AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 18, 1998
REGISTRATION NO. 333-38651
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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

AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

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

BNC MORTGAGE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

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

DELAWARE 6162 33-0661303
(STATE OR (PRIMARY STANDARD INDUSTRIAL (I.R.S. IDENTIFICATION NUMBER)
OTHER CLASSIFICATION CODE NUMBER)
JURISDICTION
OF
INCORPORATION
OR
ORGANIZATION)

1063 MCGAW AVENUE
IRVINE, CALIFORNIA 92614
(714) 260-6000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)

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

EVAN R. BUCKLEY
CHIEF EXECUTIVE OFFICER
BNC MORTGAGE, INC.
1063 MCGAW AVENUE
IRVINE, CALIFORNIA 92614
(714) 260-6000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)

COPIES TO:

THOMAS J. POLETTI, ESQ. ROBERT E. DEAN, ESQ.
KATHERINE J. BLAIR, ESQ. GIBSON, DUNN & CRUTCHER LLP
DARREN O. BIGBY, ESQ. 4 PARK PLAZA
FRESHMAN, MARANTZ, ORLANSKI, COOPER & IRVINE, CALIFORNIA 92614
KLEIN TELEPHONE (714) 451-3948
9100 WILSHIRE BOULEVARD, 8TH FLOOR EAST FACSIMILE (714) 451-4220
BEVERLY HILLS, CALIFORNIA 90212
TELEPHONE (310) 273-1870
FACSIMILE (310) 274-8357

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

Approximate Date of Commencement of Proposed Sale to the Public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]

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

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.

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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++

SUBJECT TO COMPLETION, DATED FEBRUARY 18, 1998

3,173,196 SHARES

BNC MORTGAGE, INC.

COMMON STOCK

[LOGO OF BNC MORTGAGE, INC.] -----------

Of the 3,173,196 shares of common stock (the "Common Stock") offered hereby
(the "Offering"), 1,400,000 shares are being sold by BNC Mortgage, Inc., a
Delaware corporation (the "Company"), and 1,773,196 shares are being sold by
DLJ Mortgage Capital, Inc. ("DLJ" or the "Selling Stockholder"). The Company
will not receive any of the proceeds from the sale of shares of Common Stock by
the Selling Stockholder. After the Offering, the Selling Stockholder will own
no shares of the Company.

Prior to the Offering, there has been no public market for the Common Stock,
and there can be no assurance that any active trading market will develop. It
is currently anticipated that the initial public offering price will be between
$9.00 and $11.00 per share. See "Underwriting" for a discussion of factors to
be considered in determining the initial public offering price.

The Company has been approved, subject to official notice of issuance, for
quotation of the Common Stock on the Nasdaq National Market under the symbol
"BNCM."

THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 8 HEREOF FOR A DISCUSSION OF MATERIAL FACTORS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF SHARES OF COMMON STOCK.

-----------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.

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- -----------------------------------------------------------------------------------------------
PRICE UNDERWRITING PROCEEDS TO
TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDER(2)
- -----------------------------------------------------------------------------------------------

Per Share........................ $ $ $ $
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Total (3)........................ $ $ $ $
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(1) Does not include warrants to be issued to the representatives of the
underwriters (the "Representatives"), to purchase up to 317,319 shares of
Common Stock at an exercise price of $ per share, exercisable over a
period of four years, commencing one year from the date of this Prospectus
(the "Representatives' Warrants"). See "Underwriting" for information
relating to indemnification of the Underwriters, and other matters.
(2) Before deducting expenses estimated to be $850,000, of which $385,000 are
payable by the Company and $465,000 are payable by the Selling Stockholder.
(3) The Company has granted the Underwriters an option, exercisable from time
to time within 30 days from the date hereof, to purchase up to 475,979
additional shares of Common Stock at the Price to Public per share, less
the Underwriting Discount, solely for the purpose of covering over-
allotments, if any. If the Underwriters exercise such option in full, the
total Price to Public, Underwriting Discount and Proceeds to Company will
be $ , $ and $ , respectively. See "Underwriting."

The shares of Common Stock are offered by the Underwriters when, as and if
delivered to and accepted by them, subject to their right to withdraw, cancel
or reject orders in whole or in part and subject to certain other conditions.
It is expected that delivery of certificates representing the shares of Common
Stock will be made against payment on or about , 1998 at the office of
CIBC Oppenheimer Corp., CIBC Oppenheimer Tower, World Financial Center, New
York, New York 10281.

-----------

CIBC OPPENHEIMER PIPER JAFFRAY INC.

The date of this Prospectus is , 1998

[ARTWORK MAP OF THE UNITED STATES, INDICATING, AS OF DECEMBER 31, 1997, (I)
STATES IN WHICH BNC LOANS ARE ORIGINATED: CALIFORNIA, ILLINOIS, FLORIDA, HAWAII,
- --------------------------------------------------------------------------------
UTAH, WISCONSIN, OREGON, MASSACHUSETTS, MARYLAND, COLORADO, INDIANA, OHIO,
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WASHINGTON, IDAHO, MISSOURI, MICHIGAN, GEORGIA, SOUTH CAROLINA, RHODE ISLAND,
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OKLAHOMA, TEXAS, NORTH CAROLINA, MINNESOTA, CONNECTICUT, NEW JERSEY, MONTANA,
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WYOMING, NEVADA, ARIZONA, KANSAS, KENTUCKY, VIRGINIA, PENNSYLVANIA, NEW YORK AND
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NEW HAMPSHIRE;
- -------------

(II) BNC ORIGINATION LOCATIONS WITH OFFICES: 34;
--
(III) BNC ORIGINATION LOCATIONS WITHOUT OFFICES: 12;
--
AND (IV) THE LOCATION OF THE COMPANY'S CORPORATE OFFICES IN IRVINE,
CALIFORNIA.]

AT OR FOR THE AT OR FOR THE SIX
YEAR ENDED MONTHS ENDED
JUNE 30, DECEMBER 31,
----------------- -----------------
1996 1997 1996 1997
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)

Mortgage Loan Originations.................. $199,963 $532,621 $223,859 $354,572
Mortgage Loan Sales......................... $156,559 $519,909 $216,964 $333,045
States with Origination Locations........... 8 21 15 23
States in which Loans were Originated....... 21 33 27 36
Origination Locations with Offices.......... 18 30 24 34
Origination Locations without Offices....... 1 8 2 12
Account Executives.......................... 29 59 50 86
Approved Independent Brokers................ 620 1,830 1,271 2,541

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING PURCHASES OF THE COMMON STOCK TO STABILIZE ITS MARKET PRICE,
PURCHASES OF THE COMMON STOCK TO COVER SOME OR ALL OF A SHORT POSITION IN THE
COMMON STOCK MAINTAINED BY THE UNDERWRITERS AND THE IMPOSITION OF PENALTY BIDS.
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."

IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS (AND SELLING GROUP
MEMBERS, IF ANY) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON
STOCK ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 103 OF REGULATION M
UNDER THE SECURITIES EXCHANGE ACT OF 1934. SEE "UNDERWRITING."

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and Consolidated Financial
Statements, including the Notes thereto, appearing elsewhere in this
Prospectus. Except as otherwise specified, all information in this Prospectus
(i) assumes no exercise of the Underwriters' over-allotment option (see
"Underwriting"), (ii) regarding outstanding shares, excludes (A) shares of
Common Stock reserved for issuance under the Company's 1997 Stock Option,
Deferred Stock and Restricted Stock Plan (the "Stock Option Plan") and (B)
shares of Common Stock issuable upon exercise of the Representatives' Warrants
and (iii) gives effect to the reincorporation of the Company in Delaware, which
will be effected prior to the consummation of this Offering, whereby the
existing California corporation will be merged into a newly formed Delaware
corporation and pursuant to which each outstanding share of Class A and Class B
Common Stock of the existing California corporation will be exchanged for
4,123.71134 shares of $.001 par value Common Stock of the new Delaware
corporation. For a further description of the transactions referenced in
subparagraph (iii) above, see "Arrangements with DLJ and the Recapitalization."
Unless otherwise indicated, all references herein to the Company refer to BNC
Mortgage, Inc. and its subsidiaries. This Prospectus contains forward-looking
statements which involve risks and uncertainties. The Company's actual results
could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including those set forth under
"Risk Factors" and elsewhere in this Prospectus.

THE COMPANY

The Company is a specialty finance company that originates and sells, on a
whole loan basis for cash, non-conforming residential mortgage loans secured by
one-to-four family residences. The term "non-conforming loans" as used herein
means loans made to borrowers who are unable or unwilling to obtain mortgage
financing from conventional mortgage sources, whether for reasons of credit
impairment, income qualification or credit history or a desire to receive
funding on an expedited basis. The Company's loans are made primarily to
refinance existing mortgages, consolidate other debt, finance home
improvements, education and other similar needs, and, to a lesser extent, to
purchase single family residences. The Company has two divisions: (i) a
wholesale division which has relationships with approximately 2,500 approved
independent loan brokers and which historically accounted for substantially all
of the Company's total loan originations and (ii) a retail division which is
being developed to market loans directly to homeowners.

Since it commenced operations in August 1995, the Company has experienced
significant growth in loan originations, with approximately $532.6 million of
originations in 33 states during the year ended June 30, 1997 compared to
$200.0 million in 21 states during its first full fiscal year ended June 30,
1996. Total originations were $354.6 million during the six months ended
December 31, 1997, as compared to $223.9 million during the six months ended
December 31, 1996, a 58% increase. This growth in originations resulted in an
increase in revenues to $20.0 million and $32.8 million for the six months
ended December 31, 1997 and the year ended June 30, 1997, respectively,
compared to $13.2 million and $8.2 million for the six months ended December
31, 1996 and the year ended June 30, 1996, respectively. In addition, as a
result, total expenses increased to $14.1 million and $20.3 million for the six
months ended December 31, 1997 and the year ended June 30, 1997, respectively,
compared to $8.3 million and $7.5 million for the six months ended December 31,
1996 and the year ended June 30, 1996, respectively. The Company's net income
rose to $7.5 million for the year ended June 30, 1997 as compared to $417,000
for the year ended June 30, 1996. Net income was $3.5 million for the six
months ended December 31, 1997 as compared to $3.0 million for the six months
ended December 31, 1996.

The Company currently sells substantially all of its mortgage loans through
whole loan sales resulting in cash gain on sale of mortgage loans. For the six
months ended December 31, 1997 and the years ended June 30, 1997 and 1996, the
Company had mortgage loan sales of $333.0 million, $519.9 million and
$156.6 million, respectively, with resulting cash gain on sale of mortgage
loans of $13.5 million, $21.9 million and $4.2 million, respectively.

Substantially all loans originated by the Company are secured by a first
priority mortgage on the subject property. During the six months ended December
31, 1997, less than 0.2% of the principal balance of the loans originated were
secured by second priority mortgages; none of such loans were originated for
the years ended June 30, 1997 or 1996. The Company's core borrower base
consists of individuals who do not qualify for traditional "A" credit because
their credit history, income or other factors cause them not to conform to
standard agency lending criteria. During the six months ended December 31, 1997
and the year ended June 30, 1997, approximately 64.3% and 57.4% of the
principal balance of the loans originated by the Company, respectively, were to
borrowers with a Company risk classification of "A+" or "A-" while the
remainder were to borrowers with a Company risk classification of "B," "C+,"
"C" or "C-," respectively, representing approximately 35.7% and 42.6%,
respectively, of the total principal amount of loans originated by the Company.
Loans with a Company risk classification of "B," "C+," "C" or "C-" are referred
to as "sub-prime" loans. Borrowers with a Company risk classification of "A+"
or "A-" have a very good credit history within the last 12 to 24 months with
minor late payments allowed on a limited basis. Borrowers with a "B" Company
risk classification generally have good credit within the last 12 months with
some late payments. Borrowers with a "C+" Company risk classification have some
significant derogatory credit in the past 12 months while those in the "C"
category have frequent derogatory consumer credit. Borrowers with a Company
risk classification of "C-" have numerous derogatory credit items up to and
including a bankruptcy in the most recent 12 month period. During each of the
six months ended December 31, 1997 and the year ended June 30, 1997,
approximately 3.9% of the principal balance of the loans originated by the
Company were to borrowers with a Company risk classification of "C-." For a
tabular presentation of the Company's loan production by borrower risk
classification, see "Business--Loan Production by Borrower Risk
Classification."

The Company believes that its primary strengths are (i) the experience of its
management, account executives and staff in the non-conforming lending
industry, which enhances the Company's ability to establish and maintain long-
term relationships with mortgage brokers, (ii) its service oriented sales
culture whereby the Company strives to respond quickly and efficiently to
customer needs and market demands, (iii) its operating philosophy to create
stable and deliberate loan origination growth by utilizing consistent and
prudent underwriting guidelines designed to produce mortgage products readily
saleable in the secondary market and (iv) its ability to manage and control
operating costs in order for it to remain a low cost originator. The Company
enters into a mortgage broker agreement with each of its independent mortgage
brokers. For a description of the contractual nature of the Company's
relationships with its independent mortgage brokers, see "Business--Mortgage
Loan Originations--Wholesale Division."

The Company's growth and operating strategy is based on the following key
elements:

Whole Loan Sales for Cash. The Company sells substantially all of its
originated mortgage loans monthly for cash, historically at a premium over the
principal balance of the mortgage loans. Management believes that the cash
received in loan sales provides the Company greater flexibility and operating
leverage than a traditional portfolio lender, which holds the loans it
originates, by allowing the Company to generate income through interest on
loans held for sale and gain on loans sold. This strategy of frequent loan
sales has been an important factor in generating the Company's earnings,
creating cash flow to fund operations, decreasing the need for other forms of
financing and reducing the level of interest rate and default risk borne by the
Company.

Continuing Growth of Wholesale Production. The Company's growth strategy for
its Wholesale Division is greater penetration in existing markets and selective
geographic expansion. The Company intends to add additional sales personnel to
its existing origination locations in order to provide continued high levels of
service to brokers, to increase loan origination and further the basis for
repeat business, referral and other future lending opportunities. For each of
the six months ended December 31, 1997 and the year ended June 30, 1997, the
Company's loan originations primarily were in California, Illinois, Florida,
Hawaii, Utah, Wisconsin, Oregon, Massachusetts, Maryland, Colorado, Ohio and
Indiana. The Company anticipates that short-term geographic expansion will
focus on the development of lending operations in Texas, Pennsylvania, North
Carolina, Virginia and Tennessee. Thereafter, further expansion will be focused
on those geographic regions which management believes represent the most
attractive markets for the Company's products.

Expertise on Product Offerings. The Company utilizes long-term relationships
with mortgage loan brokers to quickly and efficiently tailor existing products
or introduce new products to satisfy broker and consumer product needs.
Examples of recently introduced products include loans with higher loan-to-
value ratios for borrowers with good credit histories. Also, the Company
attempts to anticipate changing demands and formulate new products accordingly.

The Company intends to utilize its primary strengths and its growth and
operating strategy to remain competitive in the non-conforming mortgage
industry. Increased competition in the non-conforming mortgage industry could
have the effect of (i) lowering gains that may be realized on loan sales, (ii)
reducing an individual company's volume of loan originations and sales,
(iii) increasing demand for experienced personnel increasing the likelihood
such personnel will be recruited by competitors and (iv) lowering the industry
standard for non-conforming underwriting guidelines as competitors attempt to
increase or maintain market share in the face of increased competition. In the
past, certain of these factors have caused the revenues and net income of many
participants in the non-conforming mortgage industry, including the Company, to
fluctuate from quarter to quarter.

In connection with the capitalization of the Company in August 1995, DLJ
agreed to provide a $50.0 million warehouse line of credit and an outlet for
the Company's loan production. In exchange, DLJ received the exclusive right to
purchase all of the Company's loan production. In addition, DLJ purchased
shares of the Company's capital stock which represented approximately 44% of
the outstanding shares of Common Stock as of December 31, 1997 and which are
offered hereby. Upon completion of the Offering, the Company, with the
concurrence of DLJ, expects to expand the scope of the Company's financing and
loan sale activity beyond the exclusive arrangements with DLJ. DLJ has also
agreed to provide the Company with an increased $150.0 million financing
facility and, with regard to the purchase of loans from the Company by DLJ, DLJ
will receive no fees in connection with any such purchases for the first 12
months after the closing of the Offering and 12.5 basis points for the second
12 months after the closing. The financing facility bears interest at the
federal funds rate plus 100 basis points until the closing of the Offering;
thereafter, borrowings under the facility during the first 12 months will bear
interest at the federal funds rate plus 50 basis points and thereafter the rate
will be the federal funds rate plus 100 basis points. Furthermore, the Company,
DLJ and a major investment bank are negotiating an agreement whereby the bank
will agree to purchase from the Company (through DLJ) for a period of three
months certain mortgage loans with an anticipated aggregate principal balance
of approximately $130 million. See "Business--Financing and Sale of Loans." For
a further description of the nature and parameters of the Company's existing
and anticipated future relationship with DLJ, see "Arrangements with DLJ and
the Recapitalization" and "Risk Factors--Discontinuance of Exclusive
Arrangements with DLJ Could Adversely Affect the Company's Operating Results."

The Company's predecessor was incorporated in California in May 1995. Prior
to the consummation of this Offering, the Company will reincorporate in
Delaware. The Company's administrative offices are located at 1063 McGaw
Avenue, Irvine, California, 92614, and its telephone number is (714) 260-6000.

THE OFFERING

Common Stock Offered Hereby:
By the Company.................................... 1,400,000 shares
By the Selling Stockholder........................ 1,773,196 shares
Common Stock to be Outstanding After the Offering(1). 5,400,000 shares
Use of Proceeds...................................... The net proceeds
received by the Company
will be used to fund
future loan originations
and for general
corporate purposes.
Nasdaq National Market Symbol........................ "BNCM"

- --------

(1) Excludes shares issuable pursuant to the Representatives' Warrants and
shares of Common Stock reserved for issuance pursuant to the Company's
Stock Option Plan. The Stock Option Plan authorizes the grant of options to
purchase, and awards of, 800,000 shares; of this amount, options to acquire
163,265 shares were granted prior to this Offering at a per share exercise
price of $6.10. Options to acquire an additional 425,000 shares are
expected to be granted to certain employees, officers and directors of the
Company on the effective date of the Offering at an exercise price equal to
the initial public offering price. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--General" and
"Management--Stock Options."

RISK FACTORS

See "Risk Factors" for a description of certain factors which should be
carefully considered before making an investment in the Company.

DIVIDEND POLICY

The Company intends to retain all of its future earnings to finance its
operations and does not anticipate paying cash dividends in the foreseeable
future. Any decision made by the Company's Board of Directors to declare
dividends in the future will depend upon the Company's future earnings, capital
requirements, financial condition and other factors deemed relevant by the
Company's Directors. See "Dividend Policy."

DILUTION

The assumed initial public offering price is substantially higher than the
book value per outstanding share of the Common Stock. Purchasers of the Common
Stock will experience immediate and substantial dilution of $5.63 per share
based upon an assumed initial public offering price of $10.00 per share. See
"Dilution."

SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA
(In thousands, except per share data and ratios)

The financial data set forth below should be read in conjunction with the
Consolidated Financial Statements of the Company and related notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere herein.

SIX MONTHS
YEAR ENDED ENDED
JUNE 30, DECEMBER 31,
-------------- ---------------
1996 1997 1996 1997
STATEMENT OF OPERATIONS DATA: ------ ------- ------- -------

Revenues:
Gain on sale of mortgage loans................ $4,240 $21,855 $ 8,525 $13,543
Loan origination income....................... 1,978 5,473 2,383 2,767
Interest income............................... 1,960 5,182 2,215 3,447
Other income.................................. 52 250 91 220
------ ------- ------- -------
Total revenues............................... 8,230 32,760 13,214 19,977
------ ------- ------- -------
Expenses:
Employees' salaries and commissions........... 3,624 11,052 4,396 8,326
General and administrative expenses........... 2,400 5,543 2,279 3,257
Interest expense.............................. 1,452 3,693 1,595 2,471
------ ------- ------- -------
Total expenses............................... 7,476 20,288 8,270 14,054
------ ------- ------- -------
Income before income taxes...................... 754 12,472 4,944 5,923
Income tax expense.............................. 337 4,930 1,954 2,392
------ ------- ------- -------
Net income.................................... $ 417 $ 7,542 $ 2,990 $ 3,531
====== ======= ======= =======
Pro forma net income per share.................. $ 0.14 $ 1.80 $ 0.71 $ 0.86
====== ======= ======= =======
Shares used in computing pro forma net income
per share(1)................................... 2,889 4,192 4,191 4,108

AT JUNE 30, AT DECEMBER 31, 1997
--------------- ----------------------
1996 1997 ACTUAL AS ADJUSTED(2)
------- ------- ------- --------------

BALANCE SHEET DATA:
Cash and cash equivalents................ $ 2,452 $ 8,268 $ 7,142 $19,777(3)
Restricted cash.......................... -- -- 614 614
Mortgage loans held for sale............. 42,723 55,145 76,196 76,196
Total assets............................. 46,352 65,713 87,339 99,974
Warehouse line of credit................. 42,723 54,625 74,369 74,369
Total liabilities........................ 44,506 56,509 76,387 76,387
Total stockholders' equity............... 1,846 9,204 10,952 23,587

SIX MONTHS
YEAR ENDED ENDED
JUNE 30, DECEMBER 31,
------------------ ------------------
1996 1997 1996 1997
OPERATING STATISTICS: -------- -------- -------- --------

Loan originations:
Mortgage loan originations........... $199,963 $532,621 $223,859 $354,572
Average initial principal balance per
loan................................ $ 101 $ 98 $ 95 $ 96
Weighted average interest rate:
Fixed rate residential loans........ 10.7% 10.5% 10.8% 10.6%
Variable rate residential loans..... 9.2% 9.4% 9.4% 9.6%
Small commercial rate loans(4)...... -- 9.8% 9.2% --
Weighted average initial loan-to-
value ratio......................... 68.5% 69.3% 68.3% 72.9%
Whole loan sales....................... $156,559 $519,909 $216,964 $333,045
Gain on sale as a percentage of whole
loan sales............................ 2.7% 4.2% 3.9% 4.1%
Credit risk(5):
A+.................................. 9.7% 30.7% 22.8% 42.5%
A-.................................. 41.9% 26.7% 30.6% 21.8%
B................................... 26.0% 18.9% 21.0% 20.4%
C+.................................. 12.0% 10.7% 12.1% 8.0%
C................................... 7.7% 5.7% 6.9% 3.4%
C-.................................. 2.7% 3.9% 3.8% 3.9%
Small commercial(4)................. -- 3.4% 2.8% --

- --------
(1) See Note 1 of Notes to Consolidated Financial Statements.

(2) As adjusted to reflect the sale of the shares of Common Stock by the
Company in this Offering at an assumed initial public offering price of
$10.00 per share and the application of the estimated net proceeds
therefrom. See "Use of Proceeds" and "Capitalization."
(3) The net proceeds of this Offering will be principally used to fund future
loan originations and for general corporate purposes. See "Use of
Proceeds."
(4) The Company discontinued the origination of small commercial loans in April
1997.
(5) Credit ratings are based on the Company's classification of loan products.
See "Business--Underwriting Guidelines."

RISK FACTORS

Investment in the Common Stock offered hereby involves a high degree of
risk, including the risks described below. Prospective investors should
carefully consider the risk factors set forth below, as well as other
information included in this Prospectus, before making an investment decision
concerning the Common Stock.

This Prospectus contains certain "forward-looking statements" which
represent the Company's expectations or beliefs, including, but not limited
to, statements concerning industry performance and the Company's operations,
performance, financial condition, prospects, growth and strategies. For this
purpose, any statements contained in this Prospectus except for historical
information may be deemed to be forward-looking statements. Without limiting
the generality of the foregoing, words such as "may," "will," "expect,"
"believe," "anticipate," "intend," "could," "estimate," or "continue" or the
negative or other variations thereof or comparable terminology are intended to
identify forward-looking statements. These statements by their nature involve
substantial risks and uncertainties, certain of which are beyond the Company's
control, and actual results may differ materially depending on a variety of
important factors, including those described below in this "Risk Factors"
section and elsewhere in this Prospectus.

LIMITED HISTORY OF OPERATIONS LIMITS PRIOR PERFORMANCE AS AN INDICATOR OF
FUTURE PERFORMANCE

The Company commenced operations in August 1995 and began originating loans
in October 1995. Although the Company has been profitable for each fiscal
period presented herein and has experienced substantial growth in mortgage
loan originations and total revenues, there can be no assurance that the
Company will be profitable in the future or that these rates of growth will be
sustainable or indicative of future results. Any decline in future
profitability or growth rates may adversely affect the market for the
Company's Common Stock which could result in volatility or a decline in its
market price.

Since it commenced operations in August 1995, the Company's growth in
originating loans has been significant. In light of this growth, the
historical financial performance of the Company may be of limited relevance in
predicting future performance. Since the Company historically has sold
substantially all loans originated on a whole loan basis, it has not tracked
the performance of its loans in the secondary market and thus is unable to
determine the history of loan losses associated with such loans. If a material
portion of such loans result in loan losses to the holders thereof, the market
for and pricing of the Company's loans could be adversely affected, which
could materially lower revenues for a subject reporting period.

NO ASSURANCE OF PLANNED GROWTH; INABILITY OF THE COMPANY TO GROW COULD
ADVERSELY AFFECT THE COMPANY'S OPERATING RESULTS

The Company's total revenues and net income have grown significantly since
inception, primarily due to increased mortgage loan origination and sales
activities. The Company intends to continue to pursue a growth strategy for
the foreseeable future. Since the Company expects recent higher levels of
mortgage broker compensation, which reduce the cash gain on sale of mortgage
loans, to continue for the three months ending March 31, 1998 and possibly
thereafter, the Company believes that its future operating results will depend
largely upon its ability to expand its mortgage origination and sales
activities, and, in particular, increased penetration in existing markets.
While the Company plans to continue its growth of loan originations through
the expansion of its Wholesale Division and Retail Division, these plans
require additional personnel and assets. To date, the Company has had a
relative lack of experience in retail originations, having only originated
$14.5 million through its Retail Division from the inception of the division
in March 1996 through December 31, 1997. There can be no assurance that the
Company will be able to successfully expand and operate such divisions and
programs profitably. It also is expected that such expansion plans will result
in a substantial increase in operating expenses in the short-run. Furthermore,
since management expects that there will be a time lag between the expenditure
of such monies and the receipt of any revenues from such expansion efforts,
the Company's results of operations may be adversely affected in the short-
run. There can be no assurance that the Company will anticipate and respond
effectively to all of the changing demands that its expanding operations will
have on the Company's management, information and operating systems, and the
failure to adapt its systems could have a material adverse effect on the
Company's results of operations and financial condition. There can be no
assurance that the Company will successfully achieve its planned expansion or,
if achieved, that the expansion will result in profitable operations.

RISK OF VARIATIONS IN QUARTERLY OPERATING RESULTS

Several factors affecting the Company's business can cause significant
variations in its quarterly results of operations. In particular, variations
in the volume of the Company's loan originations, the differences between the
Company's costs of funds and the average interest rates of originated loans,
the inability of the Company to complete significant loan sales transactions
in a particular quarter, and problems generally affecting the mortgage loan
industry can result in significant increases or decreases in the Company's
revenues from quarter to quarter. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Quarterly Data." A delay in
closing a particular loan sale transaction during a particular quarter would
postpone recognition of cash gain on sale of loans. In addition, delays in
closing a particular loan sale transaction would also increase the Company's
exposure to interest rate fluctuations by lengthening the period during which
its variable rate borrowings under its warehouse facilities are outstanding.
If the Company were unable to sell a sufficient number of its loans at a
premium in a particular reporting period, the Company's revenues for such
period would decline, resulting in lower net income and possibly a net loss
for such period, which could have a material adverse effect on the Company's
results of operations and financial condition. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."

DISCONTINUANCE OF EXCLUSIVE ARRANGEMENTS WITH DLJ COULD ADVERSELY AFFECT THE
COMPANY'S OPERATING RESULTS

The Company commenced operations in August 1995 and prior to this Offering,
has benefitted from its relationship with DLJ, which owned approximately 44%
of the Company's outstanding Common Stock as of December 31, 1997. Since
commencement of operations, DLJ has provided the Company with a $50.0 million
warehouse line of credit to fund loan production (the "DLJ Facility"), which
has been the only financing facility the Company has used to date. The
interest rate under the DLJ Facility was equal to the federal funds rate plus
100 basis points, subject to increase based on the length of time loans are
held by the Company. The Company is substantially dependent upon its access to
warehouse lines of credit and other lending facilities in order to fund loan
originations.

In October 1997, the Company and DLJ agreed to amend the terms of the DLJ
Facility (the "Amended DLJ Facility") to increase the amount of the DLJ
Facility to $150.0 million and modified the term of the DLJ Facility to two
years after the closing of this Offering. The interest rate of the DLJ
Facility will remain effective until the closing of this Offering; thereafter,
borrowings under the Amended DLJ Facility during the first 12 months will bear
interest at the federal funds rate plus 50 basis points and thereafter the
rate will be the federal funds rate plus 100 basis points. See "Business--
Financing and Sale of Loans." It is expected that the Amended DLJ Facility
will not be extended beyond the modified term. The Company is seeking to
obtain additional and alternative sources of financing on favorable terms to
decrease its reliance on DLJ. While the Company is currently negotiating with
other lenders to obtain additional warehouse lines of credit, the Company
currently has no financing commitment for such lines of credit. Any failure by
DLJ to continue to provide financing under the Amended DLJ Facility or the
Company's failure to obtain adequate funding under any additional or
alternative facilities, on favorable terms or otherwise, could cause the
Company to curtail loan origination activities, which would result in a
decline in revenues, the effect of which could have a material adverse effect
on the Company's operations.

In addition, under the Company's master loan purchase agreement and
commitment letter thereto with DLJ (the "Master Loan Purchase Agreement"),
since the Company commenced business, DLJ has purchased substantially all of
the Company's loan production through whole loan sales. For a more detailed
discussion of the terms of the Master Loan Purchase Agreement, see
"Arrangements with DLJ and the Recapitalization." Gain on sales of loans
represents the primary source of the Company's revenues and net income. The
Company relies almost entirely on proceeds from loan sales to generate cash
for repayment of borrowings under the Company's warehouse facilities. There
can be no assurance that DLJ will continue to purchase loans originated by the
Company or will be willing to purchase such loans on terms under which it had
historically purchased the Company's loans. Following the completion of this
Offering, the Company intends to sell loan production to DLJ and other
institutional purchasers in the secondary market. While the Company has
historically assisted DLJ in identifying purchasers of those loans purchased
by DLJ

under the Master Loan Purchase Agreement (see "Business--Financing and Sale of
Loans--Loan Sales"), there can be no assurance that the Company would be
successful in identifying other institutional purchasers or in negotiating
favorable terms for such loan sales. The failure by the Company to timely sell
its loans would expose the Company to interest rate fluctuations and greater
risks of borrower defaults and bankruptcies, fraud losses and special hazard
losses. The failure of the Company to negotiate favorable terms for its loan
sales would adversely affect the Company's revenues.

SUBSTANTIAL DEPENDENCE ON WHOLESALE BROKERS

The Company depends largely on independent mortgage brokers, financial
institutions and mortgage bankers for its originations of mortgage loans.
Substantially all of the independent mortgage brokers with whom the Company
does business deal with multiple loan originators for each prospective
borrower. Non-conforming originators, including the Company, compete for
business based upon pricing, service, loan fees and costs and other factors.
The Company's competitors also seek to establish relationships with such
independent mortgage brokers, financial institutions and mortgage bankers,
none of whom is contractually obligated to continue to do business with the
Company. In addition, the Company expects the volume of wholesale loans that
it originates to increase which will depend in large part on maintaining and
expanding its relationships with its independent mortgage brokers. The
Company's future results may become increasingly exposed to fluctuations in
the volume and cost of its wholesale loans resulting from competition from
other originators and purchasers of such loans, market conditions and other
factors.

