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                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                                    FORM 10-Q

(MARK ONE)
[X]      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE 
         SECURITIES EXCHANGE ACT OF 1934

                 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998 OR

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


                          COMMISSION FILE NUMBER 1-7614

                         FIRSTCITY FINANCIAL CORPORATION
             (Exact Name of Registrant as Specified in Its Charter)

                 DELAWARE                   76-0243729
   (State or Other Jurisdiction of       (I.R.S. Employer
    Incorporation or Organization)      Identification No.)

       6400 IMPERIAL DRIVE, WACO, TX           76712
 (Address   of   Principal   Executive      (Zip Code)
Offices)

                                 (254) 751-1750
              (Registrant's Telephone Number, Including Area Code)


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

         Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [X] No [ ]

         The  number of shares  of common  stock,  par  value  $.01 per  share,
outstanding  at August 1, 1998 was 8,260,582.

<PAGE>
                           FORWARD LOOKING INFORMATION

         This Quarterly Report on Form 10-Q may contain forward-looking
statements. The factors identified under Item 2. Management's Discussion and
Analysis of Financial Condition and Results of Operations are important factors
(but not necessarily all of the important factors) that could cause actual
results to differ materially from those expressed in any forward-looking
statement made by, or on behalf of, the Company.

         When any such forward-looking statement includes a statement of the
assumptions or bases underlying such forward-looking statement, the Company
cautions that, while such assumptions or bases are believed to be reasonable and
are made in good faith, assumed facts or bases almost always vary from actual
results, and the differences between assumed facts or bases and actual results
can be material, depending upon the circumstances. When, in any forward-looking
statement, the Company, or its management, expresses an expectation or belief as
to future results, such expectation or belief is expressed in good faith and is
believed to have a reasonable basis, but there can be no assurance that the
statement of expectation or belief will result or be achieved or accomplished.
The words "believe," "expect," "estimate," "project," "anticipate" and similar
expressions identify forward-looking statements.







                                       2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

                                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
                                            CONSOLIDATED BALANCE SHEETS
                                              (DOLLARS IN THOUSANDS,
                                              EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>

                                                                           JUNE 30, 1998         DECEMBER 31, 1997
                                                                        --------------------    --------------------
                                                                      <S>                      <C>   

                              ASSETS

Cash and cash equivalents                                                           $30,531                 $31,605
Portfolio Assets, net                                                                68,476                  89,951
Loans receivable, net                                                                55,912                  90,115
Mortgage loans held for sale                                                      1,021,185                 533,751
Investment securities                                                                43,046                   6,935
Equity investments in and advances to Acquisition Partnerships                       36,076                  35,529
Mortgage servicing rights                                                           124,242                  69,634
Receivable for servicing advances and accrued interest                               34,040                  21,410
Deferred tax benefit, net                                                            32,185                  30,614
Other assets, net                                                                    64,346                  30,575
                                                                       --------------------    --------------------
Total Assets                                                                     $1,510,039                $940,119
                                                                       ====================    ====================

        LIABILITIES, REDEEMABLE PREFERRED STOCK AND SHAREHOLDERS' EQUITY

Liabilities:
Notes payable                                                                    $1,227,966                $750,781
Other liabilities                                                                    68,164                  34,672
                                                                       --------------------    --------------------
Total Liabilities                                                                 1,296,130                 785,453
Commitments and contingencies                                                            --                      --
Redeemable preferred stock:
Special preferred stock, including dividends of $669 (nominal stated value of
$21 per share; 2,500,000 shares authorized;
849,777 shares issued and outstanding)                                               18,515                  18,515
Adjusting  rate  preferred  stock,   including  dividends  of  $846
(redemption  value of $21 per share;  2,000,000 shares  authorized;
1,073,704 shares issued and outstanding)                                             23,393                  23,393
Shareholders' equity:
Optional  preferred  stock (par  value  $.01 per share;  98,000,000
shares authorized; no shares issued or outstanding)                                      --                      --
Common  stock (par value  $.01 per share;  100,000,000  authorized;
issued   and   outstanding:   8,260,582   and   6,526,510   shares,                      83                      65
respectively)
Paid in capital                                                                      78,091                  29,509
Retained earnings                                                                    93,827                  83,184
                                                                       --------------------    --------------------
Total Shareholders' Equity                                                          172,001                 112,758
                                                                       --------------------    --------------------
Total  Liabilities,  Redeemable  Preferred Stock and  Shareholders'              $1,510,039                $940,119
Equity                                                                 ====================    ====================

</TABLE>

          See accompanying notes to consolidated financial statements.

                                       3
<PAGE>
                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
                       CONSOLIDATED STATEMENTS OF INCOME
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>

                                                             THREE MONTHS ENDED JUNE 30,       SIX MONTHS ENDED JUNE 30,
                                                            ------------------------------    -----------------------------
                                                                1998             1997            1998             1997        
                                                            --------------    ------------    ------------    -------------
                                                            <S>              <C>             <C>             <C>    
      Revenues:
      Gain on sale of mortgage and other loans                    $28,303          $7,999         $48,572          $13,320
      Gain on sale of automobile loans                              2,434              --           2,434               --
      Net mortgage warehouse income                                 2,395             526           4,117            1,292
      Gain on sale of mortgage servicing rights                        --           2,263              --            4,529
      Servicing fees:
      Mortgage                                                      5,588           3,414          10,282            6,985
      Other                                                         1,250           1,660           2,363            9,522
      Gain on resolution of Portfolio Assets                        2,839           4,891           5,936           10,192
      Equity in earnings of Acquisition Partnerships                1,523           2,772           4,737            4,313
      Rental income on real estate Portfolios                          75              87             156              157
      Interest income                                               2,898           3,449           6,697            6,228
      Other income                                                  2,239           2,409           6,276            3,570
      Interest income on Class A Certificate                           --           1,515              --            3,174
                                                           --------------    ------------    ------------    -------------
      Total revenues                                               49,544          30,985          91,570           63,282
      Expenses:
      Interest on other notes payable                               3,304           3,650           6,722            6,512
      Salaries and benefits                                        20,447          10,293          36,464           19,284
      Amortization:
      Mortgage servicing rights                                     4,126           1,596           7,302            3,143
      Other                                                           373             812             805            1,765
      Provision for loan losses                                       575           1,357           2,927            2,155
      Provision for valuation of mortgage servicing rights            500              --             500               --
      Occupancy, data processing, communication and other          13,121           8,608          24,812           16,185
                                                           --------------    ------------    ------------    -------------
      Total expenses                                               42,446          26,316          79,532           49,044
      Net earnings  before  minority  interest,  preferred          7,098                          12,038
      dividends and income taxes                                                    4,669                           14,238
      Benefit (provision) for income taxes                            755           (230)           1,396            (582)
                                                           --------------    ------------    ------------    -------------
      Net earnings before minority interest and preferred           7,853           4,439          13,434           13,656
            dividends
      Minority interest                                               229              69              14               69
      Preferred dividends                                           1,515           1,515           3,030            3,174
                                                           --------------    ------------    ------------    -------------
      Net earnings to common shareholders                          $6,109          $2,855         $10,390          $10,413
                                                           ==============    ============    ============    =============
      Net earnings per common share-- basic                         $0.84           $0.44           $1.51            $1.60
      Net earnings per common share-- diluted                       $0.83           $0.44           $1.47            $1.58
      Weighted average common shares outstanding-- basic            7,243           6,517           6,889            6,517
      Weighted average common shares outstanding-- diluted          7,401           6,549           7,045            6,575


</TABLE>

          See accompanying notes to consolidated financial statements.

                                       4
<PAGE>
                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
                  
                         

<TABLE>
<CAPTION>
                                          NUMBER OF          COMMON    PAID IN       RETAINED              TOTAL
                                        COMMON SHARES        STOCK     CAPITAL       EARNINGS          SHAREHOLDERS'
                                                                                                           EQUITY
                                       -------------- --------------  -------------- --------------  -----------------
                                     <S>             <C>            <C>            <C>               <C>

           BALANCES, JANUARY 1, 1997        6,513,346            $65         $29,783        $54,954            $84,802
  Exercise of warrants, options and            13,164             --             318             --                318
  employee stock purchase plan
  Change in subsidiary year end                    --             --              --        (1,195)            (1,195)
  Net earnings, after minority                     --             --              --         35,628             35,628
  interest, for 1997
  Preferred dividends                              --             --              --        (6,203)            (6,203)
  Other                                            --             --           (592)             --              (592)
                                       -------------- --------------  -------------- --------------  -----------------
  BALANCES, DECEMBER 31, 1997               6,526,510             65          29,509         83,184            112,758
  Exercise of warrants, options and           491,922              5          12,275             --             12,280
  employee stock purchase plan
  Issuance of common stock to acquire          41,000              1           2,149             --              2,150
  the minority interest of subsidiary
  Issuance of common stock in public        1,201,150             12          34,158             --             34,170
  offering
  Net earnings, after minority                     --             --              --         13,420             13,420
  interest, for six months ended June
  30, 1998
  Foreign currency translation and                 --             --              --            253                253
  other adjustments
  Preferred dividends                              --             --              --        (3,030)            (3,030)
                                       -------------- --------------  -------------- --------------  -----------------
  BALANCES, JUNE 30, 1998                   8,260,582            $83         $78,091        $93,827           $172,001
                                       ============== ==============  ============== ==============  =================

</TABLE>



          See accompanying notes to consolidated financial statements.


