TRANSNATIONAL FINANCIAL CORP
424B4, 1998-06-25
MORTGAGE BANKERS & LOAN CORRESPONDENTS
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<PAGE>
 
PROSPECTUS
                                               Filed pursuant to Rule 424(b)(4)
                                                         SEC File No. 333-50657
 
                               1,200,000 SHARES
 
                      TRANSNATIONAL FINANCIAL CORPORATION
 
                                 COMMON STOCK
 
  Transnational Financial Corporation (the "Company") is hereby offering
1,200,000 shares of Common Stock, no par value (the "Common Stock"). See
"Description of Securities." Prior to this offering, there has been no public
market for the Common Stock, and there can be no assurance that an active
market will develop. See "Underwriting" for information relating to the
factors considered in determining the initial public offering price. The
Common Stock has been listed on the American Stock Exchange under the symbol
"TFN."
 
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE SECTION ENTITLED "RISK
FACTORS" BEGINNING ON PAGE 6 HEREOF CONCERNING THE COMPANY AND THIS OFFERING.
PROSPECTIVE INVESTORS SHOULD ALSO CONSIDER THAT THEIR INVESTMENT WILL RESULT
IN IMMEDIATE SUBSTANTIAL DILUTION.  SEE "DILUTION."
 
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
 EXCHANGE COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION
 PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
 THE CONTRARY IS A CRIMINAL OFFENSE.
 
<TABLE>
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
<CAPTION>
                                                   PRICE     UNDERWRITING
                                                   TO THE   DISCOUNTS AND  PROCEEDS TO
                                                   PUBLIC   COMMISSIONS(1) COMPANY(2)
- --------------------------------------------------------------------------------------
<S>                                              <C>        <C>            <C>
Per Share......................................    $7.50       $.73125      $6.76875
- --------------------------------------------------------------------------------------
Total (2)(3)...................................  $9,000,000    $877,500    $8,122,500
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
</TABLE>
 
(1) Excludes a nonaccountable expense allowance payable by the Company to the
    Representative of 2.0% of the aggregate initial public offering price of
    the shares. The Company has also agreed to issue to the Representative
    warrants exercisable for four years commencing one year from the date of
    this Prospectus to purchase 120,000 shares of Common Stock at 120% of the
    public offering price to the public (the "Representative's Warrants"). The
    Company has agreed to indemnify the Underwriters against certain
    liabilities, including liabilities under the Securities Act of 1933, as
    amended (the "Securities Act"). See "Underwriting."
(2) Before deducting estimated expenses of $640,000 payable by the Company,
    including the Representative's 2.0% nonaccountable expense allowance.
(3) The Kristul Family LLC (the "Selling Shareholder") has granted to the
    Underwriters an option, exercisable within 45 days from the date of this
    Prospectus, to purchase up to 180,000 shares, on the same terms set forth
    above, solely for the purpose of covering over-allotments, if any, the
    Company will not receive any proceeds from the sale of such shares. If the
    over-allotment option is exercised in full, the total Price to the Public,
    Underwriting Discounts and Commissions, and Proceeds to Selling
    Shareholder will be $1,350,000, $131,625, and $1,218,375. See "Principal
    and Selling Shareholders" and "Underwriting."
 
  The shares of Common Stock are being offered severally by the Underwriters
named herein subject to receipt and acceptance by them and to their right to
reject any order, in whole or in part. It is expected that delivery of the
shares of Common Stock will be made against payment therefor at the offices of
the Representative in Austin, Texas on or about June 29, 1998.
 
                         TEJAS SECURITIES GROUP, INC.
 
                 The date of this Prospectus is June 24, 1998.
<PAGE>
 
                             ADDITIONAL INFORMATION

          The Company has not previously been subject to the reporting
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form SB-2, (including any amendments
thereto, the "Registration Statement") under the Securities Act of 1933, as
amended (the "Securities Act") with respect to the shares offered hereby. This
Prospectus does not contain all of the information set forth in the Registration
Statement and the exhibits and schedules thereto. For further information with
respect to the Company and the shares, reference is made to the Registration
Statement and the exhibits and schedules thereto. Statements made in this
Prospectus regarding the contents of any contract or document filed as an
exhibit to the Registration Statement are not necessarily complete and, in each
instance, reference is hereby made to the copy of such contract or document so
filed. Each such statement is qualified in its entirety by such reference. The
Registration Statement and the exhibits and the schedules thereto filed with the
Commission may be inspected, without charge, at the office of the Commission at
Judiciary Plaza, 450 Fifth Street, NW, Washington, D.C. 20549. Copies of such
materials may also be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, NW, Washington, D.C. 20549, at prescribed rates.
The Commission maintains a Web site that contains reports, proxy and information
statements and other information regarding issuers that file electronically with
the Commission at http://www.sec.gov.

          As a result of this offering, the Company will become subject to the
reporting requirements of the Exchange Act, and in accordance therewith will
file periodic reports, proxy statements and other information with the
Commission.  The Company will furnish its shareholders with annual reports
containing audited financial statements certified by independent public
accountants following the end of each fiscal year, proxy statements and
quarterly reports containing unaudited financial information for the first three
quarters of each fiscal year following the end of such fiscal quarter.

          The Company has applied to list the Common Stock on the American Stock
Exchange.  If the Company's application is accepted, then reports, proxy
statements and other information concerning the Company will be available for
inspection at the principal office of the American Stock Exchange at 86 Trinity
Place, New York, New York, 10006.

 



     CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN  OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING EXERCISING THE OVER-ALLOTMENT OPTION, EFFECTING SYNDICATE COVERING
TRANSACTIONS OR IMPOSING PENALTY BIDS.  FOR A DESCRIPTION OF THESE ACTIVITIES ,
SEE "UNDERWRITING."

                                       2
<PAGE>
 
                               PROSPECTUS SUMMARY

        The following summary is qualified in its entirety by the more detailed
information and financial statements (including notes thereto) appearing
elsewhere in this Prospectus.  Unless otherwise indicated, the information
herein has been adjusted to reflect (i) the 2,468.75-for-one split of the Common
Stock effected in March 1998, (ii) the change in the Company's status from an S
corporation to a C corporation on April 30, 1998, and (iii) the issuance on May
1, 1998, of 31,250 shares to certain individuals for services rendered to the
Company, and assumes the Underwriters' over-allotment option and the
Representative's Warrants are not exercised.  The shares offered hereby involve
a high degree of risk.  Investors should carefully consider the information set
forth under "Risk Factors."

          Prospective investors should note that this Prospectus contains
certain "forward-looking statements, including without limitation, statements
containing the words "believes," "anticipates," "expects," "intends," "plans,"
"should," "seeks to," and similar words. Prospective investors are cautioned
that such forward-looking statements are not guarantees of future performance
and involve risks and uncertainties. Actual results may differ materially from
those in the forward-looking statements as a result of various factors,
including but not limited to, the risk factors set forth in this Prospectus. The
accompanying information contained in this Prospectus identifies certain
important factors that could cause such differences. See "Risk Factors."

                                  THE COMPANY

          The Company is a wholesale and retail mortgage banker which
originates, funds and sells mortgage loans secured by one-to-four family
residential properties in the San Francisco Bay area. The Company sells all of
its mortgage loans in the secondary market and all of the servicing rights
associated with those mortgage loans. Since the Company's inception in 1985, it
has not been required to repurchase any mortgage loan.

          Since 1985, the Company has been engaged in retail mortgage banking
and originated mortgage loans that were sold prior to funding. In 1995, the
Company began a wholesale division to close and fund mortgage loans originated
by others. The total loan production volume increased from approximately
$92,000,000 in 1995 to approximately $261,000,000 in 1996 and approximately
$463,000,000 in 1997. For the year ended December 31, 1997, 84% of the Company's
loan production volume was wholesale and 16% was retail .

          The Company's marketing strategy is to provide mortgage banking
services to qualified borrowers at favorable rates on large loans. In 1997, the
average size of the mortgage loans funded by the Company was approximately
$280,000. Its underwriters are experienced employees who evaluate the financial
quality of the borrower and the mortgage loan. The Company believes that
qualified lending supported by experienced personnel permits effective, cost-
efficient operations with low fixed-expenses.

          The volume of loans the Company may fund is limited by the liquid
capital of the Company. The primary purpose of this offering is to increase the
Company's liquid capital which the Company intends to use to support an increase
in its warehouse lines of credit and the total amount of loans that can be
funded by the Company. See "Use of Proceeds." A warehouse line of credit is a
line of credit on which the Company borrows on a short-term basis so that the
Company has the funds to close a mortgage loan. This short-term loan is repaid
upon the sale of a mortgage loan to an investor. See "Business - Funding of
Mortgage Loans." One of the effects of increased capital, management believes,
will be to lower significantly the Company's cost of borrowing. Following the
completion of this offering, the Company also intends to establish new warehouse
lines of credit at lower interest rates.

          The Company is licensed as a mortgage broker by the State of
California and is an approved seller for the Federal National Mortgage
Association ("FNMA" or "Fannie Mae"). Because the Company's market is not
oriented to smaller loans, the Company has not sought to originate mortgage
loans insured by the Federal Housing Authority ("FHA") or guaranteed by the
Veterans Administration ("VA"). The Company is also licensed by the Department
of Housing and Urban Development ("HUD").

          The Company maintains warehouse lines of credit to fund mortgage loans
prior to their sale in the secondary market.  Beginning in 1997, the Company
commenced hedging activities to control the risk related to interest rate
changes between the time a mortgage loan is funded and sold. The Company does
not plan, at the present time, to securitize its own loans or engage in
servicing the mortgage loans.

          The Company maintains in separate locations a retail office in San
Francisco, a wholesale office in San Francisco, a wholesale office in San Jose,
California and a mortgage loan processing facility in San Francisco.  The
Company's executive offices are located at 301 Junipero Serra Blvd., Suite 270,
San Francisco, California 94127, and its telephone number is (415) 334-7000.
The Company was incorporated in California in 1985.

                                       3
<PAGE>
 
                                 THE OFFERING


Common Stock offered..............   1,200,000 shares

Common Stock to be outstanding
 after the Offering...............   3,700,000 shares (1)

Use of Proceeds...................   Working capital and repayment of
                                     subordinated debt. See "Use of Proceeds."

Risk Factors......................   The shares of Common Stock offered hereby
                                     are speculative and involve a high degree
                                     of risk and should not be purchased by
                                     investors who cannot afford the loss of
                                     their entire investment. See "RISK
                                     FACTORS."

American Stock Exchange Symbol...    "TFN"



_____________________

(1)  Based on shares outstanding as of May 1, 1998. Does not include (i) 300,000
     shares of Common Stock reserved for issuance under the Company's 1998 Stock
     Option Plan (the "Stock Option Plan") or (ii) an aggregate of up to 120,000
     shares issuable upon exercise of the Representative's Warrants. The Company
     has agreed to grant options to certain employees under the Stock Option
     Plan to purchase a total of 45,000 to be effective upon the consummation of
     this offering. See "Management Stock Option Plan," "Certain Relationships
     and Related Transactions." and "Underwriting."

                                       4
<PAGE>
                         SUMMARY FINANCIAL INFORMATION

     The following income statement data has been derived from the audited
income statements of the Company as of December 31, 1996 and 1997 and the
audited balance sheet from December 31, 1997.  This summary financial data
should be read in conjunction with and are qualified by reference to the
financial statements of the Company and the related notes thereto included
elsewhere in this Prospectus.  See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
                                                                                 THREE MONTHS ENDED
                                                   YEAR ENDED DECEMBER 31,            MARCH 31,
                                                  ------------------------   ------------------------------
                                                         1997         1996          1998               1997
                                                  -----------  -----------   -----------        -----------
INCOME STATEMENT DATA:                                                       (UNAUDITED)      (UNAUDITED)
<S>                                              <C>           <C>           <C>             <C>
Income:
Net gain from sale of mortgage loans              $ 2,230,309  $ 1,013,579   $   969,783        $   428,671
Production Income                                     943,182      915,505       305,697            229,032
Other                                                  16,346            -        10,784              3,675
                                                  -----------  -----------   -----------        -----------
Total                                               3,189,837    1,929,084     1,286,264            661,378
                                                  -----------  -----------   -----------        -----------
Expenses:
Salaries and benefits (1)                           1,262,790      757,755       513,472            244,441
General and administrative                            674,962      558,535       314,658            164,446
Interest expense, net of interest income              279,093      146,860       152,431             32,199
Occupancy                                             125,020       63,860        39,041             20,799
                                                  -----------  -----------   -----------        -----------
Total Expenses                                      2,341,865    1,527,010     1,019,602            461,885
                                                  -----------  -----------   -----------        -----------
Income before income taxes                            847,972      402,074       266,662            199,493
Provision for State Income Tax                         13,000        6,227         4,000              3,000
                                                  -----------  -----------   -----------        -----------
Net income                                        $   834,972  $   395,847   $   262,662        $   196,493
                                                  ===========  ===========   ===========        ===========
PRO FORMA INFORMATION: (2)
Income before income taxes, as reported           $   847,972  $   402,074   $   266,662        $   199,493
Pro forma provision for income taxes                  339,200      158,300       106,000             80,000
                                                  -----------  -----------   -----------        -----------
Pro forma net income                              $   508,772  $   243,774   $   160,662        $   119,493
                                                  ===========  ===========   ===========        ===========
PER SHARE DATA:
Pro forma net income per share                          $0.20        $0.10         $0.06              $0.05
Pro forma weighted average shares outstanding       2,500,000    2,500,000     2,500,000          2,500,000
OPERATING DATA (IN THOUSANDS):
Production volume - Wholesale                     $   387,312  $   206,613   $   139,783        $    81,512
Production volume - Retail                             75,427       54,686        25,206             14,616
                                                  -----------  -----------   -----------        -----------
Total production volume                           $   462,739  $   261,299   $   164,989        $    96,128
                                                  ===========  ===========   ===========        ===========
Average principal balance per loan,
wholesale and retail                              $   280,448  $   261,823   $   241,124        $   273,870
</TABLE> 
<TABLE>
<CAPTION>
                                                  DECEMBER 31                   MARCH 31,
                                                  -----------   --------------------------------------------
                                                      1997         1998          1998               1998
                                                  -----------   ----------   -----------       -------------
BALANCE SHEET DATA:                                             (UNAUDITED)  PRO FORMA(2)      AS ADJUSTED(3) 
<S>                                              <C>           <C>           <C>             <C>
Cash and equivalents                              $   754,856  $ 1,916,461   $ 1,603,448        $ 7,985,948
Mortgage loans held                                50,288,714   37,015,012    37,015,012         37,015,012
Total assets                                       51,975,783   39,721,077    39,408,064         45,790,564
Warehouse notes payable                            50,154,791   36,781,678    36,781,678         36,781,678
Subordinated debt                                           -    1,000,000     1,000,000                  -
Shareholders equity                                 1,338,639    1,461,639     1,148,626          8,631,126
- -------------
</TABLE>

(1) Not included in salary and benefits are dividend distributions of $381,197
    in 1996, $513,073 in 1997 and $139,662 in the first quarter of 1998 which
    were distributed to the stockholders for income and to meet tax liabilities
    when the Company was an S corporation. See "Dividends" and "Management -
    Executive Compensation."