SUBSTANTIAL RISKS RELATED TO LENDING TO LOWER CREDIT GRADE BORROWERS

The Company is a lender in the non-conforming mortgage banking industry,
which means that the Company focuses its marketing efforts on borrowers who
may be unable to obtain mortgage financing from conventional mortgage sources.
Specifically, the Company makes "sub-prime" loans to persons with a Company
risk classification of "B," "C+," "C" or "C-." Approximately 3.9% of the total
principal amount of loans originated by the Company during each of the six
months ended December 31, 1997 and the year ended June 30, 1997 were to
borrowers with a Company risk classification of "C-," which includes borrowers
with numerous derogatory credit items up to and including a bankruptcy in the
most recent 12 month period. In addition, for the six months ended
December 31, 1997 and the year ended June 30, 1997, approximately 50.9% and
48.8%, respectively, of the Company's total loan originations were made under
its "Stated Income Documentation" program pursuant to which the Company does
not require any income documentation. As a result, the Company does not
independently verify in writing the accuracy of the stated income of such
borrowers on their mortgage loan applications which may subject the Company to
a greater risk of borrower misrepresentations. Also, an undeterminable
percentage of the Company's loans are made based on exceptions to the
Company's underwriting guidelines; any exception may cause a borrower to be
placed in a more favorable borrower risk classification and thereby be
provided loan terms which such borrower may not have qualified for absent such
exception. Loans made to such non-conforming borrowers generally entail a
higher risk of delinquency and higher losses than loans made to borrowers who
utilize conventional mortgage sources. Delinquencies, foreclosures and losses
generally increase during economic slowdowns or recessions. Further, any
material decline in real estate values increase the loan-to-value ratios of
loans previously made by the Company, thereby weakening collateral coverage
and increasing the possibility of a loss in the event of a borrower default.
Any sustained period of increased delinquencies, foreclosures or losses after
the loans are sold could adversely affect the pricing of the Company's future
loan sales and the ability of the Company to sell its loans in the future. In
the past, certain of these factors have caused revenues and net income of many
participants in the non-conforming mortgage industry, including the Company,
to fluctuate from quarter to quarter. See "Business--Underwriting."

SUBSTANTIAL COMPETITION MAY ADVERSELY AFFECT THE COMPANY'S ABILITY TO
ORIGINATE, SELL OR FINANCE MORTGAGE LOANS

As an originator of non-conforming mortgage loans, the Company faces intense
competition, primarily from mortgage banking companies, commercial banks,
credit unions, thrift institutions and finance companies. Many of these
entities are substantially larger and have more capital and other resources
than the Company. With respect to other mortgage banking and specialty finance
companies, there are many larger companies that focus on the same types of
non-conforming mortgage loans with which the Company directly competes for
product. From time to time, one or more of these companies may be dominant in
the origination and sale of non-conforming mortgage loans.

Competition can take many forms, including convenience in obtaining a loan,
customer service, marketing distribution channels and loan pricing. If the
Company is unable to remain competitive in these areas, the volume of the
Company's loan originations may be materially adversely affected as borrowers
seek out other lenders for their financing needs. Lower originations may have
an adverse effect on the Company's ability to negotiate and obtain sufficient
financing under warehouse lines of credit upon acceptable terms. Furthermore,
the current level of gains realized by the Company and its competitors on the
sale of the type of loans they originate and purchase is attracting and may
continue to attract additional competitors into this market with the possible
effect of lowering gains that may be realized on the Company's loan sales.
Establishing a broker-sourced loan business typically requires a substantially
smaller commitment of capital and personnel resources than a direct-sourced
loan business. This relatively low barrier to entry permits new competitors to
enter the broker-sourced loan market quickly, particularly existing direct-
sourced lenders which can draw upon existing branch networks and personnel in
seeking to sell products through independent brokers. Competition may be
affected by fluctuations in interest rates and general economic conditions.
During periods of rising rates, competitors which have locked in low borrowing
costs may have a competitive advantage. See "Business--Competition."

Increased competition could have the possible effects of (i) lowering gains
that may be realized on the Company's loan sales, (ii) reducing the volume of
the Company's loan originations and loan sales, (iii) increasing the demand
for the Company's experienced personnel and the potential that such personnel
will be recruited by the Company's competitors and (iv) lowering the industry
standard for non-conforming underwriting guidelines (i.e., providing for
higher loan-to-value ratios) as competitors attempt to increase or maintain
market share in the face of increased competition. In the past, certain of
these factors have caused revenues and net income of many participants in the
non-conforming mortgage industry, including the Company, to fluctuate from
quarter to quarter. See "--Risk of Variations in Quarterly Operating Results."

There can be no assurance that the Company will be able to continue to
compete successfully in the markets it serves. Inability to compete
successfully would have a material adverse effect on the Company's results of
operations and financial condition.

RISK OF COMPETITION IN NEW MARKETS

As the Company expands into new geographic markets, it may face competition
from lenders with established positions in these locations. There can be no
assurance that the Company will be able to successfully compete with such
established lenders, the effect of which may have a material adverse effect on
the Company's results of operations and financial condition.

RISK OF COMPETITION FROM GOVERNMENT-SPONSORED ENTITIES

In the future, the Company may also face competition from, among others,
government-sponsored entities which may enter the non-conforming mortgage
market. Existing or new loan purchase programs may be expanded by the Federal
National Mortgage Association ("FNMA"), the Federal Home Loan Mortgage
Corporation ("FHLMC"), or the Government National Mortgage Association
("GNMA") to include non-conforming mortgages, particularly those in the "A-"
category, which constitute a significant portion of the Company's loan
production. For example, the FHLMC has announced that it is entering the non-
conforming market in 1998. Entries of such government-sponsored entities into
the non-conforming market may have an adverse effect on loan yields on
mortgage loans originated by the Company and reduce or eliminate premiums on
loan sales.

GENERAL ECONOMIC CONDITIONS MAY ADVERSELY AFFECT COMPANY OPERATIONS

The Company's business may be adversely affected by periods of economic
slowdown or recession which may be accompanied by decreased demand for
consumer credit and declining real estate values. Any material decline in real
estate values reduces the ability of borrowers to use home equity to support
borrowings and increases the loan-to-value ratios of loans previously made by
the Company, thereby weakening collateral coverage and increasing the
possibility of a loss in the event of default. To the extent that the loan-to-
value ratios of prospective borrowers' home equity collateral do not meet the
Company's underwriting criteria, the volume of loans originated by the Company

could decline. Further, delinquencies, foreclosures and losses generally
increase during economic slowdowns or recessions. Because of the Company's
focus on borrowers who are unable or unwilling to obtain mortgage financing
from conventional mortgage sources, whether for reasons of credit impairment,
income qualification or credit history or a desire to receive funding on an
expedited basis, the actual rates of delinquencies, foreclosures and losses on
such loans could be higher under adverse economic conditions than those
currently experienced in the mortgage lending industry in general. Any
sustained period of such increased delinquencies, foreclosures or losses could
adversely affect the pricing of the Company's loan sales whether through whole
loan sales or future securitizations. A decline in loan origination volumes
could have a material adverse effect on the Company's operations and financial
condition.

CHANGES IN INTEREST RATES MAY ADVERSELY AFFECT NET INCOME AND PROFITABILITY

Profitability may be directly affected by the level of and fluctuations in
interest rates which affect the Company's ability to earn a spread between
interest received on its loans held for sale and rates paid on warehouse
lines. The Company's profitability may be adversely affected during any period
of unexpected or rapid change in interest rates due to the fact that the
Company does not currently hedge its portfolio of mortgage loans held for
sale. A substantial and sustained increase in interest rates could adversely
affect the Company's ability to originate loans. Also, a significant decline
in interest rates could increase the level of loan prepayments and require the
Company to write down the value of the interest-only and residual certificates
retained in any future securitizations, thereby adversely impacting earnings.

Adjustable-rate mortgage loans originated by the Company amounted to $48.9
million, $110.9 million and $96.9 million in principal amount during the six
months ended December 31, 1997 and the years ended June 30, 1997 and 1996,
respectively. Substantially all such adjustable-rate mortgage loans included a
"teaser" rate, i.e., an initial interest rate significantly below the fully
indexed interest rate at origination. Although these loans are underwritten at
1.0% above the initial or start rate at origination, borrowers may encounter
financial difficulties as a result of increases in the interest rate over the
life of the loan, which may adversely impact the performance of the Company's
loans in the secondary market. Any sustained period of increased
delinquencies, foreclosures or losses after the loans are sold could adversely
affect the pricing of the Company's future loan sales and the ability of the
Company to sell its loans in the future.

ELIMINATION OF LENDER PAYMENTS TO BROKERS COULD ADVERSELY AFFECT RESULTS OF
OPERATIONS

Lawsuits have been filed against several mortgage lenders, not including the
Company, alleging that such lenders have made certain payments to independent
mortgage brokers in violation of the Federal Real Estate Settlement Procedures
Act of 1974, as amended ("RESPA"). These lawsuits have generally been filed on
behalf of a purported nationwide class of borrowers alleging that payments
made by a lender to a broker in addition to payments made by the borrower to a
broker are prohibited by RESPA and are therefore illegal. If these cases are
resolved against the lenders, it may cause an industry-wide change in the way
independent mortgage brokers are compensated. The Company's broker
compensation programs permit such payments. The Company makes such payments in
the ordinary course of business. Due to competitive conditions, these payments
have increased in recent periods, which adversely affected the Company's cash
gain on sale of mortgage loans for the six months ended December 31, 1997.
Management expects this increased level of payments to continue for the three
months ending March 31, 1998 and possibly thereafter. Although the Company
believes that its broker compensation programs comply with all applicable laws
and are consistent with long-standing industry practice and regulatory
interpretations, in the future new regulatory interpretations or judicial
decisions may require the Company to change its broker compensation practices.
Such a change may have a material adverse effect on the Company and the entire
mortgage lending industry.

POTENTIAL ADVERSE EFFECT OF REPRESENTATIONS AND WARRANTIES IN LOAN SALES

institutional purchasers to whom DLJ sells the subject loans. The Company,
therefore, may be required to repurchase or substitute loans in the event of a
breach of a representation or warranty to DLJ or the institutional purchaser,
any misrepresentation during the mortgage loan origination process or, in some
cases, upon any fraud or first payment default on such mortgage loans. In an
environment of rapid whole loan sales, the Company may not have substitute
loans which are not previously committed for sale readily available in which
case the Company would be required to effect a repurchase. During the year
ended June 30, 1997, the Company repurchased $178,000 of loans; no loans were
repurchased during the six months ended December 31, 1997 and the year ended
June 30, 1996. There can be no assurance that such repurchase levels will not
substantially increase in future periods. Any claims asserted against the
Company in the future by its loan purchasers may result in liabilities or
legal expenses that could have a material adverse effect on the Company's
results of operations and financial condition. In addition, any material
repurchase or substitution of loans may have an adverse effect on the market
for and pricing of the Company's loans.

DEPENDENCE ON A LIMITED NUMBER OF KEY PERSONNEL

The Company's growth and development to date have been largely dependent
upon the services of Evan R. Buckley, the Company's Chief Executive Officer,
and Kelly W. Monahan, the Company's President and Chief Financial Officer. The
loss of Messrs. Buckley's or Monahan's services for any reason could have a
material adverse effect on the Company. The Company does not maintain key
person life insurance on the lives of any of its employees. In addition, the
Company's future success will require it to recruit additional key personnel,
including additional sales and marketing personnel. The Company believes that
its future success also substantially depends on its ability to attract,
retain and motivate highly skilled employees, who are in great demand. There
can be no assurance that the Company will be successful in doing so.

SUBSTANTIAL RISKS ASSOCIATED WITH FUTURE SECURITIZATIONS

The Company may in the future sell loans through securitizations which
involve substantial risks, including the following:

Inability to Securitize Mortgage Loans. The Company anticipates that it may
in the future acquire and accumulate mortgage loans until a sufficient
quantity has been acquired for securitization. There can be no assurance that
the Company will be successful in securitizing mortgage loans. During the
accumulation period, the Company will be subject to risks of borrower defaults
and bankruptcies, fraud losses and special hazard losses. In the event of any
default under mortgage loans held by the Company, the Company will bear the
risk of loss of principal to the extent of any deficiency between the value of
the mortgage collateral and the principal amount of the mortgage loan. Also
during the accumulation period, the costs of financing the mortgage loans
through warehouse lines of credit or reverse repurchase agreements could
exceed the interest income on the mortgage loans. It may not be possible or
economical for the Company to complete the securitization of all mortgage
loans that it acquires, in which case the Company will continue to hold the
mortgage loans and bear the risks of borrower defaults and special hazard
losses.

Potential Recourse Against Company in Securitizations. To the extent that
the Company engages in securitizations, the Company intends to transfer loans
originated by the Company to a trust in exchange for cash, "interest-only" and
residual certificates issued by the trust. The trustee will have recourse to
the Company with respect to the breach of standard representations or
warranties made by the Company at the time such loans are transferred, the
effect of which may have a material adverse effect on the Company's results of
operations and financial condition.

Value of Interest-Only, Principal-Only, Residual Interest and Subordinated
Securities Subject to Fluctuation. To the extent that the Company engages in
securitizations, the Company's assets will likely include "interest-only,"
"principal-only," residual interest and subordinated securities, which will be
valued by the Company in accordance with SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities." The Company will record its retained interest in securitizations
(including

"interest-only," "principal-only" and subordinated securities) as investments
classified as trading securities. Realization of these "interest-only,"
"principal-only," residual interest and subordinated securities in cash is
subject to the timing and ultimate realization of cash flows associated
therewith, which is in turn effected by the prepayment and loss
characteristics of the underlying loans. The Company will estimate future cash
flows from these "interest-only," "principal-only," residual interest and
subordinated securities and will value such securities with assumptions that
it believes to be consistent with those that would be utilized by an
unaffiliated third-party purchaser. If actual experience differs from the
assumptions used in the determination of the asset value, future cash flows
and earnings could be negatively impacted, and the Company could be required
to reduce the value of its "interest-only," "principal-only," residual
interest and subordinated securities in accordance with SFAS 125. The value of
such securities can fluctuate widely and may be extremely sensitive to changes
in discount rates, projected mortgage loan prepayments and loss assumptions.

Risks Regarding Hedging. In the future the Company may hedge its variable-
rate mortgage loans and any interest-only and residual certificates retained
in connection with any future securitizations with hedging transactions which
may include forward sales of mortgage loans or mortgage-backed securities,
interest rate caps and floors and buying and selling of futures and options on
futures. Hedging techniques involving the use of derivative financial
investments are highly complex and may prove volatile. The financial futures
contracts and options thereon in which the Company may invest are subject to
periodic margin calls that would result in additional costs to the Company. If
a hedging instrument utilized by the Company were found to be legally
unenforceable, the Company's portfolio of loans held for sale would be exposed
to interest rate fluctuations which could materially and adversely affect the
Company's business and results of operations. Additionally, hedging strategies
have significant transaction costs. The nature and quantity of hedging
transactions will be determined by the Company's management based on various
factors, including market conditions and the expected volume of mortgage loan
originations and purchases. No assurance can be given that such hedging
transactions will offset the risks of changes in interest rates, and it is
possible that there will be periods during which the Company could incur
losses after accounting for its hedging activities.

COMPANY PERFORMANCE MAY BE AFFECTED BY CONTRACTED SUB-SERVICING

While the Company currently sells substantially all of the mortgage loans it
originates servicing released, it is required to service the loans from the
date of funding through the date of sale. Since the Company conducts whole
loan sales monthly, the Company currently does not have a substantial
servicing portfolio. Nonetheless, the Company currently contracts for the sub-
servicing of all mortgage loans it originates through the date of sale and is
subject to risks associated with inadequate or untimely services. To the
extent that the Company decides to retain servicing rights in the future or
conduct securitizations, it currently intends to contract for the sub-
servicing of such mortgage loans, which would expose it to more substantial
risks associated with contracted sub-servicing. In such event, it is expected
that many of the Company's borrowers will require notices and reminders to
keep their mortgage loans current and to prevent delinquencies and
foreclosures. A substantial increase in the Company's delinquency rate or
foreclosure rate could adversely affect its ability to access profitably the
capital markets for its financing needs, including any future securitizations.

Any of the Company's sub-servicing agreements with its third-party sub-
servicers are expected to provide that if the Company terminates the agreement
without cause (as defined in the agreement), the Company may be required to
pay the third-party sub-servicer a fee. Depending upon the size of the
Company's loan portfolio sub-serviced at any point in time, the termination
penalty that the Company would be obligated to pay upon termination without
cause, may be substantial.

The Company intends to subcontract with sub-servicers to service the
mortgage loans for any of its public securitizations. With respect to such
mortgage loans, the related pooling and servicing agreements would permit the
Company to be terminated as master servicer under specific conditions
described in such agreements, which generally include the failure to make
payments, including advances, within specific time periods. Such termination
would generally be at the option of the trustee but not at the option of the
Company. If, as a result of a sub-servicer's failure to perform adequately,
the Company were terminated as master servicer of a securitization, the value
of any servicing rights held by the Company would be adversely impacted. In
addition, if a new sub-servicer were selected with respect to any such
securitization, the change in sub-servicing may result in greater
delinquencies and losses on the related loans, which would adversely impact
the value of any "interest-only," "principal-only," residual interest and
subordinated securities held by the Company in connection with such
securitization.

CONCENTRATION OF OPERATIONS MAY ADVERSELY AFFECT COMPANY OPERATIONS

Approximately 28.3%, 36.9% and 53.6% of the dollar volume of loans
originated by the Company during the six months ended December 31, 1997 and
the years ended June 30, 1997 and 1996, respectively, were secured by
properties located in California. No other state contained properties securing
more than 10% of the dollar volume of loans originated by the Company during
such periods, other than Florida which accounted for 10.3% for the six months
ended December 31, 1997, Illinois which accounted for 16.7% and 10.4% for the
six months ended December 31, 1997 and year ended June 30, 1997, respectively,
and Hawaii which accounted for 12.0% for the year ended June 30, 1997.
Although the Company has a growing independent broker network outside of
California, the Company is likely to continue to have a significant amount of
its loan originations in California for the foreseeable future, primarily
because California represents a significant portion of the national mortgage
marketplace. Consequently, the Company's results of operations and financial
condition are dependent upon general trends in the California economy and its
residential real estate market. The California economy experienced a slowdown
or recession in recent years that has been accompanied by a sustained decline
in the California real estate market. Residential real estate market declines
may adversely affect the values of the properties securing loans such that the
principal balances of such loans will equal or exceed the value of the
mortgaged properties. Reduced collateral value will adversely affect the
volume of the Company's loans as well as the pricing of the Company's mortgage
loans and the Company's ability to sell its loans.

In addition, California historically has been vulnerable to certain natural
disaster risks, such as earthquakes and erosion-caused mudslides, which are
not typically covered by the standard hazard insurance policies maintained by
borrowers. Uninsured disasters may adversely impact borrowers' ability to
repay mortgage loans made by the Company, any sustained period of increased
delinquencies or defaults could adversely affect the pricing of the Company's
future loan sales and the ability of the Company to sell its loans. The
existence of adverse economic conditions or the occurrence of such natural
disasters in California could have a material adverse effect on the Company's
results of operations and financial condition.

REAL PROPERTY WITH ENVIRONMENTAL PROBLEMS MAY CREATE LIABILITY FOR THE COMPANY

In the course of its business, the Company may acquire real property
securing loans that are in default. There is a risk that hazardous substances
or waste, contaminants, pollutants or sources thereof could be discovered on
such properties after acquisition by the Company. In such event, the Company
might be required to remove such substances from the affected properties at
its sole cost and expense. The cost of such removal may substantially exceed
the value of the affected properties or the loans secured by such properties.
There can be no assurance that the Company would have adequate remedies
against the prior owners or other responsible parties, or that the Company
would not find it difficult or impossible to sell the affected real properties
either prior to or following any such removal, the effect of which may have a
material adverse effect on the Company's results of operations and financial
condition.

COMPANY SUBJECT TO EXTENSIVE LEGISLATIVE AND REGULATORY RISKS

The Company's business is subject to extensive regulation, supervision and
licensing by federal, state and local governmental authorities and is
subjected to various laws and judicial and administrative decisions imposing
requirements and restrictions on a substantial portion of its operations. The
Company's consumer lending activities are subject to the Federal Truth-in-
Lending Act and Regulation Z (including the Home Ownership and Equity
Protection Act of 1994), the Federal Equal Credit Opportunity Act and
Regulation B, as amended ("ECOA"), the Fair Credit Reporting Act of 1970, as
amended, RESPA and Regulation X, the Fair Housing Act, the Home Mortgage
Disclosure Act and the Federal Debt Collection Practices ACT, as well as other
federal and state statutes and regulations affecting the Company's activities.
The Company is also subject to the rules and regulations of and examinations
by the Department of Housing and Urban Development ("HUD") and state
regulatory authorities with respect to originating, processing, underwriting,
selling, securitizing and servicing loans. These rules and regulations, among
other things, impose licensing obligations on the Company, establish
eligibility criteria for mortgage loans, prohibit discrimination, provide for
inspections

and appraisals of properties, require credit reports on loan applicants,
regulate assessment, collection, foreclosure and claims handling, investment
and interest payments on escrow balances and payment features, mandate certain
disclosures and notices to borrowers and, in some cases, fix maximum interest
rates, fees and mortgage loan amounts. Failure to comply with these
requirements can lead to loss of approved status, termination or suspension of
servicing contracts without compensation to the servicer, demands for
indemnifications or mortgage loan repurchases, certain rights of rescission
for mortgage loans, class action lawsuits and administrative enforcement
actions.

In October 1997, HUD issued proposed regulations regarding the treatment and
disclosure of fees charged and collected by mortgage brokers providing certain
safe harbors for the payment of fees by lenders to mortgage brokers and
setting forth standards to determine whether payments to mortgage brokers
violate RESPA. Whether such regulations will be adopted and the form and
content of any final regulations is unknown.

The Company is subject to licensing by state authorities. In addition, any
person who acquires more than 10% of the Company's stock will become subject
to certain state licensing regulations requiring such person periodically to
file certain financial and other information. If any person holding more than
10% of the Company's stock refuses to adhere to such filing requirements, the
Company's existing licensing arrangements could be jeopardized. The loss of
required licenses could have a material adverse effect on the Company's
results of operations and financial condition.

Although the Company believes that it has systems and procedures to
facilitate compliance with these requirements and believes that it is in
compliance in all material respects with applicable local, state and federal
laws, rules and regulations, there can be no assurance that more restrictive
laws, rules and regulations will not be adopted in the future that could make
compliance more difficult or expensive.

Members of Congress and government officials have from time to time
suggested the elimination of the mortgage interest deduction for federal
income tax purposes, either entirely or in part, based on borrower income,
type of loan or principal amount. Because many of the Company's loans are made
to borrowers for the purpose of consolidating consumer debt or financing other
consumer needs, the competitive advantage of tax deductible interest, when
compared with alternative sources of financing, could be eliminated or
seriously impaired by such government action. Accordingly, the reduction or
elimination of these tax benefits could have a material adverse effect on the
demand for loans of the kind offered by the Company.

POSSIBLE NEED FOR ADDITIONAL EQUITY FINANCING

The Company's primary operating cash requirements include the funding or
payment of (i) loan originations, (ii) interest expense incurred on borrowings
under warehouse lines of credit, (iii) income taxes, (iv) capital expenditures
and (v) other operating and administrative expenses. The Company funds these
cash requirements primarily through warehouse lines of credit and whole loan
sales. In addition, if the Company conducts securitizations, it would require
liquidity to fund its investments in "interest-only" and residual certificates
and for fees and expenses incurred with securitizations. The Company's ability
to implement its business strategy will depend upon its ability to establish
alternative long-term financing arrangements with parties other than DLJ and
obtain sufficient financing under warehouse facilities upon acceptable terms.
There can be no assurance that such financing will be available to the Company
on favorable terms, if at all. If such financing were not available or the
Company's capital requirements exceed anticipated levels, then the Company
would be required to obtain additional equity financing which would dilute the
interests of stockholders who invest in this Offering. The Company cannot
presently estimate the amount and timing of additional equity financing
requirements because such requirements are tied to, among other things, the
growth of the Company. If the Company were unable to raise such additional
capital, its results of operations and financial condition would be adversely
affected. See "Management's Discussion and Analysis of Results of Operations
and Financial Condition--Liquidity and Capital Resources."

ANY FUTURE ACQUISITIONS OF OTHER SPECIALTY FINANCE COMPANIES OR ASSETS MAY
HAVE ADVERSE EFFECTS ON THE COMPANY'S BUSINESS

The Company may, from time to time, engage in the acquisition of other
specialty finance companies or portfolios of loan assets. Any acquisition made
by the Company may result in potentially dilutive issuances of equity
securities, the incurrence of additional debt and the amortization of expenses
related to goodwill and other intangible assets, any of which could have a
material adverse effect on the Company's business and results of operations.
The Company also may experience difficulties in the assimilation of the
operations, services, products and personnel related to acquired companies or
loan portfolios, an inability to sustain or improve the historical revenue
levels of acquired companies, the diversion of management's attention from
ongoing business operations and the potential loss of key employees of such
acquired companies. The Company currently has no agreements with regard to any
potential acquisition and there can be no assurance that future acquisitions,
if any, will be consummated.

SIGNIFICANT INFLUENCE OF CURRENT MANAGEMENT

After the Offering, the officers and directors of the Company will
beneficially own 34.1% of the outstanding Common Stock of the Company (or
approximately 31.3% of the outstanding Common Stock if the Underwriters' over-
allotment option is exercised in full). As a result, the Company's current
management through its stock ownership and otherwise will be able to exert
significant influence over the business and affairs of the Company. See
"Management" and "Principal and Selling Stockholders."

NO ASSURANCE OF ACTIVE TRADING MARKET FOR COMMON STOCK; DETERMINATION OF
OFFERING PRICE; POSSIBLE VOLATILITY OF STOCK PRICE

Prior to this Offering, there has been no public market for the Common Stock
of the Company. Although the Company has been approved, subject to official
notice of issuance, for quotation of the Common Stock on the Nasdaq National
Market, there can be no assurance that an active public trading market for the
Common Stock will develop after the Offering or that, if developed, it will be
sustained. The initial public offering price of the Common Stock offered
hereby has been determined by negotiations between the Company and the
Representatives of the Underwriters and may not be indicative of the price at
which the Common Stock will trade after the Offering. See "Underwriting."

The trading price of the Company's Common Stock could be subject to
significant fluctuations in response to variations in quarterly operating
results, changes in analysts' estimates, general conditions in the speciality
finance industry and other factors. For example, companies engaging in
securitizations record non-cash gain on sale of mortgage loans from the
revenue expected to be obtained from retained residual interests in future
payments on the loans. Realization of cash from these residual interests is
subject to the timing and ultimate realization of cash flows associated
therewith, which in turn is affected by the prepayment and loss
characteristics of the underlying loans. Several specialty finance companies
recently have been required to "write-down" the value of their retained
interests, and therefore reduce or eliminate reported earnings, largely as a
result of a higher than anticipated level of prepayments on the underlying
loans which has materially adversely affected their stock prices. Stock prices
of other specialty finance companies that utilize more conservative
assumptions in recording non-cash gain on sale and those, such as the Company,
that sell whole loans for cash and do not engage in material securitization
activities, also have been adversely impacted by these developments. There can
be no assurance the future market price of the Company's Common Stock will not
be adversely impacted by the results of operation of, and market reactions to,
other specialty finance companies. Consequently, there can be no assurance
that the market price for the Common Stock will not fall below the initial
public offering price.

The Company may increase its capital by making additional private or public
offerings of its Common Stock, securities convertible into its Common Stock or
debt securities. The actual or perceived effect of such offerings, the timing
of which cannot be predicted, may be the dilution of the book value or
earnings per share of the Common Stock outstanding, which may result in the
reduction of the market price of the Common Stock.

ANTI-TAKEOVER EFFECT OF DELAWARE LAW

The Company intends to reincorporate as a Delaware corporation prior to
completion of the Offering and as such will be subject to the anti-takeover
provisions of Section 203 of the Delaware General Corporation Law. In general,
Section 203 prevents an "interested stockholder" (defined generally as a
person owning more than 15% or more of the Company's outstanding voting stock)
from engaging in a "business combination" with the Company for three years
following the date that person became an interested stockholder unless the
business combination is approved in a prescribed manner. This statute could
make it more difficult for a third party to acquire control of the Company.
See "Description of Capital Stock--Certain Provisions of Delaware Law."

ISSUANCE OF PREFERRED STOCK MAY ADVERSELY AFFECT HOLDERS OF COMMON STOCK

The Board of Directors has the authority to issue up to 5,000,000 shares of
undesignated Preferred Stock and to determine the rights, preferences,
privileges and restrictions of such shares without any further vote or action
by the stockholders. Although at present the Company has no plans to issue any
of the Preferred Stock, the Preferred Stock could be issued with voting,
liquidation, dividend and other rights superior to the rights of the Common
Stock. The issuance of Preferred Stock under certain circumstances could have
the effect of delaying or preventing a change in control of the Company. See
"Description of Capital Stock."

SHARES ELIGIBLE FOR FUTURE SALE MAY ADVERSELY AFFECT THE MARKET PRICE OF THE
COMPANY'S COMMON STOCK

The sales of substantial amounts of the Company's Common Stock in the public
market or the prospect of such sales could materially and adversely affect the
market price of the Common Stock. Upon completion of this Offering, the
Company will have outstanding 5,400,000 shares of Common Stock. The 3,173,196
shares of Common Stock offered hereby will be immediately eligible for sale in
the public market without restriction beginning on the date of this
Prospectus. The remaining 2,226,804 shares of Common Stock are restricted in
nature and are saleable to the extent permitted for "affiliates" pursuant to
Rule 144 under the Securities Act. The Company and its officers and directors
have agreed that they will not, without the prior written consent of CIBC
Oppenheimer Corp. (which consent may be withheld in its sole discretion) and
subject to certain limited exceptions, sell, transfer, or otherwise dispose of
any shares of Common Stock, options or warrants to acquire Common Stock, or
securities exchangeable or exercisable for or convertible into Common Stock
for a period commencing on the date of this Prospectus and continuing to a
date 180 days after such date. See "Shares Eligible for Future Sale" and
"Underwriting." The Stock Option Plan authorizes the grant of options to
purchase, and awards of, 800,000 shares; of this amount, options to acquire
163,265 shares of Common Stock were granted prior to this Offering at a per
share exercise price of $6.10. In addition, it is expected that stock options
for an additional 425,000 shares of Common Stock will be granted to certain
employees, officers and directors of the Company on the date of this Offering
at a per share exercise price equal to the initial public offering price. The
Company intends to register under the Securities Act of 1933, as amended (the
"Securities Act"), shares reserved for issuance pursuant to the Stock Option
Plan. The holders of the Representatives' Warrants are entitled to certain
registration rights. See "Description of Capital Stock--Registration Rights"
and "Shares Eligible for Future Sale."

IMMEDIATE AND SUBSTANTIAL DILUTION

The initial public offering price is substantially higher than the book
value per outstanding share of the Common Stock. Purchasers of the Common
Stock will experience immediate and substantial dilution in pro forma net
tangible book value of $5.63 per share of Common Stock from the assumed
initial public offering price of $10.00 per share of Common Stock. See
"Dilution."