                                       5
<PAGE>
                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                             SIX MONTHS ENDED JUNE 30,
                                                          --------------------------------
                                                              1998              1997
                                                         --------------    --------------
<S>                                                     <C>              <C>

Cash flows from operating activities:
  Net earnings  before  minority  interest and preferred        $13,434           $13,656
dividends
  Adjustments  to  reconcile  net  earnings  to net cash
used in
    operating activities, net of effect of acquisitions:
    Proceeds from resolution of Portfolio Assets                 30,032            30,122
    Gain on resolution of Portfolio Assets                      (5,936)          (10,192)
    Purchase of Portfolio  Assets and loans  receivable,       (11,827)          (20,791)
net
    Origination of automobile receivables                      (57,762)          (50,071)
    Gain on sale of mortgage servicing rights                        --           (4,529)
    Increase in mortgage loans held for sale                  (487,434)          (87,131)
    Increase in construction loans receivable                   (9,569)           (5,488)
    Originated mortgage servicing rights                       (62,409)          (20,981)
    Purchases of mortgage servicing rights                         (69)           (5,677)
    Proceeds from sale of mortgage servicing rights                  --            13,826
    Provision  for loan losses and valuation of mortgage          3,427             2,155
servicing                    rights
    Equity in earnings of Acquisition Partnerships              (4,737)           (4,313)
    Proceeds from performing  Portfolio Assets and loans         57,491            46,457
receivable,                 net
    (Increase) decrease in net deferred tax asset               (1,571)                13
    Depreciation and amortization                                 9,185             7,360
    Increase in other assets                                   (32,221)          (34,246)
    Increase in other liabilities                                38,775            11,795
                                                         --------------    --------------
         Net cash used in operating activities                (521,191)         (118,035)
                                                         --------------    --------------
Cash flows from investing activities:
  Payments on advances to acquisition partnerships and               --             1,029
          affiliates
  Acquisition of subsidiaries                                        --             1,118
  Principal payments on Class A Certificate                          --            33,807
  Property and equipment, net                                   (3,269)           (1,752)
  Contributions to Acquisition Partnerships                    (13,581)          (11,378)
  Distributions from Acquisition Partnerships                    15,653             7,759
                                                         --------------    --------------
         Net  cash   provided  by  (used  in)  investing        (1,197)            30,583
activities
                                                         --------------    --------------
Cash flows from financing activities:
  Borrowings under notes payable                             10,630,721         4,754,364
  Payments of notes payable                                (10,152,827)       (4,640,385)
  Purchase of special preferred stock                                --          (12,567)
  Proceeds from issuance of common stock                         46,450               111
  Distributions to minority interest                                 --           (5,669)
  Preferred dividends paid                                      (3,030)           (3,597)
  Other increases in paid in capital                                 --               311
                                                         --------------    --------------
         Net cash provided by financing activities              521,314            92,568
                                                         --------------    --------------
Net increase (decrease) in cash                                $(1,074)            $5,116
Cash, beginning of period                                        31,605            16,445
                                                         --------------    --------------
Cash, end of period                                             $30,531           $21,561
                                                         ==============    ==============
Supplemental disclosure of cash flow information: 
Cash paid during the period for:
    Interest                                                    $28,867           $15,621
    Income taxes                                                   $231              $104

</TABLE>

          See accompanying notes to consolidated financial statements.

                                       6
<PAGE>
                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 1998
                  (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

(1) BASIS OF PRESENTATION

         The unaudited consolidated financial statements of FirstCity Financial
Corporation ("FirstCity" or the "Company") reflect, in the opinion of
management, all adjustments, consisting only of normal and recurring
adjustments, necessary to present fairly FirstCity's financial position at June
30, 1998, the results of operations and the cash flows for the three month and
six month periods ended June 30, 1998 and 1997. Additionally, the Company's
merger with Harbor Financial Group, Inc. ("Mortgage Corp.") on July 1, 1997 has
been accounted for as a pooling of interests. The accompanying consolidated
financial statements have been retroactively restated to reflect the pooling of
interests.

         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. Significant estimates include the estimation of future
collections on purchased portfolio assets used in the calculation of net gain on
resolution of portfolio assets, interest rate environments, prepayment speeds of
loans in servicing portfolios, collectibility on loans held in inventory and for
investment. Actual results could differ materially from those estimates. Certain
amounts in the financial statements for prior periods have been reclassified to
conform with current financial statement presentation.

(2) MERGERS AND ACQUISITIONS

         On July 1, 1997, the Company merged with Mortgage Corp. (the "Harbor
Merger"). The Company issued 1,580,986 shares of its common stock in exchange
for 100% of Mortgage Corp.'s outstanding capital stock in a transaction
accounted for as a pooling of interests. Mortgage Corp. originates and services
residential and commercial mortgage loans. Mortgage Corp. had approximately $12
million in equity, assets of over $300 million and 700 employees prior to the
Harbor Merger.

         At year end 1997, an unrelated party exercised warrants to acquire a
four percent minority interest in Mortgage Corp.'s subsidiary, Harbor Financial
Mortgage Corporation. On March 31, 1998, the Company issued 41,000 shares of
common stock in exchange for the four percent minority interest in this
subsidiary.








                                       7
<PAGE>
                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company's net revenues, net earnings to common shareholders and net earnings
per common share, for the three months and six months ended June 30, 1997,
before and after the Harbor Merger are summarized as follows:

<TABLE>
<CAPTION>
                                                                       THREE MONTHS            SIX MONTHS ENDED
                                                                      ENDED JUNE 30,                JUNE 30, 
                                                                           1997                       1997
                                                                 -------------------------    ------------------
<S>                                                             <C>                         <C>
           Net revenues (including equity earnings):
           Before 1997 pooling                                                  $15,273                 $34,838
           1997 pooling                                                          15,712                  28,444
           After 1997 pooling                                                    30,985                  63,282
           Net earnings to common shareholders:
           Before 1997 pooling                                                   $2,066                  $8,966
           1997 pooling                                                             789                   1,447
           After 1997 pooling                                                     2,855                  10,413
           Net earnings per common share - diluted:
           Before 1997 pooling                                                    $0.42                   $1.79
           1997 pooling                                                            0.02                  (0.21)
           After 1997 pooling                                                      0.44                    1.58
</TABLE>


         In the first quarter of 1997, FirstCity received $6.8 million (recorded
as servicing fees) from the FirstCity Liquidating Trust (the "Trust") for
termination of the Investment Management Agreement.

(3) PORTFOLIO ASSETS

         Portfolio Assets are summarized as follows:

<TABLE>
<CAPTION>
                                                                     JUNE 30,            DECEMBER
                                                                       1998              31,1997
                                                                 ----------------    ---------------
<S>                                                             <C>                 <C>

           Non-performing                                                $106,757           $130,657
           Performing                                                      12,187             16,131
           Real estate                                                     16,721             22,777
                                                                 ----------------    ---------------
           Total                                                          135,665            169,565
           Discount  required  to  reflect  Portfolio  Assets at         (67,189)           (79,614)
           carrying value
                                                                 ----------------    ---------------
           Portfolio Assets, net                                          $68,476            $89,951
                                                                 ================    ===============
</TABLE>

         Portfolio Assets are pledged to secure non-recourse notes payable.

(4) LOANS RECEIVABLE

         Loans receivable are summarized as follows:

<TABLE>
<CAPTION>
                                                                  JUNE 30,          DECEMBER 31,
                                                                    1998                1997
                                                             -----------------   -----------------
<S>                                                           <C>               <C>

           Construction loans receivable                               $29,163             $19,594
           Residential mortgage and other loans held for                 8,364               6,386
           investment
           Automobile and consumer finance receivables                  24,876              73,417
           Allowance for loan losses                                   (6,491)             (9,282)
                                                             -----------------   -----------------
           Loans receivable, net                                       $55,912             $90,115
                                                             =================   =================

                                       8
</TABLE>
<PAGE>
                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

        The activity in the allowance for loan losses is summarized as follows
for the periods indicated:

<TABLE>
<CAPTION>
                                                      SIX MONTHS ENDED
                                                           JUNE 30,
                                                 --------------------------
                                                      1998         1997
                                                 ------------- ------------
<S>                                              <C>           <C>

Balances, beginning of period                           $9,282       $2,693
Provision for loan losses                                2,852        2,155
Discounts acquired                                       8,649        4,936
Reduction in contingent liabilities                         --          458
Allocation of reserves to sold loans                   (7,602)           --
Charge off activity:
Principal balances charged off                         (8,956)      (7,460)
Recoveries                                               2,266        1,158
                                                 ------------- ------------
Net charge offs                                        (6,690)      (6,302)
                                                 ------------- ------------
Balances, end of period                                 $6,491       $3,940
                                                 ============= ============
</TABLE>

         During 1997, a note recorded at the time of original purchase of the
initial automobile finance receivables pool and contingent on the ultimate
performance of the pool was adjusted to reflect a reduction in anticipated
payments due pursuant to the contingency. The reduction in the recorded
contingent liability was recorded as an increase in the allowance for losses.

(5) MORTGAGE LOANS HELD FOR SALE

         Mortgage loans held for sale include loans collateralized by first lien
mortgages on one-to-four family residences as follows:

<TABLE>
<CAPTION>

                                                             JUNE 30, 1998    DECEMBER 31,1997
                                                            --------------   ------------------
<S>                                                        <C>              <C>

                     Residential mortgage loans                   $993,677             $522,970
                     Unamortized premiums and discounts             27,508               10,781
                                                            --------------   ------------------
                                                                $1,021,185             $533,751
                                                            ==============   ==================
</TABLE>

(6) INVESTMENT SECURITIES

         The Company has investment securities (investments) consisting of rated
securities, retained interests and related interest only strips (collectively
referred to as residual interests) which are all attributable to loans sold
through securitization transactions by the Company. The investments are
accounted for in accordance with SFAS No.115, "Accounting for Investments in
Certain Debt and Equity Marketable Securities" and classified as available for
sale. Accordingly, the Company records these investments at estimated fair
value. The increases or decreases in estimated fair value are recorded as
unrealized gains or losses in the accompanying consolidated statement of
shareholders' equity. The determination of fair value is based on the present
value of the anticipated excess cash flows using valuation assumptions unique to
each securitization. As of June 30, 1998 and December 31, 1997 the Company had
recorded no unrealized gain or loss on the investments. Investments are
comprised of the following as of the dates indicated.









<TABLE>
<CAPTION>

                                                                     JUNE 30,            DECEMBER
                                                                       1998              31,1997
                                                                 ----------------    ---------------
<S>                                                              <C>                 <C>

           Rated securities                                                $2,801     $           --
           Interest only strips                                            19,849              3,396
           Retained interests                                              20,164              3,308
           Other securities                                                    88                 --
           Accrued interest                                                   144                231
                                                                 ----------------    ---------------
           Investment securities                                          $43,046             $6,935
                                                                 ================    ===============
</TABLE>


                                       9
<PAGE>

                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The activity in investments for the six months ended June 30, 1998 and the year
ended December 31, 1997 is as follows:

<TABLE>
<CAPTION>
                                                                     JUNE 30,            DECEMBER
                                                                       1998              31,1997
                                                                 ----------------    ---------------
<S>                                                         <C>                     <C>

           Balance, beginning of period                                    $6,935     $           --
           Cost allocated from securitizations                             37,175              6,925
           Interest accreted.                                                 688                548
           Increase in other securities, net                                   88                 --
           Cash received from trusts                                      (1,840)              (538)
                                                                 ----------------    ---------------
           Balance, end of period                                         $43,046             $6,935
                                                                 ================    ===============
</TABLE>


The investments are valued using discount rates ranging from 12% to 15% for both
home equity and consumer residual interests. Estimated loss rates range from
1.5% to 14% and prepayment assumptions range from 12% to 30% and 3% to 5% on
home equity and consumer residual interests, respectively.