(2) On April 1, 1995, the Company elected to be taxed as an S corporation.
    Accordingly, in lieu of payment of income taxes at the corporate level, the
    stockholders individually reported their pro rata share of the Company's
    income, deductions, losses and credits. Pro forma information reflects
    results that would have been reported had the Company not been an S
    corporation during the applicable period. In addition the pro forma
    information reflects distributions made in April 1998 to the Company's then
    shareholders, assumes that these distributions were made from cash available
    at March 31, 1998, and that retained earnings since the Company's inception
    as an S corporation in excess of distributions during that period constitute
    additional paid-in capital.

(3) Adjusted to reflect the sale of the shares offered hereby at an offering
    price of $7.50 per share and application of the net proceeds therefrom of
    $7,482,500.  See "Use of Proceeds."

                                       5
<PAGE>
 
                                  RISK FACTORS

          An investment in the Securities offered hereby involves a high degree
of risk. Prospective investors should consider the following factors in addition
to the other information set forth in the Prospectus before purchasing the
Securities offered hereby.

GENERAL BUSINESS RISKS

          The Company's business is subject to various business risks, including
economic risks. Economic conditions affect the overall level of mortgage
business activity. The decisions to buy, sell or refinance residences are
affected by such economic conditions as changes in overall growth of the
economy, the level of consumer confidence, real estate values, prevailing
interest rates and investment returns expected by the financial community. These
conditions could affect the number and size of mortgage loans of the types
originated and purchased by the Company and make these mortgage loans less
attractive to borrowers or investors. In addition, a decline in real estate
values will have an adverse effect on the loan-to-value ratios for the related
mortgage loans, weakening the collateral coverage and resulting in greater
exposure in the event of a default. This greater exposure to default could make
it more difficult for the Company to obtain interim financing for mortgage
loans it originates or purchases or decrease the availability of purchasers of
such mortgage loans or interest expected by the purchasers. See "Business"
and "---Liabilities Under Representations and Warranties."

          Mortgage companies often offset the effects of an economic downturn
where the economic downturn is caused by higher interest rates by servicing
mortgages. Such servicers receive from the owners of the mortgages up to
one-half of one per cent of the outstanding mortgage loan balance per annum and
consequently have a continuing revenue stream during periods when the volume of
new originations slows. The Company sells the servicing rights of all of the
mortgage loans it originates or purchases. Not servicing mortgage loans subjects
the Company to reliance upon the generation or purchase of mortgage loans for
revenues and, consequently, subjects the Company to changes in the economic
cycle and the general economic health in the geographic area or areas in which
it operates.

DEPENDENCE UPON WHOLESALE BROKERS

          During the year ended December 31, 1997, purchased loans from brokers
accounted for approximately 84% of the mortgage loans closed by the Company,
while the Company's retail division originated the remainder, approximately 16%
of such mortgage loans. None of these brokers are contractually obligated to do
business with the Company. Further, the Company's competitors also have
relationships with the Company's brokers and actively compete with the Company
in its efforts to expand its broker relationships. Accordingly, there can be no
assurance that the Company will be successful in maintaining its existing
relationships or expanding its broker and correspondent network. If the Company
is not successful in maintaining or expanding its broker network, its business,
results of operations and financial condition could be materially and adversely
affected. See "Business - Loan Production."

DEPENDENCE UPON FUNDING SOURCES

          The Company's ability to originate and purchase mortgage loans depends
to a large extent upon its ability to fund mortgage loans upon acceptable terms
on an interim basis. The Company funds substantially all of the mortgage loans
it purchases and originates through borrowings under collateralized loan
purchase agreements with several commercial banks and thrifts which provide
primary credit facilities upon which the Company relies. These agreements are
generally terminable at will by either party. The Company's borrowings are in
turn repaid with proceeds received by the Company when such mortgage loans are
sold. The Company has relied upon a few lenders to provide the primary credit
facilities for its loan originations and purchases. Accordingly, any failure to
renew or obtain adequate funding under the Company's financing facilities or
other financing arrangements, or any substantial reduction in the size of or
increase in the cost of such facilities, could have a material adverse effect on
the Company's business, results of operations and financial condition. To the
extent the Company is not successful in maintaining or replacing existing
financing, it may have to curtail its mortgage loan origination and purchase
activities, which could have a material adverse effect on the Company's
business, results of operations and financial condition. See "Business - Funding
of Mortgage Loans."

                                       6
<PAGE>
 
DEPENDENCE ON PROGRAMS THAT PURCHASE LOANS OR GUARANTEE LOANS

          Institutional investors, which purchase all of the mortgage loans
originated by the Company, generate funds by selling mortgage-backed securities
and are largely dependent upon the continuation of programs administered by
Freddie Mac, Fannie Mae and Ginnie Mae, which provide the context and facilitate
the issuance of such securities.  Although the Company is not aware of any
proposed actions, the discontinuation of, or a significant reduction in, the
operation of such programs could have a material adverse effect on the Company's
operations.  In addition, the mortgage loan products eligible for such programs
may be changed from time to time by the sponsor.  The profitability of specific
types of mortgage loan products may vary depending on a number of factors,
including the administrative costs to the Company of purchasing or originating
such types of mortgage loans.  See "Business - Mortgage Loan Sales."


COMPETITION

          The Company faces strong competition in originating, purchasing and
selling mortgage loans and the related mortgage servicing rights.  The Company's
competition is principally from savings and loans associations, other mortgage
companies, commercial banks and, to a lesser degree, credit unions and insurance
companies, depending upon the type of mortgage loan product offered.  Many of
these institutions have greater financial and other resources than the Company
and maintain a significant number of branch offices in the area in which the
Company conducts operations.  Increased competition for mortgage loans from
other lenders may result in a decrease in the volume of mortgage loans
originated and purchased by the Company  If the Company is unable to compete
effectively, its business, results of operations and financial condition could
be materially and adversely affected.  See "Business - Competition."


LIABILITIES UNDER REPRESENTATIONS AND WARRANTIES

          In the ordinary course of business, the Company makes representations
and warranties to the purchasers and insurers of mortgage loans and the related
mortgage servicing rights regarding compliance with laws, regulations and
program standards.  The Company generally receives similar representations and
warranties from the brokers from whom it purchases mortgage loans. In the event
of a breach of these representations and warranties, the Company may be required
to repurchase these mortgage loans and/or may be liable for certain damages.
However, in its twelve years of business, the Company has not been required to
repurchase any mortgage loans.  There can be no assurance that the Company will
not experience any such losses in the future.  See "Business."


INTEREST RATE FLUCTUATIONS

          Changes in interest rates can have differing effects on various
aspects of the Company's business, particularly in the areas of volume of
mortgage loans originated and purchased, discussed above (See "Risk Factors -
General Business Risks."), as well as net interest income and sales of mortgage
loans.  When the Company purchases or originates a loan, it usually has a
commitment from a third party to purchase that loan.  Generally, the Company
funds the loan using borrowings from its lines of credit at commercial banks and
thrifts known as warehouse lines of credit.  The warehouse line of credit is
repaid upon the sale of the warehoused loans.  Before the Company sells the
mortgage loan, it is entitled to receive interest income on the loan from the
borrower and simultaneously pays interest expense to the institution providing
the warehouse line of credit.  The interest rate the Company receives during
this period and the interest rate it pays are different.  The profitability of
the loan is affected by this difference and the fluctuations in interest rates
before the mortgage loan is sold.  Although the Company generally has a
commitment to sell the mortgage loan before it commits to fund the mortgage
loan, there are situations in which the Company does bear a risk in changing
interest rates prior to the mortgage loan being sold.  In particular, if the
interest rates increase during the time before the Company sells the uncommitted
mortgage loan but after it has funded the mortgage loan, the Company could sell
the principal of the mortgage loan for less than the Company funded, thereby
decreasing the mortgage loan's profitability or incurring a loss on the mortgage
loan's sale.

                                       7
<PAGE>
 
          To manage the risk of interest rate fluctuation between the time the
mortgage loan is funded and sold, the Company engages in certain hedging
activity by entering forward delivery contracts to sell mortgage-backed
securities and forward delivery commitments for the sale of whole loans.  Often
the Company hedges more than 90% of the aggregate amount of the mortgage loans
that have been warehoused or approved but not yet funded. Although this hedging
activity is designed to reduce or eliminate risks related to interest rate
fluctuations, there can be no assurance that such hedging activity will be
successful or that the Company will not incur significant losses in connection
therewith. See "--- Sale of Mortgage Loan Servicing."

INABILITY TO SUSTAIN AND MANAGE GROWTH

          Although the Company has experienced rapid and substantial growth in
total revenues recently, there can be no assurance that the Company can sustain
these rates of growth or that it will be able to continue to recruit and retain
sufficient personnel to keep pace with a prolonged period of growth.

SALE OF MORTGAGE LOAN SERVICING

          The prices obtained by the Company upon the sale of mortgage loan
servicing rights depend upon a number of factors, including the general supply
of and demand for mortgage servicing rights, as well as prepayment and
delinquency rates on the portfolios of mortgage servicing rights being sold.
Interest rate changes can affect the profitability of the sale of mortgage loan
servicing rights to a third party.  Purchasers of mortgage loan servicing rights
analyze a variety of factors to determine the purchase price they are willing to
pay, including prepayment sensitivity of servicing rights.  Because of the
increased likelihood of prepayment in periods of declining interest rates, sales
of mortgage loan servicing rights related to higher interest rate mortgage loans
may be sold for less than in times of stable or increasing interest rates, which
could adversely affect the Company's results of operations and financial
condition.  See "Business - Mortgage Loan Sales."

LEGISLATION AND REGULATION

          Federal, state and local authorities regulate and examine the
origination, processing, underwriting, selling and servicing of mortgage loans.
The Company is an approved seller/servicer of mortgage loans for Fannie Mae.  In
addition, the Company is an approved mortgagee by HUD.  Among other
consequences, the failure to comply with HUD or Fannie Mae regulations could
prevent the Company from reselling its mortgage loans or prevent its ability to
enter into the servicing of mortgage loans should it choose to do so.  Such
failure could also result in demands for indemnification or mortgage loan
repurchase, certain rights of rescission for mortgage loans, class action law
suits and administrative enforcement actions, any of which could have a material
adverse effect on the Company's business results of operations and financial
conditions.

          Federal, state and local governmental authorities also regulate the
Company's activities as a lender.  The Truth in Lending Act ("TILA") and
Regulation Z promulgated thereunder contain certain requirements designed to
provide consumers with uniform, understandable information with respect to the
terms and conditions of mortgage loans and credit transactions.  The Equal
Credit Opportunity Act ("ECOA") prohibits creditors from discriminating against
applicants on the basis of race, color, sex, age or marital status, among other
restrictions and requirements.  In instances where the applicant is denied
credit, or the rate or charge for a mortgage loan increases as a result of
information obtained from a consumer credit agency, the Fair Credit Reporting
Act of 1970 requires the lender to supply the applicant with a name and address
of the reporting agency.  The Real Estate Settlement Procedures Act and the Debt
Collection Practices Act subject the Company to filing an annual report with the
Department of Housing and Urban Development.

          There can be no assurance that the Company will maintain compliance
with these requirements in the future without additional expenses, or that more
restrictive local, state or federal laws, rules and regulations will not be
adopted or that existing laws and regulations will not be interpreted in a more
restrictive manner, which would make compliance more difficult and more
expensive for the Company.

GEOGRAPHIC CONCENTRATION

          All of the Company's mortgage loan originations and purchases for the
year ended December 31, 1997, were derived from the San Francisco Bay area.  The
Company currently does no business outside the San Francisco Bay area and
intends to continue its loan origination and purchases activity in the San
Francisco Bay area.  The Company is, however, studying business opportunities
outside of the San Francisco Bay area, including other areas of California or
Utah.  There is no assurance that the Company will enter these or other markets
or that if the Company does expand to new markets, it will generate sufficient
revenues that exceed the costs associated with activities in such new markets or
that the business activity in those new markets will match that achieved in the
San Francisco Bay area.  Whether or not the Company enters into new geographic
markets, the Company's results of operations and financial condition will be
significantly affected by general trends in the economy of the San Francisco Bay
area and its residential real estate market for the foreseeable future.

                                       8
<PAGE>
 
YEAR 2000 COMPLIANCE

          The Company's computer systems may not comply with year 2000 issues.
Over the next few years, the Company may incur additional expenditures to modify
its software to operate correctly for the year 2000.  While considered to be
immaterial by management, the Company has not yet quantified such costs, which
will be expensed as incurred.  If the Company does not address this issue
successfully, the Company's business could be materially and adversely affected.

DEPENDENCE UPON KEY PERSONNEL

          The Company's business is substantially dependent on the efforts of
Joseph Kristul, its Chief Executive Officer, and Maria Kristul, its President.
Joseph Kristul and Maria Kristul are husband and wife.  Both have executed
employment agreements with the Company through December 31, 1999.  Each may
terminate the agreement for good reason in the event the executive has a
reduction in title and/or compensation or the assignment of duties not
consistent with those of a senior executive; the material breach by the Company
of any provisions of the employment agreement; the relocation of the Company's
principal executive offices to a location more than 25 miles from its present
location; or a change in control of the Company, as defined.  In defined
circumstance the agreements provide for severance payments up to two times the
executive's base salary.  The Company has obtained key-man insurance in the face
amount of $3,000,000 on the life of Mr. Kristul.  There can be no assurance that
amount will be sufficient to compensate the Company for the loss of Mr.
Kristul's services.  See "Management."

ABSENCE OF PRIOR PUBLIC MARKET - AMERICAN STOCK EXCHANGE LISTING

          Prior to this offering, there has been no public market for the Common
Stock.  The Company has applied to have the Common Stock listed on the American
Stock Exchange. There can be no assurance that the Company's Common Stock will
be approved for listing or if approved that the Company will be able to maintain
the criteria for listing.  Such listing, if granted, does not imply that a
meaningful, sustained market for the Common Stock will develop.  If a meaningful
market does not develop or if the Company is not listed on the American Stock
Exchange, holders of Common Stock may be unable to sell Common Stock or may be
able to sell only at significantly lower prices than the original offering
price.  There can be no assurance that an active trading market for the Common
Stock offered hereby will develop or, if it should develop, will continue nor
can there be any assurance that the Common Stock may be sold at its original
offering price or at any other price.  From time to time after this offering,
there also may be significant volatility in the market price for the Common
Stock.