ARRANGEMENTS WITH DLJ AND THE RECAPITALIZATION

Arrangements With DLJ

Prior to this Offering, the Company has benefitted from its relationship
with DLJ, which owned approximately 44% of the Company's outstanding Common
Stock as of December 31, 1997. Since commencement of operations, DLJ has
provided the Company with a $50.0 million warehouse line of credit to fund
loan production (the "DLJ Facility"), which has been the only financing
facility the Company has used to date. The interest rate under the DLJ
Facility was equal to the federal funds rate plus 100 basis points, subject to
increase based on the length of time loans are held by the Company, and DLJ
received a security interest on all loans, and other rights in connection
therewith, originated by the Company. Any loan not purchased by DLJ was not
allowed to remain subject to the warehouse line for more than nine months. The
term of the DLJ Facility was through August 31, 2000. As of December 31, 1997
and June 30, 1997 and 1996, $74.4 million, $54.6 million and $42.7 million,
respectively, was outstanding under the DLJ Facility.

In October 1997, the Company and DLJ modified the DLJ Facility and the terms
under which DLJ would purchase mortgage loans from the Company (the "Amended
DLJ Facility"). The Amended DLJ Facility has similar terms to the DLJ Facility
with certain modifications. The Amended DLJ Facility provides for advances of
up to $150.0 million. The interest rate of the DLJ Facility will remain
effective until the closing of this Offering; thereafter, borrowings under the
Amended DLJ Facility will bear an interest rate of the federal funds rate plus
50 basis points for 12 months after the closing of the Offering and,
thereafter, the federal funds rate plus 100 basis points. The Amended DLJ
Facility also modifies the termination date to two years after the closing of
the Offering. Furthermore, DLJ has agreed to provide the Company with up to
$5.0 million of financing for a term of one year for subordinated "interest-
only" securities to the extent they are retained by the Company in connection
with any future securitizations of loans originated by the Company. Advances
will be made only to the extent the Company does not have sufficient cash, in
excess of reasonable reserves, to fund the retention of such securities.

It is expected that the Amended DLJ Facility will not be extended beyond the
modified term. The Company is seeking to obtain additional and alternative
sources of financing on favorable terms to decrease its reliance on DLJ. While
the Company is currently negotiating with other lenders to obtain additional
warehouse lines of credit, the Company currently has no financing commitment
for such lines of credit. Any failure by DLJ to continue to provide financing
under the Amended DLJ Facility or the Company's failure to obtain adequate
funding under any additional or alternative facilities, on favorable terms or
otherwise, could cause the Company to curtail loan origination activities
which could have a material adverse effect on the Company's operations.

The Amended DLJ Facility modifies the exclusivity of the relationship
between DLJ and the Company. In connection with the DLJ Facility, DLJ,
pursuant to the Master Loan Purchase Agreement, agreed to purchase, and the
Company agreed to sell to DLJ, all mortgage loans originated by the Company.
While over the course of this relationship, the Company and DLJ have agreed
that certain of such loans will not be so purchased, the Company has
historically sold substantially all of its originated loans to DLJ as whole
loans on a servicing released basis. Under the Amended DLJ Facility, this
exclusive contractual arrangement will be modified and the Company, as of the
consummation of the Offering, will have no obligation to sell any loans to
DLJ, and DLJ will have no obligation to purchase any loans from the Company.

purchasers) who in most cases have purchased similar resold loans from DLJ in
the past. The successful bidder is committed to a minimum quantity of loans at
a determined price, and is generally granted the option to purchase more than
the minimum quantity at a negotiated price. DLJ then agrees to pay the Company
the determined price minus 50 basis points, which represents DLJ's fees. As a
result of this agreement, management is able to directly control the sales
process of its loans in an effort to obtain more favorable pricing and other
terms. A successful bidder is not obligated to purchase loans other than those
to which its bid applies. For the six months ended December 31, 1997 and the
years ended June 30, 1997 and 1996, an aggregate of $1.7 million, $2.1 million
and $1.8 million, respectively, was paid to DLJ as fees pursuant to the Master
Loan Purchase Agreement. Under the Amended DLJ Facility, DLJ and the Company
have agreed that DLJ will receive no fees in connection with any such
purchases for the first 12 months after the closing of the Offering and 12.5
basis points for the second 12 months after the closing.

The Master Loan Purchase Agreement, along with the Amended DLJ Facility,
terminates on August 31, 2000, or may be terminated earlier by DLJ upon an
event of default by the Company, including the occurrence of any proceeding
adversely affecting the Company's ability to perform its obligations to DLJ, a
material breach by the Company of any related agreement with DLJ or a material
adverse change in the Company's business. The Master Loan Purchase Agreement
may also be terminated by DLJ if the Company merges (other than the
reincorporation of the Company into Delaware to which DLJ has consented),
sells substantially all of its assets or fails to meet certain financial
criteria as agreed to by DLJ and the Company.

Since the Company commenced business, DLJ has purchased substantially all of
the Company's loan production through whole loan sales. During the six months
ended December 31, 1997 and the years ended June 30, 1997 and 1996, the
Company sold loans to DLJ having an aggregate principal balance of $331.4
million, $473.7 million and $153.2 million, respectively. Cash gain on sales
of loans represents the primary source of the Company's revenues and net
income. The Company relies almost entirely on proceeds from loan sales to
generate cash for repayment of borrowings under the Company's warehouse
facilities. There can be no assurance that DLJ will continue to purchase loans
originated by the Company or will be willing to purchase such loans on terms
under which it had historically purchased the Company's loans. Following the
completion of this Offering, the Company intends to sell loan production to
DLJ and other institutional purchasers in the secondary market. While the
Company has historically assisted DLJ in identifying purchasers of those loans
purchased by DLJ under the Master Loan Purchase Agreement, there can be no
assurance that the Company would be successful in identifying other
institutional purchasers or in negotiating favorable terms for such loan
sales.

The Recapitalization

The Company has endeavored to effectuate a series of corporate transactions
to properly position the Company prior to its initial public offering. The
transactions are as follows:

Repurchase of Preferred Stock. In November 1997, the Company redeemed all
outstanding shares of its Series A Preferred Stock for approximately $1.6
million; of this amount, $800,000 was paid to DLJ and $775,000 was paid to BNC
Equity Investors, LLC, an entity of which 37.2% and 6.5% is owned by Evan R.
Buckley and Gary Vander-Haeghen, the Company's Chief Executive Officer and
Vice President, Sales, respectively.

Reincorporation in Delaware. Prior to the consummation of this Offering, the
Company intends to reincorporate in Delaware to take advantage of certain
favorable provisions of Delaware law (see "Description of Capital Stock--
Certain Provisions of Delaware Law"). Further to the reincorporation, the
existing California corporation will be merged into a newly formed Delaware
corporation pursuant to which each outstanding share of Class A and Class B
Common Stock of the existing California corporation will be exchanged for
4,123.71134 shares of $.001 par value Common Stock of the new Delaware
corporation and the certificate of incorporation of the new Delaware
corporation will authorize 50,000,000 shares of Common Stock and 5,000,000
shares of Preferred Stock. As a result of the reincorporation, there will be
no outstanding shares of Class A or Class B Common Stock at the consummation
of this Offering.

USE OF PROCEEDS

The net proceeds to be received by the Company from the sale of the
1,400,000 shares of Common Stock offered by the Company at an assumed initial
public offering price of $10.00 (after deducting the estimated underwriting
discount and offering expenses payable by the Company), are estimated to be
$12.6 million. The Company intends to apply approximately $9.4 million of the
net proceeds from this Offering to fund future loan originations and $3.2
million for general corporate purposes. Prior to their eventual use, the net
proceeds will be invested in high quality, short-term investment instruments
such as short-term corporate investment grade or United States Government
interest-bearing securities. The Company will not receive any proceeds from
the sale of Common Stock by the Selling Stockholder.

DIVIDEND POLICY

The Company has never paid any cash dividends on its Common Stock. The
Company intends to retain all of its future earnings to finance its operations
and does not anticipate paying cash dividends in the foreseeable future. Any
decision made by the Company's Board of Directors to declare dividends in the
future will depend upon the Company's future earnings, capital requirements,
financial condition and other factors deemed relevant by the Company's
Directors.

DILUTION

The pro forma net tangible book value of the Company at December 31, 1997
was $10,952,000 or $2.74 per share. Pro forma net tangible book value per
share represents the amount of the Company's total tangible assets less total
liabilities, divided by the number of shares of Common Stock outstanding.
After giving effect to the receipt by the Company of the net proceeds from the
sale of the shares of Common Stock offered hereby at an assumed initial public
offering price of $10.00 per share and the application of the net proceeds
therefrom, after deducting the estimated underwriting discount and offering
expenses, the pro forma as adjusted net tangible book value of the Company at
December 31, 1997 would have been $23,587,000 or $4.37 per share. This
represents an immediate increase in pro forma net tangible book value of $1.63
per share to the existing stockholders and an immediate dilution of $5.63 per
share to new investors purchasing shares in this Offering. The following table
illustrates this per share dilution:

Assumed initial public offering price per share.................... $10.00
Pro forma net tangible book value per share before this Offering. $2.74
Increase per share attributable to new investors................. 1.63
-----
Pro forma net tangible book value per share after this Offering.... 4.37
------
Dilution per share to new investors................................ $ 5.63
======

The following table summarizes as of December 31, 1997, the differences
between existing stockholders and new investors (before deducting underwriting
discounts and commissions and estimated offering expenses) with respect to the
number of shares of Common Stock purchased from the Company, the total
consideration paid and the average price per share:

SHARES OWNED
AFTER THE
OFFERING TOTAL CONSIDERATION
----------------- ------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------

Existing stockholders....... 2,226,804 41.24% $ 6,300 0.02% --
New investors............... 3,173,196 58.76 31,731,960 99.98 $10.00
--------- ------ ----------- ------
Total..................... 5,400,000 100.00% $31,738,260 100.00%
========= ====== =========== ======

CAPITALIZATION

The following table sets forth, as of December 31, 1997, the Company's (i)
actual capitalization and (ii) capitalization as adjusted to reflect the sale
by the Company of the 1,400,000 shares of Common Stock offered by the Company
hereby at an assumed initial public offering price of $10.00 per share and
application of the net proceeds therefrom (after deducting the estimated
underwriting discount and offering expenses payable by the Company). This
table should be read in conjunction with the Consolidated Financial Statements
and the Notes thereto included elsewhere in this Prospectus.

AT DECEMBER 31,
1997
-------------------
AS
ACTUAL ADJUSTED(1)
------- -----------
(DOLLARS IN
THOUSANDS)

Warehouse line of credit.................................... $74,369 $74,369
======= =======
Stockholders' equity(2):
Preferred Stock, $.001 par value; 5,000,000 shares
authorized,
none issued and outstanding actual and as adjusted....... $ -- $ --
Common Stock, $.001 par value; 50,000,000 shares
authorized; 4,000,000 shares issued and outstanding
actual; 5,400,000 shares issued and outstanding as
adjusted(3).............................................. 6 7
Additional paid-in capital................................ -- 12,634
Retained earnings......................................... 10,946 10,946
------- -------
Total stockholders' equity and capitalization........... $10,952 $23,587
======= =======

- -------
(1) After deducting the estimated underwriting discount and offering expenses
payable by the Company, and assuming no exercise of the Underwriters'
over-allotment option.

(2) Gives effect to the reincorporation of the Company in Delaware which will
be effected prior to the consummation of this Offering whereby the
existing California corporation will be merged into a newly formed
Delaware corporation and pursuant to which each outstanding share of Class
A and Class B Common Stock of the existing California corporation will be
exchanged for 4,123.71134 shares of $.001 par value Common Stock of the
new Delaware corporation and the certificate of incorporation of the new
Delaware corporation will authorize 50,000,000 shares of Common Stock and
5,000,000 shares of Preferred Stock. See "Arrangements with DLJ and the
Recapitalization."

(3) Excludes shares issuable pursuant to the Representatives' Warrants and
shares of Common Stock reserved for issuance pursuant to the Company's
Stock Option Plan. The Stock Option Plan authorizes the grant of options
to purchase, and awards of, 800,000 shares; of this amount, options to
acquire 163,265 were granted prior to this Offering at a per share
exercise price of $6.10. Options to acquire an additional 425,000 shares
are expected to be granted to employees, officers and directors of the
Company at the effective date of this Offering at a per share exercise
price equal to the initial public offering price. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
General" and "Management--Stock Options."

SELECTED CONSOLIDATED FINANCIAL DATA
(In thousands, except per share data and ratios)

The following selected statement of operations data for the years ended June
30, 1996 and 1997 and the balance sheet data at June 30, 1996 and 1997 are
derived from consolidated financial statements of the Company included
elsewhere in this Prospectus, which have been audited by Ernst & Young LLP,
independent auditors, as indicated in their report included elsewhere in this
Prospectus, and are qualified by reference to such financial statements
including the related notes thereto. The selected statements of operations
data for the six months ended December 31, 1996 and 1997 and the balance sheet
data at December 31, 1997 have been derived from unaudited interim condensed
consolidated financial statements of the Company contained elsewhere herein
and reflect in management's opinion, all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of financial
position and results of operations for these periods. Results of operations
for the six months ended December 31, 1997 are not necessarily indicative of
results to be expected for the year ending June 30, 1998. The selected
financial data set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements, notes thereto and the
independent auditors' report included elsewhere in this Prospectus. The
Company was formed on May 2, 1995 and began operations in August 1995. For the
period of May 2, 1995 through June 30, 1995, the Company did not have any
revenue and recorded start-up costs of $10,000. Financial statements are not
presented for the period May 2, 1995 through June 30, 1995 as the operations
were not material.

SIX MONTHS
YEAR ENDED ENDED
JUNE 30, DECEMBER 31,
-------------- ---------------
1996 1997 1996 1997
------ ------- ------- -------

STATEMENT OF OPERATIONS DATA:
Revenues:
Gain on sale of mortgage loans................ $4,240 $21,855 $ 8,525 $13,543
Loan origination income....................... 1,978 5,473 2,383 2,767
Interest income............................... 1,960 5,182 2,215 3,447
Other income.................................. 52 250 91 220
------ ------- ------- -------
Total revenues.............................. 8,230 32,760 13,214 19,977
------ ------- ------- -------
Expenses:
Employees' salaries and commissions........... 3,624 11,052 4,396 8,326
General and administrative expense............ 2,400 5,543 2,279 3,257
Interest expense.............................. 1,452 3,693 1,595 2,471
------ ------- ------- -------
Total expenses.............................. 7,476 20,288 8,270 14,054
------ ------- ------- -------
Income before taxes............................. 754 12,472 4,944 5,923
Income tax expense.............................. 337 4,930 1,954 2,392
------ ------- ------- -------
Net income.................................... $ 417 $ 7,542 $ 2,990 $ 3,531
====== ======= ======= =======
Pro forma net income per share.................. $ 0.14 $ 1.80 $ 0.71 $ 0.86
====== ======= ======= =======
Shares used in computing pro forma net income
per share(1)................................... 2,897 4,192 4,191 4,108

AT JUNE 30,
--------------- AT DECEMBER 31,
1996 1997 1997
------- ------- ---------------

BALANCE SHEET DATA:
Cash and cash equivalents....................... $ 2,452 $ 8,268 $ 7,142
Restricted cash................................. -- -- 614
Mortgage loans held for sale.................... 42,723 55,145 76,196
Total assets.................................... 46,352 65,713 87,339
Warehouse line of credit........................ 42,723 54,625 74,369
Total liabilities............................... 44,506 56,509 76,387
Total stockholders' equity...................... 1,846 9,204 10,952

SIX MONTHS ENDED
YEAR ENDED JUNE 30, DECEMBER 31,
-------------------- --------------------
1996 1997 1996 1997
--------- --------- --------- ---------

OPERATING STATISTICS:
Loan originations:
Mortgage loan originations....... $ 199,963 $ 532,621 $ 223,859 $ 354,572
Average initial principal balance
per loan........................ $ 101 $ 98 $ 95 $ 96
Weighted average interest rate:
Fixed rate residential loans.... 10.7% 10.5% 10.8% 10.6%
Variable rate residential loans. 9.2% 9.4% 9.4% 9.6%
Small commercial rate loans(2).. -- 9.8% 9.2% --
Weighted average, initial loan-
to-value ratios................ 68.5% 69.3% 68.3% 72.9%
Whole loan sales................. $ 156,559 $ 519,909 $ 216,964 $ 333,045
Gain on sale as a percentage of
whole loan sales................ 2.7% 4.2% 3.9% 4.1%
Credit risk(3):
A+.............................. 9.7% 30.7% 22.8% 42.5%
A-.............................. 41.9% 26.7% 30.6% 21.8%
B............................... 26.0% 18.9% 21.0% 20.4%
C+.............................. 12.0% 10.7% 12.1% 8.0%
C............................... 7.7% 5.7% 6.9% 3.4%
C-.............................. 2.7% 3.9% 3.8% 3.9%
Small commercial(2)............. -- 3.4% 2.8% --

- --------
(1) See Note 1 of Notes to Consolidated Financial Statements.
(2) The Company discontinued the origination of small commercial loans in April
1997.
(3) Credit ratings are based on the Company's classification of loan products.
See "Business--Underwriting Guidelines."

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the Company's
consolidated financial statements and notes thereto appearing elsewhere
herein.

GENERAL

The Company is a specialty finance company engaged in the business of
originating and selling non-conforming residential mortgage loans secured by
one-to-four family residences. The Company's principal borrower base consists
of individuals who do not qualify under traditional lending criteria
established by agencies such as FNMA and FHLMC, because of their credit
history, income or other factors. The Company originates loans through
independent mortgage brokers and, to a lesser extent, through its retail
origination division. Substantially all of the Company's mortgage loan
originations are sold in the secondary market through loan sales in which the
Company disposes of its entire economic interest in the loans including the
related servicing rights for cash. See "Business."

The following table shows the Company's mortgage loan originations, mortgage
loan sales, and origination locations with account executives for the periods
indicated:

SIX MONTHS ENDED
YEAR ENDED JUNE 30, DECEMBER 31,
------------------- -----------------
1996 1997 1996 1997
--------- --------- -------- --------
(DOLLARS IN THOUSANDS)

Mortgage loan originations............ $ 199,963 $ 532,621 $223,859 $354,572
Mortgage loan sales................... $ 156,559 $ 519,909 $216,964 $333,045
Origination locations at end of period
..................................... 19 38 26 46

Revenues are derived primarily from cash gain on sales of loans and interest
income from loans held for sale. The major components of the Company's
revenues are (i) the volume of loans originated, (ii) the premium over
principal amount received in loan sales, (iii) origination points received or
paid, (iv) origination fees received and (v) the differential between the
interest rate on borrowings under revolving warehouse credit facilities and
the interest rate of loans held for sale. Cash gain on sale of mortgage loans
is affected by, among other things, borrower credit risk classification, loan-
to-value ratio, interest rate and margin of the loans. Revenues increased to
$20.0 million and $32.8 million for the six months ended December 31, 1997 and
the year ended June 30, 1997, respectively, compared to $13.2 million and $8.2
million for the six months ended December 31, 1996 and the year ended June 30,
1996, respectively.

The major components of expenses are employees' salaries and commissions,
general and administrative, and interest. Employees' salaries and commissions,
which for the six months ended December 31, 1997 and the years ended June 30,
1997 and 1996 accounted for 59.2%, 54.5% and 48.5% of total expenses,
respectively, is significantly related to the loan origination volume because
the Company's sales force is compensated on a commission basis in addition to
salaries. Total expenses increased to $14.1 million and $20.3 million for the
six months ended December 31, 1997 and the year ended June 30, 1997,
respectively, compared to $8.3 million and $7.5 million for the six months
ended December 31, 1996 and the year ended June 30, 1996, respectively.

The Company's net income increased to $3.5 million and $7.5 million for the
six months ended December 31, 1997 and the year ended June 30, 1997,
respectively, compared to $3.0 million and $417,000 for the six months ended
December 31, 1996, and the year ended June 30, 1996, respectively.

Increased competition in the non-conforming mortgage industry could have the
effect of (i) lowering gains that may be realized on loan sales, (ii) reducing
an individual company's volume of loan originations and sales,
(iii) increasing demand for experienced personnel increasing the likelihood
such personnel will be recruited by competitors and (iv) lowering the industry
standard for non-conforming underwriting guidelines as competitors

attempt to increase or maintain market share in the face of increased
competition. In the past, certain of these factors have caused the revenues
and net income of many participants in the non-conforming mortgage industry,
including the Company, to fluctuate from quarter to quarter. The Company
intends to utilize its primary strengths and its growth and operating strategy
to remain competitive in the non-conforming mortgage industry. The Company
believes that its primary strengths are (i) the experience of its management,
account executives and staff in the non-conforming lending industry, which
enhances the Company's ability to establish and maintain long-term
relationships with mortgage brokers, (ii) its service oriented sales culture
whereby the Company strives to respond quickly and efficiently to customer
needs and market demands, (iii) its operating philosophy to create stable and
deliberate loan origination growth by utilizing consistent and prudent
underwriting guidelines designed to produce mortgage products readily saleable
in the secondary market and (iv) its ability to manage and control operating
costs in order for it to remain a low cost originator. For a description of
the contractual nature of the Company's relationships with its independent
mortgage brokers, see "Business--Mortgage Loan Originations--Wholesale
Division."

RESULTS OF OPERATIONS

Six Months Ended December 31, 1997 Compared to Six Months Ended December 31,
1996

Revenues. The following table sets forth the components of the Company's
revenues for the periods indicated:

SIX MONTHS ENDED
DECEMBER 31,
-----------------------
1996 1997
----------- -----------
(DOLLARS IN THOUSANDS)

Gain on sale of mortgage loans...................... $ 8,525 $ 13,543
Loan origination income............................. 2,383 2,767
Interest income..................................... 2,215 3,447
Other income........................................ 91 220
----------- -----------
$ 13,214 $ 19,977
=========== ===========

The increase in revenues was due primarily to increased mortgage loan
originations and cash gain on sales of mortgage loans. Mortgage loan
originations increased $130.7 million to $354.6 million for the six months
ended December 31, 1997 from $223.9 million for the six months ended December
31, 1996.

Cash gain on sale of mortgage loans increased $5.0 million to $13.5 million
for the six months ended December 31, 1997 from $8.5 million for the six
months ended December 31, 1996. This was due primarily to a 5.1% increase in
weighted average cash gain on sale to 4.1% for the six months ended December
31, 1997 from 3.9% for the six months ended December 31, 1996, primarily due
to improved pricing of whole loan sales. There can be no assurance that the
Company will recognize comparable levels of cash gain on sale of mortgage
loans in future periods. The Company makes yield spread premium payments to
its mortgage broker customers in the ordinary course of business. Due to
competitive conditions, these payments have increased in recent periods, which
adversely affected the Company's cash gain on sale of mortgage loans for the
six months ended December 31, 1997. Management expects this increased level of
payments to continue for the three months ending March 31, 1998 and possibly
thereafter.

Loan origination income, which consists of loan origination fees, increased
to $2.8 million for the six months ended December 31, 1997 from $2.4 million
for the six months ended December 31, 1996 due to an increase in mortgage loan
originations. As a percentage of total revenues, loan origination income for
the six months ended December 31, 1997 decreased to 13.8% as compared to 18.0%
for the six months ended December 31, 1996 as a result of competitive
conditions as management was required to lower the amount of origination
points and fees charged on its loan products to satisfy mortgage broker and
consumer demands.

Interest income increased $1.2 million to $3.4 million for the six months
ended December 31, 1997 from $2.2 million for the six months ended December
31, 1996. This increase is due to an increase in loan originations during the
period.

Other income, which is composed of investment income, prepayment penalties
and late charges, increased to $220,000 for the six months ended December 31,
1997 as compared to $91,000 for the six months ended December 31, 1996 largely
as a result of an increase in mortgage loan originations.

Expenses. The following table sets forth the components of the Company's
expenses for the periods indicated:

SIX MONTHS ENDED
DECEMBER 31,
----------------------
1996 1997
----------------------
(DOLLARS IN THOUSANDS)

Employees' salaries and commissions.................. $ 4,396 $ 8,326
General and administrative expenses.................. 2,279 3,257
Interest expense..................................... 1,595 2,471
---------- -----------
$ 8,270 $ 14,054
========== ===========

Total expenses increased to $14.1 million for the six months ended December
31, 1997 from $8.3 million for the six months ended December 31, 1996. This
increase is related to geographical expansion to 46 origination locations at
December 31, 1997 from 26 at December 31, 1996, and to an increase in mortgage
loan originations.

Employee salaries and commissions increased $3.9 million to $8.3 million
during the six months ended December 31, 1997 from $4.4 million for the six
months ended December 31, 1996. The primary reason for the increase was due to
an increase in mortgage loan originations and continued geographical
expansion.

General and administrative expenses increased $978,000 to $3.3 million for
the six months ended December 31, 1997 from $2.3 million for the three months
ended December 31, 1996. This increase is due primarily to a corresponding
increase in the origination locations and the related increase in mortgage
loan originations.

Interest expense increased $876,000 to $2.5 million for the six months ended
December 31, 1997 from $1.6 million for the three months ended December 31,
1996 as a result of higher levels of warehouse borrowing.

It is expected that the Company's expansion plans will result in an increase
in operating expenses in the short-term. Furthermore, since management expects
that there will be a lag time between the incurrence of such expense and the
receipt of any revenues from such expansion efforts, the Company's results of
operations may be adversely affected in the short-term.

In October 1997, the Company issued stock options to purchase 163,265 shares
of the Company's Common Stock at a per share exercise price of $6.10. The
stock options vest 33 1/3% on each anniversary date from the date of the
grant. In connection therewith, the Company will recognize stock compensation
expense of $212,000 per year over the three-year period ended October 2000, or
$53,000 per quarter which commenced with the quarter ending December 31, 1997.

Fiscal Year Ended June 30, 1997 Compared to Fiscal Year Ended June 30, 1996

Revenues. The following table sets forth the components of the Company's
revenues for the periods indicated:

YEAR ENDED JUNE 30,
----------------------
1996 1997
----------------------
(DOLLARS IN THOUSANDS)

Gain on sale of mortgage loans....................... $ 4,240 $ 21,855
Loan origination income.............................. 1,978 5,473
Interest income...................................... 1,960 5,182
Other income......................................... 52 250
---------- -----------
$ 8,230 $ 32,760
========== ===========

Revenues increased to $32.8 million for the year ended June 30, 1997 from
$8.2 million for the year ended June 30, 1996 largely due to increased
mortgage loan originations and cash gain on sale of mortgage loans.

The increase in mortgage loan originations was due to both increased
production from existing branches and expansion into new markets. Origination
locations increased to 38 at June 30, 1997 from 19 at June 30, 1996.

Cash gain on sale of mortgage loans increased $17.6 million to $21.9 million
in the year ended June 30, 1997 from $4.2 million in the year ended June 30,
1996. The increase was due primarily to the $332.7 million increase in
mortgage loan originations during the year ended June 30, 1997. Total loans of
$519.9 million were sold in the year ended June 30, 1997 with a weighted
average cash gain on sale of 4.2%. During the year ended June 30, 1996, total
loans of $156.6 million were sold with a weighted average cash gain on sale of
2.7%. The increase in weighted average cash gain on sale was primarily
attributable to improved pricing of whole loan sales.

Loan origination income increased to $5.5 million in the year ended June 30,
1997 from $2.0 million in the year ended June 30, 1996 due to increased
mortgage loan originations.

Interest income increased $3.2 million to $5.2 million in the year ended
June 30, 1997 from $2.0 million in the year ended June 30, 1996 due to a
higher balance of loans held for sale as a result of the increase in mortgage
loan originations.

Other income increased to $250,000 for the year ended June 30, 1997 as
compared to $52,000 for the year ended June 30, 1996 largely as a result of
increased mortgage loan originations and an increase in cash and cash
equivalents.

Expenses. The following table sets forth the components of the Company's
expenses for the periods indicated:

YEAR ENDED JUNE 30,
----------------------
1996 1997
----------------------
(DOLLARS IN THOUSANDS)

Employees' salaries and commissions................... $3,624 $11,052
General and administrative expenses................... 2,400 5,543
Interest expense...................................... 1,452 3,693
---------- -----------
$7,476 $20,288
========== ===========

Expenses increased to $20.3 million for the year ended June 30, 1997 from
$7.5 million for the year ended June 30, 1996, due to the cost of geographical
expansion and in large part to increased compensation and other personnel
costs related to the 166% increase in mortgage loan originations. Expenses for
the year ended June 30, 1996 included a litigation reserve of $200,000
relating to potential exposure from a lawsuit against the Company which was
settled through payment during the year ended June 30, 1997.

Employee salaries and commissions increased $7.4 million to $11.1 million in
the year ended June 30, 1997 from $3.6 million in the year ended June 30,
1996, primarily due to an increase in the number of employees to 257 at June
30, 1997 from 148 at June 30, 1996 and increases in commissions paid to
employees.

General and administrative expense increased $3.1 million to $5.5 million in
the year ended June 30, 1997 from $2.4 million in the year ended June 30,
1996. The increase was due to the expansion of the Company's loan origination
network and the related increase in mortgage loan originations.

Interest expense increased $2.2 million to $3.7 million in the year ended
June 30, 1997 from $1.5 million in the year ended June 30, 1996 due to greater
borrowings to fund the increased mortgage loan originations.

SELECTED QUARTERLY RESULTS OF OPERATIONS

The following table sets forth results of operations for each of the
Company's last six quarters. In the opinion of management, this information
has been presented on the same basis as the audited consolidated financial
statements appearing elsewhere in this Prospectus, and includes all
adjustments, consisting only of normal recurring adjustments and accruals,
that the Company considers necessary for a fair presentation. The unaudited
quarterly information should be read in conjunction with the audited
consolidated financial statements of the Company and the notes thereto. The
operating results for any quarter are not necessarily indicative of results
for any future period.

THREE MONTHS THREE MONTHS THREE MONTHS THREE MONTHS THREE MONTHS THREE MONTHS
ENDED ENDED ENDED ENDED ENDED ENDED
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1996 1996 1997 1997 1997 1997
------------- ------------ ------------ ------------ ------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA AND OPERATING STATISTICS)

STATEMENT OF OPERATIONS
DATA:
Revenues:
Gain on sale of
mortgage loans........ $ 3,410 $ 5,116 $ 6,017 $ 7,312 $ 6,635 $ 6,908
Mortgage loan
origination income.... 1,022 1,360 1,453 1,638 1,240 1,527
Interest income........ 1,101 1,114 1,403 1,564 1,645 1,802
Other income........... 39 52 67 92 102 118
------- -------- -------- -------- -------- --------
Total revenues......... 5,572 7,642 8,940 10,606 9,622 10,355
Expenses:
Employees' salaries and
commissions........... 1,837 2,558 3,131 3,526 3,755 4,571
General and
administrative
expenses.............. 1,055 1,224 1,461 1,803 1,798 1,459
Interest expense....... 846 750 980 1,117 1,179 1,292
------- -------- -------- -------- -------- --------
Total expenses......... 3,738 4,532 5,572 6,446 6,732 7,322
------- -------- -------- -------- -------- --------
Income before taxes..... 1,834 3,110 3,368 4,160 2,890 3,033
Income tax expense...... 723 1,230 1,332 1,645 1,193 1,199
------- -------- -------- -------- -------- --------
Net income.............. $ 1,111 $ 1,880 $ 2,036 $ 2,515 $ 1,697 $ 1,834
======= ======== ======== ======== ======== ========
Operating statistics:
Mortgage loan
originations.......... $93,427 $130,432 $152,140 $156,622 $164,402 $190,170
Weighted average
interest rate......... 9.6% 9.7% 9.4% 9.6% 9.6% 9.8%
Weighted average
initial loan-to-value
ratios................ 68.2% 68.4% 69.3% 70.7% 72.0% 73.7%
Number of employees.... 181 220 254 257 309 332
Number of account
executives............ 38 50 64 59 81 86
Loan origination
locations with office. 24 24 28 30 32 34
Loan origination
locations without
office................ 2 2 7 8 21 12

For each of the three months ended September 30, 1997 and December 31, 1997,
revenues, cash gain on sale of mortgage loans, and net income were at lower
levels than for the three months ended June 30, 1997, primarily due to
increased yield spread premium payments made by the Company to its mortgage
broker customers. These payments were necessitated due to competitive pressure
in the broker-originated non-

conforming loan market. Loan origination income for each of the three months
ended September 30, 1997 and December 31, 1997 was also affected by
competitive pressure; the Company was required to lower the amount of
origination points and fees charged on its loan products to satisfy mortgage
broker and consumer demands. Management expects these competitive trends to
continue in the foreseeable future.