(7) INVESTMENTS IN ACQUISITION PARTNERSHIPS

The Company has investments in Acquisition Partnerships and their general
partners that are accounted for on the equity method. The condensed combined
financial position and results of operations of the Acquisition Partnerships,
which include the domestic and foreign Acquisition Partnerships and their
general partners, are summarized below:

                        CONDENSED COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>

                                                                    JUNE 30,            DECEMBER
                                                                     1998               31,1997
                                                                 ---------------   ----------------
<S>                                                         <C>                 <C>    

                 Assets                                                 $278,649           $338,484
                                                                 ===============   ================
                 Liabilities                                            $186,025           $250,477
                 Net equity                                               92,624             88,007
                                                                 ---------------   ----------------
                                                                        $278,649           $338,484
                                                                 ===============   ================
                 Company's equity in Acquisition Partnerships            $36,076            $35,529
                                                                 ===============   ================
</TABLE>


                     CONDENSED COMBINED SUMMARY OF EARNINGS

<TABLE>
<CAPTION>
                                                         THREE MONTHS ENDED              SIX MONTHS ENDED
                                                              JUNE 30,                        JUNE 30,
                                                   -----------------------------   ----------------------------
                                                       1998             1997           1998            1997
                                                   ------------    -------------   ------------    ------------
<S>                                               <C>             <C>             <C>            <C>    

     Proceeds from resolution of Portfolio Assets       $30,070          $91,068        $87,628        $115,652
     Gross margin                                         9,110           11,857         27,643          19,558
     Interest   income  on  performing   portfolio        2,169            1,822          4,622           3,728
     assets
     Net earnings                                        $3,860           $7,424        $12,982         $11,015
                                                   ============    =============   ============    ============
     Company's equity in earnings of Acquisition         $1,523           $2,772         $4,737          $4,313
     Partnerships                                  ============    =============   ============    ============

</TABLE>

(8) PREFERRED STOCK AND SHAREHOLDERS' EQUITY

         In May 1998, the Company closed the public offering of 1,542,150 shares
of FirstCity common stock, of which 341,000 shares were sold by selling
shareholders. Net proceeds (after expenses) of $34.2 million were used to retire
debt.

                                       10
<PAGE>
                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

         On May 11, 1998, the Company notified holders of its outstanding
warrants to purchase shares of common stock that it was exercising its option to
repurchase such warrants for $1.00 each. In June 1998, as a result of such
notification, warrants representing 471,380 shares of common stock were
exercised for an aggregate warrant purchase price of $11.8 million.

         In the first six months of 1997, the Company purchased 537,430 shares
of special preferred stock. In the third quarter of 1997, 1,073,704 shares of
special preferred stock were exchanged for a like number of shares of adjusting
rate preferred stock. At June 30, 1998, accrued dividends totaled $.7 million
for special preferred stock and $.8 million for adjusting rate preferred stock,
or $.7875 per share, and were paid on July 15, 1998.

         On July 17, 1998 the Company filed a shelf registration statement with
the Securities and Exchange Commission which allows the Company to issue up to
$250 million in debt and equity securities from time to time in the future. The
registration statement became effective July 28, 1998.

         Earnings per share ("EPS") has been calculated in conformity with SFAS
No. 128, Earnings Per Share, and all prior periods have been restated. A
reconciliation between the weighted average shares outstanding used in the basic
and diluted EPS computations is as follows:


<TABLE>
<CAPTION>
                                                              THREE MONTHS ENDED               SIX MONTHS ENDED
                                                                  JUNE 30,                        JUNE 30,
                                                          -------------------------       -------------------------
                                                              1998          1997              1998          1997               
                                                          -----------    ----------       ------------   ----------
<S>                                                    <C>              <C>            <C>             <C>

Net earnings to common shareholders                            $6,109        $2,855            $10,390      $10,413
                                                          ===========    ==========       ============   ==========
Weighted average common shares outstanding - basic              7,243         6,517              6,889        6,517
Effect of dilutive securities:
Assumed exercise of stock options                                  78            32                 76           45             
Assumed exercise of warrants                                       80            --                 80           13
                                                          -----------    ----------       ------------   ----------
Weighted average common shares outstanding - diluted            7,401         6,549              7,045        6,575
                                                          ===========    ==========       ============   ==========
Net earnings per common share - basic                           $0.84         $0.44              $1.51        $1.60
Net earnings per common share - diluted                         $0.83         $0.44              $1.47        $1.58

</TABLE>

         The Company adopted Financial Accounting Standards Board Statement No.
130, Reporting Comprehensive Income ("SFAS 130") as of January 1, 1998. SFAS 130
establishes standards for reporting and displaying comprehensive income and its
components in a financial statement that is displayed with the same prominence
as other financial statements. SFAS 130 also requires the accumulated balance of
other comprehensive income to be displayed separately in the equity section of
the consolidated balance sheet. The accumulated balance of other comprehensive
income at each of June 30, 1998 and December 31, 1997 was $(1) and $44,
respectively, and other comprehensive income for the six months ended June 30,
1998 and 1997 was $(45) and $0, respectively. The adoption of this statement had
no material impact on net earnings or shareholders' equity.

(9) INCOME TAXES

         Federal income taxes are provided at a 35% rate. Net operating loss
carry forwards ("NOLs") are available to FirstCity and are recognized as an
offset to the provision in the period during which the benefit is determined to
be realizable. During the first six months of 1998, FirstCity recognized a
deferred tax benefit of $1.5 million (compared to $.6 million in the first six
months of 1997). Realization of the resulting net deferred tax asset is
dependent upon generating sufficient taxable income prior to expiration of the
net operating loss carry forwards. Although realization is not assured,
management believes it is more likely than not that all of the recorded deferred
tax asset will be realized. The amount of the deferred tax asset considered
realizable, however, could be adjusted in the future if estimates of future
taxable income during the carry forward period change.


                                       11
<PAGE>
                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(10) COMMITMENTS AND CONTINGENCIES

         The Company is involved in various legal proceedings in the ordinary
course of business. In the opinion of management, the resolution of such matters
will not have a material adverse impact on the consolidated financial condition,
results of operations or liquidity of the Company.

                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

         The Company is a 50% owner in an entity that is obligated to advance up
to $2.5 million toward the acquisition of Portfolio Assets from financial
institutions in California. At June 30, 1998, advances of $.2 million had been
made under the obligation.








                                       12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 
        RESULTS OF OPERATIONS

OVERVIEW

         The Company is a diversified financial services company engaged in
residential and commercial mortgage banking ("Mortgage Corp."), Portfolio Asset
acquisition and resolution ("Commercial Corp.") and consumer lending ("Consumer
Corp."). The mortgage banking business involves the origination, acquisition and
servicing of residential and commercial mortgage loans and the subsequent
warehousing, sale or securitization of such loans through various public and
private secondary markets. The Portfolio Asset acquisition and resolution
business involves acquiring Portfolio Assets at a discount to Face Value and
servicing and resolving such Portfolios in an effort to maximize the present
value of the ultimate cash recoveries. The Company also seeks opportunities to
originate and retain high yield commercial loans to businesses and to finance
real estate projects that are unable to access traditional lending sources. The
consumer lending business involves the acquisition, origination, warehousing,
securitization and servicing of consumer receivables. The Company's current
consumer lending operations are focused on the acquisition of sub-prime
automobile receivables.

         The Company's financial results are affected by many factors including
levels of and fluctuations in interest rates, fluctuations in the underlying
values of real estate and other assets, and the availability and prices for
loans and assets acquired in all of the Company's businesses. The Company's
business and results of operations are also affected by the availability of
financing with terms acceptable to the Company and the Company's access to
capital markets, including the securitization markets.

         The Harbor Merger, which occurred in July 1997, was accounted for as a
pooling of interests. The Company's historical financial statements have
therefore been retroactively restated to include the financial position and
results of operations of Mortgage Corp. for all periods presented. As a result
of the significant period to period fluctuations in the revenues and earnings of
the Company's Portfolio Asset acquisition and resolution business, period to
period comparisons of the Company's results of operations may not be meaningful.

ANALYSIS OF REVENUES AND EXPENSES

         The following table summarizes the revenues and expenses of each of the
Company's businesses and presents the contribution that each business makes to
the Company's operating margin.

                        SUMMARY OF REVENUES AND EXPENSES
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                 SECOND QUARTER                     SIX MONTHS ENDED
                                                                                                        JUNE 30,
                                                       ---------------------------------     ------------------------------
                                                             1998              1997               1998             1997
                                                       ---------------    --------------     -------------    -------------
<S>                                               <C>                 <C>                 <C>               <C>           
MORTGAGE BANKING:
Revenues:
Net mortgage warehouse income                                   $2,395              $526            $4,117           $1,292
Gain on sale of mortgage loans                                  28,303             7,999            48,572           13,320
Servicing fees                                                   5,588             3,414            10,282            6,985
Other                                                            1,552             3,773             3,556            6,848
                                                       ---------------    --------------     -------------    -------------
Total                                                           37,838            15,712            66,527           28,445
Expenses:
Salaries and benefits                                           17,216             7,647            30,151           13,573
Amortization of mortgage servicing rights                        4,126             1,596             7,302            3,143
Provision for valuation of mortgage servicing rights               500                --               500               --
Interest on other notes payables                                   486               304               987              559
Occupancy, data processing, communication and other              9,410             4,887            17,514            8,846
                                                       ---------------    --------------     -------------    -------------
Total                                                           31,738            14,434            56,454           26,121
                                                       ---------------    --------------     -------------    -------------
Operating contribution before direct taxes                      $6,100            $1,278           $10,073           $2,324
                                                       ===============    ==============     =============    =============
Operating contribution, net of direct taxes                     $6,100              $833            $9,984           $1,491
                                                       ===============    ==============     =============    =============
         PORTFOLIO ASSET ACQUISITION AND RESOLUTION:
Revenues:
Gain on resolution of Portfolio Assets                          $2,839            $4,891            $5,936          $10,192
Equity in earnings of Acquisition Partnerships                   1,523             2,772             4,737            4,313
Servicing fees (1)                                                 666             1,554             1,395            9,382