ARBITRARY DETERMINATION OF OFFERING PRICE

          The public offering price for the Common Stock offered hereby was
determined by negotiation between the Company and the Representative.  The
factors considered in determining the public offering price include the
Company's revenue growth since its organization, the industry in which it
operates, the Company's business potential and earning prospects and the general
condition of the securities markets at the time of the offering.  Prices for the
shares of Common Stock after this offering will be determined in the market and
may be influenced by many factors, including the depth and liquidity of the
market for the Common Stock, investor perception of the Company and the mortgage
banking industry as a whole.  See "Underwriting."

IMMEDIATE SUBSTANTIAL DILUTION

          The Company's current shareholders acquired their shares of Common
Stock at a cost substantially below the price at which such shares are being
offered in this offering. Consequently, investors purchasing the shares of
Common Stock offered hereby will incur an immediate and substantial dilution of
their investment.  See "Dilution."

INDEMNIFICATION AND LIMITATION OF LIABILITIES OF DIRECTORS AND OFFICERS

          The Company's Restated Articles of Incorporation provide that the
liability of directors of the Company for monetary damages is eliminated to the
fullest extent permitted under California law. The Company's Bylaws provide that
the Company will indemnify its directors and officers against expenses,
judgments, fines, settlements and other amounts actually and reasonably incurred
in connection with any proceeding arising by reason of such person being or
having been a director or officer to the fullest extent permitted under
California law. Therefore, while the directors and officers may be accountable
to the Company and its shareholders as fiduciaries, the Company and its
shareholders have a more limited right of action than they would, absent the
indemnification and limitation of liability provisions contained in the Restated
Articles of Incorporation and Bylaws.

                                       9
<PAGE>
 
          If available at reasonable cost, the Company intends to maintain
insurance against any liability incurred by its officers and directors in
defense of any actions to which they are made parties by reason of their
positions as officers and directors. The Company does not presently have such
insurance.

          The provisions of the Company's Restated Articles of Incorporation and
Bylaws and the Company's intent to obtain insurance on behalf of its officers
and directors may reduce the likelihood of litigation against directors and may
discourage shareholders from bringing a lawsuit against directors for breach of
their duty.  See "Management  Indemnification and Limitation on Liability."

 

ANTI-TAKEOVER PROVISIONS IN CORPORATE CHARTER

          The Restated Articles of Incorporation of the Company authorize the
issuance of 2,000,000 shares of preferred stock without shareholder approval and
subject to such terms and conditions as determined by the Board of Directors
which may have the effect of deterring a non-negotiated attempt to acquire
control of the Company.  There are currently no shares of preferred stock
outstanding.  A series of preferred stock could be issued in the future, for
example, to thwart a possible take-over and may, in any event, operate to the
significant disadvantage of the holders of Common Stock by including
convertibility features which are lower than the market price for the Common
Stock, which would dilute the value of existing shareholdings, including the
shares of Common Stock issued in this offering.  See "Description of Capital
Stock - Preferred Stock."



PAYMENT OF DIVIDENDS

          Although the Company has paid dividends in the past as an S
corporation, the Company's Board of Directors presently intends to retain all of
the Company's earnings for the expansion of its business.  The Company therefore
does not anticipate the distribution of cash dividends in the foreseeable
future.  Any future decision of the Company's Board of Directors to pay cash
dividends will depend, among other factors, upon the Company's earnings,
financial position, and cash requirements. See "Dividend Policy."


SHARES ELIGIBLE FOR FUTURE SALE

          Upon completion of this offering, the Company's current shareholders
will own 2,500,000 shares of Common Stock, which will represent 67.6% of the
then issued and outstanding shares of Common Stock (62.7% if the over-allotment
option is exercised in full).  Of such restricted shares of Common Stock,
2,468,750 have been held for more than one year and will be eligible for resale
under Rule 144 under the Securities Act of 1933, as amended (the "Securities
Act"), subject to volume and other limitations, beginning 90 days after the date
of this Prospectus.  All of such shares are held by an affiliate of the Company,
the Kristul Family LLC.  Another 31,250 shares will be eligible for sale on May
1, 1999, and the Company has granted options to purchase a total of 45,000
shares effective upon the completion of this offering.  All existing
shareholders of the Company have agreed not to sell, offer, contract to sell, or
enter into any swap or similar agreement that transfers, in whole or in part,
the economic risk of ownership of the Common Stock, or otherwise dispose of any
of their shares of Common Stock for a period of one year following the
completion of this offering.  The Company has also agreed to grant to the
Representative warrants to acquire 120,000 shares of Common Stock.  These shares
have certain demand and piggyback registration rights.  Sales of significant
amounts of Common Stock by current shareholders in the public market after this
offering or the perception that such sales could occur could adversely affect
the market price of the Common Stock.  See "---Shares Eligible for Future
Sale,""--- Effect of Representative's Warrants, "Principal and Selling
Shareholders." and "Description of Capital Stock."


CONTROL OF THE COMPANY

          The Kristul Family LLC, of which Joseph and Maria Kristul are managing
members, will continue to own 66.7% of the Common Stock of the Company (61.9% if
the Underwriters' over-allotment option is exercised in full).  Accordingly,
they will be in a position to elect the Company's directors and officers, to
control the policies and operations of the Company and to determine the outcome
of corporate transactions or other matters submitted for shareholder approval,
including mergers, consolidations, the sale of the Company's assets or a change
in control of the Company.  See "Principal and Selling Shareholder."

                                       10
<PAGE>
 
BENEFITS TO CONTROLLING SHAREHOLDERS

          The Kristul Family LLC has pledged all of the stock owned by it in
connection with certain borrowings of the Company and Joseph and Maria Kristul
have personally guaranteed that debt as well as other debt of the Company.  See
"Certain Relationships and Related Transactions."  This offering will benefit
the Kristul Family LLC and Joseph and Maria Kristul because the proceeds of this
offering will be used to repay the debt for which the stock is pledged resulting
in the release of the stock pledge and the related personal guarantees.  The
existing warehouse lines are also personally guaranteed by Joseph and Maria
Kristul.  Upon completion of this offering, the Company will seek to enter into
new warehouse lines without such personal guarantees.  In addition, the Kristul
Family LLC will receive proceeds from the sale of the shares, if any, sold in
connection with an exercise of the Underwriters' over-allotment option.

EFFECT OF REPRESENTATIVE'S WARRANTS.

          Until the date five years following the date of this Prospectus, the
holders of the Representative's Warrants are given an opportunity to profit from
a rise in the market price of the Common Stock, with a resulting dilution in the
interests of the other shareholders.  The shares of Common Stock underlying the
Representative's Warrants have certain registration rights.  Further, the terms
on which the Company might obtain additional financing during that period may be
adversely affected by the existence of the Representative's Warrants.  The
holders of the Representative's Warrants may exercise the Representative's
Warrants at a time when the Company might be able to obtain additional capital
through a new offering of securities on terms more favorable than those provided
herein.  The Company has agreed that, under certain circumstances, it will
register under federal and state securities laws the Representative's Warrants
and/or the securities issuable thereunder. Exercise of these registration rights
could involve substantial expense to the Company at a time when it could not
afford such expenditures and may adversely affect the terms upon which the
Company may obtain financing.  See "Description of Capital Stock" and
"Underwriting."

REPRESENTATIVE'S INFLUENCE ON THE MARKET

          A significant amount of the shares of Common Stock offered hereby may
be sold to customers of the Representative.  Such customers subsequently may
engage in transactions for the sale or purchase of such Common Stock through or
with the Representative.  Although they have no obligation to do so, the
Representative may otherwise effect transactions in such securities.  Such
market making activity may be discontinued at any time.  If they participate in
the market, the Representative may exert a dominating influence on the market,
if one develops, for the Common Stock described in this Prospectus.  The price
and the liquidity of the Common Stock may be significantly affected by the
degree, if any, of the Representative's participation in such market.

                                       11
<PAGE>
 
                                USE OF PROCEEDS

          The net proceeds of this offering are $7,482,500, assuming a public
offering price of $7.50 per share and after deducting estimated underwriting
discounts and commissions and other offering expenses relating to this offering.
The Company intends to use the net proceeds of this offering as follows:

<TABLE>
<CAPTION>
                                                     APPROXIMATE  APPROXIMATE
Application of Net Proceeds                            AMOUNT       PERCENT
                                                     -----------  ------------
<S>                                                  <C>          <C>
Repayment of Subordinated Debt to InSouth Bank(1)     $1,100,000         14.7%
Working Capital(2)                                     6,382,500         85.3
                                                      ----------        -----
                                                      $7,482,500        100.0%
                                                      ==========        =====
</TABLE>
____________
(1) The Kristul Family LLC has pledged and guaranteed all of the shares owned by
    it as security for this loan as well as guaranteeing that obligation.
    Joseph and Maria Kristul have also personally guaranteed this obligation.
    Upon repayment, such pledges and guarantees will be released.  See "Certain
    Relationships and Related Transactions."

(2) The primary purpose of this offering is to increase the Company's liquidity
    and capital resources to have larger lines of credit from its warehouse
    lenders and to reduce the cost of borrowing.  The Company anticipates that
    the proceeds from this offering will be adequate for its liquidity and
    capital resources for at least twelve months following the close of this
    offering.  To the extent such amounts are insufficient, the Company's
    growth will be slowed.

          Pending application of the net proceeds of this offering, the Company
may invest the net proceeds from this offering in short-term, investment-grade
interest-bearing securities.


                                DIVIDEND POLICY

          The Company does not anticipate paying dividends on the Common Stock
at any time in the foreseeable future. The Company's Board of Directors
currently plans to retain earnings for the development and expansion of the
Company's business. Any future determination as to the payment of dividends will
be at the discretion of the Board of Directors of the Company and will depend on
a number of factors including future earnings, capital requirements, financial
conditions and such other factors as the Board of Directors may deem relevant.

          Until April 30, 1998, the Company was treated for federal and certain
state income tax purposes as an S corporation under the Internal Revenue Code.
As a result, earnings of the Company were subject to taxation at the stockholder
rather than the corporate level for federal and, with respect to California
stockholders, certain state income tax purposes. In past years, the Company
made S corporation distributions to provide its stockholders with funds to
pay income taxes on the allocable share of the Company's earnings. See
"Management-Executive Compensation."

                                       12
<PAGE>
 
                                    DILUTION

          As of March 31, 1998, after giving effect to the issuance of 31,250
shares of Common Stock in May 1998, the pro forma net tangible book value of the
Company was $1.1 million or $0.46 per share of Common Stock. The net tangible
book value of the Company equals the total tangible assets of the Company less
its total liabilities. The net tangible book value per share represents the net
tangible book value of the Company divided by the number of shares of Common
Stock outstanding. After giving effect to the sale of 1,200,000 shares of Common
Stock at an assumed offering price per share of $7.50, and the application of
the estimated net proceeds therefrom, the net tangible book value of the Company
at March 31, 1998, will be $8.6 million or $2.33 per share. This represents an
immediate increase in net tangible book value of $1.87 per share to current
shareholders and an immediate dilution of $5.17 per share, or 68.9% to new
investors, as illustrated in the following table:

<TABLE>
<CAPTION>
 
<S>                                                                      <C>          <C>
     Initial public offering price per share                                          $7.50
     Pro forma net tangible book value per share as of March 31, 1998    $0.46
     Increase per share attributable to new investors                     1.87
                                                                         -----
     Adjusted net tangible book value per share after this offering                    2.33
                                                                                      -----
     Dilution per share to new investors                                              $5.17
                                                                                      =====
     Percentage dilution                                                               68.9%
</TABLE>


          The following table sets forth as of March 31, 1998, (i) the number of
shares of Common Stock purchased from the Company, the total consideration paid
to the Company and the average price per share paid by the current shareholders,
and (ii) the number of shares of Common Stock included in the shares to be
purchased from the Company and total consideration to be paid by new investors
in this offering (before deducting underwriting discounts and other estimated
expenses) at an assumed offering price of $7.50 per share.

<TABLE>
<CAPTION>
 
 
                           SHARES PURCHASED       TOTAL CONSIDERATION   
                        ------------------------  ---------------------  AVERAGE PRICE
                           NUMBER        PERCENT     AMOUNT     PERCENT     PER SHARE
                        -------------    -------  -----------  --------  -------------
<S>                     <C>              <C>     <C>           <C>       <C>
Current shareholders       2,500,000 (1)  67.6%  $ 1,148,626     11.3%      $0.46
New investors              1,200,000      32.4%    9,000,000     88.7%      $7.50
                        ------------     -----   -----------    -----
Total                      3,700,000 (2) 100.0%  $10,148,626    100.0%
                        ============     =====   ===========    =====
</TABLE>
________
(1) Includes 31,250 shares of Common Stock issued in May 1998.

(2) Does not include a total of 120,000 shares of Common Stock issuable upon the
    exercise of the Representative's Warrants or 300,000 shares reserved for
    issuance under the Company's Stock Option Plan.


          The computations in the above table are determined after having
deducted the estimated underwriting discount and offering expenses payable by
the Company. Both tables set forth in this section assume no exercise of
existing stock options. To the extent outstanding options are exercised, there
will be further dilution to holders of Common Stock.

                                       13
<PAGE>
 
                                CAPITALIZATION

          The following table sets forth (i) the actual debt and equity
capitalization of the Company as of March 31, 1998, (ii) pro forma equity and
debt capitalization of the Company as of March 31, 1998 adjusted to reflect the
certain distributions made in April 1998 in connection with the Company's
termination as a S corporation and (iii) pro forma as adjusted to give effect to
the sale of 1,200,000 shares offered hereby and the application of the estimated
net proceeds therefrom, giving retroactive effect to the Company's issuance of
1,200,000 shares.  See "Use of Proceeds."

<TABLE>
<CAPTION>
                                                           MARCH 31, 1998
                                             -------------------------------------------
                                               ACTUAL       PRO FORMA(1)     AS ADJUSTED
                                             -----------  -----------------  -----------
<S>                                          <C>          <C>                <C>
DEBT:
 Subordinated debt(1)                        $ 1,000,000     $ 1,000,000     $         -
 Real estate mortgage                            146,092         146,092         146,092
 Warehouse notes payable                      36,781,678      36,781,678      36,781,678
                                             -----------     -----------     -----------
 Total debt                                   37,927,770      37,927,770      36,927,770
SHAREHOLDERS' EQUITY:
 Common Stock, without par value,
  10,000,000 shares authorized, 2,500,000
  shares issued and outstanding,
  3,700,000 as adjusted (2)(3)                     1,000           1,000       7,483,500
 Additional paid in capital                    1,001,090       1,147,626       1,147,626
 Retained earnings                               459,549               -               -
                                             -----------     -----------     -----------
  Total shareholders' equity                   1,461,639       1,148,626       8,631,126
                                             -----------     -----------     -----------
  Total capitalization                       $39,389,409     $39,076,396     $45,558,896
                                             ===========     ===========     ===========
- -------
</TABLE>
(1) Reflects the termination of the Company's status as an S corporation
    effective April 30, 1998.  Subsequent to March 31, 1998 the Company
    distributed approximately $313,000 to its shareholders on March 31, 1998.
    The pro forma capitalization assumes that undistributed S corporation
    earnings constitute additional paid-in capital. See "Use of Proceeds" and
    "Management's Discussion and Analysis - Liquidity and Capital Resources."