The Company will attempt to increase profitability through growth in loan
origination volume. Future managed growth will be related to the opening of
new origination locations, the hiring of additional account executives, the
recruitment of additional mortgage brokers into the Company's wholesale
network, the expansion of its Retail Division and its ability to control
costs. The Company plans to open up to 15 additional origination locations,
and increase the total number of account executives to 118 by the end of 1998
from 86 at December 31, 1997.

It is expected that the Company's expansion plans will result in an increase
in operating expenses in the short-term. Furthermore, since management expects
that there will be a lag time between the incurrence of such expenses and the
receipt of any revenues from such expansion efforts, the Company's results of
operations may be adversely affected in the short-term.

LIQUIDITY AND CAPITAL RESOURCES

The Company's sources of cash flow include cash gain on sale of mortgage
loans, net interest income and borrowings. The Company sells its mortgage
loans generally on a monthly basis to generate cash for operations. The
Company's uses of cash in the short-term include the funding of mortgage loan
originations, payment of interest, repayment of amounts borrowed under
warehouse lines of credit, operating and administrative expenses, start-up
costs for new origination locations, income taxes and capital expenditures.
Long-term uses of cash may also include the funding of securitization
activities and selective acquisitions of other specialty finance companies or
portfolios of loan assets. The Company currently has no agreements with regard
to any potential acquisition and there can be no assurance that future
acquisitions, if any, will be consummated. Capital expenditures totaled
$364,000, $448,000 and $488,000 for the six months ended December 31, 1997 and
the years ended June 30, 1997 and 1996, respectively. In November 1997, the
Company repurchased all outstanding shares of the Company's shares of Series A
Preferred Stock for approximately $1.6 million. See "Arrangements with DLJ and
the Recapitalization."

Cash and cash equivalents were $7.1 million, $8.3 million and $2.5 million
at December 31, 1997 and at June 30, 1997 and 1996, respectively.

The Company funds its business through cash reserves and from August 1995
through October 1997, the DLJ Facility under which it borrowed money to
finance the origination of loans. The DLJ Facility provided a $50.0 million
warehouse line of credit to the Company, subject to periodic upward
adjustments to facilitate increases in the Company's loan production. The
interest rate under the DLJ Facility was equal to the federal funds rate plus
100 basis points, subject to increase based on the length of time loans are
held by the Company. The term of the DLJ Facility was through August 31, 2000.
In October 1997, the Company and DLJ modified the DLJ Facility and the terms
under which DLJ would purchase mortgage loans from the Company (the "Amended
DLJ Facility"). The Amended DLJ Facility provides borrowings up to $150.0
million. The interest rate from the DLJ Facility will remain effective until
the closing of the Offering; thereafter, borrowings under the Amended DLJ
Facility will bear an interest rate of the federal funds rate plus 50 basis
points for 12 months after the closing of the Offering and, thereafter, the
federal funds rate plus 100 basis points. The Amended DLJ Facility also
modifies the termination date to two years after the closing of the Offering.
It is expected that the Amended DLJ Facility will not be extended beyond the
modified term. The Company is currently negotiating with other lenders to
obtain additional warehouse lines of credit and interest rates and terms that
are consistent with management's objectives. The Company repays borrowings
with the proceeds of its loan sales.

The Company's ability to continue to originate loans is dependent in large
part upon its ability to sell the mortgage loans at par or for a premium in
the secondary market in order to generate cash proceeds to repay borrowings
under the warehouse facility, thereby creating borrowing capacity to fund new
originations. The

value of and market for the Company's loans are dependent upon a number of
factors, including the borrower credit risk classification, loan-to-value
ratios and interest rates, general economic conditions, warehouse facility
interest rates and governmental regulations. During the six months ended
December 31, 1997 and the years ended June 30, 1997 and 1996, the Company used
cash of $354.6 million, $532.6 million and $200.0 million, respectively, for
new loan originations. During the same periods, the Company received cash
proceeds from the sale of loans of $333.0 million, $519.9 million and $156.6
million, respectively, representing the principal balance of loans sold. The
Company received cash proceeds from the premiums on such sale of loans of
$13.5 million, $21.9 million and $4.2 million, respectively, for the six
months ended December 31, 1997 and the years ended June 30, 1997 and 1996,
respectively. A significant amount of the Company's loan production in any
month is funded during the last several business days of that month.

RECENTLY ISSUED ACCOUNTING CONSIDERATIONS

In October 1995, the Statement of Financial Accounting Standards ("SFAS")
No. 123, "Accounting for Stock-Based Compensation", was issued and is
effective for the Company's 1998 fiscal year end. The Company intends to
account for employee stock options in accordance with Accounting Principles
Board Opinion No. 25 "Accounting for Stock Issued to Employees", and related
interpretations in accounting for its stock options. The Company will make the
pro forma disclosures required by FAS 123 beginning in the year ending June
30, 1998.

In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share" which is effective for financial statements issued
for periods ending after December 15, 1997. It replaces the presentation of
primary earnings per share with a presentation of basic earnings per share. It
also requires the presentation of diluted earnings per share for entities with
complex capital structures. Diluted earnings per share takes into account the
potential dilution that could occur if securities or other contracts to issue
common stock, such as options, were exercised or converted into common stock.
The Company does not believe that SFAS No. 128 will have a material impact on
its financial statements.

In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information
about Capital Structure." This Statement shall be effective for financial
statements for both interim and annual periods ending after December 15, 1997.
At this time the Company has determined that this Statement will have no
significant impact on the financial position or results of operations for
1998.

In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This Statement establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general-purpose financial statements. This Statement shall be
effective for fiscal years beginning after December 15, 1997. Reclassification
of financial statements for earlier periods provided for comparative purposes
is required. At this time the Company has determined that this Statement will
have no impact on the financial position or results of operations for 1998.

BUSINESS

The Company is a specialty finance company that originates and sells, on a
whole loan basis, for cash non-conforming residential mortgage loans secured
by one-to-four family residences. The Company's loans are made primarily to
refinance existing mortgages, consolidate other debt, finance home
improvements, education and other similar needs, and, to a lesser extent, to
purchase single family residences. Non-conforming loans are loans made to
borrowers who are unable or unwilling to obtain mortgage financing from
conventional mortgage sources, whether for reasons of credit impairment,
income qualification or credit history or a desire to receive funding on an
expedited basis. The Company has two divisions: (i) a wholesale division which
has relationships with approximately 2,500 approved independent loan brokers
and which historically accounted for substantially all of the Company's total
loan originations and (ii) a retail division which is being developed to
market loans directly to homeowners.

Since it commenced operations in August 1995, the Company has experienced
significant growth in loan originations, with approximately $532.6 million of
originations in 33 states during the year ended June 30, 1997 compared to
$200.0 million in 21 states during its first full fiscal year ended June 30,
1996. Total originations were $354.6 million during the six months ended
December 31, 1997, as compared to $223.9 million during the six months ended
December 31, 1996, a 58% increase. This growth in originations resulted in an
increase in revenues to $20.0 million and $32.8 million for the six months
ended December 31, 1997 and the year ended June 30, 1997, respectively,
compared to $13.2 million and $8.2 million for the six months ended December
31, 1996 and the year ended June 30, 1996, respectively. In addition, as a
result total expenses to $14.1 million and $20.3 million for the six months
ended December 31, 1997 and the year ended June 30, 1997, respectively,
compared to $8.3 million and $7.5 million for the six months ended
December 31, 1996 and the year ended June 30, 1996, respectively. The
Company's net income rose to $7.5 million for the year ended June 30, 1997 as
compared to $417,000 for the year ended June 30, 1996. Net income was
$3.5 million for the six months ended December 31, 1997 as compared to
$3.0 million for the six months ended December 31, 1996.

The Company believes its primary strengths are the following:

Experience of Management. The Company believes that it derives substantial
benefits from the experience of its management, account executives and staff,
in the non-conforming lending industry, including the establishment of long-
term relationships with mortgage brokers. Evan R. Buckley, the Company's
founder and Chief Executive Officer, and Kelly W. Monahan, the Company's
President and Chief Financial Officer, have over 21 and five years of non-
conforming mortgage industry experience, respectively, and have assembled a
management team with substantial experience in the non-conforming mortgage
loan origination industry. Through equity ownership and other incentives, the
Company has developed a highly motivated management team whose goals are
aligned with the overall performance of the Company. The Company believes that
its long-term relationships with mortgage brokers enhance the likelihood of
loan origination growth. The Company enters into a mortgage broker agreement
with each of its independent mortgage brokers. For a description of the
contractual nature of the Company's relationships with its independent
mortgage brokers, see "--Mortgage Loan Originations--Wholesale Division."

Service Oriented Sales Culture. The Company strives to respond quickly and
efficiently to customer needs and market demands. The Company believes that
its ongoing emphasis on prompt and responsive customer service provides
support for an increased level of originations and repeat lending
opportunities from its independent broker network. Typically, the Company
approves loan applications (subject to credit verification, an independent
third-party appraisal and other documentation) within 24 hours of receipt and
funds within 15 to 40 days thereafter. The Company funds and closes
substantially all loan production under the BNC name. The Company is
continuously seeking to improve its customer service efforts as its operations
expand.

Stable and Managed Loan Origination Growth. A key element of the Company's
operating philosophy is to create stable and managed loan origination growth
by utilizing consistent and prudent underwriting guidelines designed to
provide high quality products acceptable to the secondary market. The
Company's policy is to underwrite loans in accordance with its underwriting
guidelines to ensure that its loans receive optimal pricing in the secondary
market. Since inception, the Company has successfully sold substantially all
of its production to third parties without having to retain a substantial
amount of rejected loans. The Company has been able to achieve this standard
by continually reevaluating its underwriting guidelines and quality control
criteria.

Low Cost Originator of Non-conforming Mortgage Loans. The Company's success
has been due in part on its ability to manage and control operating costs. The
Company has established a low-cost origination network, which during the six
months ended December 31, 1997 originated non-conforming mortgage loans in 36
states. For the six months ended December 31, 1997 and the year ended June 30,
1997, the Company's cost to originate averaged 3.3% and 3.1% of loan volume,
respectively. Low cost origination is driven in part by the Company's
wholesale expansion strategy; the Company initially penetrates a market with a
limited number of employees to recruit brokers for the Company's wholesale
network. The Company typically opens an office in a market only after it
achieves a minimum loan volume. By utilizing this strategy, the Company
believes it can maintain lower overhead expenses compared with companies
utilizing a more extensive branch office system. In addition, the Company has
the flexibility to expand or contract its operations quickly in response to
local demand.

Substantially all loans originated by the Company are secured by a first
priority mortgage on the subject property. During the six months ended
December 31, 1997, less than 0.2% of the principal balance of the loans
originated were secured by second priority mortgages; none of such loans were
originated for the years ended June 30, 1997 or 1996. The Company's core
borrower base consists of individuals who do not qualify for traditional "A"
credit because their credit history, income or other factors cause them not to
conform to standard agency lending criteria. During the six months ended
December 31, 1997 and the year ended June 30, 1997, approximately 64.3% and
57.4% of the principal balance of the loans originated by the Company,
respectively, were to borrowers with a Company risk classification of "A+" or
"A-" while the remainder were to borrowers with a Company risk classification
of "B," "C+," "C" or "C-," respectively, representing approximately 35.7% and
42.6% of the total principal amount of loans originated by the Company. Loans
with a Company risk classification of "B," "C+," "C" or "C-" are referred to
as "sub-prime" loans. Borrowers with a Company risk classification of "A+" or
"A-" have a very good credit history within the last 12 to 24 months with
minor late payments allowed on a limited basis. Borrowers with a "B" Company
risk classification generally have good credit within the last 12 months with
some late payments. Borrowers with a "C+" Company risk classification have
some significant derogatory credit in the past 12 months while those in the
"C" category have frequent derogatory consumer credit. Borrowers with a
Company risk classification of "C-" have numerous derogatory credit items up
to and including a bankruptcy in the most recent 12 month period. During each
of the six months ended December 31, 1997 and the year ended June 30, 1997,
approximately 3.9% of the principal balance of the loans originated by the
Company were to borrowers with a Company risk classification of "C-." For a
tabular presentation of the Company's loan production by borrower risk
classification, see "--Loan Production by Borrower Risk Classification."

Historically, the Company's primary source of mortgage loans has been its
Wholesale Division which originates mortgage loans through approved
independent mortgage loan brokers. Mortgage loan brokers qualify to
participate in the Wholesale Division's program only after a formal
application process that includes obtaining the broker's financial statements,
state licensing qualifications and references and general lending expertise.
At December 31, 1997, the Company had approved relationships with
approximately 2,500 mortgage loan brokers compared with approximately 1,300 as
of December 31, 1996. During the six months ended December 31, 1997 and the
year ended June 30, 1997, approximately 1,000 and 1,100 brokers, respectively,
funded mortgage loans through the Company. At December 31, 1997, the Wholesale
Division originated loans through a sales force of 75 account executives
located in 46 origination locations in 23 states that solicit these mortgage
loan brokers for loan applications that meet the Company's underwriting
criteria. Each mortgage loan is accepted for funding by the Company only after
approval by the Company's loan underwriters. Of the mortgage loan applications

submitted during the six months ended December 31, 1997 and the year ended
June 30, 1997, approximately 38.5% and 38.4%, respectively, were approved and
funded with the remaining 61.5% and 61.6%, respectively, either rejected by
the Company's underwriters or withdrawn by the brokers.

By concentrating on wholesale mortgage banking services through independent
mortgage loan brokers, the Company is able to originate mortgage loans in a
cost effective manner. By monitoring and controlling the number of branch
offices and personnel needed to generate mortgage loans, the Company has
effectively transferred the overhead burden of mortgage origination to the
independent mortgage loan brokers who originate the loans, with a commensurate
reduction in fee income obtained. As a result, the Company can match its costs
more directly with loan origination volume so that a substantial portion of
the Company's cost is variable rather than fixed. Loans originated through the
Wholesale Division accounted for $347.6 million and $507.3 million or 98.0%
and 95.2% of the Company's mortgage loan production during the six months
ended December 31, 1997 and the year ended June 30, 1997, respectively.

The Company, while maintaining its focus on its Wholesale Division, has
recently formulated a low cost retail marketing strategy designed to produce
growth in its Retail Division. The Company's strategy focuses on loan
originations from borrowers through telemarketing and advertising coordinated
by its retail sales staff primarily at the Company's executive offices and, to
a lesser extent, at local sales offices. This focus on centralization enables
the Company to conduct its retail operations with less overhead than a retail
business that operates exclusively through a sales office network. The Company
believes this centralized strategic approach also allows the Company to
originate mortgage loans at a competitive cost while maintaining credit
quality. In connection with mortgage loan originations, the Company obtains
origination fees which offset the costs of retail lending. The Retail Division
accounted for $7.0 million and $7.5 million or 2.0% and 1.4% of the Company's
mortgage loan production during the six months ended December 31, 1997 and the
year ended June 30, 1997, respectively.

The Company's growth and operating strategy is based on the following key
elements:

Whole Loan Sales for Cash. The Company sells substantially all of its
originated mortgage loans monthly for cash, historically at a premium over the
principal balance of the mortgage loans. The Company enhances earnings and
cash flows from whole loan sales by tailoring the composition of its whole
loan pools to meet the investment preferences of specific buyers. This
strategy, as opposed to securitizations, in which a residual interest in
future payments on the loans is retained, provides certain benefits. The
Company receives cash revenue, rather than recognizing non-cash revenue
attributable to residual interests, as is the case in securitizations, thereby
avoiding the risk of having to adjust revenue in future periods to reflect a
lower realization on residual interests because actual prepayments or defaults
exceeded levels assumed at the time of securitization. By selling its
originated loans, the Company also reduces its exposure to default risk (other
than certain first payment defaults) and the prepayment risk normally inherent
in a mortgage lender's business. Management believes that the cash received in
loan sales provides the Company greater flexibility and operating leverage
than a traditional portfolio lender, which holds the loans it originates, by
allowing the Company to generate income through interest on loans held for
sale and gain on loans sold. This strategy of frequent loan sales has been an
important factor in generating the Company's earnings, creating cash flow to
fund operations, decreasing the need for other forms of financing and reducing
the level of interest rate and default risk borne by the Company.

Continuing Growth of Wholesale Production. The Company intends to continue
the growth of its Wholesale Division through greater penetration in existing
markets and selective geographic expansion. Greater market penetration is
expected to be accomplished through additional sales personnel to existing
origination locations in order to provide continued high levels of service to
brokers to increase loan origination and further the basis for repeat
business, referral and other future lending opportunities. For each of the six
months ended December 31, 1997 and year ended June 30, 1997, the Company's
loan originations primarily were in California, Illinois, Florida, Hawaii,
Utah, Wisconsin, Oregon, Massachusetts, Maryland, Colorado, Ohio and Indiana.
The Company will seek to improve and enhance relationships with mortgage
brokers by continuing to (i) improve response times to loan applications, (ii)
streamline wholesale origination and funding activities and (iii) provide

a broad selection of attractive product offerings. The Company anticipates
that short-term geographic expansion will focus on the development of lending
operations in Texas, Pennsylvania, North Carolina, Virginia and Tennessee. The
Company plans to open up to 10 additional origination locations and to
increase the total number of wholesale account executives to approximately 105
by the end of 1998. Management intends to focus further expansion on those
geographic regions which it believes represent the most attractive markets for
the Company's products.

Expanding Product Offerings. The Company frequently reviews and tailors its
products and pricing for competitiveness, as well as introducing new products
to meet the needs of its borrowers and brokers, expand its customer base and
diversify its product mix. The Company utilizes long-term relationships with
mortgage loan brokers to quickly and efficiently tailor existing products or
introduce new products to satisfy its broker and consumer product needs. Also,
the Company attempts to anticipate changing demands and formulate new products
accordingly. Examples of recently introduced products include loans with
higher loan-to-value ratios for borrowers with good credit histories (see "--
Product Types"). The Company believes that these mortgage products enable the
Company to increase loan production from brokers who have customers seeking
such products and from borrowers identified through the Company's retail
marketing efforts.

Securitization Flexibility. While a substantial majority of the Company's
mortgage loan originations will continue to be sold through whole loan sales
in cash transactions, the Company may in the future sell a portion of its
loans through securitizations. The ability to conduct securitizations may
provide the Company with the flexibility to take advantage of favorable
pricing differentials between the securitization and whole loan sales markets
that may exist from time to time. The Company may seek to enhance earnings by
securitizing loans with characteristics which the securitization market
considers most favorable. The percentage of loans, if any, sold through
securitizations will be based on economic conditions, secondary market
conditions and available financial resources.

The Company intends to utilize its primary strengths and growth and
operating strategy to remain competitive in the non-conforming mortgage
industry. Increased competition in the non-conforming mortgage industry could
have the effect of (i) lowering gains that may be realized on loan sales, (ii)
reducing an individual company's volume of loan originations and sales,
(iii) increasing demand for experienced personnel increasing the likelihood
such personnel will be recruited by competitors and (iv) lowering the industry
standard for non-conforming underwriting guidelines as competitors attempt to
increase or maintain market share in the face of increased competition. In the
past, certain of these factors have caused the revenues and net income of many
participants in the non-conforming mortgage industry, including the Company,
to fluctuate from quarter to quarter.

MORTGAGE LOAN ORIGINATIONS

The Company originates mortgage loans through its Wholesale and Retail
Divisions. The Wholesale Division originates loans through a network of
independent mortgage brokers and the Retail Division is being developed to
solicit loans directly from prospective borrowers. The following table sets
forth selected data regarding the Company's mortgage loan originations for the
periods indicated:

YEAR ENDED JUNE SIX MONTHS
30, ENDED
------------------ DECEMBER 31,
1996 1997 1997
-------- -------- ------------
(DOLLARS IN THOUSANDS)

Mortgage loan originations:
Wholesale Division principal balance..... $199,963 $507,250 $347,555
Retail Division principal balance........ -- 7,451 7,017
Small Commercial principal balance(1).... -- 17,920 --
-------- -------- --------
$199,963 $532,621 $354,572
======== ======== ========
Number of mortgage loans................... 1,988 5,425 3,704
Average principal balance per loan......... $ 101 $ 98 $ 96
Weighted average loan-to-value ratio(2).... 68.5% 69.3% 72.9%
Weighted average fixed interest rate....... 10.7% 10.5% 10.6%
Weighted average adjustable interest rate.. 8.6% 9.2% 9.5%
Weighted average fixed/adjustable interest
rate...................................... 10.0% 9.5% 9.6%
"A+" and "A-" loans as a percentage of
total mortgage loans originated(3)........ 51.6% 57.5% 64.3%

- --------
(1) The Company discontinued the origination of small commercial loans in
April 1997.
(2) Determined by dividing the amount of the loan by the lesser of the
purchase price or the appraised value of the mortgaged property at
origination.
(3) Based on initial principal balance.

Substantially all mortgage loans originated by the Company are secured by a
first priority mortgage on the subject property and for the six months ended
December 31, 1997, less than 0.2% of the principal balance of the mortgage
loans originated were secured by second priority mortgages; none of such
mortgage loans were originated for the years ended June 30, 1997 and 1996.

Wholesale Division. Historically, the Company's primary source of mortgage
loans has been its Wholesale Division, which maintains relationships with
approximately 2,500 independent mortgage brokers which, during the six months
ended December 31, 1997, originated mortgage loans in 36 states. During the
six months ended December 31, 1997 and the year ended June 30, 1997,
approximately 1,000 and 1,100 brokers, respectively, funded loans through the
Company. At December 31, 1997, the Company had 43 origination locations in
23 states and employed 75 account executives who service mortgage brokers. The
states in which the Company had origination locations at December 31, 1997
were California, Illinois, Florida, Hawaii, Utah, Wisconsin, Oregon,
Massachusetts, Maryland, Colorado, Indiana, Ohio, Washington, Idaho, Missouri,
Michigan, Georgia, South Carolina, Rhode Island, Oklahoma, Texas, North
Carolina and Minnesota. The Wholesale Division funded $347.6 million in loans,
or 98% of the Company's total mortgage loan production, during the six months
ended December 31, 1997. During the six months ended December 31, 1997, the
Company's 10 largest producing brokers originated approximately 11.5% of the
Company's mortgage loans, with the largest broker accounting for approximately
1.8%.

Mortgage loan brokers act as intermediaries between property owners and the
Company in arranging mortgage loans. The Company enters into a mortgage broker
agreement with each of its independent mortgage brokers. Pursuant to the
agreement, the Company and the mortgage broker establish a non-exclusive
relationship whereby the mortgage broker will, from time to time and at its
option, submit completed mortgage loan application packages from the general
public to the Company for funding consideration and facilitate the

closing of mortgage loan application packages approved for funding by the
Company. The broker's role is to identify the applicant, assist in completing
the loan application form, gather necessary information and documents and
serve as the Company's liaison with the borrower through the lending process.
The Company reviews and underwrites the applications submitted by the broker,
approves or denies the application, sets the interest rate and other terms of
the loan and, upon acceptance by the borrower and satisfaction of all
conditions imposed by the Company, funds the loan. Because brokers conduct
their own marketing and employ their own personnel to obtain loan applications
and maintain contact with borrowers, originating loans through the Wholesale
Division allows the Company to increase its loan volume without incurring the
higher marketing, labor and other overhead costs associated with increased
retail originations. The Company has no obligation to pay a mortgage broker
any sum owed to the mortgage broker by a borrower, nor does the Company have
any obligation to pay a mortgage broker any sum with respect to accounts of
any mortgage loan application package which the Company does not fund and
close.

Loan applications generally are submitted by mortgage brokers to an account
executive in one of the Company's sales offices. The loan is logged-in for
RESPA and other regulatory compliance purposes, underwritten and, in most
cases, conditionally approved or denied within 24 hours of receipt. Because
mortgage brokers generally submit individual loan files to several prospective
lenders simultaneously, the Company attempts to respond to each application as
quickly as possible. If approved, a "conditional approval" will be issued to
the broker with a list of specific conditions to be met (for example, credit
verifications and independent third-party appraisals) and additional documents
to be supplied prior to the funding of the loan. The originating account
executive and a production assistant will work directly with the submitting
mortgage broker to collect the requested information and to meet the
underwriting conditions and other requirements. In most cases, the Company
funds loans within 15 to 40 days after approval of the loan application.

All independent mortgage brokers who submit loan applications to the Company
must be registered or licensed as required by the jurisdiction in which they
operate and must be approved by the Company. The Company audits 100% of its
brokers on an annual basis in order to confirm possession of a current
license, updated financials on file and any changes in broker staff or
address.

The Company believes that an important element in developing, maintaining
and expanding its independent mortgage broker relationships is to provide a
high level of product knowledge and customer service to its brokers. Each
account executive receives training prior to being assigned to a territory
which, in most cases, includes experience in the loan production department so
that the account executive will be familiar with all phases of loan
origination and production. This training enables the account executive to
quickly review a loan application in order to identify the borrower's probable
risk classification and then assist the broker in identifying the appropriate
product for the borrower, thereby enhancing the likelihood that the loan will
be approved at the rate and on the terms anticipated by the borrower. After a
loan package is submitted to the Company, the account executive and production
assistant provide assistance to the broker to complete the loan transaction.
Account executives are compensated based on the number and the dollar volume
of loans funded.

The following table sets forth selected information relating to wholesale
loan originations during the periods shown:

YEAR ENDED JUNE SIX MONTHS
30, ENDED
------------------ DECEMBER 31,
1996 1997 1997
-------- -------- ------------
(DOLLARS IN THOUSANDS)

Principal balance.......................... $199,963 $507,250 $347,555
Average principal balance per loan......... $ 101 $ 96 $ 96
Weighted average initial loan-to-value
ratio..................................... 68.5% 69.5% 73.0%
Weighted average interest rate............. 9.4% 9.6% 9.7%
Occupancy:
Owner occupied........................... 86.6% 85.1% 86.6%
Non-owner occupied....................... 13.4% 14.9% 13.4%

Retail Division. The Company's Retail Division, which markets mortgage loans
directly to homeowners, began operations in March 1996. The Company operates
the Retail Division, which as of December 31, 1997 consisted of 31 persons,
including 11 account executives, to further diversify loan production sources
and to capture origination fees typically collected by retail brokers. By
creating a direct relationship with the borrower, retail lending provides a
sustainable loan origination franchise, offering greater control over the
lending process while generating loan origination fees to offset the higher
costs of retail lending. The cash gain on sales of retail loans is generally
greater than the cash gain on sales of broker-sourced loans because, unlike in
the case of broker-sourced originations, a third party does not share in the
fees and points paid by the borrower. The Company's Retail Division offers the
same products as those of its Wholesale Division.

The Company, while maintaining its focus on its Wholesale Division, has
recently formulated a low cost retail marketing strategy designed to produce
growth in its Retail Division. The Company's strategy focuses on loan
originations from borrowers through telemarketing and advertising coordinated
by its retail sales staff primarily at the Company's executive offices and, to
a lesser extent, at local sales offices. This focus on centralization enables
the Company to conduct its retail operations with less overhead than a retail
business that operates exclusively through a sales office network. During the
six months ended December 31, 1997 and the year ended June 30, 1997, the
Company originated $7.0 million and $7.5 million, respectively, in loans, or
2.0% and 1.4%, respectively, of its total mortgage loan production, through
its Retail Division.

The Company emphasizes telemarketing and advertising to attract borrowers
for the Retail Division. Using database screening, the Company selects the
areas of concentration for the Company's retail activities and a target group
of borrowers within these areas. This database screening involves a marketing
analysis intended to identify current homeowners who are likely to be
qualified candidates for the Company's loan products. Factors considered by
the Company identifying homeowners for its telemarketing activities include
the length of time the homeowner has owned the home and the individual's
credit profile. Longer periods of home ownership increase the likelihood that
the homeowner has substantial equity in the home and will satisfy the
Company's loan-to-value requirements. Aspects of an individual's credit
profile, such as credit problems, limited credit history and prior borrowings
from consumer finance companies, also indicate that the individual is a likely
candidate for the Company's loan programs.

The Company then provides this profile information to selected telemarketing
organizations which provide phone lists of potential borrowers for use by the
Retail Division. Concurrently, the Company runs radio and television
advertising to heighten borrower awareness within the subject areas. The
Company tracks the success of its marketing efforts and regularly assesses the
accuracy of its database screening, telemarketing efforts and advertising
campaigns in identifying likely candidates for its products. By utilizing
centralized retail activities focused at a limited group of likely borrowers,
the Company believes it more efficiently utilizes its retail marketing
expenditures.

The following table sets forth selected information relating to retail loan
originations during the periods shown:

YEAR ENDED SIX MONTHS
JUNE 30, ENDED
-------------- DECEMBER 31,
1996(1) 1997 1997
------- ------ ------------
(DOLLARS IN THOUSANDS)

Principal balance.................................. -- $7,451 $7,017
Average principal balance per loan................. -- $ 83 $ 74
Weighted average initial loan-to-value ratio....... -- 70.1% 69.9%
Weighted average interest rate..................... -- 9.6% 9.4%
Occupancy:
Owner occupied................................... -- 87.8% 95.6%
Non-owner occupied............................... -- 12.2% 4.4%

- --------
(1) The Company did not originate any loans in the Retail Division for the
year ended June 30, 1996.

Other Activities. In August 1996, the Company formed a division to originate
commercial and multi-family loans. Of total loan originations for the year
ended June 30, 1997, this division originated $17.9 million or 3.4% of total
originations. This division was discontinued in April 1997.

PRODUCT TYPES

The Company offers both fixed-rate and adjustable-rate loans, as well as
loans with an interest rate that is initially fixed for a period of time and
subsequently converts to an adjustable-rate. Most of the adjustable-rate loans
originated by the Company are offered at a low initial rate, sometimes
referred to as a "teaser" rate. At each interest rate adjustment date, the
Company adjusts the rate, subject to certain limitations on the amount of any
single adjustment, until the rate charged equals the fully indexed rate. The
Company's borrowers fall into six non-conforming risk classifications and
products are available at different interest rates and with different
origination and application points and fees depending on the particular
borrower's risk classification (see "Underwriting"). The Company offers a wide
variety of interest rate and points paid combinations on many of its products
so that customers may elect to pay higher points at closing to secure a lower
rate over the life of the loan or pay a higher interest rate and reduce or
eliminate points payable at closing. The interest rate on the Company's
adjustable rate mortgages is typically tied to six-month LIBOR and the Company
offers 1.0% or 1.5% semi-annual interest rate caps and 6.5% or 7.0% life caps.
The Company sets mortgage loan coupons and fees after considering several
factors, including the borrower's credit rating, the loan-to-value ratio of
the property, the state in which the loan was originated and competitive and
market conditions. The Company's maximum loan amounts are generally $500,000
with a loan-to-value ratio of up to 85%. The Company does, however, offer
larger loans with lower loan-to-value ratios on a case-by-case basis, and also
offers products that permit a loan-to-value ratio of up to 90% for selected
borrowers with a Company risk classification of "A+" or "A-."