</TABLE>                                       
                                       13
<PAGE>

<TABLE>
<CAPTION>
                                                                 SECOND QUARTER                     SIX MONTHS ENDED
                                                                                                        JUNE 30,
                                                       ---------------------------------     ------------------------------
                                                             1998              1997               1998             1997
                                                       ---------------    --------------     -------------    -------------
<S>                                               <C>                  <C>                 <C>            <C>
Other                                                              512             1,001             2,510            2,033
                                                       ---------------    --------------     -------------    -------------
Total                                                            5,540            10,218            14,578           25,920
Expenses:
Salaries and benefits                                            1,100             1,268             2,267            2,883
Interest on other notes payable                                  1,336             1,762             2,812            3,214
Asset level expenses,  occupancy,  data processing and           1,886             2,835             4,098            6,033
other
                                                       ---------------    --------------     -------------    -------------
Total                                                            4,322             5,865             9,177           12,130
                                                       ---------------    --------------     -------------    -------------
Operating contribution before direct taxes                      $1,218            $4,353            $5,401          $13,790
                                                       ===============    ==============     =============    =============
Operating contribution, net of direct taxes                     $1,223            $4,348            $5,392          $13,685
                                                       ===============    ==============     =============    =============
         CONSUMER LENDING:
          Revenues:
 Gain on sale of automobile loans                               $2,434     $          --            $2,434     
                                                                                                              $          --
 Interest income                                                 2,659             2,777             5,225            4,869
 Servicing fees and other                                          653               186             1,043              234
                                                       ---------------    --------------     -------------    -------------
 Total                                                           5,746             2,963             8,702            5,103
 Expenses:
 Salaries and benefits                                           1,292               592             2,404            1,097
 Provision for loan losses                                         500             1,357             2,852            2,155
 Interest on other notes payable                                   939             1,113             1,819            1,835
 Occupancy, data processing and other                            1,658               761             2,765            1,594
                                                       ---------------    --------------     -------------    -------------
 Total                                                           4,389             3,823             9,840            6,681
                                                       ===============    ==============     =============    =============
 Operating contribution before direct taxes                     $1,357            $(860)          $(1,138)         $(1,578)
                                                       ===============    ==============     =============    =============
 Operating contribution, net of direct taxes                    $1,357            $(862)          $(1,138)         $(1,581)
                                                       ===============    ==============     =============    =============
     Total  operating  contribution,   net  of 
direct taxes                                                    $8,680            $4,319           $14,238          $13,595 
                                                       ===============    ==============     =============    =============

         CORPORATE OVERHEAD:
Interest income on Class A Certificate (2)              $           --            $1,515                             $3,174
                                                                                                $      --
Salaries and  benefits,  occupancy,  professional  and         (1,806)           (1,764)           (2,318)          (3,782)
other income and expenses, net
Deferred tax benefit                                               750               300             1,500              600
                                                       ---------------    --------------     -------------    -------------
Net earnings before preferred dividends                          7,624             4,370            13,420           13,587
Preferred dividends                                              1,515             1,515             3,030            3,174
                                                       ---------------    --------------     -------------    -------------
Net earnings to common shareholders                             $6,109            $2,855           $10,390          $10,413
                                                       ===============    ==============     =============    =============
         SHARE DATA:
Net earnings per common share-- basic                            $0.84             $0.44             $1.51            $1.60
Net earnings per common share-- diluted                          $0.83             $0.44             $1.47            $1.58
Weighted average common shares outstanding - basic               7,243             6,517             6,889            6,517
Weighted average common shares outstanding - diluted             7,401             6,549             7,045            6,575

</TABLE>

(1) Includes $6.8 million received as a result of terminating the Investment
    Management Agreement with FirstCity Liquidating Trust in first quarter 1997.
(2) Prior to June 30, 1997, income was received from FirstCity Liquidating Trust
    equal to the Company's preferred stock dividend obligation.


ORIGINATION AND OTHER FINANCIAL DATA:
Mortgage Corp.:

<TABLE>
<CAPTION>
                                                                 SECOND QUARTER                     SIX MONTHS ENDED
                                                                                                        JUNE 30,
                                                       ---------------------------------     ------------------------------
                                                             1998              1997               1998             1997
                                                       ---------------    --------------     -------------    -------------
<S>                                               <C>                  <C>                 <C>            <C>

Origination of residential mortgage loans:
Conventional                                                $1,584,727          $466,256        $2,945,592         $876,352
Agency                                                         377,364           118,060           708,592          201,291

</TABLE>



                                       14
<PAGE>
<TABLE>
<CAPTION>
                                                                 SECOND QUARTER                     SIX MONTHS ENDED
                                                                                                        JUNE 30,
                                                       ---------------------------------     ------------------------------
                                                             1998              1997               1998             1997
                                                       ---------------    --------------     -------------    -------------
<S>                                               <C>                  <C>                 <C>            <C>


Home equity                                                     89,022            48,477           147,284           59,522
Other                                                           37,075            16,235            56,987           24,138
                                                       ---------------    --------------     -------------    -------------
Total                                                       $2,088,188          $649,028        $3,858,455       $1,161,303
                                                       ===============    ==============     =============    =============
Origination of commercial mortgage loans:
Correspondent                                                  $67,985           $42,474          $181,250          $42,474
Construction                                                    12,767            15,623            28,363           26,380
                                                       ---------------    --------------     -------------    -------------
Total                                                          $80,752           $58,097          $209,613          $68,854
                                                      
                                                       ===============    ==============     =============    =============
Acquisition of Home Equity Loans                               $69,312     $          --          $105,728     $         --  

Commercial Corp.:
Aggregate purchase price of assets acquired                    $17,869           $10,949           $69,840          $58,187
Proceeds from resolution                                        43,126           106,348           117,660          145,774
Consumer Corp.:
Aggregate acquisition of automobile and other                  $33,255           $21,980           $66,630          $53,104
consumer receivables

</TABLE>

         MORTGAGE BANKING

The following table presents selected information regarding the
revenues and expenses of the Company's mortgage banking business.

                   ANALYSIS OF SELECTED REVENUES AND EXPENSES
                                MORTGAGE BANKING
                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                              SIX MONTHS ENDED
                                                               SECOND QUARTER                     JUNE 30,
                                                      -------------------------------    --------------------------
                                                            1998             1997            1998          1997
                                                      ---------------   -------------    -----------  -------------
<S>                                               <C>                 <C>               <C>          <C>

         WAREHOUSE INVENTORY:
         Average inventory balance                           $745,982        $207,978       $907,195       $226,474
         Net mortgage warehouse income:
         Dollar amount                                          2,395             526          4,117          1,292
         Annualized  percentage of average  inventory           1.28%           1.01%          0.91%          1.14%
         balance
         GAIN ON SALE OF MORTGAGE LOANS:
         Gain  on  sale  of   mortgage   loans  as  a
         percentage of loans sold:
         Residential                                            1.15%           1.21%          1.26%          1.13%
         Home Equity                                            4.43%           4.44%          4.59%          4.20%
         Securitized Home Equity                                1.24%              --          1.24%             --
         OMSR income as a percentage  of  residential           1.78%           1.68%          1.80%          1.72%
         mortgage loans sold
                  SERVICING REVENUES:
         Average servicing portfolios:
         Residential                                       $5,621,502      $3,496,301     $5,119,061     $3,462,207
         Commercial                                         1,388,470         978,812      1,433,898        623,561
         Sub-serviced                                       1,099,795         833,533        960,261        824,958
         Servicing fees:
         Residential                                           $5,123          $2,991         $9,407         $6,323
         Commercial                                               247             210            485            253
         Sub-serviced                                             218             213            390            409
                                                      ---------------   -------------    -----------  -------------
         Total                                                 $5,588          $3,414        $10,282         $6,985
         Annualized servicing fee percentage:
         Residential                                            0.36%           0.34%          0.37%          0.37%
         Commercial                                             0.07%           0.09%          0.07%          0.08%
         Sub-serviced                                           0.08%           0.10%          0.08%          0.10%
         Gain on sale of servicing rights                         $--          $2,263     $       --         $4,529
         Amortization of servicing rights:
         Servicing rights amortization                         $4,126          $1,596         $7,302         $3,143



</TABLE>

                                       15
<PAGE>
<TABLE>
<CAPTION>
                                                                                            SIX MONTHS ENDED
                                                               SECOND QUARTER                     JUNE 30,
                                                      -------------------------------    --------------------------
                                                            1998             1997            1998          1997
                                                      ---------------   -------------    -----------  -------------
<S>                                               <C>                 <C>               <C>          <C>
         Servicing rights amortization as a                     0.29%           0.18%          0.29%          0.18%
         percentage of average residential servicing
         portfolio (annualized)
                  PERSONNEL:
         Personnel expenses                                   $17,216          $7,647        $30,151        $13,573
         Number of personnel (at period end):
         Production                                               511             313
         Servicing                                                146             120
         Other                                                    710             338
                                                      ---------------   -------------
         Total                                                  1,367             771
                                                      ===============   =============
</TABLE>

PORTFOLIO ASSET ACQUISITION AND RESOLUTION

         During the first quarter of 1997, the Trust terminated the Investment
Management Agreement and paid Commercial Corp. a termination payment of $6.8
million representing the present value of servicing fees projected to have been
earned by Commercial Corp. upon the liquidation of the assets of the Trust,
which was expected to occur principally in 1997. The following table presents
selected information regarding the revenues and expenses of the Company's
Portfolio Asset acquisition and resolution business.

                   ANALYSIS OF SELECTED REVENUES AND EXPENSES
                   PORTFOLIO ASSET ACQUISITION AND RESOLUTION
                             (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
                                                                                              SIX MONTHS ENDED
                                                               SECOND QUARTER                     JUNE 30,
                                                      -------------------------------    --------------------------
                                                            1998             1997            1998          1997
                                                      ---------------   -------------    -----------  -------------
<S>                                               <C>                 <C>               <C>          <C>                          
       GAIN ON RESOLUTION OF PORTFOLIO ASSETS:
       Average investment:
       Nonperforming Portfolios                               $42,201           $57,445        $46,005        $51,667
       Performing Portfolios                                   13,177             8,335         14,956          8,314
       Real estate Portfolios                                  17,639            21,773         18,053         22,810
                Gain  on   resolution   of  Portfolio
       Assets:
       Nonperforming Portfolios                                $1,626            $4,057         $3,889         $8,029
       Performing Portfolios                                       --                --            299             --
       Real estate Portfolios                                   1,213               834          1,748          2,163
                                                      ---------------   ---------------   ------------    -----------
       Total                                                   $2,839            $4,891         $5,936        $10,192
                                                      ===============   ===============   ============    ===========
       Interest income on performing Portfolios                 $455              $571         $1,186         $1,061
                         Gross profit percentage on
       resolution of Portfolio Assets:
       Nonperforming Portfolios                                20.37%            32.05%         21.97%         34.47%
       Performing Portfolios                                       --                --          7.99%             --
       Real estate Portfolios                                  22.26%            31.82%         20.35%         31.67%
       Weighted average gross profit percentage                21.74%            32.01%         19.77%         33.84%
       Interest       yield       on       performing          13.81%            27.40%         15.86%         25.52%
       Portfolios              (annualized)        
       SERVICING FEE REVENUES:
       Acquisition partnerships                                  $648            $1,510         $1,308         $2,383
       Trust                                                       --                --             --          6,800
       Affiliates                                                  18                44             87            199
                                                      ---------------   ---------------   ------------    -----------
       Total                                                     $666            $1,554         $1,395         $9,382
                                                      ===============   ===============   ============    ===========
                PERSONNEL:
       Personnel expenses                                      $1,100            $1,268         $2,267         $2,883
       Number of personnel (at period end):
       Production                                                  11                11
       Servicing                                                   70                92
                                                      ---------------   ---------------
       Total                                                       81               103
                                                      ===============   ===============
</TABLE>


                                       16
<PAGE>
<TABLE>
<CAPTION>
                                                                                              SIX MONTHS ENDED
                                                               SECOND QUARTER                     JUNE 30,
                                                      -------------------------------    --------------------------
                                                            1998             1997            1998          1997
                                                      ---------------   -------------    -----------  -------------
<S>                                               <C>                 <C>               <C>          <C>

       Interest expense:
       Average debt                                           $70,641           $81,298        $73,589        $71,038
       Interest expense                                         1,336             1,703          2,812          3,154
       Average yield (annualized)                               7.56%             8.38%          7.64%          8.88%

</TABLE>


The following chart presents selected information regarding the revenues and
expenses of the Acquisition Partnerships.