(2) Does not include 300,000 shares of Common Stock reserved for issuance under
    the Stock Option Plan. See "Management  Stock Option Plan" and
    "Underwriting."

(3) Upon the Company's formation in 1985, the Common Stock had a par value of
    $1.00 per share.  California corporate law subsequently eliminated the par
    value concept.  Upon the split of the Company's shares which occurred in
    March 1998, the Common Stock was designated without par value.

                                       14
<PAGE>
 
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS

          The following should be read in connection with the Company's
financial statements, related notes and other financial information included
elsewhere in this Prospectus.

GENERAL

          In May of 1995, the Company expanded its operations to include
wholesale mortgage banking in addition to its existing retail mortgage banking.
See "Business - The Wholesale Origination Division." The growth of the Company
has been driven since that time by the wholesale division. The wholesale
division's mortgage loan volume increased to approximately $206,613,000 in 1996
compared to approximately $38,328,000 in 1995. In 1995, the retail division's
mortgage loan volume was approximately $53,380,000 compared to approximately
$54,686,000 in 1996.

          The effect of the establishment of the Company's wholesale division
has been to place greater demand on the Company's financial resources as well as
the requirements for additional personnel. The purpose of this offering is to
provide additional capital to facilitate the growth of the wholesale division as
well as lower the Company's overall cost of borrowing.

THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997

          The Company's pro forma net income increased during the first quarter
of 1998 to $160,662 from $119,493 in the first quarter of 1997. Gross revenues
grew as mortgage loan production for both wholesale and retail divisions grew by
72% during the first quarter of 1998 as compared to the first quarter of 1997.
Gross revenues for the first quarter of 1998 were $1,286,264 compared to the
first quarter of 1997 of $661,378 or an increase of 94%.

          While gross revenues increased, expenses increased approximately 121%.
The increase in expenses was attributable to a hedging loss of $63,798 incurred
prior to the employment of the Company's current director of secondary
marketing. In addition, the net interest expense on the warehouse lines of
credit increased by 373% because of the increased volume and the loans being in
the warehouse line of credit longer than usual while waiting for investors to
purchase these loans. Management of the Company believes that this delay is
attributable to the increase in mortgage lending throughout the United States
with consequent delays in processing. The delay has caused the Company to rely
upon loan participations, buy/sell agreements and other credit facilities during
the first quarter of 1998 which increased the Company's borrowing costs. The
hedging loss and increase in borrowing costs accounted for 18% of the total
reported expenses. See "---Liquidity and Capital Resources" and "Business -
Funding of Mortgage Loans."

YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996

          The Company's pro forma net income increased in 1997 to $508,772 from
$243,774 in 1996. The increase is principally due to the Company's growth in
revenues attributable to its wholesale mortgage loan production. Revenues for
the 1997 fiscal year were $3,189,837 compared to revenues of $1,929,084 in
fiscal 1996. Wholesale mortgage loan production for 1997 was $387,311,770
compared to $206,613,000 for 1996. The average mortgage loan size for the
wholesale operations remained essentially unchanged between 1997 and 1996,
$283,537 and $278,079, respectively.

          Although the dominant increase in the Company's revenues is
attributable to growing wholesale operations, the Company's retail operations
also contributed to its increase in revenues in 1997 over 1996. Retail mortgage
loan production increased to $75,427,000 in 1997 compared to $54,686,000 in
1996, an increase of approximately 38%. The number of loans originated by the
retail division increased, however, by approximately 11% reflecting, in
management's opinion, increased housing costs in the San Francisco Bay area.

          While revenues grew approximately 65% from 1996 to 1997, expenses grew
approximately 53%. The Company benefited from operational efficiencies relating
to the growth of its wholesale division with salaries and benefits, general and
administrative expenses and occupancy expenses an aggregate of approximately
49.5%. However, the savings that arose from these efficiencies were reduced
because of increased interest costs, which increased to $279,093 in 1997 from
$146,860 in 1996, or approximately 90.0% attributable to the Company's larger
volume of mortgage loans.

                                       15
<PAGE>
 
LIQUIDITY AND CAPITAL RESOURCES

          The Company's capital resources substantially are provided by its
warehouse lenders who fund mortgage loans pending resale of those mortgage loans
to investors. The Company presently uses two such warehouse facilities. One of
these lenders has recently committed to the Company to expand its warehouse line
until April of 1999 to $25,000,000 with temporary bulge expansions to
$30,000,000 which would increase the Company's warehouse lines to $37,000,000.
The interest rate for this line will be LIBOR plus 2.75%. To enable the Company
to fund mortgage loans that it closes, the Company has entered into a repurchase
agreement with a financial institution. The interest rate under that repurchase
agreement is at prime plus one quarter per cent.

          The purpose of this offering is to increase the Company's liquidity
and capital resources by having larger lines of credit from its warehouse
lenders and to reduce its costs of borrowing and to enable the Company to
increase the volume of its loan production. The existing limitations have
inhibited the Company's growth, and the Company plans to replace its existing
warehouse lines of credit upon the completion of this offering. The Company
anticipates that the proceeds from this offering will be adequate for its
liquidity and capital resources for at least twelve months following the close
of this offering.

          The primary function of the secondary marketing is to protect the
Company's mortgage position against adverse movements in interest rates and
thereby maintain the Company's net profit margins. Protection is accomplished by
committing to the forward sale of mortgage loans with either a "best efforts"
purchase, that is, a purchase whereby the Company commits to use its best
efforts to supply a mortgage loan at a specified interest rate, or a mandatory
purchase by an investor where the interest rate on the sale is not determined
until an investor acquires the mortgage loan. Best efforts transactions transfer
the interest rate risk to the investor and therefore require no hedging
activity. Mortgage loans scheduled for a mandatory sale, that is, those mortgage
loans that the Company does not have a commitment to purchase the mortgage loan
at a specified rate, are hedged according to the hedging policy. The hedging
policy is an analytical framework that accurately and systematically quantifies
exposure to interest rate risk. The foundation of the Company's risk analysis
for hedged mortgage loans is the Tuttle & Company Risk Management model. The
hedge involves the sale of the appropriate quantity of mortgage-backed
securities as mortgage loans are committed to by the Company. The Company then
purchases the same securities as mortgage loans are sold on a mandatory basis.
The risks involved include market risk on the unsold portion of the mortgage
loans and the interest rate risk between whole mortgage loan and security
pricing. At December 31, 1997 and March 31, 1998, the Company had hedged 92% and
95%, respectively of the mortgage loans that had been warehoused or approved but
not yet funded.

                                       16
<PAGE>
 
                                    BUSINESS

GENERAL

  The Company is a wholesale and retail mortgage banker which originates, funds
and sells mortgage loans secured by one-to-four family residential properties in
the San Francisco Bay area. Since 1985, when the Company was incorporated in
California, the Company has been engaged in the retail origination of mortgage
loans. In 1995, the Company began a wholesale division to close and fund loans
originated by mortgage brokers as well as those originated through the Company's
retail division. The Company funds its originations through warehouse lines of
credit. The mortgage loans are subsequently sold together with the mortgage loan
servicing rights to secondary markets. The total loan production volume for 1997
was $463 million which was an increase of 77% compared to 1996, and 1996 was a
185% increase compared to 1995. Wholesale originations accounted for 84% of the
Company's loan production volume for 1997. The Company maintains four offices, a
retail office in San Francisco, wholesale offices in San Francisco and in San
Jose, California, and a mortgage loan processing facility also in San Francisco.

  The Company originates a variety of mortgage loan products.  Conforming
mortgage loans are those that qualify for inclusion in guarantee programs
sponsored by FNMA.  Non-conforming mortgage loans are those that do not conform
to FNMA requirements.  The principal deviation from such standards relates to
the size of the mortgage loan although some do not conform because of lower
documentation standards where there is a lower loan-to-value ratio.  Those that
exceed the present FNMA guidelines for the San Francisco Bay area, presently
mortgage loans no larger than $227,150, are called Jumbo loans, which comprised
65% of the mortgage loans originated by the Company in 1997.  In times of
declining interest rates, the Company's predominant products are fixed rate
mortgages for a term of 15 or 30 years.  When interest rates are rising, the
Company's predominant products are adjustable rate mortgages.  While the Company
originates some home equity financing through second mortgages and some lines of
credit using the home as a security, these products constitute a small portion
of the Company's business.

  From its inception, the Company's marketing niche has been borrowers who have
high credit ratings and require large mortgage loans with low loan to value
ratios.  As a consequence, the average loan size originated by the Company in
1997 was approximately $280,000.  Due to the large loan size and operating
efficiencies, the Company has sustained an efficient use of capital while
maintaining service quality combined with competitively priced loans.  The
Company generates revenues through gains on the sale of mortgage loans and
servicing rights to investors, interest generated on mortgage loans held or
warehoused from the time the mortgage loan is originated until the mortgage loan
is sold, hedging activities, and, in the case of retail brokerage operations,
origination fees.

  The purpose of this offering is to increase the Company's liquid capital.  The
total amount available in the Company's warehouse lines is limited to 15 to 20
times the amount of the Company's capital.  By increasing the amount of capital,
the Company believes that it can increase its warehouse lines to facilitate an
increase in its mortgage loan volume.  While the Company has considered the
possibility of expanding its operations outside of the San Francisco area,
particularly in selected counties of Southern California and Utah, its focus for
the foreseeable future is to build upon its existing business in its present
location.  The Company does not have a definitive plan to open additional
offices in the next twelve months unless management believes that significant
production can be originated from these offices.

THE WHOLESALE ORIGINATION DIVISION

  In 1997, wholesale mortgage loans constituted 84% of the Company's mortgage
loan originations.  Wholesale mortgage loan origination involves the purchase of
loan applications from mortgage brokers for a purchase price less than what the
Company receives when it sells the same mortgage loan to an investor.  The
mortgage loan is processed, closed and funded by the Company.  To maintain
competitive rates with specific profit margins, the Company prices mortgage
loans on a daily basis.

  The Company's wholesale lending division, which was established in May 1995,
operates from its executive offices in San Francisco and one other office in San
Jose, California.  Currently, the Company obtains mortgage loan volume through a
network of more than 600 independent mortgage brokers and other financial
intermediaries who are all screened and approved by the Company.  With the
exception of the Company's retail division, in 1997 no single source of
independent brokers accounted for more than 5% of the Company's total wholesale
mortgage origination's.

 

                                       17
<PAGE>
 
     Mortgage brokers are qualified to participate in the Company's wholesale
program after the completion of an application process which includes the
Company checking and verifying references, resumes, licenses and financial
statements.  New broker relationships are established through business
development staff.  Approved mortgage brokers are monitored by the Company's
wholesale account representatives and on a yearly basis the broker's financial
statements are updated and re-verified.

  Mortgage loans are processed and every mortgage loan is underwritten by the
Company's underwriters, all of whom have many years of experience.  Only those
mortgage loan applications which meet the Company's underwriting criteria are
funded.  The Company uses the Internal Revenue Service ("IRS") verification of
income program, a particular tool which specifies that brokers must include in
the submitted file an IRS form which the Company uses to confirm with the IRS
certain income data on the mortgage loan application.  This mechanism helps
ensure the quality of mortgage loans funded.  If the mortgage loan file does not
contain this IRS form, the application is automatically rejected.

  Wholesale lending allows the Company to benefit from cost efficiencies derived
from not having to take a mortgage loan application, a labor intensive function,
thereby reducing mortgage loan processing time, while being able to centralize
support functions and reduce fixed operating costs.  Wholesale lending offers
the Company economies of scale while building substantial loan volume.


THE RETAIL ORIGINATION DIVISION

  The Company's retail division was established in 1985 and employs four
commissioned mortgage loan officers located in one office in San Francisco.
While the retail division advertises weekly in San Francisco newspapers, most of
the retail division's business is generated through customer referrals, and a
high percentage of mortgage loans originated by the retail division close.

  Approximately 50% of the mortgage loans originated by the retail division are
sold to the Company's wholesale division.  The retail division completes and
processes the mortgage loan applications and prepares and organizes necessary
mortgage loan documents.  The retail division underwrites these mortgage loans
to conform to either agency guidelines or private investor guidelines.  Mortgage
loans acquired by the wholesale division are underwritten again by the wholesale
division.  During 1997 the mortgage loans originated by the retail division were
evenly divided between conforming and non-conforming (Jumbo) mortgage loans,
with the average mortgage loan size  originated by the retail division being
$265,000 and the average loan-to-value ratio being 80%.

  The Company's retail division collects origination fees and closing costs from
the borrower which make the gross revenues larger than the revenues generated by
the wholesale division.  However, the additional fees must be split with
commissioned mortgage loan officers and cover the cost of processing the
mortgage loan and assume the fixed operating costs, of the retail office.  The
primary financial benefit to the Company of the retail division is as a source
for loans for the wholesale division.

  The following table shows mortgage loan production volume by division:

<TABLE>
<CAPTION>
                                          TWELVE MONTHS ENDED          THREE MONTHS ENDED
                                              DECEMBER 31,                  MARCH 31
                                  ----------------------------------  --------------------
                                    1997         1996         1995       1998       1997
                                  ---------  -------------  --------  ----------  --------
                                                   (DOLLARS IN THOUSANDS)
<S>                               <C>        <C>            <C>       <C>         <C>
RETAIL DIVISION
Volume                            $ 75,427   $ 54,686       $53,380    $ 25,206    $14,616
Percentage of Total Volume              16%        21%           58%         15%        18%
WHOLESALE DIVISION                                     
Volume                            $387,312   $206,613       $38,328    $139,782    $81,512
Percentage of Total Volume              84%        79%           42%         85%        82%
TOTAL LOAN PRODUCTION                                  
Volume                            $462,739   $261,299       $91,708    $164,989    $96,128
Number of Loans                      1,650        998           363         684        351
Average Loan Size                 $    280   $    261       $   252    $    241    $   273
VOLUME GROWTH                           77%       185%                       72%
LOAN PRODUCTION ADMINISTRATION
</TABLE>

                                       18
<PAGE>
 
  All mortgage loan applications must be underwritten and approved in accordance
with the Company's underwriting standards and criteria. Underwriting standards
used for conforming loans are those promulgated by FNMA. Non-conforming (Jumbo)
loans are underwritten subject to credit and appraisal standards established by
specific investors. The Company analyzes the borrower's credit standing,
financial resources and repayment ability as well as the risk of the underlying
collateral.

  All mortgage loans must have a property appraisal provided by an independent
third party, fee-based appraiser. Nationally recognized credit reporting
agencies provide complete reports of the borrower's credit history including
bankruptcies and delinquencies.