Loans originated by the Company for the six months ended December 31, 1997
and the year ended June 30, 1997 had an average principal balance per loan of
approximately $95,727 and $98,179, respectively, and a weighted average
initial loan-to-value ratio of approximately 72.9% and 69.3%, respectively.
Unless prohibited by state law or otherwise waived by the Company upon the
payment by the related borrower of higher origination fees and a higher
interest rate, the Company generally imposes a prepayment penalty on the
borrower. Approximately 61.0% and 58.1% of the loans the Company originated
during the six months ended December 31, 1997 and the year ended June 30,
1997, respectively, provided for the payment by the borrower of a prepayment
charge in limited circumstances on certain full or partial prepayments.

The Company's current products are as follows:

Standard Products

2-Year or 5-Year Fixed/Adjustable Rate Programs--A 30-year fully amortized
program with the initial interest rate fixed for the first two or five years
of the loan. Beginning with the 25th or 61st monthly payment, the loan
converts to an adjustable rate, LIBOR-indexed loan. There is no rate cap on
the first adjustment (at conversion). Thereafter, all interest rate caps apply
as described in the LIBOR loan product.

6-Month LIBOR Adjustable--An adjustable rate first mortgage program indexed
to six-month LIBOR, featuring a semi-annual interest rate cap of 1.0%-1.5%,
and a life cap of 6.5%-7.0%. This product is fully amortized over a 30-year
life.

15- or 30-Year Fixed Rate Program--A fixed rate first mortgage loan program
fully amortized over a 15- or 30-year period.

All of the standard mortgage products have prepayment penalties (where
legally allowed) for a period of one to five years.

Other Products

90% LTV First Mortgage Loan--A 30-year fully amortized adjustable rate or
fixed rate program. The adjustable rate program is indexed to LIBOR featuring
a semi-annual interest rate cap of 1.0% and a life cap of 6.5%. This product
is limited to the A+ and A- credit risk categories.

Conforming Mortgage Products--Both fixed rate and adjustable rate loan
programs that meet the guidelines for purchase by government sponsored
entities, such as FNMA and FHLMC, which guarantee mortgage backed securities
and permanent investors in mortgage backed securities secured by or
representing an ownership interest in such mortgage loans.

Second Mortgage Program--Fixed rate amortizing and fixed rate with balloon
payments are offered. This product is limited to the A+ through B credit risk,
with a maximum combined loan-to-value ratio equal to 100%. Underwriting
guidelines are similar to that of the Company's standard products.

125% LTV Program--A fixed rate first or second mortgage with an initial
loan-to-value ratio of up to 125% with terms ranging from five to 25 years
limited to borrowers with good credit histories. The use of loan proceeds is
limited to debt consolidation, home improvements and/or asset purchases.
Underwriting guidelines are primarily credit score and mortgage history
driven.

The following table sets forth selected information relating to loan
originations by product type for the periods indicated:

SIX MONTHS ENDED DECEMBER 31, 1997
------------------------------------------------------------------------
WEIGHTED
WEIGHTED AVERAGE
PRINCIPAL NUMBER AVERAGE AVERAGE WEIGHTED INITIAL
AMOUNT % OF TOTAL OF BALANCE INTEREST AVERAGE LOAN-TO-VALUE
TYPE ORIGINATED ORIGINATIONS LOANS PER LOAN RATE(1) MARGIN(2) RATIO
---- ---------- ------------ ------ -------- -------- --------- -------------
(DOLLARS IN THOUSANDS, EXCEPT AVERAGE BALANCE)

2-Year Fixed............ $253,046 71.4% 2,502 $101,137 9.6% 6.3% 73.7%
6-Month Adjustable...... 48,943 13.8 421 $116,254 9.5% 6.5% 73.8%
30-Year Fixed........... 34,965 9.8 525 $ 66,600 10.6% -- 69.3%
5-Year Fixed............ 11,596 3.3 117 $ 99,107 9.5% 6.7% 70.7%
15-Year Fixed........... 5,416 1.5 123 $ 44,034 10.6% -- 63.7%
Second Mortgages........ 606 0.2 16 $ 37,891 13.0% -- 36.4%
-------- ----- -----
$354,572 100.0% 3,704 $ 95,727 9.7% 6.4% 72.9%
======== ===== =====

YEAR ENDED JUNE 30, 1997
------------------------------------------------------------------------
WEIGHTED
WEIGHTED AVERAGE
PRINCIPAL NUMBER AVERAGE AVERAGE WEIGHTED INITIAL
AMOUNT % OF TOTAL OF BALANCE INTEREST AVERAGE LOAN-TO-VALUE
TYPE ORIGINATED ORIGINATIONS LOANS PER LOAN RATE(1) MARGIN(2) RATIO
---- ---------- ------------ ------ -------- -------- --------- -------------
(DOLLARS IN THOUSANDS, EXCEPT AVERAGE BALANCE)

2-Year Fixed............ $289,549 54.4% 2,838 $102,027 9.5% 6.4% 70.5%
6-Month LIBOR
Adjustable............. 110,870 20.8 1,066 $104,005 9.2% 6.5% 70.2%
30-Year Fixed........... 74,162 13.9 1,011 $ 73,355 10.5% -- 66.1%
5-Year Fixed............ 30,379 5.7 286 $106,221 9.2% 6.5% 67.4%
15-Year Fixed........... 9,741 1.8 198 $ 49,198 10.6% -- 62.6%
Small Commercial(3)..... 17,920 3.4 26 $689,231 9.8% -- 63.8%
-------- ----- -----
$532,621 100.0% 5,425 $ 98,179 9.6% 6.4% 69.3%
======== ===== =====

YEAR ENDED JUNE 30, 1996
------------------------------------------------------------------------
WEIGHTED
WEIGHTED AVERAGE
PRINCIPAL NUMBER AVERAGE AVERAGE WEIGHTED INITIAL
AMOUNT % OF TOTAL OF BALANCE INTEREST AVERAGE LOAN-TO-VALUE
TYPE ORIGINATED ORIGINATIONS LOANS PER LOAN RATE(1) MARGIN(2) RATIO
---- ---------- ------------ ------ -------- -------- --------- -------------
(DOLLARS IN THOUSANDS, EXCEPT AVERAGE BALANCE)

2-Year Fixed............ $ 61,141 30.6% 592 $103,280 10.0% 5.5% 67.6%
6-Month LIBOR
Adjustable............. 96,866 48.4 901 $107,509 8.6% 5.9% 70.6%
30-Year Fixed........... 29,993 15.0 371 $ 80,843 10.7% -- 65.4%
5-Year Fixed............ 10,020 5.0 94 $106,595 10.0% 5.7% 64.9%
15-Year Fixed........... 1,943 1.0 30 $ 64,764 10.7% -- 65.6%
-------- ----- -----
$199,963 100.0% 1,988 $100,585 9.4% 5.7% 68.5%
======== ===== =====

- --------
(1) Each fixed rate loan bears interest at a fixed rate set on its date of
funding and lasting through the term of the loan. Loans bearing interest
at the adjustable rate adjust every six months to a new rate through the
term of the loan. The weighted average interest rate for loans bearing
interest at an adjustable rate is the weighted average of the rates of
such loans during the initial six month period. Loans bearing interest at
the fixed/adjustable rate bear interest at a fixed rate for an initial
period commencing on the date of funding (e.g., two years or five years)
and thereafter adjust to new rates every six months for the remaining term
of the loans. The weighted average interest rate for loans bearing
interest at a fixed/adjustable rate is the weighted average of the rates
of such loans during the initial period.

(2) The margin for a loan is a fixed amount set for the life of the loan,
which when added to the index (as described below) determines the interest
rate on the loan (subject to interest rate floors, ceilings and caps). The
index used by the Company is the six-month LIBOR, as published each Monday
in the Wall Street Journal. Fixed rate loans have no margin because such
loans are not tied to an index.

(3) The Company discontinued the origination of small commercial loans in
April 1997.

GEOGRAPHIC CONCENTRATION

The following table sets forth aggregate dollar amounts and the percentage
of all loans originated by the Company by state for the periods shown:

SIX MONTHS ENDED
FOR THE YEAR ENDED JUNE 30, DECEMBER 31, 1997
----------------------------------------------- -----------------------
1996 1997
----------------------- -----------------------
PRINCIPAL PRINCIPAL PRINCIPAL
AMOUNT % OF TOTAL AMOUNT % OF TOTAL AMOUNT % OF TOTAL
ORIGINATED ORIGINATIONS ORIGINATED ORIGINATIONS ORIGINATED ORIGINATIONS
---------- ------------ ---------- ------------ ---------- ------------
(DOLLARS IN THOUSANDS)

California.............. $107,063 53.6% $196,526 36.9% $100,218 28.3%
Illinois................ 13,741 6.9 55,351 10.4 59,217 16.7
Florida................. 7,430 3.7 28,597 5.4 36,440 10.3
Hawaii.................. 12,021 6.0 63,868 12.0 23,890 6.7
Utah.................... 6,934 3.5 20,486 3.8 17,504 4.9
Wisconsin............... 5,251 2.6 22,174 4.2 14,415 4.0
Oregon.................. 12,420 6.2 21,123 4.0 10,853 3.1
Massachusetts........... -- -- 6,277 1.2 10,805 3.0
Maryland................ -- -- 5,010 0.9 10,170 2.9
Ohio.................... 2,472 1.2 19,938 3.7 9,805 2.8
Indiana................. -- -- 12,757 2.4 9,282 2.6
Colorado................ 14,693 7.3 24,102 4.5 9,107 2.6
Washington.............. 9,564 4.8 9,495 1.8 7,744 2.2
Idaho................... 2,246 1.1 8,314 1.6 7,091 2.0
Missouri................ 27 0.0 10,712 2.0 6,463 1.8
Michigan................ -- -- 2,353 0.4 5,113 1.5
Other(1)................ 6,101 3.1 25,538 4.8 16,455 4.6
-------- ----- -------- ----- -------- -----
$199,963 100.0% $532,621 100.0% $354,572 100.0%
======== ===== ======== ===== ======== =====

- --------
(1) Except for Texas which accounted for 1.3% for the year ended June 30,
1996, no other state accounted for greater than 1.0%.

QUALITY CONTROL

The Company has implemented a loan quality control process designed to
ensure sound lending practices and compliance with the Company's policies and
procedures. Prior to the funding of a loan, the Company performs a "pre-
funding quality control audit" which consists of the verification of a
borrower's credit and employment, utilizing automated services and verbal
verifications.

Properties underlying the potential mortgage loans are appraised by an
appraiser selected by the submitting broker. Every independent appraisal is
reviewed by the Company's chief appraiser (the "Chief Appraiser"), other
Company appraisers or by another independent appraiser approved by the
Company's Chief Appraiser to confirm the adequacy of the property as
collateral prior to funding.

Subsequent to funding, the Company's quality assurance department audits
100% of all closed loans. The department performs a review of documentation
for compliance with established underwriting guidelines and lending procedures
along with independent appraisal reviews and recertifications. All funding
documents are reviewed for accuracy, completeness and adherence to corporate,
state and federal requirements. As a part of this audit process, deficiencies
are reported to the Company's senior management to determine trends and the
need for additional training of Company personnel.

UNDERWRITING

The Company originates its mortgage loans in accordance with the
underwriting criteria (the "Underwriting Guidelines") described below. The
loans the Company originates generally do not satisfy underwriting standards
such as those utilized by FNMA and FHLMC; therefore, the Company's loans are
likely to result in rates of delinquencies and foreclosures that are higher,
and may be substantially higher, than those rates experienced by portfolios of
mortgage loans underwritten in a more traditional manner. The Underwriting
Guidelines are intended to evaluate the credit history of the potential
borrower, the capacity of the borrower to repay the mortgage loan, the value
of the real property and the adequacy of such property as collateral for the
proposed loan. Based upon the underwriter's review of the loan application and
related data and application of the Underwriting Guidelines, the loan terms,
including interest rate and maximum loan-to-value, are determined.

The Company employs experienced underwriters and the Company's chief
underwriter (the "Chief Underwriter") must approve the hiring of all
underwriters, including those located in the regional offices and branch
locations. The Company's underwriters are required to have had either
substantial underwriting experience with a consumer finance company or other
non-conforming lender or substantial experience with the Company in other
aspects of the non-conforming mortgage finance industry before becoming part
of the Company's underwriting department. As of December 31, 1997, 36
underwriters with an average of approximately five years of non-conforming
mortgage lending experience were employed by the Company. All underwriters
participate in ongoing training, including regular supervisory critiques of
each underwriter's work. The Company believes that its experienced
underwriting personnel have the ability to analyze the specific
characteristics of each loan application and make appropriate credit
judgments.

The underwriting staff reviews the value of the underlying collateral based
on a full appraisal completed by pre-approved qualified licensed independent
appraisers. All appraisers are required to conform to the Uniform Standards of
Professions Appraisal Practice adopted by the Appraisal Standards Board of the
Appraisal Foundation. In addition, every independent appraisal is reviewed by
the Company's Chief Appraiser, other Company appraisers or by another
independent appraiser approved by the Company's Chief Appraiser to confirm the
adequacy of the property as collateral.

The Underwriting Guidelines include three levels of applicant documentation
requirements, referred to as the "Full Documentation," "Lite Documentation"
and "Stated Income Documentation" programs. Under each of the programs, the
Company reviews the applicant's source of income, calculates the amount of
income from sources indicated on the loan application or similar
documentation, reviews the credit history of the applicant, calculates the
debt service-to-income ratio to determine the applicant's ability to repay the
loan, reviews the type and use of the property being financed, and reviews the
property. In determining the ability of the applicant to repay the loan, the
Company's underwriters use (i) a qualifying rate that is equal to the stated
interest rate on fixed-rate loans, (ii) the initial interest rate on loans
which provide for two or five years of fixed payments before the initial
interest rate adjustment, or (iii) one percent above the initial interest rate
on other adjustable-rate loans. The Underwriting Guidelines require that
mortgage loans be underwritten in a standardized procedure which complies with
applicable federal and state laws and regulations and requires the Company's
underwriters to be satisfied that the value of the property being financed, as
indicated by an appraisal and the appraisal review. In general, the maximum
loan amount for mortgage loans originated under the programs is $500,000;
however, larger loans may be approved on a case-by-case basis. The
Underwriting Guidelines permit one-to-four family residential property loans
to have loan-to-value ratios at origination of generally up to 80%, or up to
90% for borrowers in the Company's highest credit grade categories, depending
on, among other things, the purpose of the mortgage loan, a borrower's credit
history, repayment ability and debt service-to-income ratio, income
documentation, as well as the type and use of the property.

Under the Full Documentation program, applicants are generally required to
submit two written forms of verification of stable income for at least 12
months. Under the Lite Documentation program, one such form of verification is
required for six months. Under the Stated Income Documentation program, an
applicant may

be qualified based upon monthly income as stated on the mortgage loan
application if the applicant meets certain criteria. All the foregoing
programs require that with respect to salaried employees there be a telephone
verification of the applicant's employment. Verification of the source of
funds required to be deposited by the applicant into escrow in the case of a
purchase money loan is generally required under the Full Documentation program
guidelines and on all purchase loans where the loan-to-value ratio is greater
than 80%. No such verification is required under any of the programs where the
loan-to-value ratio is less than 80%. The maximum loan-to-value ratio is
reduced by 5% to 10% for the Lite Documentation and Stated Income
Documentation programs. The level of documentation percentages of loan
originations are as follows:

YEAR ENDED SIX MONTHS
JUNE 30, ENDED
------------ DECEMBER 31,
1996 1997 1997
----- ----- ------------

Full.............................................. 50.9% 50.5% 47.4%
Stated Income..................................... 49.1 48.8 50.9
Lite.............................................. -- 0.7 1.7
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====

The Company's categories and criteria for grading the credit history of
potential borrowers is set forth in the table below. Generally, borrowers in
lower credit grades are less likely to satisfy the repayment obligations of a
mortgage loan and, therefore, are subjected to lower loan-to-value ratios and
are charged higher interest rates and loan origination fees. Loans made to
lower credit grade borrowers, including credit-impaired borrowers, entail a
higher risk of delinquency and may result in higher losses than loans made to
borrowers who use conventional mortgage sources. The Company believes that the
amount of equity present in the collateral securing its loans generally
mitigates these risks.

UNDERWRITING GUIDELINES(1)

A+ RISK A- RISK B RISK C+ RISK C RISK C- RISK
------------ ------------ ------------ -------------- ------------ -------------

Existing Mortgage One 30-day Maximum of Maximum of Maximum six Unlimited Unlimited 30-
late payment two 30-day four 30-day 30-day late number of and 60-day
in the last late late payments; or, 30-day and late payments
12 months. payments in payments four 30-days, 60-day late and a maximum
the last 12 within the one 60-day and payments and of one 150-
months. last 12 one 90-day a maximum of day late
months late payment one 120-day payment if
allowed if in the last 12 late payment LTV is
LTV is months if LTV within the greater than
greater is 75% or last 12 65%, maximum
than 80%. less. Maximum months. one 180-day
Maximum four five 30-day There may be late payment
30-day late late payments a current if LTV is
payments; and no 60-day notice of less than
or, two 30- late payments default, 65%.
day late if LTV is however the Delinquencies
payments and greater than maximum more than 180
one 60-day 75%. Maximum delinquency days may be
late payment six 30-day cannot allowed if
in the last payments if exceed 120 LTV is less
12 months if LTV is greater days. than 60%.
LTV is 80% than 65% and
or less. loan is under
the Stated
Income
Documentation
program.
Other Credit Very good to Very good Generally Some Frequent Significant
excellent credit good credit significant derogatory credit
credit history within the derogatory consumer defaults.
within the within the last 12 credit in the credit. Collections
last 24 last 12 months. Some past 12 Collections and
months. months. late months. and chargeoffs
Minor late Minor late payments Generally, chargeoffs may remain
payments payments (not more collections may remain open after
(not more (not more than 90 and chargeoffs open after closing.
than 30 than 60 days) may be not more than funding.
days) may be days) may be allowed. $2,000 may
allowed on a allowed on a remain open
limited limited after closing.
basis. basis.
Bankruptcy filings Generally, Generally, Generally, Chapter 7 Chapter 7 Current
no no no Bankruptcy Bankruptcy Bankruptcy
bankruptcy bankruptcy bankruptcy must have been must have allowed on a
filings in filings in filings in discharged at been case by case
the last two the last two the last two least 12 discharged basis;
years. years. years. months prior at least six Bankruptcy
to months prior must be paid
application. to or discharged
Chapter 13 application. at closing.
Bankruptcy Chapter 13
must have been Bankruptcy
filed for at must have
least 24 been filed
months and for at least
borrower must 18 months
have paid and borrower
according to must have
the Chapter 13 paid
Plan. Chapter according to
13 Bankruptcy the Chapter
must be paid 13 Plan.
or discharged Chapter 13
at closing. Bankruptcy
must be paid
or
discharged
at closing.
Debt service-to- 45% 45% to 90% 45% to 85% 50% to 80% LTV 60% 60%
income ratio LTV 50% to LTV 50% to 55% to 75% LTV
80% LTV 80% LTV 55% 60% to 70% LTV
to 75% LTV
Maximum LTV(2) 90% 90% 85% 80% 70% 70%

- -------
(1) The letter grades applied to each risk classification reflect the
Company's internal standards and do not necessarily correspond to the
classifications used by other mortgage lenders. "LTV" means loan-to-value
ratio.

(2) The maximum LTV set forth in the table is for borrowers providing Full
Documentation. The LTV is reduced for Lite Documentation and Stated Income
Documentation, if applicable.

The Company evaluates its Underwriting Guidelines on an ongoing basis and
periodically modifies the Underwriting Guidelines to reflect the Company's
current assessment of various issues related to an underwriting analysis. In
addition, the Company adopts underwriting guidelines appropriate to new loan
products, such as those offered by the Retail Division. The conventional
mortgage loans and second mortgage loans, including 125% loan-to-value loans,
offered by the Retail Division are underwritten to the standards of the
intended buyers thereof and utilize information not considered by the Company
in its standard Underwriting Guidelines, including credit scores.

Exceptions. As described above, the Company uses the foregoing categories
and characteristics as underwriting guidelines only. On a case-by-case basis,
the Company's underwriters may determine that the prospective borrower
warrants a risk category upgrade, a debt service-to-income ratio exception, a
pricing exception, a loan-to-value exception or an exception from certain
requirements of a particular risk category (collectively called an "upgrade"
or an "exception"). An upgrade or exception may generally be allowed if the
application reflects certain compensating factors, including among others: low
loan-to-value ratio; pride of ownership; stable employment; and the length or
residence in the subject property. Accordingly, the Company may classify
certain mortgage loan applications in a more favorable risk category than
other mortgage loan applications that, in the absence of such compensating
factors, would only satisfy the criteria of a less favorable risk category.

LOAN PRODUCTION BY BORROWER RISK CLASSIFICATION

The following tables set forth information concerning the Company's loan
production by borrower risk classification for the six months ended December
31, 1997 and the years ended June 30, 1997 and 1996.

SIX MONTHS ENDED DECEMBER 31, 1997
---------------------------------------------------------------
WEIGHTED
WEIGHTED AVERAGE
PRINCIPAL % OF NUMBER AVERAGE WEIGHTED INITIAL
AMOUNT TOTAL OF INTEREST AVERAGE LOAN-TO-VALUE
CREDIT RATING ORIGINATED ORIGINATIONS LOANS RATE(1) MARGIN(2) RATIO
- ------------- ---------- ------------ ------ -------- --------- -------------
(DOLLARS IN THOUSANDS)

Adjustable Rate (6-Month
LIBOR):
A+.................... $ 18,271 37.3% 126 8.7% 6.1% 74.4%
A-.................... 11,232 22.9 95 9.4% 6.4% 77.1%
B..................... 9,781 20.0 89 9.6% 6.6% 75.1%
C+.................... 4,635 9.5 42 10.5% 7.0% 69.3%
C..................... 2,528 5.2 32 11.3% 7.7% 67.8%
C-.................... 2,496 5.1 37 12.5% 8.1% 63.4%
-------- ----- -----
$ 48,943 100.0% 421 9.5% 6.6% 73.8%
======== ===== =====
Fixed/Adjustable Rate
(2-Year; 5-Year):
A+.................... $116,580 44.0% 933 8.8% 5.9% 75.9%
A-.................... 55,244 20.9 507 9.6% 6.3% 75.0%
B..................... 54,302 20.5 594 9.9% 6.5% 72.6%
C+.................... 20,315 7.7 295 11.0% 7.1% 68.7%
C..................... 8,444 3.2 141 12.2% 7.6% 63.6%
C-.................... 9,684 3.7 148 12.7% 7.9% 60.9%
-------- ----- -----
$264,569 100.0% 2,618 9.6% 6.3% 73.6%
======== ===== =====
Fixed Rate (15-Year; 30-
Year):
A+.................... $ 15,786 38.5% 214 9.8% 0.0% 69.4%
A-.................... 10,968 26.7 164 10.3% 0.0% 69.3%
B..................... 8,142 19.8 145 11.0% 0.0% 68.3%
C+.................... 3,348 8.2 78 11.9% 0.0% 65.8%
C..................... 1,207 2.9 30 13.0% 0.0% 55.5%
C-.................... 1,609 3.9 34 13.7% 0.0% 59.1%
-------- ----- -----
$ 41,060 100.0% 665 10.6% 0.0% 68.2%
======== ===== =====
$354,572 3,704
======== =====

(2) The margin for a loan is a fixed amount set for the life of the loan,
which when added to the Index (as described below) determines the interest
rate on the loan (subject to interest rate floors, ceiling and caps). The
index used by the Company is the six-month LIBOR, as published each Monday
in The Wall Street Journal. Fixed rate loans have no margin because such
loans are not tied to an index.

YEAR ENDED JUNE 30, 1997
---------------------------------------------------------------
WEIGHTED
WEIGHTED AVERAGE
PRINCIPAL % OF NUMBER AVERAGE WEIGHTED INITIAL
AMOUNT TOTAL OF INTEREST AVERAGE LOAN-TO-VALUE
CREDIT RATING ORIGINATED ORIGINATIONS LOANS RATE(1) MARGIN(2) RATIO
- ------------- ---------- ------------ ------ -------- --------- -------------
(DOLLARS IN THOUSANDS)

Adjustable Rate (6-Month
LIBOR):
A+.................... $ 21,238 19.1% 181 8.0% 6.0% 71.4%
A- ................... 32,913 29.7 280 8.5% 6.2% 72.6%
B..................... 24,915 22.5 236 9.0% 6.6% 72.4%
C+.................... 16,481 14.9 179 10.0% 6.7% 68.8%
C..................... 9,398 8.5 114 10.9% 7.3% 63.0%
C-.................... 5,925 5.3 76 12.7% 8.0% 59.3%
-------- ----- -----
$110,870 100.0% 1,066 9.2% 6.5% 70.2%
======== ===== =====
Fixed/Adjustable Rate
(2-Year; 5-Year):
A+.................... $116,138 36.4% 927 8.5% 6.1% 71.8%
A-.................... 82,402 25.8 708 9.2% 6.2% 71.9%
B..................... 60,570 18.9 613 9.7% 6.5% 71.0%
C+.................... 32,031 10.0 416 10.8% 6.9% 67.3%
C..................... 16,790 5.2 271 11.9% 7.2% 63.6%
C-.................... 11,997 3.7 189 12.4% 7.6% 57.7%
-------- ----- -----
$319,928 100.0% 3,124 9.5% 6.4% 70.2%
======== ===== =====
Fixed Rate (15-Year; 30-
Year):
A+.................... $ 26,249 31.2% 299 9.6% -- 64.2%
A-.................... 27,110 32.3 347 10.1% -- 66.4%
B..................... 14,980 17.9 225 10.9% -- 68.3%
C+.................... 8,529 10.2 177 11.8% -- 66.9%
C..................... 4,373 5.2 107 13.2% -- 63.5%
C-.................... 2,662 3.2 54 13.6% -- 57.9%
-------- ----- -----
$ 83,903 100.0% 1,209 10.5% -- 65.7%
======== ===== =====
Small Commercial(3)..... $ 17,920 26 9.8% -- 63.8%
======== =====
$532,621 5,425
======== =====

(2) The margin for a loan is a fixed amount set for the life of the loan,
which when added to the index (as described below) determines the interest
rate on the loan (subject to interest rate floors, ceiling and caps). The
index used by the Company is the six-month LIBOR, as published each Monday
in The Wall Street Journal. Fixed rate loans have no margin because such
loans are not tied to an index.

(3) The Company discontinued the origination of small commercial loans in
April 1997.

YEAR ENDED JUNE 30, 1996
---------------------------------------------------------------
WEIGHTED
WEIGHTED AVERAGE
PRINCIPAL % OF NUMBER AVERAGE WEIGHTED INITIAL
AMOUNT TOTAL OF INTEREST AVERAGE LOAN-TO-VALUE
CREDIT RATING ORIGINATED ORIGINATIONS LOANS RATE(1) MARGIN(2) RATIO
- ------------- ---------- ------------ ------ -------- --------- -------------
(DOLLARS IN THOUSANDS)

Adjustable Rate (6-Month
LIBOR):
A+.................... $ 5,788 6.0% 48 7.8% 5.6% 69.1%
A- ................... 44,400 45.8 389 8.1% 5.5% 72.3%
B..................... 24,967 25.8 237 8.6% 6.1% 71.8%
C+.................... 11,932 12.3 125 9.5% 6.4% 68.1%
C..................... 7,809 8.1 76 10.0% 6.5% 64.4%
C-.................... 1,970 2.0 26 10.9% 6.8% 58.9%
-------- ----- -----
$ 96,866 100.0% 901 8.6% 5.9% 70.6%
======== ===== =====
Fixed/Adjustable Rate
(2-Year; 5-Year):
A+.................... $ 12,530 17.6% 117 9.1% 4.9% 65.8%
A-.................... 21,899 30.8 197 9.6% 5.2% 67.4%
B..................... 19,717 27.7 171 10.1% 5.8% 70.1%
C+.................... 8,680 12.2 105 10.8% 6.1% 66.9%
C..................... 5,960 8.4 66 11.0% 6.3% 64.3%
C-.................... 2,375 3.3 30 12.5% 6.7% 58.6%
-------- ----- -----
$ 71,161 100.0% 686 10.0% 5.6% 67.2%
======== ===== =====
Fixed Rate (15-Year; 30-
Year):
A+.................... $ 1,121 3.5% 11 10.3% -- 70.3%
A-.................... 17,469 54.7 200 10.2% -- 65.6%
B..................... 7,263 22.7 91 10.9% -- 66.6%
C+.................... 3,483 10.9 54 12.0% -- 66.5%
C..................... 1,590 5.0 26 12.2% -- 61.2%
C-.................... 1,010 3.2 19 13.1% -- 50.9%
-------- ----- -----
$ 31,936 100.0% 401 10.7% -- 65.3%
======== ===== =====
$199,963 1,988
======== =====

(2) The margin for a loan is a fixed amount set for the life of the loan,
which when added to the index (as described below) determines the interest
rate on the loan (subject to interest rate floors, ceiling and caps). The
index used by the Company is the six-month LIBOR, as published each Monday
in The Wall Street Journal. Fixed rate loans have no margin because such
loans are not tied to an index.

FINANCING AND SALE OF LOANS

Warehouse Facility

From August 1995 through October 1997, the Company funded its business
primarily through the DLJ Facility under which it borrowed money to finance
the origination of loans. The DLJ Facility provided a $50.0 million warehouse
line of credit to the Company, subject to periodic upward adjustments to
facilitate increases in the Company's loan production. The interest rate under
the DLJ Facility was equal to the federal funds rate plus 100 basis points
subject to increase based on the length of time loans are held by the Company,
and DLJ received a security interest on all loans, and other rights in
connection therewith, originated by the

Company. Any loan not purchased by DLJ was not allowed to remain subject to
the warehouse line for more than nine months. The term of the DLJ Facility was
through August 31, 2000.

In October 1997, the Company and DLJ modified the DLJ Facility and the
terms under which DLJ would purchase mortgage loans from the Company (the
"Amended DLJ Facility"). The Amended DLJ Facility has similar terms to the DLJ
Facility with certain modifications. The Amended DLJ Facility provides for
advances of up to $150.0 million. The interest rate of the DLJ Facility will
remain effective until the closing of this Offering; thereafter, borrowings
under the Amended DLJ Facility will bear an interest rate of the federal funds
rate plus 50 basis points for 12 months after the closing of the Offering and,
thereafter, the federal funds rate plus 100 basis points. The Amended DLJ
Facility also modifies the termination date to two years after the closing of
the Offering. The Amended DLJ Facility further provides that as of the closing
of the Offering, DLJ will no longer have the exclusive right to purchase loans
from the Company. Furthermore, DLJ has agreed to provide the Company with up
to $5.0 million of financing for a term of one year for subordinated
"interest-only" securities to the extent they are retained by the Company in
connection with any future securitizations of loans originated by the Company.
Advances will be made only to the extent the Company does not have sufficient
cash, in excess of reasonable reserves, to fund the retention of such
securities.

The Company is currently negotiating with other lenders to obtain additional
warehouse lines of credit at interest rates and terms that are consistent with
management's objectives.