                   ANALYSIS OF SELECTED REVENUES AND EXPENSES
                            ACQUISITION PARTNERSHIPS
                             (DOLLARS IN THOUSANDS)

                                                                        
<TABLE>
<CAPTION>
                                                                                              SIX MONTHS ENDED
                                                                 SECOND QUARTER                     JUNE 30,
                                                        -------------------------------    --------------------------
                                                              1998             1997            1998          1997
                                                        ---------------   -------------    -----------  -------------
<S>                                                 <C>                 <C>               <C>          <C>

       GAIN ON RESOLUTION OF PORTFOLIO ASSETS:
                Gain  on   resolution   of  Portfolio            $9,110             $11,857          $27,643       $19,558
       Assets
       Gross profit percentage on resolution of                  30.30%              13.02%           31.55%        16.91%
       Portfolio Assets
       Interest income on performing Portfolios                   2,169               1,822            4,622         3,728
       Other income                                                 163                 567              333           858
       INTEREST EXPENSE:
       Interest expense                                          $3,016              $3,174           $6,957        $6,158
       Average yield (annualized)                                 7.03%               9.59%            7.04%         9.19%
       OTHER EXPENSES:
       Servicing fees                                            $1,364              $1,664           $2,785        $2,667
       Legal                                                        577                 643              985         1,224
       Property protection                                          958               1,303            1,994         2,266
       Other                                                      1,667                  38            6,895           814
                                                                                                
                                                       -----------------    ----------------    -------------   -----------
       Total other expenses                                       4,566               3,648           12,659         6,971
                                                       -----------------    ----------------    -------------   -----------
       NET EARNINGS                                              $3,860              $7,424          $12,982       $11,015
                                                       =================    ================    =============   ===========
</TABLE>


                                       17
<PAGE>
CONSUMER LENDING

         The following chart presents selected information regarding the
revenues and expenses of Consumer Corp.'s consumer lending business.

                   ANALYSIS OF SELECTED REVENUES AND EXPENSES
                                CONSUMER LENDING
                             (DOLLARS IN THOUSANDS)

                                                                           
<TABLE>
<CAPTION>
                                                                                              SIX MONTHS ENDED
                                                           SECOND QUARTER                     JUNE 30,
                                                  -------------------------------    --------------------------
                                                        1998             1997            1998          1997
                                                  ---------------   -------------    -----------  -------------
<S>                                           <C>                 <C>               <C>          <C>
       INTEREST INCOME:
       Average loans and investments:
       Auto                                               $45,697            $59,158        $51,085         $51,223
       Investments                                         22,677              3,463         18,278           1,732
       Interest income:
       Auto                                                $2,221             $2,517         $4,470          $4,530
       Investments                                            392                 78            689              78
       Average yield (annualized):
       Auto                                                19.44%             17.02%         17.50%          17.69%
       Investments                                          6.91%              9.01%          7.54%           9.01%
       SERVICING FEE REVENUES:
       Affiliates                                            $584               $106           $968            $140
                PERSONNEL:
       Personnel expenses                                  $1,292               $592         $2,404          $1,097
       Number of personnel (at period end):
       Production                                              67                 45
       Servicing                                               97                 20
                                                  ---------------   ----------------
       Total                                                  164                 65
                                                  ===============   ================
       INTEREST EXPENSE:
       Average debt                                       $41,521            $50,438        $41,158         $41,586
       Interest expense                                       939              1,113          1,819           1,808
       Average yield (annualized)                           9.05%              8.83%          8.84%           8.69%


</TABLE>

BENEFIT (PROVISION) FOR INCOME TAXES

         The Company has substantial federal NOLs, which can be used to offset
the tax liability associated with the Company's pre-tax earnings until the
earlier of the expiration or utilization of such NOLs. The Company accounts for
the benefit of the NOLs by recording the benefit as an asset and then
establishing an allowance to value the net deferred tax asset at a value
commensurate with the Company's expectation of being able to utilize the
recognized benefit in the next three to four year period. Such estimates are
reevaluated on a quarterly basis with the adjustment to the allowance recorded
as an adjustment to the income tax expense generated by the quarterly earnings.
Significant events that change the Company's view of its currently estimated
ability to utilize the tax benefits, such as the Harbor Merger in the third
quarter of 1997, result in substantial changes to the estimated allowance
required to value the deferred tax benefits recognized in the Company's periodic
financial statements. Similar events could occur in the future, and would impact
the quarterly recognition of the Company's estimate of the required valuation
allowance associated with its NOLs.

RESULTS OF OPERATIONS

         The following discussion and analysis should be read in conjunction
with the Consolidated Financial Statements of the Company (including the Notes
thereto) included elsewhere in this Quarterly Report on Form 10-Q.

SECOND QUARTER 1998 COMPARED TO SECOND QUARTER 1997

         The Company reported net earnings before minority interest and
preferred dividends of $7.9 million in the second quarter of 1998 (including a
$.8 million deferred tax benefit) compared to $4.4 million in the second quarter
of 1997. Net earnings to common shareholders were $6.1 million in 1998 compared
to $2.9 million in 1997. On a per share basis, basic net earnings attributable
to common shareholders were $.84 in 1998 compared to $.44 in 1997. Diluted net
earnings per common share were $.83 in 1998 compared to $.44 in 1997.

                                       18
<PAGE>
Mortgage Banking

         Mortgage Corp. experienced significant revenue growth in the second
quarter of 1998 relative to 1997 increasing to $37.8 million from $15.7 million.
The direct retail group ("Direct Retail") and the broker retail group ("Broker
Retail") origination networks experienced substantial growth in levels of
origination volume reflecting, in part, the level of capital that has been
contributed to Mortgage Corp. by the Company following the Harbor Merger and
relatively lower market interest rates in 1998 compared to 1997. Such revenue
growth was partially offset by increases in operating expenses associated with
the increased levels of origination volume.

         The Company entered the mortgage conduit business in August 1997 with
the formation of FirstCity Capital Corporation ("Capital Corp."). Capital Corp.
has generated interest revenue from its acquired Home Equity Loans, has incurred
interest expense to finance the acquisition of such loans and has incurred
general and administrative expenses in its start-up phase.

         Gain on sale of mortgage loans. Gain on sale of mortgage loans
increased by 254% to $28.3 million in 1998 from $8.0 million in 1997. This
increase was the result of substantial increases in the levels of residential
mortgage loan origination generated principally by the Broker Retail network of
Mortgage Corp. and, to a lesser extent, the Direct Retail network of Mortgage
Corp., and the resulting sales of such loans to government agencies and other
investors. The change in the gain on sale percentage is the result of the sale
of approximately $2.3 billion of mortgage loans in 1998 (compared to $.6 billion
in 1997) and the overall mix and pricing of the loans sold.

         Net mortgage warehouse income. Net mortgage warehouse income increased
by 355% to $2.4 million in 1998 from $.5 million in 1997. This is the result of
a significant increase in the average balance of loans held in inventory during
the year coupled with an increase in the spread earned between the interest rate
on the underlying mortgages and the interest cost of the warehouse credit
facility.

         Servicing fee revenues. Servicing fee revenues increased by 64% to $5.6
million in 1998 from $3.4 million in 1997 as a result of an increase in the size
of the servicing portfolio. The average residential servicing portfolio
increased $2.1 billion over second quarter 1997, to a level of $5.6 billion,
accounting for the majority of the increase in the servicing fee revenue.

         Other revenues. Other revenues decreased by 59% to $1.6 million in 1998
from $3.8 million in 1997. This decrease resulted from Mortgage Corp.'s decision
to retain, rather than sell, servicing rights in 1998. The sale of servicing
rights in 1997 resulted in a gain on sale of $2.3 million.

         Operating expenses. Operating expenses of Mortgage Corp. increased by
120% to $31.7 million in 1998 from $14.4 million in 1997. The expansion of the
Broker Retail and Direct Retail operation as well as the commencement of Capital
Corp.'s operations in late 1997 also contributed to the period to period
increases. The acquisition of MIG in 1997, which was accounted for as a purchase
by Mortgage Corp., produced higher relative totals for all components of
Mortgage Corp.'s operating expenses in 1998.

         Salaries and benefits increased by $9.6 million in 1998 reflecting the
596 additional staff required to support the increase in origination volumes
derived principally from the Broker Retail network and, to a lesser extent, the
Direct Retail network, and the increase in the size and number of loans in the
residential and commercial servicing portfolios in 1998.

         Amortization of mortgage servicing rights increased in 1998 as a result
of the substantially larger investment in mortgage servicing rights in 1998. In
consideration of the uncertainty as to the direction of future interest rates,
the Company has begun, through periodic provisions, to build an allowance
against any future valuation impairments of the mortgage servicing rights.
During the quarter the Company added $.5 million to this provision, resulting in
a total allowance of $1.0 million, or .84% of total mortgage servicing rights.
Interest on other notes payable (the portion not associated with Mortgage
Corp.'s warehouse credit facility) increased due to increased working capital
borrowings during 1998.

         Occupancy expense increased by $.5 million in 1998 as the result of the
opening or acquisition of several new offices in the Broker Retail and Direct
Retail networks. Increases in data processing, communication and other expenses
in 1998 resulted from the substantial increases in production and servicing
volumes.

Portfolio Asset Acquisition and Resolution

         Commercial Corp. purchased $17.9 million of Portfolio Assets during the
second quarter of 1998 for its own account and through the Acquisition
Partnerships compared to $10.9 million of acquisitions in the second quarter of
1997. Commercial Corp.'s quarter end investment in Portfolio Assets decreased to
$68.5 million in 1998 from $90.0 million in 1997. Commercial Corp. invested $8.2
million in equity in Portfolio Assets in 1998 compared to $6.2 million in 1997.

