 

     The Company also originates conventional home improvement Loans through
     several arrangements with other home improvement lenders on a pre-approved
     basis.  Total conventional loans originated in fiscal 1997 and 1996 were
     $18,718,072 and $3,105,374, respectively.  At September 30, 1997 and 1996,
     $800,545 and $52,462, respectively, of conventional loans were held for
     sale under firm purchase commitments.

22.  SUBSEQUENT EVENTS (UNAUDITED)

     During the first quarter of fiscal 1998, the Company completed its second
     securitization of Fannie Mae Mortgage-backed securities.  HOME
     Securitization Trust I, a Delaware business trust, issued and sold
     $39,193,258 of Asset Backed Bonds at 7.261% directly to an investor.  The
     Bonds are collateralized by $39,589,150 of Fannie Mae Mortgage-backed
     securities with an average pass-through rate of 12.24%.  The Company
     retained the residual interest from the securitization and is entitled to
     the excess spread from the interest received on the Fannie Mae Mortgage-
     backed securities over the interest paid on the Bonds, as well as any
     remaining Mortgage-backed securities after the Bonds are paid in full.  In
     addition, the Company earns an interest spread from the FHA Title I loans
     underlying these Mortgage-backed securities.

     Also during the first quarter of fiscal year 1998, the Company sold $6.9
     million of Fannie Mae Mortgage-backed securities with an average interest
     rate of approximately 9.7% for total sales proceeds of approximately $7.5
     million.

                                      F-30