  A given borrower may qualify for a mortgage loan through five mortgage loan
documentation programs: full documentation, limited documentation, alternative
documentation, no ratio loan documentation and no income/no asset verification.
Under the full documentation program, the borrower's assets, income and
employment are all verified by written or verbal confirmation. Under the limited
documentation program, more emphasis is placed on the ability to pay and the
property value. Under the alternative documentation program, income and assets
are confirmed by reviewing supporting documentation. Under the no ratio loan
documentation program, no income ratios are calculated. Under the no income/no
asset program, the value of the loan collateral is as critical as the borrower's
credit history. Each program places a heavy emphasis on credit scores and
differing loan to value ratios.

  The Company's underwriting department consists of three underwriters who
average eighteen years of experience and who maintain the consistent quality of
mortgage loans expected by secondary market investors. The Company generally
takes five to ten days to underwrite a mortgage loan from the initial date of
the application. Upon completion of the underwriting process, the mortgage loan
is closed by a title agency chosen by the borrower.

  The Company performs a pre-funding audit on all mortgage loans which includes
a verification of certain mortgage loan documentation to determine the integrity
of the data and a review for compliance with underwriting guidelines. Post-
funding audits are performed to monitor and evaluate the Company's origination
policies and procedures. Ten percent of all mortgage loans closed are randomly
sampled and are subjected to a full quality control review by an outside firm
including re-underwriting the mortgage loan. Management receives a monthly
report on any deficiencies found in the randomly sampled mortgage loans. During
its twelve years in business, the Company has not had to repurchase any mortgage
loans. Management of the Company believes that its use of the IRS Verification
of Income program increases significantly the quality of its originators.

MORTGAGE LOAN SALES

  The Company originates and purchases all of its mortgage loans with the intent
to sell the mortgage loans, without retaining any interest therein, and the
related servicing rights into the secondary market. The mortgage loans are sold
without recourse primarily to institutional investors, national banks and
mortgage lenders. At any given time there are several investors that have
contacted the Company and seek to purchase mortgage loans or enter into programs
to purchase mortgage loans. As part of the sale, the Company provides
representations and warranties which are customary to the industry and cover
such things as compliance with program standards, laws and regulations as well
as the accuracy of the information. In the event of a breach of these
representations and warranties, the Company may be required to repurchase these
mortgage loans and/or may be liable for certain damages. Normally, any
repurchased mortgage loan can be corrected and resold back to the original
investor. During the twelve years in business, the Company has not had to
repurchase any mortgage loans. See "Business - Loan Production Administration."

  The Company holds the originated or purchased mortgage loan for sale from the
time that the mortgage loan application is submitted by the borrower until the
time the mortgage loan is sold to an investor. During that time, the interest
rate on the mortgage loan might be higher or lower than the market rate at which
price the Company can sell the mortgage loan to an investor. Therefore, a market
gain or loss results on the mortgage loan. To protect against interest rate
changes on mortgage loans that are in the warehouse (mortgage loans that have
closed but not sold) and pipeline loans (loans which are not yet closed but on
which an interest rate has been set) the Company often commits to deliver
mortgage loans at a specific price for future delivery to investors through the
use of commitments on a "best efforts" basis where the Company has no obligation
to sell a mortgage loan to an investor unless and until the mortgage loan
closes.

  The Company has a hedging program in place which is administered for the
Company by Tuttle & Co. using a managed account. The Company is able to take
advantage of the hedging firm's reporting services, pipeline management, mark to
market, commitment and position reporting. At any one time the Company hedges a
significant portion of the value of loans warehoused or in the pipeline.
Individual mortgage loans are grouped by note rate, loan type and length of time
in the pipeline. These are then matched based on duration with the appropriate
hedging instrument which reduces risk until the mortgage loan is closed and
delivered to the investor. Gains and losses are recorded at settlement.

                                       19
<PAGE>
 
FUNDING OF MORTGAGE LOANS

  The Company needs substantial cash flow to facilitate the funding and closing
of the originated and purchased loans. These funds are provided on a short-term
basis by financial institutions that specialize in providing lines of credit
known as warehouse lines. During 1997, the Company used warehouse lines of
credit with Warehouse Lending Corporation of America and PNC Mortgage Bank,
National Association.

  The amount of the warehouse line provided by a lender is based on the
Company's net worth. Typically the warehouse lender applies a leverage factor of
between fifteen and twenty. As of the date of this Prospectus, the Company has
several warehouse agreements in place which provide warehouse lines with funding
capabilities in the aggregate of $32 million with an additional bulge facility
of $37 million. The warehouse agreements have various financial and operational
covenants with which the Company must comply. In addition, the warehouse
agreements are personally guaranteed by the existing stockholders. The Company
submits the mortgage loan to the warehouse bank for funding along with the
investor commitment to purchase the loan. The warehouse bank receives between
$35 and $40 per loan from the Company plus interest at the London Interbank
Offered Rates ("LIBOR") plus approximately 2.75% per annum on the unpaid
principal balance of the loan for the time the loan is in the warehouse. LIBOR
is the British Bankers' Association average of interbank offered rates for
dollar deposits in the London market based on quotations at 16 major banks and
act as a base lending rate similar to the prime rate. Therefore, during the
period between funding the loan and its sale to investors, the Company, under
existing warehouse agreements, loses as much as two to two and one half percent
on each loan it funds (the difference between the rate charged by the warehouse
bank and the note rate on the loan).

  The Company intends to use part of the proceeds from this offering to obtain
additional warehouse lines with better pricing which is expected by management
to reduce the Company's cost of borrowings because the additional liquidity will
reduce the Company's borrowing risk

  In addition, the Company will seek to eliminate the personal guarantees of
certain shareholders of the Company from the warehouse agreements. In accordance
with industry practice, the warehouse lines are renewable by the lenders
annually.

COMPETITION

  The Company faces strong competition in originating, purchasing and selling
mortgage loans and the related mortgage servicing rights. The Company's
competition is principally from savings and loans associations, other mortgage
companies, commercial banks and, to a lesser degree, credit unions and insurance
companies, depending upon the type of mortgage loan product offered. Many of
these institutions have greater financial and other resources than the Company
and maintain a significant number of branch offices in the area in which the
Company conducts operations. Increased competition for mortgage loans from other
lenders may result in a decrease in the volume of mortgage loans originated and
purchased by the Company If the Company is unable to compete effectively, its
business, results of operations and financial condition could be materially and
adversely affected.

  The Company depends primarily on mortgage brokers who are not obligated by
contract to originate or deliver new mortgage loans to the Company. Mortgage
brokers compete on the basis of customer service, range of loan products offered
and pricing. Although the Company emphasizes pricing to brokers, it strives to
offer brokers a variety of competitive products and efficient mortgage loan
processing and closing.


LEGISLATION AND REGULATION

  Federal, state and local authorities regulate and examine the origination,
processing, underwriting, selling and servicing of mortgage loans. The Company
is an approved seller/servicer of mortgage loans for Fannie Mae. In addition,
the Company is an approved mortgagee by HUD and is qualified to originate
mortgage loans insured by FHA and VA. Among other consequences, the failure to
comply with HUD or Fannie Mae regulations could prevent the Company from
reselling its mortgage loans or prevent its ability to enter into the servicing
of mortgage loans should it choose to do so. Such failure could also result in
demands for indemnification or mortgage loan repurchase, certain rights of
rescission for mortgage loans, class action law suits and administrative
enforcement actions, any of which could have a material adverse effect on the
Company's business results of operations and financial conditions.

                                       20
<PAGE>
 
  Federal, state and local governmental authorities also regulate the Company's
activities as a lender. The TILA and Regulation Z promulgated thereunder contain
certain requirements designed to provide consumers with uniform, understandable
information with respect to the terms and conditions of mortgage loans and
credit transactions. The ECOA prohibits creditors from discriminating against
applicants on the basis of race, color, sex, age or marital status, among other
restrictions and requirements. In instances where the applicant is denied
credit, or the rate or charge for a mortgage loan increases as a result of
information obtained from a consumer credit agency, the Fair Credit Reporting
Act of 1970 requires the lender to supply the applicant with a name and address
of the reporting agency. The Real Estate Settlement Procedures Act and the Debt
Collection Practices Act subject the Company to filing an annual report with the
Department of Housing and Urban Development.

  There can be no assurance that the Company will maintain compliance with these
requirements in the future without additional expenses, or that more restrictive
local, state or federal laws, rules and regulations will not be adopted or that
existing laws and regulations will not be interpreted in a more restrictive
manner, which would make compliance more difficult and more expensive for the
Company.


EMPLOYEES

  As of June 1, 1998, the Company had 50 employees, all of whom worked on a 
full-time basis. None of the Company's employees is represented by a union. The
Company considers its relations with its employees to be excellent.

PROPERTIES

  The Company has offices in three separate locations in San Francisco which
occupy approximately 6,900 square feet of commercial office space. The Company
has one additional office in San Jose. All of the space is leased, and presently
the Company's monthly rental for office space is approximately $16,000. The last
lease term ends in November 2001.

  In June 1998, the Company entered into a lease for 6,200 square feet of office
space in San Francisco with a monthly rental of approximately $10,000. The term
of the lease is for five years commencing the date of the Company's occupancy
which is anticipated to occur in mid July. The Company plans to continue
conducting its retail operations in the location from which it presently
operates but consolidate the other two San Francisco offices into the new
facility and sublease the two locations at which those operations are now
conducted. This new office space will be used for corporate administrative
offices and for conducting wholesale mortgage lending operations. The Company
believes that the wholesale and retail offices are adequate for the foreseeable
future. The Company maintains adequate casualty insurance on all its property

LEGAL PROCEEDINGS

  The Company is involved in legal proceedings arising in the ordinary course of
business. The ultimate outcome of these proceedings can not be determined
because of the uncertainties that exist. In the opinion of management, the
disposition of matters that are pending or asserted will not have a material
adverse effect on the financial position of the Company.

                                       21
<PAGE>
 
                                   MANAGEMENT

  The following table sets forth certain information regarding the Company's 
directors and executive officers:

<TABLE>
<CAPTION>
NAME                 AGE                     POSITION
- ----                 ---                     --------
<S>                  <C>         <C>
Joseph Kristul        50         Chief Executive Officer and Treasurer, Director
Maria Kristul         50         President, Director
Robert W. Bronson     41         Senior Vice President
Matthew Heidari       41         Chief Financial Officer
Ronald W. Kiehn       56         Director of Operations
Eugene Kristul        27         Secretary, Director
Hilary Whitley        49         Director
</TABLE>

  Joseph Kristul, who founded the Company in 1985, has been a director and
officer since that time and has been responsible for the Company's overall
management since the Company's inception, emphasizing mortgage loan pricing,
funding, administration and sales.  Beginning in 1995 Mr. Kristul created the
Company's wholesale division, developing the Company's base of brokers, which
deliver loan product, and implementing systems and controls on the quality of
the product delivered by brokers.

  Maria Kristul, who founded the Company in 1985, has been a director and
officer since 1991, and has been responsible for the Company's retail division
since the Company's inception.  As well as personally originating approximately
60%, in 1996, of the retail division's production, Ms. Kristul oversees the
retail division's day to day operations including training and managing that
divisions sales and loan processing staff and its quality assurance.

  Robert W. Bronson joined the Company effective April 1, 1998, and is the
Company's Director of Secondary Marketing.  In 1997 and 1998 Mr. Bronson was an
Account Manager for Tuttle & Co., a mortgage trading firm.  Prior to joining
Tuttle & Co., Mr. Bronson was Vice President of Secondary Marketing for WMC
Mortgage Corp and that firm's predecessor, Weyerhaeuser Mortgage Company where
he was responsible for that firm's trading operations, responsibilities he
assumed in 1991.  Mr. Bronson joined Weyerhaeuser Mortgage Company in 1986, and
prior to assuming responsibilities for that firm's trading operations, Mr.
Bronson held a variety of positions in the corporate finance department.

  Matt Heidari joined the Company in April of 1998 as Chief Financial Officer.
Prior to joining the Company, he was the Corporate Controller for Mortgage
Capital Resource, a position he assumed in 1995, where he was responsible for
enhancing and expanding accounting systems and procedures.  From 1989 to 1994,
Mr. Heidari was the Controller and Chief Financial Officer for CFC Mortgage
Corporation, managing that firm's accounting functions and implementing systems
designed to support operations.  Mr. Heidari is also a Certified Public
Accountant.

  Ronald W. Kiehn joined the Company in February 1997 and is responsible for
administration of the Company's loan processing.  For approximately one year
prior to joining the Company, Mr. Kiehn was a private consultant to the mortgage
banking industry emphasizing sales, marketing, secondary marketing, underwriting
and due diligence.  From June of 1991 through December of 1995, Mr. Kiehn was
Vice President of Secondary Marketing for Medallion Mortgage Company, and from
1986 through 1991, Mr. Kiehn held sales and marketing positions as well as
secondary marketing and loan administration responsibilities for Mortgage Loans
America.

  Eugene Kristul has been engaged in the private practice of law since December
1996.  Eugene Kristul became a director in March 1998 and Secretary in 1996.
Prior to becoming an attorney, Eugene Kristul was a law student.

  Joseph and Maria Kristul are husband and wife.  Eugene Kristul is their son.

  Hilary Whitley became a director of the Company in April 1998 and is the
founder of Financial Capital Resources, Inc., which was formed in 1988 and
specializes in client representation principally relating to financial matters
within the mortgage banking industry.  Prior to founding Financial Capital
Resources, Ms. Whitley focused her career of over fifteen years on financial
management, eight of which were directly involved with mortgage banking with an
emphasis on mergers and acquisitions, business and strategic planning.  Ms.
Whitley has held the position of Chief Financial Officer for several companies
and was previously employed by the predecessor of KPMG Peat Marwick LLP.

                                       22
<PAGE>
 
OUTSIDE DIRECTORS

  The Company has agreed to appoint an additional director who is not an
officer, employee or 5% shareholder or related to an officer, employee or 5%
shareholder upon conclusion of the offering. This director will be appointed by
the Representative of the Underwriters.

COMPENSATION OF DIRECTORS

  Directors who are employees of the Company will not receive any remuneration
for their service as directors.  Following completion of this offering non-
employee directors will receive $12,000 annually, and $500 per meeting attended
and related travel expenses.

COMMITTEES OF THE BOARD OF DIRECTORS

  The Company's Board of Directors has established an Audit Committee and a
Compensation Committee effective upon the closing of this offering.  Each
committee consists of at least two directors, none of whom will be an officer or
employee of the Company.  The duties of the Audit Committee are to recommend to
the entire Board of Directors the selection of independent certified public
accountants to perform an audit of the financial statements of the Company, to
review the activities and report of the independent certified public
accountants, and to report the results of such review to the entire Board of
Directors.  The Audit Committee also monitors the internal controls of the
Company.  The duties of the Compensation Committee are to provide a general
review of the Company's compensation and benefit plans to ensure that they meet
corporate objectives and to administer or oversee the Company's Stock Option
Plan and other benefit plans.  In addition, the Compensation Committee reviews
the compensation of officers of the Company and the recommendations of the Chief
Executive Officer on (i) compensation of all employees of the Company and (ii)
adopting and changing major Company compensation  policies and practices.
Except with respect to the administration of the Stock Option Plan, the
Compensation Committee will report its recommendations to the entire Board of
Directors for approval.