         Net gain on resolution of Portfolio Assets. Proceeds from the
resolution of Portfolio Assets decreased by 15% to $13.1 million in 1998 from
$15.3 million in 1997. The net gain on resolution of Portfolio Assets decreased
by 42% to $2.8 million in 1998 from $4.9 million in 1997 as the result of a
lower gross profit percentage in 1998. The gross profit percentage on the
proceeds from the resolution of Portfolio Assets in 1998 was 21.7% as compared
to 32.0% in 1997.

         Equity in earnings of Acquisition Partnerships. Proceeds from the
resolution of Portfolio Assets for the Acquisition Partnerships decreased by 67%
to $30.1 million in 1998 from $91.1 million in 1997 while the gross profit
percentage on proceeds increased to 30.3% in 1998 from 13.0% in 1997. Other
expenses of the Acquisition Partnerships increased by $.9 million in 1998
generally reflecting costs associated with the resolution of Portfolio Assets in
Europe which generated proceeds of $16.2 million. The net result was an overall
decrease in the net income of the Acquisition Partnerships of 48% to $3.9
million in 1998 from $7.4 million in 1997. As a result, Commercial Corp.'s
equity earnings from Acquisition Partnerships decreased by 45% to $1.5 million
in 1998 from $2.8 million in 1997.

         Servicing fee revenues. Servicing fees decreased by 57% to $.7 million
in 1998 from $1.6 million in 1997 as a result of lower domestic collection
levels in the Acquisition Partnerships and affiliated entities.

         Other revenues. Other revenues decreased to $.5 million in 1998 from
$1.0 million in 1997.

         Operating expenses. Operating expenses declined to $4.3 million in 1998
from $5.9 million in 1997 primarily as a result of reduced salaries and benefits
and lower asset level expenses.

         Salaries and benefits declined in 1998 as a result of the consolidation
of some of the servicing offices (Portfolios being serviced in the closed
offices reached final resolution).

         Interest on other notes payable declined $.4 million primarily as a
result of lower average borowings.

         Asset level expenses incurred in connection with the servicing of
Portfolio Assets decreased in 1998 as a result of the decrease in investments in
Portfolio Assets in 1998. Occupancy and other expenses decreased as a result of
the consolidation of servicing offices in 1998.

Consumer Lending

         Consumer Corp.'s revenues and expenses in 1997 were derived principally
from its original sub-prime automobile financing program. Consumer Corp.
terminated its obligations to the financial institutions participating in such
program effective as of January 31, 


                                       19
<PAGE>
1998. In late 1997 Consumer Corp., through its 80% owned subsidiary, Funding
Corp., established a new sub-prime automobile financing program through which it
originates automobile loans through direct relationships with franchised
automobile dealerships. Substantially all of Consumer Corp.'s activities are
expected to be conducted through Funding Corp. during 1998.

         Gain on sale of automobile loans. Funding Corp. completed a
securitization of $50 million in automobile loans, recognizing a gain of $2.4
million in the second quarter of 1998. Consumer Corp. has retained subordinated
interests in the form of nonrated tranches and excess spreads resulting from
three securitization transactions it has completed reflecting an aggregate
investment of $34.1 million in such interests at June 30, 1998.

         Interest and other income. Interest income on consumer loans was
relatively flat in the second quarter of 1998 as compared to the second quarter
of 1997. Other income increased $.5 million due to an increase in service fee
revenues from securitization trusts.

         Interest expense. Interest expense decreased by 16% to $.9 million in
1998 from $1.1 million in 1997 as a result of a decrease in the average
outstanding level of borrowings secured by automobile receivables to $41.5
million in 1998 from $50.4 million in 1997. The average rate at which such
borrowings incurred interest increased to 9.05% from 8.83% for the same period.

         Operating expenses. Salaries and benefits increased by 118% to $1.3
million in 1998 from $.6 million in 1997 as a result of the increased levels of
operating activity in 1998. Other expenses increased $.9 million due to the
growth of the origination and servicing operations.

         Provision for loan losses. The provision for loan losses on automobile
receivables decreased by 63% to $.5 million in 1998 from $1.4 million in 1997.
Consumer Corp. previously increased its rate of provision for loan losses based
on its determination that the discount rate at which it acquired loans under its
prior origination program did not properly provide for the losses expected to be
realized on the acquired loans. The origination program currently operated by
Funding Corp. generally allows for the acquisition of loans from automobile
dealerships at a larger discount from par than Consumer Corp.'s original
financing program. The Company believes that such acquisition prices more
closely approximate the expected loss per occurrence on the loans originated. To
the extent that Funding Corp. cannot match such discount to expected losses,
additional provisions might, in the future, be required to properly provide for
the risk of loss on the loans originated. The Company expects to incur
provisions for loan losses in 1998 on automobile loans acquired by it during
early 1998 through its previous origination program.



                                       20
<PAGE>
Other Items Affecting Net Earnings

         The following items affect the Company's overall results of operations
and are not directly related to any one of the Company's businesses discussed
above.

         Corporate overhead. Interest income on the Class A Certificate during
the second quarter of 1997 represents reimbursement to the Company from the
Trust of dividends through June 30, 1997, of $1.5 million on special preferred
stock. Company level interest expense was relatively flat year to year . Other
corporate income increased due to interest earned on the excess liquidity
derived from the Trust's redemption of the Class A Certificate. Salary and
benefits, occupancy and professional fees account for the majority of other
overhead expenses, which remained relatively flat compared to 1997.

         Income taxes. Federal income taxes are provided at a 35% rate applied
to taxable income and are offset by NOLs that the Company believes are available
to it as a result of the Merger. The tax benefit of the NOLs is recorded in the
period during which the benefit is realized. The Company reported a deferred tax
benefit of $.8 million in 1998 as compared to a benefit of $.3 million in 1997.

SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997

         The Company reported net earnings before minority interest and
preferred dividends of $13.4 million in the first six months of 1998 (including
a $1.5 million deferred tax benefit) compared to $13.7 million in the first six
months of 1997. Net earnings to common shareholders were $10.4 million in both
periods. On a per share basis, basic net earnings attributable to common
shareholders were $1.51 in 1998 compared to $1.60 in 1997. Diluted net earnings
per common share were $1.47 in 1998 compared to $1.58 in 1997. The 1997 results
reflect the positive effect of the $6.8 million, or $1.03 per share, payment
from the Trust in settlement of the Investment Management Agreement.

Mortgage Banking

         Gain on sale of mortgage loans. Gain on sale of mortgage loans
increased by 265% to $48.6 million in the first six months of 1998 from $13.3
million in the first six months of 1997. This increase was the result of
substantial increases in the levels of residential mortgage loan origination
generated principally by the Broker Retail network of Mortgage Corp. and, to a
lesser extent, the Direct Retail network of Mortgage Corp., and the resulting
sales of such loans to government agencies and other investors. The change in
the gain on sale percentage is the result of the sale of approximately $3.5
billion of mortgage loans in 1998 (compared to $1.1 billion in 1997) and the
overall mix and pricing of the loans sold.

         Net mortgage warehouse income. Net mortgage warehouse income increased
by 219% to $4.1 million in 1998 from $1.3 million in 1997. This is the result of
a significant increase in the average balance of loans held in inventory during
the year offset by a decrease in the spread earned between the interest rate on
the underlying mortgages and the interest cost of the warehouse credit facility
as the overall levels of interest rates on residential mortgage loans reached
their lowest levels in several years.

         Servicing fee revenues. Servicing fee revenues increased by 47% to
$10.3 million in 1998 from $7.0 million in 1997 as a result of an increase in
the size of the servicing portfolio. Mortgage Corp. substantially increased its
commercial mortgage servicing portfolio and its ability to originate commercial
mortgage loans for correspondents and conduit lenders with the purchase, in the
second quarter of 1997, of MIG.

         Other revenues. Other revenues decreased by 48% to $3.6 million in 1998
from $6.8 million in 1997. This decrease resulted from Mortgage Corp.'s decision
to retain, rather than sell, servicing rights in 1998. The sale of servicing
rights in 1997 resulted in a gain on sale of $4.5 million.

         Operating expenses. Operating expenses of Mortgage Corp. increased by
116% to $56.5 million in 1998 from $26.1 million in 1997. The expansion of the
Broker Retail and Direct Retail operation as well as the commencement of Capital
Corp.'s operations in late 1997 also contributed to the period to period
increases. The acquisition of MIG in 1997, which was accounted for as a purchase
by Mortgage Corp., produced higher relative totals for all components of
Mortgage Corp.'s operating expenses in 1998.

         Salaries and benefits increased by $16.6 million in 1998 reflecting the
additional staff required to support the increase in origination volumes derived
principally from the Broker Retail network and, to a lesser extent, the Direct
Retail network, and the increase in the size and number of loans in the
residential and commercial servicing portfolios in 1998.

         Amortization of mortgage servicing rights increased in 1998 as a result
of the substantially larger investment in mortgage servicing rights in 1998.
Interest on other notes payable (the portion not associated with Mortgage
Corp.'s warehouse credit facility) increased due to increased working capital
borrowings during 1998.



                                       21
<PAGE>
         Occupancy expense increased by $3 million in 1998 as the result of the
opening or acquisition of several new offices in 1997 in the Broker Retail and
Direct Retail networks. Increases in data processing, communication and other
expenses in 1998 resulted from the substantial increases in production and
servicing volumes.

Portfolio Asset Acquisition and Resolution

         Commercial Corp. purchased $69.8 million of Portfolio Assets during the
first six months of 1998 for its own account and through the Acquisition
Partnerships compared to $58.2 million of acquisitions in the first six months
of 1997. Commercial Corp.'s quarter end investment in Portfolio Assets decreased
to $68.5 million in 1998 from $90.0 million in 1997. Commercial Corp. invested
$16.9 million in equity in Portfolio Assets in 1998 compared to $12.3 million in
1997.

         Net gain on resolution of Portfolio Assets. Proceeds from the
resolution of Portfolio Assets were flat year to year. The net gain on
resolution of Portfolio Assets decreased by 42% to $5.9 million in 1998 from
$10.2 million in 1997 as the result of a lower gross profit percentage in 1998.
The gross profit percentage on the proceeds from the resolution of Portfolio
Assets in 1998 was 19.8% as compared to 33.8% in 1997.