Loan Sales

The Company follows a strategy of selling for cash substantially all of its
loan originations through loan sales in which the Company disposes of its
entire economic interest in the loans for a cash price that represents a
premium over the principal balance of the loans sold. The Company sold $333.0
million, $519.9 million and $156.6 million of loans through loan sales during
the six months ended December 31, 1997 and the years ended June 30, 1997 and
1996, respectively. Loan sales are typically made monthly. The Company did not
sell any loans directly through securitizations during these periods.

years ended June 30, 1997 and 1996, an aggregate of $1.7 million, $2.1 million
and $1.8 million, respectively, was paid to DLJ as fees pursuant to the Master
Loan Purchase Agreement. Under the Amended DLJ Facility, DLJ and the Company
have agreed that DLJ will receive no fees in connection with any such
purchases for the first 12 months after the closing of the Offering and 12.5
basis points for the second 12 months after the closing.

The Company, DLJ and a major investment bank are negotiating an agreement
whereby the Company will agree to sell (through DLJ) and the bank will agree
to purchase, for a period of three months, certain adjustable rate,
conventional first lien mortgage loans. It is anticipated that the aggregate
principal balance of all of the mortgage loans delivered pursuant to the
commitment will be approximately $130 million. It is anticipated that the
Company (through DLJ) will agree that the mortgage loans will have certain
characteristics, including, but not limited to, mortgage loan interest rate,
terms of payments and prepayments, achievement of certain credit grades, and
that the majority of the properties subject to the loans will be located in
California, Illinois and Florida.

Cash gain on sale of mortgage loans represented 67.8% and 66.7% and 51.5% of
the Company's total revenues for the six months ended December 31, 1997 and
the years ended June 30, 1997 and June 30, 1996, respectively. The Company
maximizes its cash gain on sale of mortgage loan revenue by closely monitoring
institutional purchasers' requirements and focusing on originating the types
of loans that meet those requirements and for which institutional purchasers
tend to pay higher rates. During the six months ended December 31, 1997 and
the years ended June 30, 1997 and 1996, the Company sold loans to DLJ having
an aggregate principal balance of $331.4 million, $473.7 million and $153.2
million, respectively.

Loan sales are made to DLJ on a non-recourse basis pursuant to the Master
Loan Purchase Agreement containing customary representations and warranties by
the Company regarding the underwriting criteria and the origination process.
The Company is required to provide similar representations and warranties to
those institutional purchasers to whom DLJ sells the subject loans. The
Company, therefore, may be required to repurchase or substitute loans in the
event of a breach of its representations and warranties. In addition, the
Company sometimes commits to repurchase or substitute a loan if a payment
default occurs within the first month following the date the loan is funded.
The Company is also required in some cases to repurchase or substitute a loan
if the loan documentation is alleged to contain fraudulent misrepresentations
made by the borrower. Any claims asserted against the Company in the future by
its loan purchasers may result in liabilities or legal expenses that could
have a material adverse effect on the Company's results of operations and
financial condition. In addition, any material repurchase or substitution may
have an adverse effect on the market for and pricing of the Company's loans.
Since the Company commenced operations in August 1995 through December 31,
1997, the Company has not been obligated to repurchase or substitute any loan
sold to DLJ due to breaches of representations and warranties, fraudulent
misrepresentations or borrower default in the first month. During such period,
the Company had repurchased loans with an aggregate principal balance of
$178,000 from other institutional purchasers.

Securitization Capability

While the Company has not sold loans directly through securitizations, part
of the Company's loan sale strategy may include the sale of loans directly
through securitizations in the future if management determines that such sales
are more beneficial. Management has significant securitization experience in
that several members were involved in securitization prior to their employment
with the Company. In addition, rating agencies and bond insurers have
evaluated and are familiar with the Company's procedures and underwriting
guidelines in connection with such securitizations.

Typically in a securitization, the issuer aggregates mortgages into a real
estate mortgage investment conduit trust. The regular interests or the senior
tranches of the trust are investment grade. While the issuer generally retains
the residual interests in the trust, it immediately sells the regular
interests and generally uses the proceeds to repay borrowings that were used
to fund or purchase the loans in the securitized pool. The holders of the
regular interests are entitled to receive scheduled principal collected on the
pool of securitized loans and interest at the pass-through interest rate on
the certificate balance for such interests. The residual interests represents
the subordinated right to receive cash flows from the pool of securitized
loans after payment of the required amounts to the holders of the regular
interests and the cost associated with the securitization. The issuer
recognizes non- cash revenue relating to the residual interest at the time of
the securitization.

SUB-SERVICING

While the Company currently sells substantially all of the mortgage loans it
originates servicing released (meaning the Company does not retain the
servicing rights to such loans), it is required to service the loans from the
date of funding through the date of sale. Since the Company conducts whole
loan sales monthly, the Company currently does not have a substantial
servicing portfolio. Nonetheless, the Company currently contracts for the sub-
servicing of all mortgage loans it originates through the date of sale and is
subject to risks associated with inadequate or untimely services. To the
extent that the Company decides to retain servicing rights in the future or
conduct securitizations, it currently intends to contract for the sub-
servicing of such mortgage loans, which would expose it to more substantial
risks associated with contracted sub-servicing. In such event, it is expected
that many of the Company's borrowers will require notices and reminders to
keep their mortgage loans current and to prevent delinquencies and
foreclosures. A substantial increase in the Company's delinquency rate or
foreclosure rate could adversely affect its ability to access profitably the
capital market for its financing needs, including any future securitizations.

INTEREST RATE RISK MANAGEMENT

The Company's profits depend, in part, on the difference, or "spread,"
between the effective rate of interest received by the Company on the loans it
originates or purchases and the interest rates payable by the Company under
its warehouse facilities or for securities issued in any future
securitizations. The spread can be adversely affected because of interest rate
increases during the period from the date the loans are originated until the
closing of the sale or securitization of such loans.

Since the Company historically has retained loans for a short period of time
pending sale, it has not engaged in hedging activities to date. However, in
the future the Company may hedge its variable-rate mortgage loans and any
interest-only and residual certificates retained in connection with any future
securitizations with hedging transactions which may include forward sales of
mortgage loans or mortgage-backed securities, interest rate caps and floors
and buying and selling of futures and options on futures. The nature and
quantity of hedging

transactions will be determined by the Company's management based on various
factors, including market conditions and the expected volume of mortgage loan
originations and purchases. No assurance can be given that such hedging
transactions will offset the risks of changes in interest rates, and it is
possible that there will be periods during which the Company could incur
losses after accounting for its hedging activities.

COMPETITION

The Company faces intense competition in the business of originating and
selling non-conforming mortgage loans. The Company's competitors in the
industry include other consumer finance companies, mortgage banking companies,
commercial banks, credit unions, thrift institutions, credit card issuers and
insurance finance companies. Many of these entities are substantially larger
and have considerably greater financial, technical and marketing resources
than the Company. With respect to other mortgage banking and specialty finance
companies, there are many larger companies that focus on the same types of
non-conforming mortgage loans with which the Company directly competes for
product. From time to time, one or more of these companies may be dominant in
the origination and sale of non-conforming mortgage loans. In addition, many
financial services organizations that are much larger than the Company have
formed national loan origination networks offering loan products that are
substantially similar to the Company's loan programs. Competition among
industry participants can take many forms, including convenience in obtaining
a loan, customer service, marketing and distribution channels, amount and term
of the loan, loan origination fees and interest rates. In addition, the
current level of gains realized by the Company and its competitors on the sale
of non-conforming loans could attract additional competitors into this market.
Additional competition may lower the rates the Company can charge borrowers,
thereby potentially lowering gain on future loan sales and future
securitizations. The Company may in the future also face competition from,
among others, government-sponsored entities which may enter the non-conforming
mortgage market. Existing or new loan purchase programs may be expanded by
FNMA, FHLMC, or GNMA to include non-conforming mortgages, particularly those
in the "A-" category, which constitute a significant portion of the Company's
loan production. For example, the FHLMC has announced that it is entering the
non-conforming market in 1998. Entries of such government-sponsored entities
into the non-conforming market may have an adverse effect on loan yields on
mortgage loans originated by the Company and reduce or eliminate premiums on
loan sales. To the extent any of these competitors significantly expand their
activities in the Company's market, the Company could be materially adversely
affected. Fluctuations in interest rates and general economic conditions may
also affect the Company's competition. During periods of rising rates,
competitors that have locked in low borrowing costs may have a competitive
advantage. During periods of declining rates, competitors may solicit the
Company's customers to refinance their loans. See "Risk Factors--Substantial
Competition May Adversely Affect the Company's Ability to Originate, Sell or
Finance Mortgage Loans."

REGULATION

The consumer financing industry is a highly regulated industry. The
Company's business is subject to extensive and complex rules and regulations
of, and examinations by, various federal, state and local government
authorities. These rules impose obligations and restrictions on the Company's
loan origination, credit activities and secured transactions. In addition,
these rules limit the interest rates, finance charges and other fees the
Company may assess, mandate extensive disclosure to the Company's customers,
prohibit discrimination and impose multiple qualification and licensing
obligations on the Company. Failure to comply with these requirements may
result in, among other things, loss of approved status, demands for
indemnification or mortgage loan repurchases, certain rights of rescission for
mortgage loans, class action lawsuits, administrative enforcement actions and
civil and criminal liability. Management believes that the Company is in
compliance with these rules and regulations in all material respects.

The Company's loan origination activities are subject to the laws and
regulations in each of the states in which those activities are conducted. For
example, state usury laws limit the interest rates the Company can charge on
its loans. The Company's lending activities are also subject to various
federal laws, including the Truth in Lending Act, Homeownership and Equity
Protection Act of 1994, the Equal Credit Opportunity Act, the Fair Credit
Reporting Act, the Real Estate Settlement Procedures Act and the Home Mortgage
Disclosure Act.

The Company is subject to certain disclosure requirements under the Truth-
in-Lending Act ("TILA") and Regulation Z promulgated under TILA. TILA is
designed to provide consumers with uniform, understandable information with
respect to the terms and conditions of loan and credit transactions. TILA also
guarantees consumers a three-day right to cancel certain credit transactions,
including loans of the type originated by the Company. In addition, TILA gives
consumers, among other things, a right to rescind loan transactions in certain
circumstances if the lender fails to provide the requisite disclosure to the
consumer.

The Company is also subject to the Homeownership and Equity Protection Act
of 1994 (the "High Cost Mortgage Act"), which makes certain amendments to
TILA. The High Cost Mortgage Act generally applies to consumer credit
transactions secured by the consumer's principal residence, other than
residential mortgage transactions, reverse mortgage transactions or
transactions under an open end credit plan, in which the loan has either (i)
total points and fees upon origination in excess of the greater of eight
percent of the loan amount or $400, or (ii) an annual percentage rate of more
than ten percent points higher than United States Treasury securities of
comparable maturity ("Covered Loans"). The High Cost Mortgage Act imposes
additional disclosure requirements on lenders originating Covered Loans. In
addition, it prohibits lenders from, among other things, originating Covered
Loans that are underwritten solely on the basis of the borrower's home equity
without regard to the borrower's ability to repay the loan and including
prepayment fee clauses in Covered Loans to borrowers with a debt-to-income
ratio in excess of 50% or Covered Loans used to refinance existing loans
originated by the same lender. The High Cost Mortgage Act also restricts,
among other things, certain balloon payments and negative amortization
features.

The Company is also required to comply with the Equal Credit Opportunity Act
of 1974, as amended ("ECOA") and Regulation B promulgated thereunder, the Fair
Credit Reporting Act, as amended, the Real Estate Settlement Procedures Act of
1975, as amended, and the Home Mortgage Disclosure Act of 1975, as amended.
ECOA prohibits creditors from discriminating against applicants on the basis
of race, color, sex, age, religion, national origin or marital status.
Regulation B restricts creditors from requesting certain types of information
from loan applicants. The Fair Credit Reporting Act, as amended, requires
lenders, among other things, to supply an applicant with certain information
if the lender denied the applicant credit. RESPA mandates certain disclosure
concerning settlement fees and charges and mortgage servicing transfer
practices. It also prohibits the payment or receipt of kickbacks or referral
fees in connection with the performance of settlement services. In addition,
beginning with loans originated in 1997, the Company must file an annual
report with HUD pursuant to the Home Mortgage Disclosure Act, which requires
the collection and reporting of statistical data concerning loan transactions.

In the course of its business, the Company may acquire properties securing
loans that are in default. There is a risk that hazardous or toxic waste could
be found on such properties. In such event, the Company could be held
responsible for the cost of cleaning up or removing such waste, and such cost
could exceed the value of the underlying properties.

Because the Company's business is highly regulated, the laws, rules and
regulations applicable to the Company are subject to regular modification and
change. There are currently proposed various laws, rules and regulations
which, if adopted, could impact the Company. There can be no assurance that
these proposed laws, rules and regulations, or other such laws, rules or
regulations, will not be adopted in the future which could make compliance
much more difficult or expensive, restrict the Company's ability to originate,
broker, purchase or sell loans, further limit or restrict the amount of
commissions, interest and other charges earned on loans originated, brokered,
purchased or sold by the Company, or otherwise adversely affect the business
or prospects of the Company.

EMPLOYEES

At December 31, 1997, the Company employed 332 persons. None of the
Company's employees is subject to a collective bargaining agreement. The
Company believes that its relations with its employees are satisfactory.

PROPERTIES

The Company's executive and administrative offices are located at 1063 McGaw
Avenue, Irvine, California 92614, which consists of approximately 54,768
square feet. The lease on the premises expires on November 30, 2002 and the
current monthly rent is approximately $42,782.

The Company also leases space for its other offices. These facilities
aggregate approximately 64,752 square feet, with monthly aggregate base rental
of approximately $74,163. The terms of these leases vary as to duration and
rent escalation provisions. In general, the leases expire between February 28,
1998 and August 31, 2001 and provide for rent escalations tied to either
increases in the lessor's operating expenses or fluctuations in the consumer
price index in the relevant geographical area.

LEGAL PROCEEDINGS

The Company occasionally becomes involved in litigation arising from the
normal course of business. Management believes that any liability with respect
to pending legal actions, individually or in the aggregate, will not have a
material adverse effect on the Company's financial position or results of
operations.

MANAGEMENT

DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES

The following table sets forth the name, age and position with the Company
of each person who is a director or executive officer and of certain key
employees of the Company.

NAME AGE POSITION
- ---- --- --------

Evan R. Buckley............. 45 Chief Executive Officer, Secretary and Director
Kelly W. Monahan............ 41 President, Chief Financial Officer and Director
Al Lapena................... 38 Vice President, Operations
Gary Vander-Haeghen......... 43 Vice President, Sales
Keith C. Honig.............. 37 Director
Joseph R. Tomkinson......... 49 Director
Key Employees
Karen N. Neyman............. 44 Vice President, Compliance
David A. Littlefield........ 53 Chief Underwriter
David J. Rae................ 38 Chief Appraiser

The Company intends to add one additional non-management director to the
Board of Directors within 60 days after the completion of this Offering.

EVAN R. BUCKLEY has been the Chief Executive Officer, Secretary and a
Director of the Company since its inception. Mr. Buckley was the President of
the Company from its inception to December 1997. Prior to founding the
Company, Mr. Buckley was a co-founder of Quality Mortgage USA, Inc. ("Quality
Mortgage"), a residential mortgage banker. From November 1991 to May 1995, Mr.
Buckley was the Vice President of Loan Production of Quality Mortgage, where
he was responsible for assembling and managing the loan production activities.
Mr. Buckley brings over 21 years of experience in real estate financing and
mortgage banking to the Company.

KELLY W. MONAHAN has been Chief Financial Officer of the Company since its
inception, its President since December 1997 and a Director of the Company
since October 1997. From the Company's inception through December 1997, Mr.
Monahan was the Company's Executive Vice President. From July 1992 to July
1995, Mr. Monahan served as Vice President and the Chief Financial Officer of
Quality Mortgage, where his responsibilities included the management of all
financial aspects of a national mortgage banker, including the issuance of
mortgage backed securities, secondary marketing, interest rate hedging, cash
management, financial reporting, and strategic planning. From February of 1989
to July 1992, Mr. Monahan was a practitioner for Monahan and Associates, an
accounting and consulting firm, and from 1987 to 1989, he was Equities
Controller at the Koll Company, a real estate development company. Mr. Monahan
is a certified public accountant.

AL LAPENA has been Vice President of Operations for the Company since
February 1998. From February 1997 to February 1998, Mr. Lapena was Director of
Secondary Marketing for the Company. From 1992 to 1997, Mr. Lapena was the
Vice-President of the Real Estate Finance Group of the Taxable Fixed Income
Division for Donaldson, Lufkin & Jenrette, Inc. where he was responsible for
the management of whole loan trades involving prime and subprime mortgage
loans purchased from sellers/originators with contractual relationships with
DLJ Mortgage Capital, Inc. From 1989 to 1992, he was an independent secondary
market mortgage consultant and from 1988 to 1989, he was Vice-
President/Operations Manager of the West Coast Region for U.S. Mortgage Co.,
Inc.

GARY VANDER-HAEGHEN has been the Vice-President of Sales of the Company
since September 1996. From November 1995 through September 1996, Mr. Vander-
Haeghen was with the Company in a non-executive capacity. From December 1991
to November 1995, Mr. Vander-Haeghen was a Branch Manager for Quality
Mortgage, where he opened and managed its San Diego branch. Mr. Vander-Haeghen
has been in the real estate financing industry for over 20 years.

KEITH C. HONIG has been a director of the Company since February 1998.
Mr. Honig has been Associate Counsel of SunAmerica Inc., a financial services
company, since December 1994 and, in addition, its Director of Mortgage
Lending and Real Estate since July 1997. From October 1991 through December
1994, Mr. Honig was an associate at Gibson, Dunn & Crutcher, a law firm. Mr.
Honig is also a certified public accountant.

JOSEPH R. TOMKINSON has been a director of the Company since October 1997.
Mr. Tomkinson has been the Chairman of the Board and Chief Executive Officer
of Impac Commercial Holdings, Inc. (formerly IMH Commercial Holdings, Inc.)
(AMEX-ICH) ("ICH") and, Chairman of the Board and Chief Executive Officer of
Impac Commercial Capital Corporation (formerly Imperial Commercial Capital
Corporation) since February 1997, and Chairman and Chief Executive Officer of
RAI Advisors, LLC, the Manager of ICH, since August 1997. Mr. Tomkinson has
been the Vice Chairman of the Board and Chief Executive Officer of Impac
Mortgage Holdings, Inc. (formerly Imperial Credit Mortgage Holdings, Inc.)
(AMEX-IMH) and Chairman of the Board of Impac Funding Corporation (formerly
ICI Funding Corporation) and Impac Warehouse Lending Group, Inc. (formerly
Imperial Warehouse Lending Group, Inc.) since August 1995. Mr. Tomkinson
served as President of Imperial Credit Industries, Inc. (Nasdaq-ICII) ("ICII")
from January 1992 to February 1996 and, from 1986 to January 1992, he was
President of Imperial Bank Mortgage, a subsidiary of Imperial Bank, one of the
companies that combined to become ICII in 1992. Mr. Tomkinson has been a
Director of ICII since December 1991. From 1984 to 1986, he was employed as
Executive Vice President of Loan Production for American Mortgage Network, a
privately owned mortgage banker.

KEY EMPLOYEES

KAREN N. NEYMAN has been Vice President of Compliance for the Company since
February 1998. Prior to that, since September 1995, Ms. Neyman was the
Compliance Officer and Director of Quality Assurance for the Company. From
March 1992 to September 1995, Ms. Neyman was Vice-President and Compliance
Officer for Quality Mortgage, where her responsibilities included monitoring
compliance with state and federal laws, monitoring adherence to internal
underwriting and appraisal guidelines and consumer protection laws, and
coordinating the preparation of reports to Management and the Board of
Directors. From 1991 to 1992, she was Vice-President and Compliance Officer of
TOPA Savings Bank.

DAVID A. LITTLEFIELD has been the Chief Underwriter of the Company since
September 1995. Mr. Littlefield is responsible for the coordination, training
and supervision of the underwriting staff of the Company's corporate and
branch offices. From August 1992 to August 1995, Mr. Littlefield was a Senior
Underwriter for Quality Mortgage with the responsibility of training and
supervising underwriters. From January 1992 to August 1992, he was a Senior
Lending Officer for Transamerica Equity, Inc., a mortgage lender. From 1990 to
1992, he was the Executive Vice-President of Tennecal Funding Corporation, a
mortgage lender, and from 1988 to 1990, he was the Vice-President of Mortgage
Banking for First Pacific Bank.

DAVID J. RAE has been the Chief Appraiser of the Company since August 1995.
Mr. Rae is responsible for the coordination and development of the Company
internal appraisers and outside third party review appraisers. From 1992 to
August 1995, Mr. Rae was the Assistant Chief Appraiser for Quality Mortgage,
where he was responsible for recruiting and training of management for the
western region staff review appraisers. From 1985 to 1992, he was Regional
Supervisor and Senior Staff Appraiser for Hawthorne Savings & Loan
Association.

The Company's Board of Directors currently has four members. One additional
non-management director will be added to the Board of Directors within 60 days
after the completion of this Offering. The Board of Directors is divided into
three classes. Class I Directors will serve until the annual meeting of
stockholders in 1998 and thereafter for the terms of three years until their
successors have been elected and qualified. Class II Directors will serve
until the annual meeting of stockholders in 1999 and thereafter for terms of
three years until their successors have been elected and qualified. Class III
Directors will serve until the annual meeting of stockholders in 2000 and
thereafter for terms of three years until their successors have been elected
and qualified. Evan R. Buckley is a Class I Director; Kelly W. Monahan and
Keith C. Honig are Class II Directors; and Joseph R. Tomkinson is and the
remaining to-be-added Board member will be a Class III Director.

The Company plans to pay its non-employee directors an annual fee of $10,000
payable quarterly, $2,500 for each board meeting attended (up to a maximum of
four meetings) and to reimburse them for reasonable expenses incurred in
attending meetings. Concurrently with this Offering, the Company will grant
options to purchase 12,000 shares of Common Stock under its Stock Option Plan
to each of its non-employee directors at a per share exercise price equal to
the initial public offering price. See "--Stock Options." No family
relationships exist between any of the executive officers, directors or key
employees of the Company.

COMMITTEES OF THE BOARD OF DIRECTORS

Audit Committee

The Board of Directors will establish an audit committee (the "Audit
Committee"). The Audit Committee, among other things, will make
recommendations to the Board of Directors concerning the engagement of
independent public accountants; monitor and review the quality and activities
of the Company's internal audit function and those of its independent
accountants; and monitor the adequacy of the Company's operating and internal
controls as reported by management and the independent or internal auditors.
The members of the Audit Committee will be Evan R. Buckley (Chairman), Keith
C. Honig and at least one other non-management director.

Compensation Committee

The Board of Directors will establish a compensation committee (the
"Compensation Committee"). The Compensation Committee, among other things,
will review salaries, benefits and other compensation, including stock based
compensation under the Company's Stock Option Plan, of directors, officers and
other employees of the Company and make recommendations to the Board of
Directors. The members of the Compensation Committee will be Kelly W. Monahan
(Chairman), Joseph R. Tomkinson and at least one other non-management
director.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Company does not currently have a compensation committee. Messrs.
Buckley and Monahan participated in deliberations concerning compensation of
executive officers during fiscal 1997. None of the executive officers of the
Company has served on the board of directors or on the compensation committee
of any other entity which had officers who served on the Company's Board of
Directors.

EXECUTIVE COMPENSATION

Summary Compensation Table

The following table sets forth information concerning the annual and long-
term compensation earned by the Company's Chief Executive Officer and each of
the two other executive officers whose annual salary and bonus during fiscal
1997 exceeded $100,000 (the "Named Executive Officers").

ANNUAL COMPENSATION
------------------------------
NAME AND ALL OTHER
PRINCIPAL POSITION SALARY BONUS COMPENSATION
------------------ -------- -------- ------------

Evan R. Buckley............................ $155,769 $189,200 $ 325(1)
President, Chief Executive Officer and
Director(2)
Kelly W. Monahan........................... $116,584 $ 52,500 $ 583(1)
Executive Vice President and Chief
Financial Officer(2)
Gary Vander-Haeghen ....................... $119,800 $ 13,400 $1,900(1)
Vice President, Sales

- --------
(1) Represents a contribution under the Company's 401(k) Plan.
(2) Mr. Monahan became President in December 1997.

Employment Agreements

The Company has entered into a two and three-year employment agreement with
Messrs. Buckley and Monahan, respectively, pursuant to which they would
receive an annual base salary of $250,000, and $200,000, respectively, plus an
annual bonus of up to 100% of base salary. Compensation would be subject to
increase as recommended by the Compensation Committee of the Board of
Directors of the Company. Pursuant to the employment agreements, if either
employee's employment is terminated by the Company without cause or by either
of Messrs. Buckley or Monahan for good reason (meaning the Company's uncured
breach of any material term of the agreement or any diminution of Messrs.
Buckley's or Monahan's powers, duties or authority), Messrs. Buckley or
Monahan, as the case may be, would be paid his annual salary, a semi-annual
bonus equal to 50% of his annual salary, $70,000 annually on a pro rata basis,
and would receive benefits, such as health insurance through the term of the
agreement.

STOCK OPTIONS

In October 1997, the Board of Directors and stockholders of the Company
adopted the 1997 Stock Option, Deferred Stock and Restricted Stock Plan (the
"Stock Option Plan"), which provides for the grant of qualified incentive
stock options ("ISOs") that meet the requirements of Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), stock options not so
qualified ("NQSOs"), deferred stock, restricted stock, stock appreciation
rights and limited stock appreciation rights awards ("Awards"). The Stock
Option Plan may be administered by a committee of directors appointed by the
Board of Directors or by the Board (the "Administrator"). ISOs may be granted
to the officers and key employees of the Company, any of its subsidiaries or
parent corporation. The exercise price for any option granted under the Stock
Option Plan may not be less than 100% (or 110% in the case of ISOs granted to
an employee who is deemed to own in excess of 10% of the outstanding Common
Stock) of the fair market value of the shares of Common Stock at the time the
option is granted. The purpose of the Stock Option Plan is to provide a means
of performance-based compensation in order to attract and retain qualified
personnel and to provide an incentive to those whose job performance affects
the Company.

The Stock Option Plan authorizes the grant of options to purchase, and
awards of 800,000 shares of the Company's Common Stock. The number of shares
reserved for issuance under the Stock Option Plan is subject to anti-dilution
provisions for stock splits, stock dividends and similar events. If an option
granted under the Stock Option Plan expires or terminates, or an Award is
forfeited, the shares subject to any unexercised portion of such option or
Award will again become available for the issuance of further options or
Awards under the Stock Option Plan.

Under the Stock Option Plan, the Company may make loans available to stock
option holders, subject to the Administrator's approval, in connection with
the exercise of stock options granted under the Stock Option Plan. If shares
of Common Stock are pledged as collateral for such indebtedness, such shares
may be returned to the Company in satisfaction of such indebtedness. If so
returned, such shares shall again be available for issuance in connection with
future stock options and Awards under the Stock Option Plan.

Unless the Stock Option Plan is previously terminated by the Board of
Directors, no options or Awards may be granted under the Stock Option Plan ten
years after the effective date of the Stock Option Plan.

Options granted under the Stock Option Plan will become exercisable
according to the terms of the grant made by the Administrator. Awards will be
subject to the terms and restrictions of the award made by the Administrator.
The Administrator has discretionary authority to select participants from
among eligible persons and to determine at the time an option or Award is
granted and in the case of options, whether it is intended to be an ISO or a
NQSO, and when and in what increments shares covered by the option may be
purchased.

Under current law, ISOs may not be granted to any individual who is not also
an officer or employee of the Company, any subsidiary or parent corporation.

The exercise price of any option granted under the Stock Option Plan is
payable in full (i) in cash, (ii) by surrender of shares of the Company's
Common Stock already owned by the option holder having a market value equal to
the aggregate exercise price of all shares to be purchased including, in the
case of the exercise of NQSOs, restricted stock subject to an Award under the
Stock Option Plan, (iii) by cancellation of indebtedness owed by the Company
to the optionholder, (iv) by a full recourse promissory note executed by the
optionholder, (v) by requesting that the Company withhold whole shares of
Common Stock then issuable upon exercise of an option, (vi) by arrangement
with a broker which is acceptable to the Administrator, or (vii) by any
combination of the foregoing. The terms of any promissory note may be changed
from time to time by the Board of Directors to comply with applicable Internal
Revenue Service or Commission regulations or other relevant pronouncements.

The Board of Directors may from time to time revise or amend the Stock
Option Plan, and may suspend or discontinue it at any time. However, no such
revision or amendment may impair the rights of any participant under any
outstanding Award without such participant's consent or may, without
stockholder approval, increase the number of shares subject to the Stock
Option Plan, materially modify the class of participants eligible to receive
options or Awards under the Stock Option Plan, or extend the maximum option
term under the Stock Option Plan.

The Company has granted options to purchase 163,265 shares of Common Stock
at a per share exercise price of $6.10, vesting 33 1/3% on each anniversary of
the date of grant. On the effective date of this Offering, the Company will
also grant options to purchase an additional 425,000 shares of Common Stock at
a per share exercise price equal to the initial public offering price, vesting
33 1/3% on each anniversary of the date of grant.

401(K) PLAN

The Company adopted a 401(k) savings plan (the "40l(k) Plan") effective on
July 1, 1996. Eligible employees may participate in the 401(k) Plan.
Participants in the 401(k) Plan may defer compensation in an amount not in
excess of the annual statutory limit ($10,000 in 1998). The Company may make
matching contributions in the amount determined annually by the Board of
Directors. All contributions are credited to separate accounts maintained in
trust for each participant and are invested, at the participant's direction,
in one or more of the investment funds made available under the 401(k) Plan.
Matching contributions if any, vest after three years. The 401(k) Plan is
intended to qualify under Section 401 and 501 of the Code, so that
contributions to the 401(k) Plan and income earned on the plan contributions
are not taxable to employees until withdrawn and so that the contributions
will be deductible by the Company when made.

CERTAIN TRANSACTIONS

OFFERING TO BENEFIT EXISTING STOCKHOLDERS

This Offering will provide substantial benefits to existing stockholders of
the Company. First, the assumed initial public offering price of $10.00 per
share is substantially higher than the $2.74 per share book value on the
shares held by existing stockholders. New investors will invest $31.7 million
or 99.98% of the total consideration paid for 58.76% of the shares of Common
Stock to be outstanding after the Offering. The shares of Common Stock owned
by existing stockholders would be valued at $22.3 million at the effective
time of the Offering at an assumed initial public offering price of $10.00 per
share; such shares had an aggregate book value of $6,096,989 at December 31,
1997. The following table indicates the value of the shares owned by each of
Evan R. Buckley, Kelly W. Monahan, Al Lapena and Gary Vander-Haeghen, the
Company's Chief Executive Officer, President and Chief Financial Officer, Vice
President, Operations and Vice President, Sales, respectively, and by all
directors and officers as a group at the effective time of the Offering at an
assumed initial public offering price of $10.00 per share and such shares'
aggregate book value at December 31, 1997.

BOOK VALUE OF SHARES VALUE OF SHARES
NUMBER OF SHARES BENEFICIALLY OWNED AS OF BENEFICIALLY OWNED
NAME BENEFICIALLY OWNED DECEMBER 31, 1997 AT EFFECTIVE TIME OF OFFERING
---- ------------------ ------------------------ -----------------------------

Evan R. Buckley......... 1,549,717 $4.2 million $15.5 million
Kelly W. Monahan........ 206,185 $564,535 $2.1 million
Al Lapena............... 20,619 $56,455 $206,190
Gary Vander-Haeghen..... 41,903 $114,730 $419,030
All directors and
officers as a group.... 1,839,043 $5.0 million $18.4 million

Second, DLJ will receive monies as a result of the Offering. As a selling
stockholder, DLJ will receive approximately $16.0 million of the net proceeds
of this Offering at an assumed initial public offering price of $10.00 per
share; after such shares had an aggregate book value of $4,855,011 at December
31, 1997.