INDEMNIFICATION AND LIMITATION ON LIABILITY

  The Company's Restated Articles of Incorporation provide that the liability of
directors of the Corporation for monetary damages will be eliminated to the
fullest extent permissible under California law.

  The Bylaws of the Company provide that the Company will indemnify its
directors and officers against expenses, judgments, fines, settlements and other
amounts actually and reasonably incurred in connection with any proceeding
arising by reason of such person being or having been a director or officer
expenses incurred in defending any such proceeding to the fullest extent
permissible under California law.  The Bylaws also provide that the Company may
indemnify its employees and agents for such expenses by resolution of the Board
of Directors.

  If available at reasonable cost, the Company intends to maintain insurance
against any liability incurred by its officers and directors in defense of any
actions to which they are made parties by any reason of their positions as
officers and directors.  The Company does not presently have such insurance.

EXECUTIVE COMPENSATION

  The following table sets forth the compensation paid to the Company's Chief
Executive Officer and the only other executive officer who earned more than
$100,000 in 1997 (the "Named Executive Officers") for services rendered to the
Company in all capacities for the fiscal years ended December 31, 1997:

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                        ANNUAL COMPENSATION       
NAME AND                                -------------------    ALL OTHER 
PRINCIPAL POSITION         FISCAL YEAR    SALARY     BONUS    COMPENSATION
- ------------------         -----------  ---------  --------   ------------
<S>                        <C>          <C>        <C>        <C>
Joseph Kristul (1)                1997    $12,000      -      $256,536
Chief Executive Officer
Maria Kristul (1)                 1997    $12,000      -      $256,537
President
</TABLE>
________________
(1) All Other Compensation represents distributions made to Joseph and Maria
    Kristul in connection with the Company's status as an S corporation.

                                       23
<PAGE>
 
EMPLOYMENT AGREEMENTS

  The Company has employment agreements with five people, Joseph Kristul, Maria
Kristul, Robert W. Bronson, Matthew Heidari and Ronald W. Kiehn.  Joseph and
Maria Kristul's agreements end December 31, 1999 and may be renewed for an
additional one year term.  Beginning May 1, 1998, Mr. Kristul will receive a
salary of $250,000 per year with a bonus equal to 10% of the Company's pretax
profits up to a maximum bonus of $150,000.  Beginning May 1, 1998, Maria Kristul
will receive an annual salary of $150,000 plus a bonus equal to 60 basis points
(0.60%) of the mortgage loans originated by her and 10 basis points (0.10%) of
the rest of the mortgage loans originated by the retail division less Ms.
Kristul's annual salary.

  Mr. Bronson's agreement's term ends on March 31, 1999 and may be renewed for
an additional one year term.  In addition to a signing bonus of $5,000, Mr.
Bronson's agreement calls for an annual salary of $100,000 plus a bonus of
$50,000 provided the Company's trading operations and the increase in margins,
as defined, result in an increased profit of $1,000,000.

  Mr. Heidari's agreement's term ends on April 16, 1999 and may be renewed for
an additional one year term.  Mr. Heidari will receive an annual salary of
$92,000 plus a travel reimbursement of $6,000 for commuting from his home in
Southern California.

  Mr. Kiehn's agreement's term ends on May 1, 1999 and may be renewed for an
additional one year term.  Mr. Kiehn will receive an annual salary of $92,000
plus $250 per month car expenses.

  Each of the above employment agreements provide that the executive is entitled
to benefits that the Company's Board of Directors or its Compensation Committee
may determine.  In defined circumstances, the agreements also provide severance
payments of up to two times the executive's annual base salary upon termination
and immediate vesting of any stock options.

STOCK OPTION PLAN

  The 1998 Stock Option Plan (the "Stock Option Plan") provides for the grant to
employees, officers, directors, and consultants to the Company or any parent,
subsidiary or affiliate of the Company of up to 300,000 shares of the Company's
Common Stock, subject to adjustment in the event of any subdivision,
combination, or reclassification of shares.  The Stock Option Plan will
terminate in 2008.  The Stock Option Plan provides for the grant of incentive
stock options ("ISO's") within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended, and non-qualified options at the discretion of
the Board of Directors or a committee of the Board of Directors (the
"Committee").  The exercise price of any option will not be less than the fair
market value of the shares at the time the option is granted.  The options
granted are exercisable within the times or upon the events determined by the
Board or Committee set forth in the grant, but no option is exercisable beyond
ten years from the date of the grant.  The Board of Directors or Committee
administering the Stock Option Plan will determine whether each option is to be
an ISO or non-qualified stock option, the number of shares, the exercise price,
the period during which the option may be exercised, and any other terms and
conditions of the option.  The holder of an option may pay the option price in
(1) cash, (2) check, (3) other mature shares of the Company, (4) any combination
of the foregoing methods of payment, or (5) other consideration or method of
payment for the issuance of shares as may be permitted under applicable law.
The options are nontransferable except by will or by the laws of descent and
distribution.  Upon dissolution, liquidation, merger, sale of stock or sale of
substantially all assets, outstanding options, notwithstanding the terms of the
grant, will become exercisable in full at least 10 days prior to the
transaction.  The Stock Option Plan is subject to amendment or termination at
any time and from time to time, subject to certain limitations.

  The plan is administered by the Compensation Committee of the Board of
Directors.

  In April of 1998 the Company agreed to grant options for 15,000 shares each
to Messrs. Bronson, Heidari and Kiehn, exercisable at the initial public
offering price of this offering, effective upon the consummation of this
offering.

                                       24
<PAGE>
 
                      PRINCIPAL AND SELLING SHAREHOLDERS

  The following table sets forth certain information regarding the beneficial
ownership as of June 1, 1998, of the Common stock by (a) each person known by
the Company to be a beneficial owner of more than 5% of the outstanding shares
of Common Stock and by each Selling Shareholder, (b) each director of the
Company, (c) each Named Executive Officer, and (d) as directors and executive
officers of the Company as a group.  Unless otherwise noted, each beneficial
owner named below has sole investment and voting power with respect to the
Common Stock shown below as beneficially owned by him.

<TABLE>
<CAPTION>
                                           SHARES OWNED            SHARES OWNED
                                        PRIOR TO OFFERING       AFTER OFFERING (4)
                                      ----------------------  ----------------------
        NAME AND ADDRESS OF            NUMBER OF     PERCENT   NUMBER OF     PERCENT
          BENEFICIAL OWNER            SHARES OWNED    OWNED   SHARES OWNED    OWNED
- ------------------------------------  ------------  --------  ------------  --------
<S>                                   <C>           <C>       <C>           <C>
Kristul Family LLC(1)(2) (3)             2,468,750    98.75%     2,468,750    66.72%
301 Junipero Serra Blvd.,
Ste. 270
San Francisco CA
Joseph Kristul(1)(2)                     2,468,750    98.75      2,468,750    66.72
301 Junipero Serra Blvd.,
Ste 270
San Francisco CA
Maria Kristul(1)(3)                      2,468,750    98.75      2,468,750    66.72
301 Junipero Serra Blvd.,
Ste 270
San Francisco CA
Hilary Whitley                              18,750     0.75         18,750     0.51
 
All Executive Officers  and
 Directors as a group ( 8 persons)       2,487,500     99.5%     2,487,500    67.23%
</TABLE>
- -------------------
(1)  The Kristul Family LLC has granted to the Underwriters an option to
     purchase 180,000 shares for a 45 day period following the commencement of
     this offering at a purchase price equal to the initial price to public in
     this offering. If the over-allotment option is exercised in full, its
     holdings would be 2,288,750 shares or 61.86% of the total outstanding
     shares of the Company's Common Stock.
(2)  Joseph Kristul is a managing member of the Kristul Family LLC and the
     beneficial owner of 42.5% of the shares held by the Kristul Family LLC and
     is jointly with Maria Kristul the beneficiary of a trust that is a member
     owning 15% of the Kristul Family LLC.
(3)  Maria Kristul is a managing member of the Kristul Family LLC and the
     beneficial owner of 42.5% of the shares held by the Kristul Family LLC and
     is jointly with Joseph Kristul the beneficiary of a trust that is a member
     owning 15% of the Kristul Family LLC.
(4)  Assumes no exercise of the Representative's over-allotment option.

                                       25
<PAGE>
 
                 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

  Joseph and Maria Kristul have each personally guaranteed the Company's
warehouse lines of credit. Upon completion of this offering, the Company plans
to seek larger warehouse lines to replace these lines and obtain the release of
personal guarantees of Joseph and Maria Kristul. See "Business - Funding of
Mortgage Loans."

  In 1997 and 1996, certain of the Company's certificates of deposit were
pledged to Wells Fargo Bank, N.A., for the personal indebtedness of Joseph and
Maria Kristul. In March 1998, Wells Fargo released this security interest.

  In 1995, Joseph and Maria Kristul contributed to the Company a residential
property located in the San Francisco Bay area which had a fair market value of
approximately $213,000 on the date of contribution and is subject to a mortgage
of approximately $150,000 as of December 31, 1997.

  In March 1998, the Company entered into a subordinated debt agreement with
InSouth Bank under which all of the Company's stock at the time, or 2,468,750
shares, was pledged to secure the indebtedness of $1,000,000. Upon completion of
this offering the subordinated debt will be paid, the pledge will be released
and the personal guarantees of the Kristul's released.

  The Company has agreed to indemnify Joseph and Maria Kristul for taxes owing
by the Company for which Joseph and Maria Kristul are obligated upon the
termination of the Company's status as an S corporation.

  Eugene Kristul receives a monthly retainer of $2,000 for legal services
rendered to the Company.

  For the year ended December 31, 1997, the Company paid to Financial Capital
Resources, Inc., an affiliate of Ms. Whitley's, $5,600 for consulting services.
In connection with consulting services to be rendered to the Company in 1998 by
Financial Capital Resources, Inc., the Company has agreed to pay Ms. Whitley
$100,000 and issued 18,750 shares of Common Stock.

  Effective December 31, 1997, the Company entered into a promissory note
payable to the Company by Joseph and Maria Kristul which matured March 31, 1998
bearing interest at 6.5% per annum. This note has been repaid as of March 31,
1998.

  The Board of Directors has adopted a policy that any future transactions with
affiliates of the Company will be on terms no less favorable to the Company than
are reasonably available from unrelated third parties and shall have been
approved by a majority of the Company's directors who do not have a material
interest in the transaction.

                                       26
<PAGE>
 
                           DESCRIPTION OF SECURITIES

  The Company has authorized 10,000,000 shares of Common Stock without par value
and 2,000,000 shares of preferred stock without par value.  As of June 1, 1998,
there were 2,500,000 shares of Common Stock and no shares of Preferred Stock
issued and outstanding.  There were three holders of record of Common Stock, as
of June 1, 1998.

PREFERRED STOCK

  The Board of Directors is authorized, without further notice or action of
shareholders, to issue shares of Preferred Stock in one or more series and to
determine the relative rights, preferences and privileges of the shares of any
such series.  The Company has no present plans to issue any shares of Preferred
Stock.

COMMON STOCK

  The holders of outstanding Common Stock are entitled to share ratably in any
dividends paid on the Common Stock when, as and if declared by the Board of
Directors out of funds legally available.  Each holder of Common Stock is
entitled to one vote for each share held of record.  The Common Stock is not
entitled to cumulative voting or preemptive rights and is not subject to
redemption.  Upon liquidation, dissolution or winding up of the Company, subject
to the prior rights of holders of Preferred Stock, the holders of Common Stock
are entitled to share ratably in the net assets legally available for
distribution.

TRANSFER AGENT AND REGISTRAR
  The Transfer Agent and Registrar for the Common Stock is American Stock
Transfer & Trust Company, 40 Wall Street, New York, New York 10005.

                                       27
<PAGE>
 
                        SHARES ELIGIBLE FOR FUTURE SALE

  Upon completion of this offering, the Company will have 3,700,000 shares of
Common Stock outstanding.  Of these shares, the 1,200,000 shares sold in this
offering will be freely tradable in the public market without restriction under
the Securities Act, except shares purchased by an "affiliate" (as defined in the
Securities Act) of the Company.  The remaining 2,500,000 shares (the "Restricted
Shares") will be "restricted shares" within the meaning of the Securities Act
and may be publicly sold only if registered under the Securities Act or sold in
accordance with an applicable exemption from registration, such as those
provided by Rule 144 under the Securities Act.  The holders of the Restricted
Shares have agreed to not sell shares of Common Stock for a period of one year
following the completion of this offering.   See "Management - Stock Option
Plan" and "Underwriting."

  In general, under Rule 144, as currently in effect, a person (or persons
whose shares are aggregated) is entitled to sell Restricted Shares if at least
one year has passed since the later of the date such shares were acquired from
the Company or any affiliate of the Company.  Rule 144 provides, however that
within any three-month period such person may only sell up to the greater of 1%
of the then outstanding shares of the Company's Common Stock (approximately
37,000 shares following the completion of this offering) or the average weekly
trading volume in the Company's Common Stock during the four calendar weeks
immediately preceding the date on which the notice of the sale is filed with the
Commission.  Sales pursuant to Rule 144 also are subject to certain other
requirements relating to manner of sale, notice of sale and availability of
current public information.  Any person who has not been an affiliate of the
Company for a period of 90 days preceding a sale of Restricted Shares is
entitled to sell such shares under Rule 144 without regard to such limitations
if at least two years have passed since the later of the date such shares were
acquired from the Company or any affiliate of the Company.  Shares held by
persons who are deemed to be affiliated with the Company are subject to such
volume limitations regardless of how long they have been owned or how they were
acquired.

  Without consideration of contractual restrictions described below, an
aggregate of 2,500,000 shares of Common Stock, representing  67.6% of the
outstanding shares of the Common Stock, or shares representing 62.7% if the
over-allotment option is exercised in full will be eligible for sale in the
public market pursuant to Rule 144 after the completion of this offering.  The
Company is unable to estimate the number of shares that may be sold from time to
time under Rule 144, since such number will depend upon the market price and
trading volume for the Common Stock, the personal circumstances of the sellers
and other factors.

  After this offering, executive officers, directors and senior management will
own 2,487,500 shares of the Common Stock.

  The Company can make no prediction as to the effect, if any, that the offer or
sale of these shares would have on the market price of the Common Stock.
Nevertheless, sales, or the perception that such sales could occur, of
significant amounts of Restricted Shares in the public markets could adversely
affect the market price of Common Stock.