         Equity in earnings of Acquisition Partnerships. Proceeds from the
resolution of Portfolio Assets for the Acquisition Partnerships decreased by 24%
to $87.6 million in 1998 from $115.7 million in 1997 while the gross profit
percentage on proceeds increased to 31.6% in 1998 from 16.9% in 1997. Interest
income in the Acquisition Partnerships increased $.9 million and interest
expense increased $.8 million in 1998 as a result of increased levels of
interest earning assets and interest bearing liabilities carried by the
Acquisition Partnerships in the first six months of 1998 as compared to 1997.
Other expenses of the Acquisition Partnerships increased by $5.7 million in 1998
generally reflecting costs associated with the resolution of Portfolio Assets in
Europe which generated proceeds of $58.2 million. The net result was an overall
increase in the net income of the Acquisition Partnerships of 18% to $13.0
million in 1998 from $11.0 million in 1997. As a result, Commercial Corp.'s
equity earnings from Acquisition Partnerships increased by 9.8% to $4.7 million
in 1998 from $4.3 million in 1997.

         Servicing fee revenues. Servicing fees reported during 1997 included
the receipt of a $6.8 million cash payment related to the early termination of a
servicing agreement between the Company and the Trust, under which the Company
serviced the assets of the Trust. The $6.8 million payment represents the
present value of servicing fees projected to have been earned by Commercial
Corp. upon liquidation of the Trust assets, which was expected to occur
principally in 1997. Excluding fees related to Trust assets, servicing fees
decreased by 46% to $1.4 million in 1998 from $2.6 million in 1997 as a result
of lower domestic collection levels in the Acquisition Partnerships and
affiliated entities.

         Other revenues. Other revenues increased to $2.5 million in 1998
compared to $2.0 million in 1997 principally as a result of interest income
derived from Performing Purchased Asset Portfolios in 1998.

         Operating expenses. Operating expenses declined to $9.2 million in 1998
from $12.1 million in 1997 primarily as a result of reduced salaries and
benefits, lower asset level expenses and reduced amortization expense.

         Salaries and benefits declined in 1998 as a result of the consolidation
of some of the servicing offices (Portfolios being serviced in the closed
offices reached final resolution).

         Interest on other notes payable declined $.4 million.

         Asset level expenses incurred in connection with the servicing of
Portfolio Assets decreased in 1998 as a result of the decrease in investments in
Portfolio Assets in 1998. Occupancy and other expenses decreased as a result of
the consolidation of servicing offices in 1998.

Consumer Lending

         Interest and other income. Interest income increased by 7.3% to $5.2
million in the first six months of 1998 from $4.9 million in the first six
months of 1997, reflecting increased levels of loan origination activity in 1998
and an increase in the average balance of investments held by Consumer Corp.
during 1998. Other income increased $.8 million due to increased service fee
revenue from securitization trusts.

         Interest expense. Interest expense was relatively flat period to
period.

         Operating expenses. Salaries and benefits increased by 119% to $2.4
million in 1998 from $1.1 million in 1997 as a result of the increased levels of
operating activity in 1998. Other expenses increased $1.2 million due to the
growth in the origination and servicing operations.



                                       22
<PAGE>
         Provision for loan losses. The provision for loan losses on automobile
receivables increased by 32% to $2.9 million in 1998 from $2.2 million in 1997.
Consumer Corp. increased its rate of provision for loan losses based on its
determination that the discount rate at which it acquired loans under its
previous origination program did not properly provide for the losses expected to
be realized on the acquired loans.

Other Items Affecting Net Earnings.

         The following items affect the Company's overall results of operations
and are not directly related to any one of the Company's businesses discussed
above.
         Corporate overhead. Interest income on the Class A Certificate during
1997 represents reimbursement to the Company from the Trust of dividends through
June 30, 1997, of $3.2 million on special preferred stock. Company level
interest expense increased by 22% to $1.1 million in the first six months of
1998 from $.9 million in the first six months of 1997 as a result of higher
volumes of debt associated with the equity required to purchase Portfolio
Assets, equity interests in Acquisition Partnerships and capital support to
operating subsidiaries. Other corporate income increased due to interest earned
on the excess liquidity derived from the Trust's redemption of the Class A
Certificate. Salary and benefits, occupancy and professional fees account for
the majority of other overhead expenses, which decreased in 1998 compared to
1997, as a result of the decrease in the amount of executive and other officer
bonuses granted in 1998.

         Income taxes. Federal income taxes are provided at a 35% rate applied
to taxable income and are offset by NOLs that the Company believes are available
to it as a result of the Merger. The tax benefit of the NOLs is recorded in the
period during which the benefit is realized. The Company reported a deferred tax
benefit of $1.5 million in 1998 as compared to a benefit of $.6 million in 1997.

LIQUIDITY AND CAPITAL RESOURCES

         Generally, the Company requires liquidity to fund its operations,
working capital, payment of debt, equity for acquisition of Portfolio Assets,
investments in and advances to the Acquisition Partnerships, investments in
expanding businesses to support their growth, retirement of and dividends on
preferred stock, and other investments by the Company. The potential sources of
liquidity are funds generated from operations, equity distributions from the
Acquisition Partnerships, interest and principal payments on subordinated debt
and dividends from the Company's subsidiaries, short-term borrowings from
revolving lines of credit, proceeds from equity market transactions,
securitization and other structured finance transactions and other special
purpose short-term borrowings.

         On July 17, 1998 the Company filed a shelf registration statement with
the Securities and Exchange Commission which allows the Company to issue up to
$250 million in debt and equity securities from time to time in the future. The
registration statement became effective July 28, 1998. In May 1998, the Company
closed the public offering of 1,542,150 shares of FirstCity common stock, of
which 341,000 shares were sold by selling shareholders. Net proceeds (after
expenses) of $34.2 million were used to retire debt. In June 1998, the Company
received $11.8 million from the exercise of warrants.

         In the future, the Company anticipates being able to raise capital
through a variety of sources including, but not limited to, public debt or
equity offerings (subject to limitations related to the preservation of the
Company's NOLs), thus enhancing the investment and growth opportunities of the
Company. The Company believes that these and other sources of liquidity,
including refinancing and expanding the Company's revolving credit facility to
the extent necessary, securitizations, and funding from senior lenders for
Acquisition Partnership investments and direct portfolio and business
acquisitions, should prove adequate to continue to fund the Company's
contemplated activities and meet its liquidity needs.

         The Company and each of its major operating subsidiaries have entered
into one or more credit facilities to finance its respective operations. Each of
the operating subsidiary credit facilities is nonrecourse to the Company and the
other operating subsidiaries, except as discussed below.

         Excluding the term acquisition facilities of the unconsolidated
Acquisition Partnerships, as of June 30, 1998 the Company and its subsidiaries
had credit facilities providing for borrowings in an aggregate principal amount
of $1,992 million and outstanding borrowings of $1,225 million. The following
table summarizes the material terms of the credit facilities to which the
Company, its major operating subsidiaries and the Acquisition Partnerships were
parties and the outstanding borrowings under such facilities as of June 30,
1998.



                                       23
<PAGE>
                                CREDIT FACILITIES

<TABLE>
<CAPTION>
                                                    OUTSTANDING
                                    PRINCIPAL    BORROWINGS AS OF
                                     AMOUNT        JUNE 30, 1998          INTEREST RATE        OTHER TERMS AND CONDITIONS
                                     ------        -------------          -------------        --------------------------
                                                                   (DOLLARS IN MILLIONS)

<S>                               <C>          <C>                <C>                        <C>

FIRSTCITY
  Company Credit                                                   Prime or                    Secured by the assets of
    Facility                         $ 50               $ 1        LIBOR + 2.625%              the Company, expires April
                                                                                               30, 1999

  Term fixed asset
    facility                            1                 1        Fixed 9.25%                 Secured by certain fixed
                                                                                               assets, expires January 1,
                                                                                               2001

MORTGAGE CORP.
  Warehouse facility                  670               497        LIBOR + 0.5% to 2.5%        Revolving line to warehouse
                                                                                               residential mortgage loans,
                                                                                               expires March 31, 1999
  Supplemental warehouse
    facility                           36                25        LIBOR + 0.5% to 2.25%       Revolving line to warehouse
                                                                                               residential mortgage loans
                                                                                               and related receivables,
                                                                                               expires March 31, 1999
 FNMA warehouse
    facility                          700               495        Fed Funds+ 0.5% to 1.0%     Open facility to fund
                                                                                               committed loans to FNMA and
                                                                                               other

  Operating line                       47                45        LIBOR + 2.25%               Revolving operating line
                                                                                               secured by the unencumbered
                                                                                                       assets of Harbor, expires
                                                                                               December 15, 2002

CAPITAL CORP.
  Warehouse facility                  200                28        LIBOR + 0.75%               Repurchase agreement to
                                                                                               facilitate the acquisition
                                                                                               of Home Equity Loans,
                                                                                                       expires March 30, 1999

Warehouse facility                     48                 4        Fixed 6.85%                 Repurchase agreement to
                                                                                               facilitate the acquisition
                                                                                               of Home Equity Loans,
                                                                                               expired July 31, 1998
COMMERCIAL CORP.
  Portfolio acquisition                                                                        Acquisition facility to
    facility                          100                36        LIBOR + 2.5%                acquire Portfolio Assets,
                                                                                               expires February 28, 1999         
                                                                                               (includes $23 million
                                                                                               advanced to unconsolidated
                                                                                               Acquisition Partnerships
</TABLE>


                                       24
<PAGE>
<TABLE>
<CAPTION>
                                                    OUTSTANDING
                                    PRINCIPAL    BORROWINGS AS OF
                                     AMOUNT        JUNE 30, 1998          INTEREST RATE        OTHER TERMS AND CONDITIONS
                                     ------        -------------          -------------        --------------------------
                                                                   (DOLLARS IN MILLIONS)

<S>                                <C>            <C>            <C>                        <C>


  French acquisition
    facility                             15              9       French franc LIBOR + 3.5%     Acquisition facility to
                                                                                               fund equity investments in
                                                                                               French Portfolio Assets,
                                                                                               expires March 31, 1999.
                                                                                               Guaranteed by Commercial
                                                                                               Corp. and the Company.

  Term facility (1)                      15             --       Prime + 7%                    Term facility to finance
                                                                                               the purchase of mortgage
                                                                                               servicing rights from
                                                                                               Mortgage Corp., expires
                                                                                               October 30, 1998.
                                                                                               Guaranteed by the Company

  Term acquisition
    facilities                           40              40      Fixed at 7.66%                Acquisition facilities for
                                                                                               existing Portfolio Assets.
                                                                                               Secured by portfolio
                                                                                               assets. Expires June 5, 2002

CONSUMER CORP.
  Warehouse facility                     70              54      LIBOR + 3%                    Revolving line secured by
                                                                                               automobile receivables,
                                                                                               expires May 31, 1999

UNCONSOLIDATED
  ACQUISITION PARTNERSHIPS                                                                     Senior and subordinated
Term acquisition                         62              62      Fixed at  7.51%  to  10.17%,  loans secured by Portfolio
  facilities                                                     LIBOR  +  3%  to  6.5% and    Assets, various maturities
                                                                 Prime + 2% to 7%
</TABLE>


---------------------------------
(1) The facility was entered into as of July 24, 1998.  Outstanding  borrowings
    under the facility as of July 27, 1998 were $15 million.