ARRANGEMENTS WITH DLJ

In October 1995, the Company entered into a Stock Purchase Agreement with
DLJ pursuant to which DLJ purchased shares of the Company's Class A Common
Stock, Class B Common Stock, and Series A Preferred Stock. All shares of
Series A Preferred Stock were redeemed by the Company in November 1997 for
approximately $1.6 million; of this amount $800,000 was paid to DLJ and
$775,000 was paid to BNC Equity Investors, LLC ("BNC LLC") (see "--
Arrangements with BNC Equity Investors, LLC"). DLJ currently holds
1,773,196 shares of the Company's Common Stock, all of which is being sold
pursuant to this Offering. In October 1995, the Company, DLJ and Evan R.
Buckley, the Chief Executive Officer and a director of the Company, entered
into a shareholders agreement restricting certain actions by the shareholders.
This agreement will be terminated at or before the closing of the Offering.

The DLJ Facility provided a $50.0 million warehouse line of credit to the
Company, subject to periodic upward adjustments to facilitate increases in the
Company's loan production. The interest rate under the DLJ Facility was equal
to the federal funds rate plus 100 basis points subject to increase based on
the length of time loans are held by the Company, and DLJ received a security
interest on all loans, and other rights in connection therewith, originated by
the Company. Any loan not purchased by DLJ was not allowed to remain subject
to the warehouse line for more than nine months. The term of the DLJ Facility
was through August 31, 2000. The Company from August 1995 through October 1997
financed its origination of loans primarily with the proceeds of borrowings
under the DLJ Facility. As of December 31, 1997 and June 30, 1997 and 1996,
$74.4 million, $54.6 million and $42.7 million, respectively, was outstanding
under the DLJ Facility.

federal funds rate plus 100 basis points. The Amended DLJ Facility also
modifies the termination date to two years after the closing of the Offering.
The Amended DLJ Facility further provides that as of the closing of the
Offering, DLJ will no longer have the exclusive right to purchase loans from
the Company. Furthermore, DLJ has agreed to provide the Company with up to
$5.0 million of financing for a term of one year for subordinated "interest-
only" securities to the extent they are retained by the Company in connection
with any future securitizations of loans originated by the Company. Advances
will be made only to the extent the Company does not have sufficient cash, in
excess of reasonable reserves, to fund the retention of such securities.

DLJ has purchased, and it is contemplated that it may continue to purchase,
loans under the Master Loan Purchase Agreement with a view towards
securitization or other resale transactions in the secondary mortgage market.
Since substantially all of the loans historically purchased by DLJ under the
master repurchase agreement have been resold by DLJ to institutional
purchasers generally within 48 hours of the initial purchase from the Company,
DLJ has agreed to allow the Company to assist it in the marketing of loans so
resold by DLJ. Prior to the purchase of the loans by DLJ under the Master Loan
Purchase Agreement, the Company undertakes a process to identify the
institutional purchasers who will immediately buy the subject loans from DLJ.
This program utilizes a competitive bidding process typically involving two to
four potential purchasers (including Wall Street firms, financial institutions
and conduits, along with other institutional purchasers) who in most cases
have purchased similar resold loans from DLJ in the past. The successful
bidder is committed to a minimum quantity of loans at a determined price, and
is generally granted the option to purchase more than the minimum quantity at
a negotiated price. DLJ then agrees to pay the Company the determined price
minus 50 basis points, which represents DLJ's fees. As a result of this
agreement, management is able to directly control the sales process of its
loans in an effort to obtain more favorable pricing and other terms. A
successful bidder is not obligated to purchase loans other than those to which
its bid applies. For the six months ended December 31, 1997 and the years
ended June 30, 1997 and 1996, an aggregate of $1.7 million, $2.1 million and
$1.8 million, respectively, was paid to DLJ as fees pursuant to the Master
Loan Purchase Agreement. Under the Amended DLJ Facility, DLJ and the Company
have agreed that DLJ will receive no fees in connection with any such
purchases for the first 12 months after the closing of the Offering and 12.5
basis points for the second 12 months after the closing. During the six months
ended December 31, 1997 and the years ended June 30, 1997 and 1996, the
Company sold loans to DLJ having an aggregate principal balance of $331.4
million, $473.7 million and $153.2 million, respectively. See "Arrangements
with DLJ and the Recapitalization" and "Risk Factors--Discontinuance of
Exclusive Arrangements with DLJ could adversely affect the Company's Operating
Results."

ARRANGEMENTS WITH BNC EQUITY INVESTORS, LLC

BNC LLC is a California limited liability company which was formed to
acquire and hold an ownership interest in the Company. BNC LLC currently holds
329,896 shares of the Company's Common Stock. Mr. Buckley and Mr. Vander-
Haeghen own approximately 32.2% and 6.5%, respectively, of BNC LLC. BNC LLC's
manager is the Company.

OTHER TRANSACTIONS

In January 1996, Kelly W. Monahan purchased 206,185 shares of Class B Common
Stock for $1,000, and in July 1996 and September 1996, each of David J. Rae
and Al Lapena, and Gary Vander-Haeghen, respectively, purchased 20,619 shares
of Class B Common Stock for $1,375 and $1,375 and $100, respectively. All
shares of Class B Common Stock will convert into Common Stock prior to the
consummation of the Offering. Each person purchased their shares pursuant to
an Executive Stock Purchase and Repurchase Rights Agreement which set forth
certain transfer restrictions and repurchase rights by the Company which will
terminate upon the closing of the Offering.

In August 1997, the Company loaned Evan R. Buckley an aggregate of $150,000
at an annual rate equal to the federal funds rate. The principal balance, with
interest, is due upon the sale of shares of Common Stock owned by Mr. Buckley.
As of December 31, 1997, no payments had been made on the loan.

In August 1997, the Company loaned Kelly W. Monahan $100,000 at an annual
rate equal to the federal funds rate. The note is secured by 41,237 shares of
the Common Stock of the Company held by Mr. Monahan. The principal balance,
with interest, is due upon the sale of such shares of Common Stock. As of
December 31, 1997, no payments had been made on the loan.

For the year ended June 30, 1997, the Company sold $5.8 million of mortgage
loans to Impac Funding Corporation (formerly ICI Funding Corporation), a
company of which Joseph R. Tomkinson, a director of the Company, is the Chief
Executive Officer, a director and a significant common stockholder.

INDEMNIFICATION AGREEMENTS

The Company will enter into indemnification agreements with its executive
officers and directors which require the Company to indemnify each in certain
circumstances, in the manner and to the fullest extent permitted by the
Delaware General Corporation Law.

PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of January 31, 1997, and as
adjusted to reflect the sale of 1,400,000 shares by the Company and 1,773,196
shares by the Selling Stockholder, by (i) each director of the Company, (ii)
each of the Named Executive Officers, (iii) each person known to the Company
to be beneficial owner of more than 5% of the Common Stock and (iv) all
directors and executive officers of the Company as a group.

COMMON STOCK
OWNED COMMON STOCK
PRIOR TO TO BE OWNED
OFFERING(1) AFTER THE OFFERING(2)
----------------- NUMBER ------------------------
NUMBER OF SHARES NUMBER OF
NAME OF SHARES PERCENT BEING OFFERED SHARES PERCENT
- ---- --------- ------- ------------- ------------- ----------

DLJ Mortgage Capital,
Inc.(3)................ 1,773,196 44.3% 1,773,196 -- --
BNC Equity Investors,
LLC(4)................. 329,896 8.2% -- 329,896 6.1%
Evan R. Buckley(4)(5)... 1,549,717 38.7% -- 1,549,717 28.7%
Kelly W. Monahan(4)..... 206,185 5.2% -- 206,185 3.8%
Gary Vander-
Haeghen(4)(6).......... 41,903 1.1% -- 41,903 *
All Directors and
Officers as a Group (7
persons)............... 1,839,043 46.0% -- 1,839,043 34.1%

- --------
*Less than 1%.
(1) The persons named in the table have sole voting and investment power with
respect to all shares of Common Stock shown as beneficially owned.
(2) Certain officers and directors of the Company are being offered the
opportunity to purchase shares of Common Stock at the initial public
offering price. In addition, certain officers and directors of the Company
are being granted options to purchase shares of Common Stock pursuant to
the Company's Stock Option Plan. See "Management--Stock Options."
(3) DLJ Mortgage Capital, Inc. may be reached at 277 Park Avenue, New York,
New York 10172.
(4) Each of such persons may be reached through the Company at 1063 McGaw
Avenue, Irvine, California 92614.
(5) Included in this amount are 106,418 and 1,443,299 shares which Mr. Buckley
is deemed to beneficially own through his ownership interest in BNC LLC
and the Buckley Family Trust, respectively.
(6) Included in this amount are 21,284 shares which Mr. Vander-Haeghen is
deemed to beneficially own through his ownership interest in BNC LLC.

DESCRIPTION OF CAPITAL STOCK

The authorized capital stock of the Company consists of 50,000,000 shares of
Common Stock and 5,000,000 shares of Preferred Stock. After giving effect to
this Offering, there will be 5,400,000 shares of Common Stock outstanding and
no shares of Preferred Stock outstanding.

COMMON STOCK

As of December 31, 1997, there were approximately 4,000,000 shares of Common
Stock outstanding held by approximately 13 stockholders of record. There will
be 5,400,000 shares of Common Stock outstanding after giving effect to the
sale of the shares of Common Stock offered hereby. The holders of Common Stock
are entitled to one vote per share on all matters to be voted on by
stockholders. Subject to preferences that may be applicable to any outstanding
Preferred Stock, if any, the holders of Common Stock are entitled to receive
ratably such dividends, if any, as may be declared from time to time by the
Board of Directors in its discretion out of funds legally available therefor.
See "Dividend Policy." In the event of a liquidation, dissolution or winding
up of the Company, the holders of Common Stock are entitled to share ratably
in all assets remaining after payment of liabilities, subject to prior rights
of Preferred Stock, if any, then outstanding. The Common Stock has no
preemptive or other subscription rights and there are no conversion rights or
redemption or sinking fund provisions with respect to such shares. All of the
outstanding shares of Common Stock are fully paid and nonassessable.

PREFERRED STOCK

The Board of Directors has the authority, without further action by the
stockholders of the Company, to issue up to 5,000,000 shares of Preferred
Stock in one or more series, and to fix the designations, rights, preferences,
privileges, qualifications and restrictions thereof including dividend rights,
conversion rights, voting rights, rights and terms of redemption, liquidation
preferences and sinking fund terms, any or all of which may be greater than
the rights of the Common Stock. The Board of Directors, without stockholder
approval, can issue Preferred Stock with voting, conversion and other rights
which could adversely affect the voting power and other rights of the holders
of Common Stock. Preferred Stock could thus be issued quickly with terms
calculated to delay or prevent a change in control of the Company or to make
removal of management more difficult. In certain circumstances, such issuance
could have the effect of decreasing the market price of the Common Stock. The
issuance of Preferred Stock may have the effect of delaying, deterring or
preventing a change in control of the Company without any further action by
the stockholders including, but not limited to, a tender offer to purchase
Common Stock at a premium over then current market prices. The Company has no
present plan to issue any shares of Preferred Stock.

REGISTRATION RIGHTS

The Representatives' Warrants provides certain rights with respect to the
registration under the Securities Act of up to 317,319 shares of Common Stock
issuable upon exercise thereof. The holders of the shares issuable upon
exercise of the Representatives' Warrants may require the Company to file a
registration statement under the Securities Act with respect to such shares.
In addition, if the Company registers any of its Common Stock either for its
own account or for the account of other securityholders, the holders of the
shares issuable upon exercise of the Representatives' Warrants are entitled to
include their shares of Common Stock in the registration.

CERTAIN PROVISIONS OF DELAWARE LAW

Prior to the consummation of this Offering, the Company intends to
reincorporate in Delaware. On the date of reincorporation the Company will
become subject to Section 203 of the Delaware General Corporation Law. In
general, Section 203 prevents an "interested stockholder" (defined generally
as a person owning 15% or more of the Company's outstanding voting stock) from
engaging in a "business combination" (as defined in Section 203) with the
Company for three years following the date that person became an interested
stockholder unless: (i) before that person became an interested stockholder,
the Board of Directors approved the transaction in which the interested
stockholder became an interested stockholder or approved the business
combination; (ii) upon

completion of the transaction that resulted in such person becoming an
interested stockholder, such person owned at least 85% of the voting stock of
the Company outstanding at the time the transaction commenced (excluding stock
held by directors who are also officers of the Company and by employee stock
plans that do not provide employees with the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or
exchange offer); or, (iii) on or following the date on which that person
became an interested stockholder, the business combination is approved by the
Company's Board of Directors and authorized at a meeting of stockholders by
the affirmative vote of the holders of at least 66 2/3% of the outstanding
voting stock of the Company not owned by the interested stockholder.

Under Section 203, these restrictions also do not apply to certain business
combinations proposed by an interested stockholder following the announcement
or notification of one of certain extraordinary transactions involving the
Company and a person who was not an interested stockholder during the previous
three years or who became an interested stockholder with the approval of a
majority of the Company's directors, if that extraordinary transaction is
approved or not opposed by a majority of the directors (but not less than one)
who were directors before any person became an interested stockholder in the
previous three years or who were recommended for election or elected to
succeed such directors by a majority of such directors then in office.

Pursuant to Section 162 of the Delaware General Corporation Law, the Board
of Directors of the Company can, without stockholder approval, issue shares of
capital stock, which may have the effect of delaying, deferring or preventing
a change of control of the Company. The Company has no plan or arrangement for
the issuance of any shares of capital stock other than in the ordinary course
pursuant to the Stock Option Plan.

CERTAIN CHARTER AND BYLAW PROVISIONS

The Company's Certificate of Incorporation will provide that no action which
has not been previously approved by the Board of Directors may be taken by the
stockholders except at an annual meeting or a special meeting of the
stockholders.

The Company's Bylaws will require stockholders to provide advance notice of
any stockholder nominations for directors and of any business to be brought
before any meeting of stockholders. Stockholders will not be entitled to
cumulative voting in connection with the election of directors. As a result, a
person or a group controlling the majority of shares of Common Stock could
elect all of the directors.

The Certificate of Incorporation of the Company contain certain provisions
permitted under the Delaware General Corporation Law relating to the liability
of directors. These provisions will eliminate the directors' liability for
monetary damages for a breach of fiduciary duty, except in certain
circumstances involving wrongful acts, including the breach of a director's
duty of loyalty or acts or omissions which involve intentional misconduct or a
knowing violation of a law. The Company's Certificate of Incorporation will
also contain provisions to indemnify its directors and officers to the fullest
extent permitted by the Delaware General Corporation Law.

TRANSFER AGENT AND REGISTRAR

The Transfer Agent and Registrar for the Common Stock is U.S. Stock
Transfer, Glendale, California.

SHARES ELIGIBLE FOR FUTURE SALE

After this Offering, the Company will have outstanding 5,400,000 shares of
Common Stock. Of the outstanding shares, the 3,173,196 shares to be sold in
this Offering will be freely tradeable without restriction or further
registration under the Securities Act unless purchased by "affiliates" of the
Company as that term is defined in Rule 144 under the Securities Act.

The remaining 2,226,804 shares of Common Stock outstanding upon completion
of this Offering (assuming no exercise of the Underwriters' over-allotment
option) are "restricted securities" as that term is defined in Rule 144, all
of which will be eligible for sale under Rule 144 upon completion of this
Offering, subject to the lock-up described below. As described below, Rule 144
permits resales of restricted securities subject to certain restrictions.

In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who beneficially owned shares for at least one
year, including any person who may be deemed an "affiliate" of the Company (as
the term "affiliate" is defined under the Securities Act), would be entitled
to sell within any three month period a number of such shares that does not
exceed the greater of 1% of the shares of the Company's Common Stock then
outstanding 5,400,000 shares immediately after this Offering) or the average
weekly trading volume in the Company's Common Stock during the four calendar
weeks preceding the date on which notice of the sale is filed with the
Commission. A person who is not deemed to have been an "affiliate" of the
Company any time during the three months immediately preceding a sale and who
has beneficially owned shares for at least two years would be entitled to sell
such shares under Rule 144 without regard to the volume limitation described
above.

The Company and its officers and directors have agreed that they will not,
without the prior written consent of CIBC Oppenheimer Corp. (which consent may
be withheld in its sole discretion) and subject to certain limited exceptions,
directly or indirectly, sell, offer, contract or grant any option to sell,
make any short sale, pledge, transfer, establish an open "put equivalent
position" within the meaning of Rule 16a-1(h) under the Exchange Act, or
otherwise dispose of any shares of Common Stock, options or warrants to
acquire Common Stock, or securities exchangeable or exercisable for or
convertible into Common Stock currently owned either of record or beneficially
by them or announce the intention to do any of the foregoing, for a period
commencing on the date of this Prospectus and continuing to a date 180 days
after such date. CIBC Oppenheimer Corp. may, in its sole discretion and at any
time without notice, release all or any portion of the securities subject to
these lock up agreements. In addition, the Company has agreed that, for a
period of 180 days after the date of this Prospectus, it will not, without the
consent of CIBC Oppenheimer Corp. issue, offer, sell or grant options to
purchase or otherwise dispose of any equity securities or securities
convertible into or exchangeable for equity securities except for (i) the
issuance of shares of Common stock offered hereby and (ii) the grant of
options to purchase shares of Common Stock pursuant to the Stock Option Plan
and shares of Common Stock issued pursuant to the exercise of such options,
provided that such options shall not vest, or the Company shall obtain the
written consent of the grantee not to transfer such shares, until the end of
such 180-day period. See "Underwriting."

Holders of shares issuable upon exercise of the Representatives' Warrants
are entitled to certain registration rights. See "Description of Capital
Stock--Registration Rights."

The Stock Option Plan authorizes the grant of options to purchase, and
awards of 800,000 shares of the Company's Common Stock; of this amount,
options to acquire 163,265 shares were granted prior to this Offering at a per
share exercise price of $6.10. Options to purchase an additional 425,000
shares are expected to be granted to employees, officers and directors of the
Company on the effective date of this Offering. The Company intends to file a
Registration Statement on Form S-8 covering the shares that have been reserved
for issuance under the Stock Option Plan, thus permitting the resale of such
shares in the public market.

UNDERWRITING

Subject to the terms and conditions set forth in the Underwriting Agreement
(the "Underwriting Agreement") among the Company, the Selling Stockholder and
CIBC Oppenheimer Corp. and Piper Jaffray Inc., as the representatives (the
"Representatives") of the Underwriters of this Offering, the Company and the
Selling Stockholder have agreed to sell to the Underwriters, and the
Underwriters named below have severally agreed to purchase from the Company
and the Selling Stockholder, the number of shares of Common Stock set forth
opposite their names below:

NUMBER OF SHARES
UNDERWRITERS OF COMMON STOCK
- ------------ ----------------

CIBC Oppenheimer Corp..........................................
Piper Jaffray Inc..............................................
---------
Total...................................................... 3,173,196
=========

The Underwriters propose to offer the shares of Common Stock directly to the
public at the offering price set forth on the cover page of this Prospectus
and at such price less a concession of not in excess of $ per share to
certain securities dealers, of which a concession of not in excess of $ per
share may be reallowed to certain other securities dealers. After this
offering, the public offering price, allowances, concessions and other selling
terms may be changed by the Representatives.

The Underwriting Agreement provides that the obligations of the Underwriters
to purchase shares of Common Stock are subject to certain conditions,
including that if any of the shares of Common Stock are purchased by the
Underwriters pursuant to the Underwriting Agreement, all such shares must be
so purchased.

The Company has granted an option to the Underwriters, exercisable within 30
days after the date of this Prospectus, to purchase from the Company up to an
aggregate of 475,979 additional shares of Common Stock to cover over-
allotments, if any, at the public offering price less the underwriting
discount set forth on the cover page of this Prospectus. If the Underwriters
exercise their over-allotment option to purchase any of such 475,979
additional shares of Common Stock, the Underwriters have severally agreed,
subject to certain conditions, to purchase approximately the same percentage
thereof as the number of shares to be purchased by each of them bears to the
3,173,196 shares of Common Stock offered hereby. The Company will be obligated
to sell shares of Common Stock to the Underwriters to the extent such over-
allotment option is exercised.

The Company has agreed to sell the Representatives' Warrants to the
Representatives for an aggregate consideration of $3,173. The Representatives'
Warrants evidence the right to purchase from the Company up to 317,319 shares
of Common Stock at an exercise price per share equal to 110% of the initial
public offering price per share. The Representatives' Warrants are exercisable
for a period of four years beginning one year from the date of this
Prospectus. In addition, the Company has granted certain rights to the holders
of the Representatives' Warrants to register the Common Stock underlying the
Representatives' Warrants under the Securities Act. See "Description of
Capital Stock--Registration Rights."

The Company's officers and directors have agreed that they will not, without
the prior written consent of CIBC Oppenheimer Corp., offer, sell, contract to
sell, make any short sale, pledge or otherwise dispose of any shares of Common
Stock or securities convertible into or exchangeable or exercisable for or any
other rights to purchase Common Stock until 180 days after the effective date
of this Offering. The Company has also agreed that it will not, without the
consent of CIBC Oppenheimer Corp., offer, sell, contract to sell, make any
short sale, pledge or otherwise dispose of any shares of Common Stock or
securities convertible into or exchangeable or exercisable for or other rights
to purchase Common Stock until 180 days after the effective date of this

Offering (except for (i) shares issued pursuant to stock options outstanding
on the date hereof and (ii) stock options issued pursuant to employee benefit
or incentive compensation plans in effect on the date hereof). See
"Management--Stock Options" and "Shares Eligible for Future Sale."

The Company and the Selling Stockholder have agreed to indemnify the several
Underwriters against certain liabilities, including liabilities under the
Securities Act, and to contribute to certain payments that the Underwriters
may be required to make in respect thereof.

Prior to this Offering, there has been no public market for the Common
Stock. Consequently, the initial public offering price will be determined by
negotiations among the Company, the Selling Stockholder and the
Representatives. Among the factors to be considered in such negotiations are
the history of, and prospects for, the Company and the industry in which it
competes, an assessment of the Company management, its past and present
operations and financial performance, the prospects for further earnings of
the Company, the present state of the Company's development, the general
condition of the securities markets at the time of the Offering, the market
prices of and demand for publicly traded common stocks of comparable companies
in recent periods and other factors deemed relevant.

The Representatives do not intend to confirm sales of the Common Stock to
any account over which it exercises discretionary authority.

The Representatives, on behalf of the Underwriters, may engage in over-
allotment, stabilizing transactions, syndicate covering transactions and
penalty bids in accordance with Regulation M under the Exchange Act. Over-
allotment involves syndicate sales in excess of the offering size, which
creates a syndicated short position. Stabilizing transactions permit bids to
purchase the underlying security so long as the stabilizing bids do not exceed
a specified maximum. Syndicate covering transactions involve purchases of
shares of Common Stock in the open market after the distribution has been
completed in order to cover syndicate short positions. Penalty bids permit the
Representatives to reclaim a selling concession from a syndicate member when
the shares of Common Stock originally sold by such syndicate member are
purchased in a syndicate covering transaction to cover syndicate short
positions. Such stabilizing transactions, syndicate covering transactions and
penalty bids may cause the price of the Common Stock to be higher than it
would otherwise be in the absence of such transactions. These transactions may
be effected on the Nasdaq National Market or otherwise and, if commenced, may
be discontinued at any time.

LEGAL MATTERS

Certain matters relating to this offering are being passed upon for the
Company and the Selling Stockholder by Freshman, Marantz, Orlanski, Cooper &
Klein, a law corporation, Beverly Hills, California. Certain legal matters
will be passed upon for the Underwriters by Gibson, Dunn & Crutcher LLP,
Orange County, California.

EXPERTS

The consolidated financial statements of BNC Mortgage, Inc. at June 30, 1996
and 1997, and for the years then ended, appearing in this Prospectus and
Registration Statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon appearing elsewhere herein, and
are included in reliance upon such report given upon the authority of such
firm as experts in accounting and auditing.

AVAILABLE INFORMATION

The Company has filed a Registration Statement on Form S-1 under the
Securities Act with the Commission with respect to the Common Stock offered
hereby. This Prospectus, which constitutes part of the Registration Statement,
omits certain of the information contained in the Registration Statement and
the exhibits thereto on file with the Commission pursuant to the Securities
Act and the rules and regulations of the Commission. Statements contained in
this Prospectus, such as the descriptions of the contents of any contract or
other document referred to, are not necessarily complete and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference. A copy of the Registration Statement,
including the exhibits thereto, may be inspected without charge at the
Commission's principal office at 450 Fifth Street, N.W., Judiciary Plaza,
Washington, D.C. 20549, and copies of all or any part thereof may be obtained
from the Commission upon the payment of certain fees prescribed by the
Commission. The Commission also maintains a World Wide Web site that contains
reports, proxy and information statements and other information regarding
registrants, such as the Company, that file electronically with the
Commission. The address of the site is http:/ / www.sec.gov.

The Company intends to furnish its stockholders with annual reports
containing financial statements audited by an independent accounting firm and
quarterly reports containing unaudited financial information for the first
three quarters of each fiscal year.

BNC MORTGAGE, INC.

INDEX TO FINANCIAL STATEMENTS

Report of Independent Auditors............................................ F-2
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheet................................................ F-3
Consolidated Statement of Income.......................................... F-4
Consolidated Statement of Stockholders' Equity............................ F-5
Consolidated Statement of Cash Flows...................................... F-6
Notes to Consolidated Financial Statements................................ F-7

F-1

REPORT OF INDEPENDENT AUDITORS

The Board of Directors
BNC Mortgage, Inc.

We have audited the accompanying consolidated balance sheet of BNC Mortgage,
Inc. as of June 30, 1996 and 1997, and the related consolidated statements of
income, stockholders' equity and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of BNC
Mortgage, Inc. at June 30, 1996 and 1997, and the results of its operations
and its cash flows for the years then ended, in conformity with generally
accepted accounting principles.

/s/ Ernst & Young LLP

Orange County, California
August 2, 1997, except for Note 10,
as to which the date is November 26, 1997

F-2

BNC MORTGAGE, INC.

CONSOLIDATED BALANCE SHEET

JUNE 30,
----------------------- DECEMBER
1996 1997 31, 1997
----------- ----------- -----------
(UNAUDITED)
ASSETS
------

Cash and cash equivalents....................... $ 2,452,000 $ 8,268,000 $ 7,142,000
Restricted cash................................. -- -- 614,000
Mortgage loans held for sale.................... 42,723,000 55,145,000 76,196,000
Property and equipment, net..................... 411,000 609,000 790,000
Deferred income taxes........................... 567,000 1,154,000 1,319,000
Notes receivable from officers.................. -- -- 250,000
Other assets.................................... 199,000 537,000 1,028,000
----------- ----------- -----------
Total assets................................ $46,352,000 $65,713,000 $87,339,000
=========== =========== ===========

LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------

Liabilities:
Warehouse line-of-credit...................... $42,723,000 $54,625,000 $74,369,000
Accounts payable and accrued liabilities...... 879,000 1,358,000 1,558,000
Income taxes payable.......................... 904,000 526,000 460,000
----------- ----------- -----------
Total liabilities........................... 44,506,000 56,509,000 76,387,000
----------- ----------- -----------
Commitments and contingencies (Note 8)
Stockholders' equity:
Series A preferred stock, $0.001 par value:
Authorized shares--1,000
Issued and outstanding shares--160 at
June 30, 1996 and 1997 and 0 at December
31, 1997................................... 1,575,000 1,575,000 --
Series A common stock, voting, no par value:
Authorized shares--2,886,598
Issued and outstanding shares--2,886,598 at
June 30, 1996 and 1997 and December 31,
1997....................................... -- -- --
Series B common stock, nonvoting, no par
value:
Authorized shares--1,237,113
Issued and outstanding shares--1,072,165 at
June 30, 1996, 1,237,113 at June 30, 1997
and 1,113,402 at December 31, 1997......... 2,000 7,000 6,000
Retained earnings............................. 269,000 7,622,000 10,946,000
----------- ----------- -----------
Total stockholders' equity................ 1,846,000 9,204,000 10,952,000
----------- ----------- ===========
Total liabilities and stockholders'
equity................................... $46,352,000 $65,713,000 $87,339,000
=========== =========== ===========

See accompanying notes.

F-3

BNC MORTGAGE, INC.

CONSOLIDATED STATEMENT OF INCOME

YEAR ENDED SIX MONTHS ENDED
JUNE 30, DECEMBER 31,
---------------------- -----------------------
1996 1997 1996 1997
---------- ----------- ----------- -----------
(UNAUDITED)

Revenues:
Gain on sale of mortgage
loans........................ $4,240,000 $21,855,000 $ 8,525,000 $13,543,000
Loan origination income....... 1,978,000 5,473,000 2,383,000 2,767,000
Interest income............... 1,960,000 5,182,000 2,215,000 3,447,000
Other income.................. 52,000 250,000 91,000 220,000
---------- ----------- ----------- -----------
Total revenues.............. 8,230,000 32,760,000 13,214,000 19,977,000
---------- ----------- ----------- -----------
Expenses:
Employees' salaries and
commissions.................. 3,624,000 11,052,000 4,396,000 8,326,000
General and administrative
expenses..................... 2,400,000 5,543,000 2,279,000 3,257,000
Interest expense.............. 1,452,000 3,693,000 1,595,000 2,471,000
---------- ----------- ----------- -----------
Total expenses.............. 7,476,000 20,288,000 8,270,000 14,054,000
---------- ----------- ----------- -----------
Income before income taxes...... 754,000 12,472,000 4,944,000 5,923,000
Income tax expense.............. 337,000 4,930,000 1,954,000 2,392,000
---------- ----------- ----------- -----------
Net income.................. $ 417,000 $ 7,542,000 $ 2,990,000 $ 3,531,000
========== =========== =========== ===========
Pro forma net income per share.. $ 0.14 $ 1.80 $ 0.71 $ 0.86
========== =========== =========== ===========
Shares used in computing pro
forma net income per share..... 2,896,781 4,191,904 4,191,307 4,108,048
========== =========== =========== ===========

See accompanying notes.

F-4

BNC MORTGAGE, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

SERIES A SERIES A SERIES B
PREFERRED STOCK COMMON STOCK COMMON STOCK TOTAL
------------------ ---------------- ------------------ RETAINED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT EARNINGS EQUITY
------ ----------- --------- ------ --------- ------- ----------- -------------

Balance at June 30,
1995................... 25 $ 250,000 1,443,299 $-- -- $ -- $ (10,000) $ 240,000
Issuance of preferred
stock.................. 135 1,325,000 -- -- -- -- -- 1,325,000
Issuance of common
stock.................. -- -- 1,443,299 -- 1,072,165 2,000 -- 2,000
Cash dividends on
preferred stock ($863
per share)............. -- -- -- -- -- -- (138,000) (138,000)
Net income.............. -- -- -- -- -- -- 417,000 417,000
---- ----------- --------- ---- --------- ------- ----------- -----------
Balance at June 30,
1996................... 160 1,575,000 2,886,598 -- 1,072,165 2,000 269,000 1,846,000
Issuance of common
stock.................. -- -- -- -- 185,567 6,000 -- 6,000
Repurchase of common
shares................. -- -- -- -- (20,619) (1,000) -- (1,000)
Cash dividends on
preferred stock ($1,181
share)................. (189,000) (189,000)
Net income.............. -- -- -- -- -- -- 7,542,000 7,542,000
---- ----------- --------- ---- --------- ------- ----------- -----------
Balance at June 30,
1997................... 160 1,575,000 2,886,598 -- 1,237,113 7,000 7,622,000 9,204,000
Repurchase of common
shares (unaudited)..... -- -- -- -- (123,711) (1,000) (131,000) (132,000)
Repurchase of preferred
stock (unaudited)...... (160) (1,575,000) -- -- -- -- -- (1,575,000)
Cash dividends on
preferred stock ($295
per share) (unaudited). -- -- -- -- -- -- (76,000) (76,000)
Net income (unaudited).. -- -- -- -- -- -- 3,531,000 3,531,000
---- ----------- --------- ---- --------- ------- ----------- -----------
Balance at December 31,
1997 (unaudited)....... -- -- 2,886,598 -- 1,113,402 6,000 $10,946,000 $10,952,000
==== =========== ========= ==== ========= ======= =========== ===========

See accompanying notes.