  The Company has reserved a total of 300,000 shares for issuance under its
Stock Option Plan.  In addition the Company has granted to the Underwriters'
certain registration rights related to the Representative's Warrants.

  Subject to certain limitations on the aggregate offering price of a
transaction and other conditions, Rule 701 may be relied upon with respect to
the resale of securities originally purchased from the Company by its employees,
directors, officers, consultants or advisors prior to the date the issuer
becomes subject to the reporting requirements of the Exchange Act, pursuant to
written compensatory benefit plans or written contracts relating to the
compensation of such persons.  In addition, the Commission has indicated that
Rule 701 will apply to typical stock options granted by an issuer before it
becomes subject to the reporting requirements of the Exchange Act, along with
the shares acquired upon exercise of such options (including exercises after the
date of this Prospectus).  Securities issued in reliance on Rule 701 are
restricted securities and, subject to the contractual restrictions described
above, beginning 90 days after the date of this Prospectus, may be sold by
persons other than affiliates, subject only to the manner of sale provisions of
Rule 144 and by affiliates under Rule 144 without compliance with its two-year
minimum holding period requirements.

  Options to purchase 45,000 shares of Common Stock are currently outstanding.
Shortly after this Offering, the Company intends to file a registration
statement on Form S-8 under the Securities Act covering shares of Common Stock
reserved for issuance under the Company's Stock Option Plans.  Shares of Common
Stock issued upon exercise of options under the Form S-8 will be available for
sale in the public market, subject to Rule 144 volume limitations applicable to
affiliates and subject to any contractual restrictions.  The options will vest
over a five year period.

                                       28
<PAGE>
 
                                  UNDERWRITING

  Pursuant to the terms and subject to the conditions contained in the
Underwriting Agreement, the Company has agreed to sell to the Underwriters named
below, and each of the Underwriters, for whom Tejas Securities Group, Inc (the
"Representative") is acting as Representative, has severally agreed to purchase
the number of shares set forth opposite its name in the following table.

       UNDERWRITERS                          NUMBER OF SHARES
       ------------                          ----------------
<TABLE>
<CAPTION>
 
<S>                                                  <C>
     Tejas Securities Group, Inc.                      125,000
     Spencer Trask Securities, Inc                     125,000
     M.H. Myerson & Co., Inc.                          125,000
     Smith Moore & Co.                                 125,000
     Westport Resources Investment Services, Inc.      125,000
     First London Securities Corporation               125,000
     Royce investment Group, Inc.                      100,000
     Kashner Davidson Securities Corporation           100,000
     First Asset Management, Inc                        50,000
     Centex Securities, Inc                             50,000
     Culver Financial Management, Inc.                  50,000
     Frederick & Company, Inc.                          50,000
     MS Farrell & Co., Inc.                             25,000
     Capital West Securities, Inc.                      25,000
                                                     ---------
     Total                                           1,200,000
                                                     =========
</TABLE>

  The Representative has advised the Company that the Underwriters propose to
offer the shares of Common Stock to the public at the initial public offering
price per share set forth on the cover page of this Prospectus and to certain
dealers at such price less a concession of not more than $0.35 per share, of
which $0.10 may be reallowed to other dealers.  After the initial public
offering, the public offering price, concession and reallowance to dealers may
be reduced by the Representative.

  The Selling Shareholders have granted to the Underwriters an option,
exercisable during the 45-day period after the date of this Prospectus, to
purchase up to 180,000 additional shares of Common Stock to cover over-
allotments, if any, at the same price per share as the Company will receive for
the 1,200,000 shares that the Underwriters have agreed to purchase.  To the
extent that the Underwriters exercise such option, each of the Underwriters will
have a firm commitment to purchase approximately the same percentage of such
additional shares that the number of shares to be purchased by it shown in the
above table represents as a percentage of the 1,200,000 shares offered hereby.
If purchased, such additional shares will be sold by the Underwriters on the
same terms as those on which the 1,200,000 shares are being sold.  All of such
shares will be sold to the Underwriters by Selling Shareholders, and the Company
will not receive any proceeds from the sale of such shares.  See "Principal and
Selling Shareholders."

  The Underwriting Agreement contains covenants of indemnity by the Company
to the Underwriters against certain civil liabilities, including liabilities
under the Securities Act.

  The holders of 2,500,000 shares of the Common Stock (2,320,000 if the
Underwriters' over allotment option is exercised in full) after the offering
have agreed with the Representative that, until one year after the date of this
Prospectus, subject to certain limited exceptions, they will not offer, sell,
contract to sell, or otherwise dispose of any shares of Common Stock, any
options to purchase shares of Common Stock, or any securities convertible into,
exercisable for or exchangeable for shares of Common Stock, owned directly by
such holders or with respect to which they have the power of disposition, or
enter into any swap or similar agreement that transfers, in whole or in part,
the economic risk of ownership of the Common Stock, without the prior written
consent of the Representative, except for shares sold upon exercise of the over-
allotment option.  Substantially all of such shares will be eligible for
immediate public sale following expiration of the lock-up periods, subject to
the provisions of Rule 144.  In addition, the Company has agreed that until 365
days after the date of this Prospectus, the Company will not, without the prior
written consent of the Representative, subject to certain limited exceptions,
issue, sell, contract to sell, or otherwise dispose of, any shares of Common
Stock, any options to purchase any shares of Common Stock or any securities
convertible into, exercisable for or exchangeable for shares of Common Stock, or
enter into any swap or similar agreement that transfers, in whole or in part,
the economic risk of ownership of the Common Stock, other than the Company's
sales of shares in this offering, the issuance of Common Stock upon the exercise
of outstanding options or warrants or the issuance of options under its employee
stock option plan.  See "Shares Eligible for Future Sale."

                                       29
<PAGE>
 
  Certain persons participating in this offering may over-allot or effect
transactions which stabilize, maintain or otherwise affect the market price of
the Common Stock at levels above those which might otherwise prevail in the open
market, including by entering stabilizing bids, effecting syndicate covering
transactions or imposing penalty bids.  A stabilizing bid means the placing of
any bid or effecting of any purchase, for the purpose of pegging, fixing or
maintaining the price of the Common Stock.  A syndicate covering transaction
means the placing of any bid on behalf of the underwriting syndicate or the
effecting of any purchase to reduce a short position created in connection with
this offering.  A penalty bid means an arrangement that permits the Underwriters
to reclaim a selling concession from a syndicate member in connection with this
offering when shares of Common Stock sold by the syndicate member are purchased
in syndicate covering transactions.  Such stabilizing, if commenced, may be
discontinued at any time.

  The Representative has informed the Company that they do not expect sales
to accounts over which the Underwriters exercise discretionary authority.

  The Company has agreed to pay the Representative a non-accountable expense
allowance of 2.0% of the gross amount of the shares sold  at the closing of the
offering.  The Underwriters' expenses in excess thereof will be paid by the
Representative.  To the extent that the expenses of the underwriting are less
than that amount, such excess shall be deemed to be additional compensation to
the Underwriters.

  The Company has agreed that for a period of five years from the closing of
the sale of the shares offered hereby, it will nominate for election as a
director a person designated by the Representative, and during such time as the
Representative has not exercised such right, the Representative shall have the
right to designate an observer, who shall be entitled to attend all meetings of
the Board and receive all correspondence and communications sent by the Company
to the members of the Board. The Representative have not yet identified to the
Company the person who is to be nominated for election as a director or
designated as an observer.

  The Underwriting Agreement provides for indemnification among the Company,
the Selling Shareholders and the Underwriters against certain civil liabilities,
including liabilities under the Securities Act.  In addition, the
Representative's Warrants provide for indemnification among the Company and the
holders of the Representative's Warrants and underlying shares against certain
civil liabilities, including liabilities under the Securities Act and the
Exchange Act.

REPRESENTATIVE'S WARRANTS

  Upon the closing of this offering, the Company has agreed to sell to the
Representative for nominal consideration, the Representative's Warrants.  The
Representative's Warrants will entitle the holder to purchase 120,000 shares of
Common Stock.  The Representative's Warrants are exercisable at 120% of the
public offering price for a four-year period commencing one year from the
effective date of this offering.  The Representative's Warrants may not be sold,
transferred, assigned or hypothecated for a period of one year from the date of
this offering, except to the officers of the Underwriters and their successors
and dealers participating in the offering and/or their partners or officers.
The Representative's Warrants will contain antidilution provisions providing for
appropriate adjustment of the number of shares subject to the Warrants under
certain circumstances.  The holders of the Representative's Warrants have no
voting, dividend or other rights as shareholders of the Company with respect to
shares underlying the Representative's Warrants until the Representative's
Warrants have been exercised.

  The holders of the Representative's Warrants have certain piggyback
registration rights with respect to the underlying shares of Common Stock.

DETERMINATION OF OFFERING PRICE

  The initial public offering price was determined by negotiations between
the Company and the Representative.  The factors considered in determining the
public offering price include the Company's revenue growth since its
organization, the industry in which it operates, the Company's business
potential and earning prospects and the general condition of the securities
markets at the time of the offering.  Prices for the shares of Common Stock
after this offering will be determined in the market and may be influenced by
many factors including the depth and liquidity of the market for the Common
Stock, investor perception of the Company and the mortgage banking industry as a
whole.

  Prior to this offering, there has been no public market for the Common
Stock, and there can be no assurance than an active market will develop.

AMERICAN STOCK EXCHANGE

  The Company has listed the Common Stock on the American Stock Exchange
under the trading symbol "TFN".

                                       30
<PAGE>
 
                                 LEGAL MATTERS

  The validity of the issuance of the Common Stock offered hereby will be
passed upon for the Company by Robert A. Forrester, Esq., Richardson, Texas.
Mr. Forrester owns 12,500 shares of Common Stock.  Certain legal matters in
connection with the sale of the Common Stock offered hereby will be passed upon
for the Underwriters by Wolin, Ridley & Miller LLP, Dallas, Texas.

                                    EXPERTS

  The balance sheet of the Company as of December 31, 1997, and the
statements of income, stockholders' equity, and cash flows for the years ended
December 31, 1997 and 1996 included in this Prospectus have been audited by Moss
Adams LLP, independent public accountants, as indicated in their report with
respect thereto, and are included herein in reliance upon the authority of said
firm as experts in auditing and accounting, in giving said report.

                                       31
<PAGE>
 
                       TRANSNATIONAL FINANCIAL CORPORATION


                          INDEPENDENT AUDITOR'S REPORT
                                       AND
                              FINANCIAL STATEMENTS

                           DECEMBER 31, 1997 AND 1996
                               AND MARCH 31, 1998











                                      32
<PAGE>
 
CONTENTS
- --------------------------------------------------------------------------------

                                                                           PAGE

INDEPENDENT AUDITOR'S REPORT................................................F-1

FINANCIAL STATEMENTS
    Balance sheets..........................................................F-2
    Statements of income....................................................F-3
    Statements of stockholders' equity......................................F-4
    Statements of cash flows............................................... F-5
    Notes to financial statements...........................................F-6






                                      33
<PAGE>
 
INDEPENDENT AUDITOR'S REPORT

To the Stockholders
Transnational Financial Corporation

We have audited the accompanying balance sheet of Transnational Financial
Corporation as of December 31, 1997, and the related statements of income,
stockholders' equity and cash flows for the years ended December 31, 1997 and
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.

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

In our opinion, the accompanying financial statements present fairly, in all
material respects, the financial position of Transnational Financial Corporation
as of December 31, 1997, and the results of its operations and its cash flows
for the years ended December 31, 1997 and 1996 in conformity with generally
accepted accounting principles.

As described in Note 10, the Company's December 31, 1995 balance sheet has been
restated to reflect the application of accounting principles which require the
deferral of certain loan origination costs and related fee income.


San Francisco, California
June 4, 1998                                                  /s/Moss Adams LLP



- --------------------------------------------------------------------------------
                                       F-1
<PAGE>
 
TRANSNATIONAL FINANCIAL CORPORATION
BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>

                                                                                                               PROFORMA
                                                                  DECEMBER 31,            MARCH 31,            MARCH 31,
                                                                      1997                   1998                1998
                                                              ---------------------    ----------------    -----------------
                                                                                         (unaudited)

                                     ASSETS

<S>                                                                <C>                   <C>                  <C>         
 Cash and equivalents                                              $     482,558         $   1,649,752        $  1,336,739
 Certificates of deposit                                                 272,298               266,709             266,709
 Mortgage loans held for sale, pledged                                50,288,714            37,015,012          37,015,012
 Accrued interest                                                        181,763               168,100             168,100
 Notes receivable                                                        135,819               135,819             135,819
 Note receivable, stockholders                                           250,000                     -                   -
 Real estate held for investment, net                                    199,944               198,784             198,784
 Property and equipment, net                                             103,267               110,051             110,051
 Other assets                                                             61,420               176,850             176,850
                                                                -----------------      ----------------    -----------------

      TOTAL ASSETS                                                 $  51,975,783         $  39,721,077        $ 39,408,064
                                                                =================      ================    =================

                      LIABILITIES AND STOCKHOLDERS' EQUITY

 LIABILITIES
    Warehouse notes payable                                        $  50,154,791         $  36,781,678        $ 36,781,678
    Note payable, subordinated                                                 -             1,000,000           1,000,000
    Accrued interest                                                     202,118               151,500             151,500
    Real estate mortgage                                                 146,755               146,092             146,092
    Accounts payable and accrued liabilities                             133,480               180,168             180,168
                                                                -----------------      ----------------    -----------------
      TOTAL LIABILITIES                                               50,637,144            38,259,438          38,259,438
                                                                -----------------      ----------------    -----------------

 STOCKHOLDERS' EQUITY
    Preferred stock, no par value; 2,000,000 shares
      authorized; no shares issued or outstanding                              -                     -                   -
    Common stock, no par value; 10,000,000 shares
      authorized; 2,500,000 shares issued and outstanding                  1,000                 1,000               1,000
    Additional paid-in capital                                         1,001,090             1,001,090           1,147,626
    Retained earnings                                                    336,549               459,549                   -
                                                                -----------------      ----------------    -----------------

      TOTAL STOCKHOLDERS' EQUITY                                       1,338,639             1,461,639           1,148,626
                                                                -----------------      ----------------    -----------------
      TOTAL LIABILITIES AND
        STOCKHOLDERS' EQUITY                                       $  51,975,783         $  39,721,077        $ 39,408,064
                                                                =================      ================    =================
</TABLE>




- --------------------------------------------------------------------------------
                             See accompanying notes

                                      F-2
<PAGE>
 
STATEMENTS OF INCOME
- --------------------------------------------------------------------------------

                   STATEMENT OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>

                                                                    YEAR ENDED                             THREE MONTHS
                                                                   DECEMBER 31,                          ENDED MARCH 31,
                                                       ------------------------------------    ------------------------------------
                                                             1997               1996                 1998               1997
                                                       -----------------  -----------------    -----------------  -----------------
                                                                                                           (unaudited)
<S>                                                         <C>                <C>                 <C>                <C>         
INCOME
     Net gain from sales of mortgage loans                  $ 2,230,309        $ 1,013,579         $    969,783       $    428,671
     Production income                                          943,182            915,505              305,697            229,032
     Other                                                       16,346                  -               10,784              3,675
                                                       -----------------  -----------------    -----------------  -----------------