                                       25
<PAGE>
PART II - OTHER INFORMATION

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

         The Company held its annual meeting of shareholders (the "Annual
Meeting") on May 21, 1998. The following items of business were considered at
the Annual Meeting.

         (a) Election of Directors
             All standing directors were elected as directors to serve as
         members of the Company's Board of Directors until the Company's 1999
         annual meeting of shareholders. The number of votes cast for each
         nominee was as follows:

<TABLE>
<CAPTION>
                                                Votes Cast                Votes
                        Nominee                    For                   Against                 Abstained
                ------------------------- ----------------------- ----------------------- -------------------------
          <S>                            <C>                    <C>                     <C>

                James R. Hawkins                5,721,876                   0                      6,826
                C. Ivan Wilson                  5,724,452                   0                      4,250
                James T. Sartain                5,724,452                   0                      4,250
                Rick R. Hagelstein              5,724,452                   0                      4,250
                Matt A. Landry, Jr.             5,724,452                   0                      4,250
                Richard J. Gillen               5,724,452                   0                      4,250
                Richard E. Bean                 5,724,452                   0                      4,250
                Bart A. Brown, Jr.              5,724,452                   0                      4,250
                Donald J. Douglass              5,724,452                   0                      4,250
                David W. MacLennan              5,724,452                   0                      4,250
                Thomas E. Smith                 5,724,452                   0                      4,250


</TABLE>

          (b) Ratification of Appointment of Auditors

                    A proposal to ratify the Board of Directors' appointment of
  KPMG Peat Marwick LLP as the Company's independent auditors for 1998 was
  approved by the shareholders. The number of votes for the proposal: 5,712,478;
  votes withheld: 8,236; abstentions: 7,988.


Item 6. Exhibits and Reports on Form 8-K
        (a) Exhibits

   2.1 --   Joint Plan of Reorganization by First City Bancorportion of Texas,
            Inc., Official Committee of Equity Security Holders and J-Hawk
            Corporation, with the Participation of Cargill Financial Services
            Corporation, Under Chapter 11 of the United States Bankruptcy Code,
            Case No. 392-39474-HCA-11 (incorporated by reference herein to
            Exhibit 2.1 of the Company's Current Report on Form 8-K dated July
            3, 1995 filed with the Commission on July 18, 1995)

   2.2 --   Agreement and Plan of Merger, dated as of July 3, 1995, by and
            between First City Bancorporation of Texas, Inc. and J-Hawk
            Corporation (incorporated herein by reference to Exhibit 2.2 of the
            Company's Current Report on Form 8-K dated July 3, 1995 filed with
            the Commission on July 18, 1995)

          
   4.1 --   Amended and Restated Certificate of Incorporation of the Company
            (incorporated herein by reference to Exhibit 3.1 to the Company's
            Current Report on Form 8-K dated July 3, 1995 filed with the
            Commission on July 18, 1995)


                                       26
<PAGE>
   4.2 --   Certificate of Designations of the New Preferred Stock ($0.01 par
            value) of the Company (incorporated herein by reference to Exhibit
            4.1 of the Company's Annual Report on Form 10-K for the fiscal year
            ended December 31, 1997)

   4.3 --   Bylaws of the Company (incorporated herein by reference to Exhibit
            3.2 of the Company's Current Report on Form 8-K dated July 3, 1995
            filed with the Commission on July 18, 1995)

   4.4 --   Registration Rights Agreement, dated July 1, 1997, among the
            Company, Richard J. Gillen, Bernice J. Gillen, Harbor Financial
            Mortgage Company Employees Pension Plan, Lindsey Capital
            Corporation, Ed Smith and Thomas E. Smith (incorporated herein by
            reference to Exhibit 4.3 of the Company's Annual Report on Form 10-K
            for the fiscal year ended December 31, 1997)

   10.1 --  Master Repurchase Agreement Governing Purchases and Sales of
            Mortgage Loans, dated as of July 1998, between Lehman Commercial
            Paper Inc. and FHB Funding Corp.

   10.2 --  Warehouse Credit Agreement, dated as of April 30, 1998, among
            ContiTrade Services, L.L.C., FirstCity Consumer Lending Corporation,
            FirstCity Auto Receivables L.L.C. and FirstCity Financial
            Corporation

   10.3 --  Servicing Agreement, dated as of April 30, 1998, among FirstCity
            Auto Receivables L.L.C., FirstCity Servicing Corporation of
            California, FirstCity Consumer Lending Corporation and ContiTrade
            Services L.L.C.

   10.4 --  Security and Collateral Agent Agreement, dated as of April 30, 1998,
            among FirstCity Auto Receivables L.L.C., ContiTrade Services L.L.C.
            and Chase Bank of Texas, National Association

   10.5 --  Loan Agreement, dated as of July 24, 1998, between FirstCity
            Commercial Corporation and CFSC Capital Corp. XXX

   10.6 --  Loan Agreement, dated April 8, 1998, between Bank of Scotland and
            the Company

   10.7 --  First Amendment to Loan Agreement, dated July 20, 1998, between Bank
            of Scotland and the Company

   27.1 --  Financial Data Schedule. (Exhibit 27.1 is being submitted as an
            exhibit only in the electronic format of this Quarterly Report on
            Form 10-Q being submitted to the Securities and Exchange Commission.
            Exhibit 27.1 shall not be deemed filed for purposes of Section 11 of
            the Securities Act of 1933, Section 18 of the Securities Act of
            1934, as amended, or Section 323 of the Trust Indenture Act of 1939,
            as amended, or otherwise be subject to the liabilities of such
            sections, nor shall it be deemed a part of any registration
            statement to which it relates.)

(b) Reports on Form 8-K.
    The following Current Report on Form 8-K pursuant to Section 13 or
    15(d) of the Securities Exchange Act of 1934 was filed by the
    Registrant with the Commission:

    1. A Form 8-K was filed, dated April 29, 1998, regarding the first
       quarter results.



                                       27
<PAGE>
                                   SIGNATURES

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

                             FIRSTCITY FINANCIAL CORPORATION


                              By:     /s/ Matt A. Landry, Jr.
                                   --------------------------------------
                              Name:   Matt A. Landry, Jr.
                              Title:  Executive Vice President and Chief
                                      Administrative Officer
                                      (Duly authorized officer and principal
                                      financial and accounting officer of
                                      the Registrant)


Dated: August 13, 1998







                                       28
<PAGE>
                                 EXHIBIT INDEX
                                 -------------


Exhibit No.              Description
-----------              -----------

   2.1 --   Joint Plan of Reorganization by First City Bancorportion of Texas,
            Inc., Official Committee of Equity Security Holders and J-Hawk
            Corporation, with the Participation of Cargill Financial Services
            Corporation, Under Chapter 11 of the United States Bankruptcy Code,
            Case No. 392-39474-HCA-11 (incorporated by reference herein to
            Exhibit 2.1 of the Company's Current Report on Form 8-K dated July
            3, 1995 filed with the Commission on July 18, 1995)

   2.2 --   Agreement and Plan of Merger, dated as of July 3, 1995, by and
            between First City Bancorporation of Texas, Inc. and J-Hawk
            Corporation (incorporated herein by reference to Exhibit 2.2 of the
            Company's Current Report on Form 8-K dated July 3, 1995 filed with
            the Commission on July 18, 1995)

          
   4.1 --   Amended and Restated Certificate of Incorporation of the Company
            (incorporated herein by reference to Exhibit 3.1 to the Company's
            Current Report on Form 8-K dated July 3, 1995 filed with the
            Commission on July 18, 1995)

   4.2 --   Certificate of Designations of the New Preferred Stock ($0.01 par
            value) of the Company (incorporated herein by reference to Exhibit
            4.1 of the Company's Annual Report on Form 10-K for the fiscal year
            ended December 31, 1997)

   4.3 --   Bylaws of the Company (incorporated herein by reference to Exhibit
            3.2 of the Company's Current Report on Form 8-K dated July 3, 1995
            filed with the Commission on July 18, 1995)

   4.4 --   Registration Rights Agreement, dated July 1, 1997, among the
            Company, Richard J. Gillen, Bernice J. Gillen, Harbor Financial
            Mortgage Company Employees Pension Plan, Lindsey Capital
            Corporation, Ed Smith and Thomas E. Smith (incorporated herein by
            reference to Exhibit 4.3 of the Company's Annual Report on Form 10-K
            for the fiscal year ended December 31, 1997)

   10.1 --  Master Repurchase Agreement Governing Purchases and Sales of
            Mortgage Loans, dated as of July 1998, between Lehman Commercial
            Paper Inc. and FHB Funding Corp.

   10.2 --  Warehouse Credit Agreement, dated as of April 30, 1998, among
            ContiTrade Services, L.L.C., FirstCity Consumer Lending Corporation,
            FirstCity Auto Receivables L.L.C. and FirstCity Financial
            Corporation

   10.3 --  Servicing Agreement, dated as of April 30, 1998, among FirstCity
            Auto Receivables L.L.C., FirstCity Servicing Corporation of
            California, FirstCity Consumer Lending Corporation and ContiTrade
            Services L.L.C.

   10.4 --  Security and Collateral Agent Agreement, dated as of April 30, 1998,
            among FirstCity Auto Receivables L.L.C., ContiTrade Services L.L.C.
            and Chase Bank of Texas, National Association

   10.5 --  Loan Agreement, dated as of July 24, 1998, between FirstCity
            Commercial Corporation and CFSC Capital Corp. XXX

   10.6 --  Loan Agreement, dated April 8, 1998, between Bank of Scotland and
            the Company

   10.7 --  First Amendment to Loan Agreement, dated July 20, 1998, between Bank
            of Scotland and the Company

   27.1 --  Financial Data Schedule. (Exhibit 27.1 is being submitted as an
            exhibit only in the electronic format of this Quarterly Report on
            Form 10-Q being submitted to the Securities and Exchange Commission.
            Exhibit 27.1 shall not be deemed filed for purposes of Section 11 of
            the Securities Act of 1933, Section 18 of the Securities Act of
            1934, as amended, or Section 323 of the Trust Indenture Act of 1939,
            as amended, or otherwise be subject to the liabilities of such
            sections, nor shall it be deemed a part of any registration
            statement to which it relates.)