F-5

BNC MORTGAGE, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

SIX MONTHS ENDED DECEMBER
YEAR ENDED JUNE 30, 31,
---------------------------- ----------------------------
1996 1997 1996 1997
------------- ------------- ------------- -------------
(UNAUDITED)

OPERATING ACTIVITIES
Net income.............. $ 417,000 $ 7,542,000 $ 2,990,000 $ 3,531,000
Adjustment to reconcile
net income to net cash
used in operating
activities:
Depreciation.......... 77,000 250,000 107,000 183,000
Origination of
mortgage loans held
for sale............. (199,963,000) (532,621,000) (223,859,000) (354,572,000)
Sales and principal
repayments of
mortgage loans held
for sale............. 157,240,000 520,600,000 217,369,000 333,086,000
Deferred loan
orgination costs
(fees)............... -- (401,000) (286,000) 435,000
Change in other
assets............... (199,000) (338,000) (109,000) (491,000)
Change in notes
receivable from
officers............. -- -- -- (250,000)
Change in accounts
payable and accrued
liabilities.......... 879,000 479,000 38,000 200,000
Change in income taxes
payable.............. 904,000 (378,000) 342,000 (66,000)
Change in deferred
income taxes......... (567,000) (587,000) (364,000) (165,000)
------------- ------------- ------------- -------------
Net cash used in
operating activities... (41,212,000) (5,454,000) (3,772,000) (18,109,000)
------------- ------------- ------------- -------------
INVESTING ACTIVITIES
Capital expenditures.... (488,000) (448,000) (255,000) (364,000)
------------- ------------- ------------- -------------
Net cash used in
investing activities... (488,000) (448,000) (255,000) (364,000)
------------- ------------- ------------- -------------
FINANCING ACTIVITIES
Payment of dividends on
preferred stock........ (138,000) (189,000) (94,000) (76,000)
Repurchase of common
stock.................. -- (1,000) -- (132,000)
Repurchase of preferred
stock.................. -- -- -- (1,575,000)
Proceeds from the
issuance of preferred
stock.................. 1,325,000 -- -- --
Proceeds from issuance
of common stock........ 2,000 6,000 6,000 --
Increase in restricted
cash................... -- -- -- (614,000)
Change in warehouse
line-of-credit......... 42,723,000 11,902,000 5,829,000 19,744,000
------------- ------------- ------------- -------------
Net cash provided by
financing activities... 43,912,000 11,718,000 5,741,000 17,347,000
------------- ------------- ------------- -------------
Net increase (decrease)
in cash and cash
equivalents............ 2,212,000 5,816,000 1,714,000 (1,126,000)
Cash and cash
equivalents at
beginning of year...... 240,000 2,452,000 2,452,000 8,268,000
------------- ------------- ------------- -------------
Cash and cash
equivalents at end of
year................... $ 2,452,000 $ 8,268,000 $ 4,166,000 $ 7,142,000
============= ============= ============= =============
SUPPLEMENTAL CASH FLOWS
INFORMATION
Interest paid........... $ 1,452,000 $ 3,693,000 $ 1,595,000 $ 2,471,000
============= ============= ============= =============
Taxes paid.............. $ -- $ 5,351,000 $ 1,262,000 $ 2,623,000
============= ============= ============= =============

See accompanying notes.

F-6

BNC MORTGAGE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(INFORMATION AT DECEMBER 31, 1997 AND FOR THE SIX-MONTH PERIODS ENDED
DECEMBER 31, 1996 AND 1997 IS UNAUDITED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BUSINESS AND BASIS OF PRESENTATION

The Company is a specialty finance company engaged in the business of
originating, purchasing and selling non-conforming residential mortgage loans
secured by one-to-four family residences. The Company's loans are made to
owners of single family residence who typically use the loan proceeds for
purposes such as refinancing existing mortgages, debt consolidation, financing
of home improvements, education and other similar needs, and, to a lesser
extent, to purchase residences. The Company originates loans through its
wholesale division, which originates mortgage loans through approved
independent loan brokers, and through its retail division, which markets loans
directly to homeowners. The Company currently sells all of its mortgage loans
to institutional purchasers such as investment banks, real estate investment
trusts and other large mortgage bankers for cash through whole loan sales.

DLJ Mortgage Capital, Inc. (DLJ) owns approximately 44% of the Company's
outstanding stock. During the years ended June 30, 1996 and 1997, and the six
months ended December 31, 1997, the Company sold loans to DLJ having an
aggregate principal balance of $153.2 million, $473.7 million and $331.4
million, respectively, pursuant to a Master Loan Purchase Agreement. In
connection with such sales, the Company paid fees to DLJ of $1.8 million, $2.1
million and $1.7 million for the years ended June 30, 1996 and 1997, and the
six months ended December 31, 1997, respectively.

The Company was formed on May 2, 1995 and began originating mortgage loans
in October 1995. For the period May 2, 1995 through June 30, 1995, the Company
did not have any revenue and recorded start-up costs of $10,000. Financial
statements are not presented for the period May 2, 1995 through June 30, 1995
as the operations were not material.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements of the Company include the accounts of
the Company and all of its wholly owned subsidiaries. All significant
intercompany transactions and balances are eliminated.

USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS

The preparation of the consolidated financial statements of the Company
requires management to make estimates and assumptions that affect reported
amounts. These estimates are based on information available as of the date of
the financial statements. Therefore, actual results could differ from those
estimates.

MORTGAGE LOANS HELD FOR SALE

Mortgage loans held for sale are stated at the lower of cost or aggregate
market value. Market value is determined by purchase commitments from
investors and prevailing market prices.

LOAN ORIGINATION FEES

Loan origination fees and certain direct loan origination costs for mortgage
loans held for sale are deferred until the related loans are sold.

GAIN ON SALE OF MORTGAGE LOANS HELD FOR SALE

Gains or losses on the sale of mortgage loans held for sale are recognized
at the date of sale.

CASH AND CASH EQUIVALENTS

The Company accounts for all highly liquid investments with a maturity of
three months or less when purchased as cash equivalents.

F-7

BNC MORTGAGE, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

(INFORMATION AT DECEMBER 31, 1997 AND FOR THE SIX-MONTH PERIODS ENDED
DECEMBER 31, 1996 AND 1997 IS UNAUDITED)

PROPERTY AND EQUIPMENT

Property and equipment, consisting primarily of computer hardware and
software, is stated at cost, net of accumulated depreciation and amortization.
Depreciation is provided using the straight line method over their estimated
useful lives of three years.

RECENTLY ISSUED ACCOUNTING STANDARDS

In February 1997, the FASB issued SFAS No. 129, Disclosure of Information
about Capital Structure. This Statement shall be effective for financial
statements for both interim and annual periods ending after December 15, 1997.
At this time the Company has determined that this Statement will have no
significant impact on the financial position or results of operations for
1998.

In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income.
This Statement establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general-purpose financial statements. This Statement shall be
effective for fiscal years beginning after December 15, 1997. Reclassification
of financial statements for earlier periods provided for comparative purposes
is required. At this time the Company has determined that this Statement will
have no significant impact on the financial position or results of operations
for 1998.

INCOME TAXES

The Company accounts for income taxes using Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes (FAS 109). FAS 109
requires the use of the asset and liability method of accounting for taxes.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. Under FAS 109,
the effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.

PRO FORMA NET INCOME PER SHARE

In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings per Share. Statement 128
replaced the previously reported primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earnings per share,
basic earnings per share excludes any dilutive effects of options, warrants,
and convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share.

Pro forma net income per share is computed using the weighted average number
of shares of common stock outstanding. In accordance with Securities and
Exchange Commission Staff Accounting Bulletins, common equivalents shares
issued by the Company at prices substantially below the anticipated initial
public offering price during the period beginning one year prior to the
proposed public offering have been included in the calculation as if they were
outstanding for all periods presented (using the treasury stock method and the
estimated initial public offering price).

INTERIM RESULTS

The accompanying balance sheet as of December 31, 1997 and the statements of
income, stockholders' equity and cash flows for the six months ended December
31, 1996 and 1997 are unaudited. In the opinion of

F-8

BNC MORTGAGE, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

(INFORMATION AT DECEMBER 31, 1997 AND FOR THE SIX-MONTH PERIODS ENDED
DECEMBER 31, 1996 AND 1997 IS UNAUDITED)

management, the statements have been prepared on the same basis as the audited
financial statements and include all adjustments, consisting only of normal
recurring adjustments, necessary for the fair statement of the results of
interim periods.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The fair values presented in Note 6 are estimates of the fair values of the
financial instruments at a specific point in time using available market
information and appropriate valuation methodologies. These estimates are
subjective in nature and involve uncertainties and significant judgment in the
interpretation of current market data. Therefore, the fair values presented
are not necessary indicative of amounts the Company could realize or settle
currently.

2. MORTGAGE LOANS HELD FOR SALE

Mortgage loans held for sale are collateralized by first trust deeds on
underlying real properties and are used as collateral for the Company's
borrowings. Approximately 32% of these properties are located in California.
Mortgage loans held for sale include net deferred origination fees and (costs)
of $3,000, $401,000 and $(810,000) at June 30, 1996 and 1997 and December 31,
1997, respectively.

Subsequent to June 30, 1997, substantially all of the mortgage loans were
sold to DLJ pursuant to the Master Mortgage Loan Purchase Agreement.

3. PROPERTY AND EQUIPMENT

Property and equipment consists of the following at June 30, 1996 and 1997:

JUNE 30,
------------------- DECEMBER 31,
1996 1997 1997
-------- --------- ------------

Office equipment........................... $406,000 $ 840,000 $1,047,000
Software................................... 82,000 96,000 253,000
-------- --------- ----------
488,000 936,000 1,300,000
Less accumulated depreciation.............. (77,000) (327,000) (510,000)
-------- --------- ----------
$411,000 $ 609,000 $ 790,000
======== ========= ==========

4. INCOME TAXES

Income tax expense for the years ended June 30, 1996 and 1997 are summarized
as follows:

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

Current:
Federal............................................. $ 749,000 $4,119,000
State............................................... 155,000 1,398,000
--------- ----------
904,000 5,517,000
Deferred:
Federal............................................. (504,000) (603,000)
State............................................... (63,000) 16,000
--------- ----------
(567,000) (587,000)
--------- ----------
$ 337,000 $4,930,000
========= ==========

F-9

BNC MORTGAGE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(INFORMATION AT DECEMBER 31, 1997 AND FOR THE SIX-MONTH PERIODS ENDED
DECEMBER 31, 1996 AND 1997 IS UNAUDITED)

The reconciliation of income tax expense at the U.S. federal statutory tax
rate to the income tax expense for the years ended June 30, 1996 and 1997 is
as follows:

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

Tax computed at the statutory rate...................... $272,000 $4,365,000
State income tax, net of federal income tax benefit..... 61,000 665,000
Other................................................... 4,000 (100,000)
-------- ----------
Income tax expense...................................... $337,000 $4,930,000
======== ==========

The components of the Company's deferred income tax assets and liabilities
as of June 30, 1996 and 1997 are as follows:

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

Deferred tax assets (liabilities):
Depreciation........................................ $ (7,000) $ (16,000)
State income taxes.................................. 32,000 479,000
Reserve for loan repurchases........................ 68,000 263,000
Accrued vacation.................................... 37,000 104,000
Litigation reserve.................................. 104,000 15,000
Mark-to-market adjustments.......................... 289,000 491,000
Deferred loan fees.................................. -- (186,000)
Other accrued liabilities........................... 44,000 4,000
-------- ----------
Total deferred tax assets............................. $567,000 $1,154,000
======== ==========

5. WAREHOUSE LINE-OF-CREDIT

The Company has entered into a Master Mortgage Loan Purchase Agreement (the
Agreement) with DLJ whereby DLJ will purchase substantially all mortgage loans
originated by the Company.

The Agreement provides for borrowings up to $50,000,000 with interest
payable monthly at the Federal Funds rate plus 1% (7.25% at June 30, 1997). At
June 30, 1997, borrowings under this line of $54,625,000 are collateralized by
mortgage loans held for sale. The Agreement provides that the amount borrowed
under the facility can exceed the maximum amount available from time to time
as the Company's production increases so as to enable the Company to continue
to fund mortgage loans without delay or interruption. The line-of-credit
matures and is subject to renewal on August 31, 2000. The weighted average
interest rate for the fiscal year ended June 30, 1997 was 6.4%.

6. FINANCIAL INSTRUMENTS

The following describes the methods and assumptions used by the Company in
estimating fair value:

Mortgage loans held for sale--Fair value is estimated using the quoted
market prices for securities backed by similar types of loans and investor
commitments to purchase loans on a service-released basis.

Warehouse line-of-credit--Fair value is estimated using rates currently
available to the Company for debt with similar terms and remaining
maturities.

F-10

BNC MORTGAGE, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

(INFORMATION AT DECEMBER 31, 1997 AND FOR THE SIX-MONTH PERIODS ENDED
DECEMBER 31, 1996 AND 1997 IS UNAUDITED)

The carrying values and the estimated fair values of the Company's financial
instruments for which it is practical to calculate a fair value are as
follows:

JUNE 30, 1996 JUNE 30, 1997 DECEMBER 31, 1997
----------------------- ----------------------- -----------------------
CARRYING FAIR CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE VALUE VALUE
----------- ----------- ----------- ----------- ----------- -----------

Mortgage loans held for
sale................... $42,723,000 $43,188,000 $55,145,000 $56,816,000 $76,196,000 $79,817,000
Warehouse line-of-
credit................. 42,723,000 42,723,000 54,625,000 54,625,000 74,369,000 74,369,000

7. RELATED PARTY TRANSACTION

In July 1997, the Company loaned an aggregate of $250,000 to two officers of
the Company. The loans accrue interest monthly at the Federal Funds rate and
are due upon the sale of common stock. For the six months ended December 31,
1997 interest income of $7,000 was recorded related to these notes.

For the year ended June 30, 1997, the Company sold $5.8 million of mortgage
loans to ICI Funding Corporation, a company of which Joseph R. Tomkinson, a
director of the Company, is the Chief Executive Officer, a director and a
significant common stockholder.

8. COMMITMENTS AND CONTINGENCIES

Repurchase Obligation

The Company engages in bulk loan sales pursuant to agreements that generally
require the Company to repurchase or substitute loans in the event of a breach
of a representation or warranty made by the Company to the loan purchaser, any
misrepresentation during the mortgage loan origination process or, in some
cases, upon any fraud or first payment default on such mortgage loans. A
reserve for potential repurchases of $150,000, $503,000 and $503,000 at June
30, 1996 and 1997 and December 31, 1997, respectively, is included in accounts
payable and accrued liabilities.

Leases

The Company's executive and administrative offices are occupied under
various month to month leases with aggregate monthly payments of approximately
$23,000. In June 1997, the Company entered into a noncancelable operating
lease which expires in 2002. The lease agreement, requires the Company to
deliver a letter of credit to the lessor in the amount of $600,000. Cash
deposited into escrow to secure the letter of credit and accrued interest
thereon is classified as restricted cash on the balance sheet.

The Company's loan offices are occupied under noncancelable operating leases
which expire between October 31, 1997 and August 31, 2001 and provide for rent
escalations tied to either increases in the lessor's operating expenses or
fluctuations in the consumer price index in the relevant geographical area.

The minimum annual rental payments under these operating leases is as
follows:

1998........................................................... $ 836,000
1999........................................................... 1,033,000
2000........................................................... 916,000
2001........................................................... 832,000
2002........................................................... 832,000
Thereafter..................................................... 347,000
----------
$4,796,000
==========

F-11

BNC MORTGAGE, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

(INFORMATION AT DECEMBER 31, 1997 AND FOR THE SIX-MONTH PERIODS ENDED
DECEMBER 31, 1996 AND 1997 IS UNAUDITED)

Rent expense for the years ended June 30, 1996 and 1997 and the six months
ended December 31, 1997 was $169,000, $597,000 and $482,000, respectively.

9. STOCKHOLDERS' EQUITY

PREFERRED STOCK

The Series A Preferred stock has a par value of $0.001 per share and has no
voting rights. The holders of the Preferred stock are entitled to receive, to
the extent of available funds from the operations of the Company, dividends on
a cumulative basis at a rate equal to $1,200 per annum per share.

No dividends or other distributions on any other class of stock may be made
until the Series A Preferred stock has been fully redeemed. The Company may at
its option, redeem the Series A Preferred stock at any time, in whole or in
part, at a price per share in cash equal to the liquidation value. The
liquidation value shall be the sum of (i) $10,000 per share plus (ii) all
accrued but unpaid dividends as of the date the liquidation value of such
share is determined.

COMMON STOCK

The relative rights, privileges and limitations of the Class A common stock
and the Class B common stock are identical except that the Class A common
stock has exclusive voting rights and the Class B common stock does not.

401(K) PLAN

The Company adopted a 401(k) savings plan (the "401(k) Plan") effective on
July 1, 1996. Eligible employees may participate in the 401(k) Plan.
Participants in the 401(k) Plan may defer compensation in an amount not in
excess of the annual statutory limit ($10,000 in 1998). The Company may make
matching contributions in the amount determined annually by the Board of
Directors. Matching contributions if any, vest after three years.
Contributions made for the year ended June 30, 1997 and the six months ended
December 31, 1997 were 37,000 and 24,000, respectively.

10. SUBSEQUENT EVENTS

Reorganization

In October 1997, the Board of Directors authorized management of the Company
to file a registration statement with the Securities and Exchange Commission
authorizing the issuance of 1,400,000 shares of common stock to the public
(the Offering). If the Offering is consummated under the terms presently
anticipated, the Company will reincorporate in Delaware. Further to the
reincorporation, the existing California corporation will be merged into a
newly formed Delaware corporation pursuant to which each outstanding share of
Class A and Class B common stock of the existing California corporation will
be exchanged for 4,123.71134 shares of $.001 par value common stock of the new
Delaware corporation and the certificate of incorporation of the new Delaware
corporation would authorize 50,000,000 shares of common stock and 5,000,000
shares of preferred stock. As a result of the reincorporation, there will be
no outstanding shares of Class A or Class B common stock at the consummation
of this Offering. In November 1997, the Company redeemed all shares of Series
A Preferred Stock for $1,575,000.

All common share and per share amounts included in the consolidated
financial statements have been retroactively adjusted to reflect the stock
split discussed above.

F-12

BNC MORTGAGE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(INFORMATION AT DECEMBER 31, 1997 AND FOR THE SIX-MONTH PERIODS ENDED
DECEMBER 31, 1996 AND 1997 IS UNAUDITED)

Stock Option Plan

In October 1997, the Company adopted the 1997 Stock Option, Deferred Stock
and Restricted Stock Plan (the Stock Option Plan), which provides for a
committee of the Board of Directors (the Committee) to authorize the grant of
incentive stock options, nonqualified stock options, deferred stock,
restricted stock, stock appreciation rights and limited stock appreciation
rights awards to any officer or key employee of the Company. The Stock Option
Plan authorizes the grant of options to purchase, and awards of, an aggregate
of 800,000 shares. Incentive stock options are granted at a price not less
than 100% (110% in the case of incentive stock options granted to an employee
who is deemed to own in excess of 10% of the outstanding common stock) of the
fair market value of the shares of common stock at the time the option is
granted. Incentive stock options and nonqualified stock options become
exercisable according to the terms of the grant made by the Committee and
remain exercisable until their specified expiration date.

The Committee has authorized the issuance of nonqualified stock options to
an employee for the purchase of 163,265 shares of common stock at $6.10 per
share. The options vest ratably over a three year period beginning on the
effective date of the Offering. The difference between the fair market value
of the common stock and the exercise price of the options of $637,000 will be
recorded as compensation expense over the vesting period of the options
beginning with the reporting of the Company's first quarterly results of
operations subsequent to the effective date of the Offering.

The Company has elected to follow Accounting Principles Board No. 25,
Accounting for Stock Issued to Employees and related Interpretations in
accounting for its employee stock options and make the required pro forma
disclosures regarding net income and earnings per share required by FASB
Statement No. 123, Accounting for Stock-Based Compensation in the notes to
financial statements for its fiscal year ended June 30, 1998.

Warehouse Line of Credit

In October 1997, the Company renegotiated its warehouse line-of-credit with
DLJ, to increase the maximum borrowing to $150 million with interest payable
monthly at the Federal Funds rate plus 50 basis points during the first 12
months and 100 basis points during the second 12 months. The maturity of the
warehouse line-of-credit is two years following the closing date of the
initial public offering. Additionally, DLJ has agreed to provide the Company
with up to $5.0 million of financing for a term of one year for subordinated
"interest-only" securities to the extent they are retained by the Company in
connection with any future securitizations of loans originated by the Company.

F-13

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

NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE IN THIS PROSPECTUS AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY, ANY OF THE UNDERWRITERS OR THE SELLING
STOCKHOLDER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF, ANY OFFER TO BUY ANY SHARES OF COMMON STOCK OTHER THAN THE
SHARES OF COMMON STOCK TO WHICH IT RELATES OR AN OFFER TO, OR A SOLICITATION
OF, ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD
BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.

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

TABLE OF CONTENTS

PAGE
----

Prospectus Summary ....................................................... 3
Risk Factors.............................................................. 8
Arrangements with DLJ and the Recapitalization............................ 19
Use of Proceeds........................................................... 21
Dividend Policy........................................................... 21
Dilution.................................................................. 22
Capitalization............................................................ 23
Selected Consolidated Financial Data...................................... 24
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 26
Business.................................................................. 33
Management................................................................ 57
Certain Transactions...................................................... 62
Principal and Selling Stockholders........................................ 65
Description of Capital Stock.............................................. 66
Shares Eligible for Future Sale........................................... 68
Underwriting.............................................................. 69
Legal Matters............................................................. 71
Experts................................................................... 71
Available Information..................................................... 71
Index to Financial Statements............................................. F-1

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

UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS) ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.

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

3,173,196 SHARES

[LOGO OF BNC MORTGAGE, INC.]

BNC MORTGAGE, INC.

COMMON STOCK

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

PROSPECTUS

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

CIBC OPPENHEIMER

PIPER JAFFRAY INC.

, 1998

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

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The Registrant estimates that expenses in connection with the offering
described in this registration statement will be as follows:

AMOUNT TO
BE PAID
---------

Securities and Exchange Commission registration fee............... $ 12,975
NASD filing fee................................................... 4,898
Nasdaq National Market Listing fee................................ 64,000
Printing expenses................................................. 200,000
Accounting fees and expenses...................................... 200,000
Legal fees and expenses........................................... 300,000
Fees and expenses (including legal fees) for qualifications under
state securities laws............................................ 50,000
Transfer agent's fees and expenses................................ 10,000
Miscellaneous..................................................... 8,127
--------
Total......................................................... $850,000*
========

- --------
* Of this amount, $465,000 is payable by the Selling Stockholder.

All amounts except the Securities and Exchange Commission registration fee
and the NASD filing fee are estimated.

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Section 145 of the Delaware General Corporation Law permits the Registrant
to, and Article 8 of the Certificate of Incorporation provides that the
Registrant may, indemnify each person who was or is a party or is threatened
to be made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative, by
reason of the fact that he is or was, or has agreed to become, a director or
officer of the Registrant, or is or was servicing, or has agreed to serve, at
the request of the Registrant, as a director, officer or trustee of, or in a
similar capacity with, another corporation, partnership, joint venture, trust
or other enterprise (including any employee benefit plan), or by reason of any
action alleged to have been taken or omitted in such capacity, against all
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him or on his behalf in
connection with such action, suit or proceeding and any appeal therefrom. The
Company will enter into indemnification agreements with its executive officers
and directors which require the Company to indemnify each in certain
circumstances, in the manner and to the fullest extent permitted by the
Delaware General Corporation Law.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

During the past three years the Registrant issued unregistered securities in
the following transactions (shares and dollar amounts have not been adjusted
to reflect the reincorporation of the Registrant in Delaware to be effected by
the Registrant prior to the consummation of this Offering whereby each
outstanding share of the Registrant's Class A and Class B Common Stock will be
exchanged for 4,123.71134 shares of $.001 par value Common Stock):

(a) In October 1995, in connection with its organization, the Registrant
issued 350 shares of its Class A Common Stock and 25 shares of its Series A
Preferred Stock to Evan R. Buckley for an aggregate consideration of
$250,000.

II-1

(b) In October 1995, in connection with its organization, the Registrant
issued 350 shares of its Class A Common Stock, 80 shares of its Class B
Common Stock and 80 shares of its Series A Preferred Stock to DLJ Mortgage
Capital Inc. for an aggregate consideration of $800,004.

(c) In October 1995, in connection with its organization, the Registrant
issued 55 shares of Class B Common Stock and 55 shares of its Series A
Preferred Stock to BNC Equity Investors, LLC for an aggregate consideration
of $250,000.

(d) In January 1996, the Registrant issued 80 shares of its Class B
Common Stock to two of its employees for an aggregate consideration of
$1,600.

(e) In February 1996, the Registrant issued 20 shares of its Class B
Common Stock to one of its employees for an aggregate consideration of
$400.

(f) In June 1996, the Registrant issued 20 shares of its Class B Common
Stock to four of its employees for an aggregate consideration of $400.

(g) In July 1996, the Registrant issued 20 shares of its Class B Common
Stock to four of its employees for an aggregate consideration of $5,500.

(h) In September 1996, the Registrant issued 5 shares of its Class B
Common Stock to one of its employees for an aggregate consideration of
$100.

The aforementioned issuances of stock were deemed to be exempt from
registration under the Securities Act in reliance in Section 4(2) promulgated
under the Securities Act as transactions by an issuer not involving a public
offering or on Rule 701 promulgated under the Securities Act. In addition, the
recipients of securities in each such transaction represented their intentions
to acquire the securities for investment only and not with a view to or for
sale in connection with any distribution thereof and appropriate legends were
affixed to the share certificates issued in such transactions. All recipients
had adequate access, through their relationships with the Company, to
information about the Company.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) EXHIBITS

1.1* Form of Underwriting Agreement

1.2* Form of Representatives' Warrant

2.1+ Agreement of Reorganization and Plan of Merger

3.1+ Certificate of Incorporation of BNC Mortgage, Inc., a Delaware
corporation

3.2+ Bylaws of BNC Mortgage, Inc., a Delaware corporation

4.1* Specimen Stock Certificate

5.1 Opinion of Freshman, Marantz, Orlanski, Cooper & Klein

10.1+ Office Lease, as amended, between the Registrant and Shuwa
Investments Corporation dated June 15, 1997

10.2 1997 Stock Option Plan and form of agreements

10.3+ Form of Indemnification Agreement

10.4+ Employment Agreement between the Registrant and Evan R. Buckley

10.5+ Employment Agreement between the Registrant and Kelly W. Monahan

10.6(a)* Letter Agreement, dated October 22, 1997, from DLJ Mortgage
Capital, Inc. to the Registrant.
(b)* Form of Whole Loan Financing Facility between the Registrant and
DLJ Mortgage Capital, Inc.

II-2

(c)* Form of Promissory Note, by the Registrant made in favor of DLJ
Mortgage Capital, Inc.
(d)* Form of Pledge Agreement, between the Registrant and DLJ Mortgage
Capital, Inc.
(e)* Whole Loan Financing Program Tri-Party Custody Agreement, dated
September 26, 1995, among the Registrant, DLJ Mortgage Capital,
Inc. and Bankers Trust Company
(f)* Form of Master Mortgage Loan Purchase Agreement, between the
Registrant and DLJ Mortgage Capital, Inc.

11.1 Statement re: Computation of Per Share Earnings

21.1+ Subsidiaries

23.1 Consent of Ernst & Young LLP

23.2 Consent of Freshman, Marantz, Orlanski, Cooper & Klein (contained in
Exhibit 5.1)

24.1+ Power of Attorney

27 Financial Data Schedule
- --------
+ Previously filed
* To be filed by amendment

ITEM 17. UNDERTAKINGS

(a) The undersigned registrant hereby undertakes to provide to the
Underwriter at the closing specified in the Underwriting Agreement
certificates in such denominations and registered in such names as required by
the Underwriter to permit prompt delivery to each purchaser.

(b) insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.

(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b) (1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it is declared effective.

(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.

II-3

SIGNATURES

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF SANTA ANA, STATE OF
CALIFORNIA ON FEBRUARY 17, 1998.

By /s/ Evan R. Buckley
_____________________________________
Evan R. Buckley
Chief Executive Officer (Principal
Executive Officer)

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION
STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITY INDICATED ON
FEBRUARY 17, 1998.

SIGNATURE TITLE
--------- -----

/s/ Evan R. Buckley Chief Executive Officer
____________________________________ and Director
Evan R. Buckley (Principal Executive
Officer)

/s/ Kelly W. Monahan President, Chief Financial
____________________________________ Officer and Director
Kelly W. Monahan (Principal Accounting
Officer)

* Director
____________________________________
Keith C. Honig

* Director
____________________________________
Joseph R. Tomkinson

*By: /s/ Kelly W. Monahan
____________________________________
Kelly W. Monahan
Attorney in fact

II-4

EXHIBIT INDEX

SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DOCUMENT DESCRIPTION PAGE
------- -------------------- ------------

1.1* Form of Underwriting Agreement
1.2* Form of Representatives' Warrant
2.1+
Agreement of Reorganization and Plan of Merger
3.1+ Certificate of Incorporation of BNC Mortgage, Inc.,
a Delaware corporation
3.2+
Bylaws of BNC Mortgage, Inc., a Delaware corporation
4.1* Specimen Stock Certificate
5.1 Opinion of Freshman, Marantz, Orlanski, Cooper &
Klein
10.1+ Office Lease, as amended, between the Registrant and
Shuwa Investments Corporation dated June 15, 1997
10.2 1997 Stock Option Plan and form of agreements
10.3+
Form of Indemnification Agreement
10.4+ Employment Agreement between the Registrant and Evan
R. Buckley
10.5+ Employment Agreement between the Registrant and
Kelly W. Monahan
10.6(a)* Letter Agreement, dated October 22, 1997, from DLJ
Mortgage Capital, Inc. to the Registrant.
(b)* Form of Whole Loan Financing Facility between the
Registrant and DLJ Mortgage Capital, Inc.
(c)* Form of Promissory Note, by the Registrant made in
favor of DLJ Mortgage Capital, Inc.
(d)* Form of Pledge Agreement, between the Registrant and
DLJ Mortgage Capital, Inc.
(e)* Whole Loan Financing Program Tri-Party Custody
Agreement, dated September 26, 1995, among the
Registrant, DLJ Mortgage Capital, Inc. and Bankers
Trust Company
(f)* Form of Master Mortgage Loan Purchase Agreement,
between the Registrant and DLJ Mortgage Capital,
Inc.
11.1
Statement re: Computation of Per Share Earnings
21.1+ Subsidiaries
23.1+
Consent of Ernst & Young LLP
23.2 Consent of Freshman, Marantz, Orlanski, Cooper &
Klein (contained in Exhibit 5.1)
24.1+
Power of Attorney
27 Financial Data Schedule

- --------
+ Previously filed
* To be filed by amendment