                                                              3,189,837          1,929,084            1,286,264            661,378
                                                       -----------------  -----------------    -----------------  -----------------
EXPENSES
     Salaries and benefits                                    1,262,790            757,755              513,472            244,441
     General and administrative                                 674,962            558,535              314,658            164,446
     Interest expense, net of interest income                   279,093            146,860              152,431             32,199
     Occupancy                                                  125,020             63,860               39,041             20,799
                                                       -----------------  -----------------    -----------------  -----------------

                                                              2,341,865          1,527,010            1,019,602            461,885
                                                       -----------------  -----------------    -----------------  -----------------
INCOME BEFORE PROVISION FOR
     STATE INCOME TAX                                           847,972            402,074              266,662            199,493

PROVISION FOR STATE INCOME
     TAX, current                                                13,000
                                                                                     6,227                4,000              3,000
                                                       -----------------  -----------------    -----------------  -----------------

NET INCOME                                                 $    834,972       $    395,847         $    262,662       $    196,493
                                                       =================  =================    =================  =================

PRO FORMA INFORMATION
     Income before income taxes, as reported               $    847,972       $    402,074         $    266,662       $    199,493
     Pro forma income tax provision                             339,200            158,300              106,000             80,000
                                                       -----------------  -----------------    -----------------  -----------------
     Pro forma net income                                  $    508,772       $    243,774         $    160,662       $    119,493
                                                       =================  =================    =================  =================
     Pro forma earnings per share                          $       0.20       $       0.10         $       0.06       $       0.05
                                                       =================  =================    =================  =================
     Pro forma dividends per share                         $       0.21       $       0.15         $       0.06       $       0.18
                                                       =================  =================    =================  =================
     Pro forma weighted average common
        shares outstanding                                    2,500,000          2,500,000            2,500,000          2,500,000
                                                       =================  =================    =================  =================
</TABLE>



- --------------------------------------------------------------------------------
                             See accompanying notes

                                      F-3
<PAGE>
 
TRANSNATIONAL FINANCIAL CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>

                                                                                                 Additional        Total
                                                 Shares           Common          Paid-In         Retained      Stockholders'
                                               Outstanding         Stock          Capital         Earnings         Equity
                                              -------------     -----------    -------------    -----------    ---------------

<S>                                               <C>           <C>             <C>             <C>            <C>            
BALANCE, December 31, 1995                        2,468,750     $     1,000     $    922,779    $    16,663    $       940,442

 Prior period adjustment - Note 10                        -               -          (64,689)       (16,663)           (81,352)

 Distributions to stockholders                            -               -                -       (381,197)          (381,197)

 Stockholder contributions                                -               -          143,000              -            143,000

 Net income                                               -               -                -        395,847            395,847
                                              -------------     -----------    -------------    -----------    ---------------

BALANCE, December 31, 1996                        2,468,750           1,000        1,001,090         14,650          1,016,740

 Distributions to stockholders                            -               -                -       (513,073)          (513,073)

 Net income                                               -               -                -        834,972            834,972
                                              -------------     -----------    -------------    -----------    ---------------

BALANCE, December 31, 1997                        2,468,750           1,000        1,001,090        336,549          1,338,639

 Distributions to stockholders                            -               -                -       (139,662)          (139,662)

 Net income                                               -               -                -        262,662            262,662
                                              -------------     -----------    -------------    -----------    ---------------

BALANCE, March 31, 1998                           2,468,750     $     1,000     $ 1,001,090     $   459,549    $     1,461,639
                                              =============     ===========    =============    ===========    ===============
</TABLE>



- --------------------------------------------------------------------------------
                             See accompanying notes

                                      F-4
<PAGE>
 
STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>

                                                                               YEAR ENDED                       THREE MONTHS
                                                                              DECEMBER 31,                    ENDED MARCH 31,
                                                                     ------------------------------    ----------------------------
                                                                          1997            1996             1998           1997
                                                                     -------------  ---------------    -------------  -------------
                                                                                                                (unaudited)
<S>                                                                  <C>            <C>                <C>            <C>          
 CASH FLOWS FROM OPERATING ACTIVITIES
    Net income                                                       $     834,972  $       395,847    $     262,662  $     196,493
    Adjustments to reconcile net income to net cash
       used for operating activities
        Depreciation                                                        14,851           11,487            7,935          4,138
        Loss from sale of real estate                                            -           35,308                -              -
       Changes in operating assets and liabilities
        Origination of mortgage loans held for sale                   (399,235,560)    (191,331,640)    (164,989,035)   (96,131,000)

        Proceeds from sales of mortgage loans                          368,442,507      173,271,367      178,262,737     99,957,142
        (Increase) decrease in accrued interest receivable                (152,110)         (11,281)          13,663         (3,475)

        Increase (decrease) in accounts payable and accrued liabilities     23,537           94,000           46,688        (26,372)

        Increase (decrease) in accrued interest payable                    158,769                -          (50,618)        (8,883)

        Decrease (increase) in other assets                                  2,344          (17,489)        (115,430)        10,634
                                                                     -------------  ---------------    -------------  -------------
            Net cash (used for) provided by operating activities       (29,910,690)     (17,552,401)      13,438,602      3,998,677
                                                                     -------------  ---------------    -------------  -------------

 CASH FLOWS FROM INVESTING ACTIVITIES
     Purchase of certificates of deposit                                  (272,298)        (221,000)               -              -
     Proceeds from sales and maturities of certificates of deposit         379,095          171,117            5,589              -
     Purchase of property and equipment                                    (29,930)         (69,178)         (13,559)        (1,237)

     Proceeds from sale of real estate held for investment                       -          245,000                -              -
                                                                     -------------  ---------------    -------------  -------------
            Net cash provided by (used for) investing activities            76,867          125,939           (7,970)        (1,237)

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

 CASH FLOWS FROM FINANCING ACTIVITIES
     Borrowings on warehouse notes payable                             399,152,597      191,280,680      166,638,925     95,966,691
     Payments on warehouse notes payable                              (368,442,507)    (173,271,367)    (180,012,038)   (99,951,471)

     Contributions from stockholders                                             -          143,000                -              -
     Distributions to stockholders                                        (513,073)        (381,197)        (139,662)      (125,342)

     Issuance of note receivable, stockholders                            (250,000)               -                -              -
     Payment of note receivable, stockholders                                    -                -          250,000              -
     Real estate mortgage loan payments                                     (2,608)        (213,606)            (663)          (629)

     Borrowings on note payable, subordinated                                    -                -        1,000,000              -
                                                                     -------------  ---------------    -------------  -------------
            Net cash provided by (used for) financing activities        29,944,409       17,557,510      (12,263,438)    (4,110,751)

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

 NET CHANGE IN CASH AND EQUIVALENTS                                        110,586          131,048        1,167,194       (113,311)


 CASH AND EQUIVALENTS, beginning of period                                 371,972          240,924          482,558        371,972
                                                                     -------------  ---------------    -------------  -------------

 CASH AND EQUIVALENTS, end of period                                 $     482,558  $       371,972    $   1,649,752  $     258,661
                                                                     =============  ===============    =============  =============

 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
       Cash paid during the period for:
         Income taxes                                                $           -  $         3,908    $           -  $           -
                                                                     =============  ===============    =============  =============
         Interest                                                    $   1,411,720  $       617,511    $     783,923  $     209,143
                                                                     =============  ===============    =============  =============
</TABLE>



- --------------------------------------------------------------------------------
                             See accompanying notes

                                      F-5
<PAGE>
 
TRANSNATIONAL FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------


Note 1 - Description of Operations and Summary of Significant Accounting
         Policies

         Description of Operations - Transnational Financial Corporation
         conducts real estate mortgage banking activities through wholesale and
         retail branch operations located in and around the San Francisco Bay
         area. The Company's revenues are derived primarily from the origination
         and sale of conforming and non-conforming residential real estate loans
         for placement in the secondary market.

         Cash and Equivalents - Cash and equivalents consist of amounts on
         deposit with major regional financial institutions and certificates of
         deposit with an original maturity of not greater than 90 days.

         Certificates of Deposit - Certificates of deposit generally mature
         within 180 days. Certificates of deposit amounting to $318,672 are
         subject to restrictions at December 31, 1997, including approximately
         $160,000 classified as cash equivalents. These securities were pledged
         as collateral for certain obligations of the stockholders. The bank
         released this collateral subsequent to December 31, 1997.

         Mortgage Loans Held for Sale - All mortgage loans originated are
         intended for sale in the secondary market and are carried at the lower
         of cost or estimated market value, as determined by quoted market
         prices, in aggregate. Substantially all loans are sold servicing
         released. The real property of the borrower is pledged as collateral
         for mortgage loans.

         Loan origination fees and certain direct origination costs are
         recognized when the loan is made or when the costs are incurred.
         Origination fees earned in excess of direct loan origination costs are
         deferred and recognized as income when the related loan is sold. Fees
         representing reimbursement for the costs of specific services performed
         by third parties (such as for appraisals) are recognized when the
         services have been performed. Loan placement fees are recognized when
         all significant services have been performed.

         Gains or losses realized from mortgage loan sales are recognized at
         time of settlement with investors based upon the difference between the
         proceeds from sale and the carrying value of the mortgage loan sold,
         net of commitment fees paid. The Company reflects the value paid for
         servicing rights released in net gain from sales of mortgage loans.

         Property and Equipment - Property and equipment is stated at cost and
         is depreciated using accelerated depreciation methods over the
         estimated useful lives of the assets, which range from five to ten
         years. Accumulated depreciation at December 31, 1997 was $58,423.


- --------------------------------------------------------------------------------
                                      F-6
<PAGE>
 
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------


Note 1 - Description of Operations and Summary of Significant Accounting
         Policies (continued)

         Financial Statement Presentation - The Company prepares its financial
         statements using an unclassified balance sheet presentation as is
         customary in the mortgage banking industry. A classified balance sheet
         presentation would have aggregated current assets, current liabilities
         and net working capital as follows at December 31, 1997:

               Current Assets                          $ 51,536,753
               Current Liabilities                     $ 50,493,589
                                                       ------------

               Net Working Capital                     $  1,043,164
                                                       ============

         Production Income - Production income consists of fees paid to the
         Company by borrowers for the preparation, documentation and
         underwriting of loans. These fees and related lending transaction costs
         are deferred until the related loan is sold. Upon sale of the loan, the
         deferred fees and costs are recognized as production income, and
         deferred costs are recognized in the applicable expense
         classifications.

         Income Taxes - The Company is a Subchapter S corporation and therefore
         is not subject to Federal income tax at December 31, 1997.
         Distributions are periodically made to cover the Federal and state tax
         liability of the stockholders. The California Revenue and Taxation Code
         also levies a corporate tax of 1.5% on taxable income for which a
         provision has been provided. However, pro forma income tax results are
         presented on the statement of income and discussed in Note 16.
         Effective April 30, 1998, the Company terminated its S status and
         became a C corporation for tax purposes.

         Off-Balance-Sheet Financial Instruments - The Company is a party to
         financial instruments with off-balance sheet risk in the normal course
         of business to meet the real estate mortgage financing needs of its
         customers and to reduce its own exposure to market risk resulting from
         fluctuations in interest rates. These financial instruments include
         commitments to extend credit, commitments to sell whole loans on a
         mandatory basis and forward delivery contracts to sell mortgage backed
         securities. These instruments involve, to varying degrees, elements of
         credit, and market risk resulting from changing interest rates, in
         excess of the amount recognized in the financial statements. The
         contract or notional amounts of those instruments reflect the extent of
         the Company's involvement in particular classes of financial
         instruments. Gains and losses resulting from such financial instruments
         are recorded in the financial statements when they are funded or
         settled.


- --------------------------------------------------------------------------------
                                      F-7
<PAGE>
 
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------


Note 1 - Description of Operations and Summary of Significant Accounting
         Policies (continued)

              Commitments to Extend Credit - In response to marketplace
              demands, the Company routinely makes commitments to extend credit
              for fixed rate and variable rate loans with or without rate lock
              guarantees. When rate lock guarantees are made to customers, the
              Company becomes subject to market risk for changes in interest
              rates that occur between the rate lock date and the date that a
              firm commitment to purchase the loan is made by a secondary market
              investor. Generally, as interest rates increase, the market value
              of the loan commitment goes down. The opposite effect takes place
              when interest rates go up. As described below, the Company uses a
              combination of Financial Futures and Forward Delivery Commitments
              to manage this risk. Hedging of the market risk is most successful
              when these instruments are matched, resulting in the market values
              of the Financial Futures and Forward Delivery Commitments moving
              in an inverse relationship with the market value changes of the
              Company's loan commitments.

              Commitments to extend credit are agreements to lend to a customer
              as long as the borrower satisfies the Company's underwriting
              standards. Commitments generally have fixed expiration dates or
              other termination clauses and may require payment of a fee. The
              Company's exposure to credit loss in the event of nonperformance
              by the other party to the financial instrument for commitments to
              extend credit is represented by the contractual notional amount of
              those commitments. The Company uses the same credit policies in
              making commitments to extend credit as it does for
              on-balance-sheet instruments. Collateral is required for
              substantially all loans, and normally consists of real property.
              The Company's experience has been that substantially all loan
              commitments are completed or terminated by the borrower within
              three months. The Company funds these commitments from operating
              capital and through short-term borrowings on various warehouse
              lines of credit. Sale of loans to permanent investors provides
              additional liquidity to the Company.

              Financial Futures - Mortgage Backed Securities ("MBS") futures
              contracts are entered into by the Company as hedges against
              exposure to interest-rate risk and are not for speculation
              purposes. Changes in the market value of futures contracts are
              deferred while the contracts are open and subsequently recognized
              in income or expense after the contract closes and the related
              hedged assets are sold. The Company provides collateral in the
              form of standby letters of credit to support sales commitments
              made to counterparties. However, the Company generally closes out
              their financial futures positions and the offsetting standby
              letters of credit without actually funding these instruments.
              Credit risk on these instruments arise when the Company's position
              in these securities becomes positive (i.e. "in-the-money") and the
              Company is a net creditor to the counterparty to the agreement. To
              manage this risk, the Company only enters into these agreements
              with major, well-known financial institutions.


- --------------------------------------------------------------------------------
                                      F-8
<PAGE>
 
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------


Note 1 - Description of Operations and Summary of Significant Accounting
         Policies (continued)

              Forward Delivery Commitments - The Company uses mandatory sell
              forward delivery commitments to sell whole loans. These
              commitments are also used as a hedge against exposure to
              interest-rate risks resulting from rate locked loan origination
              commitments and certain mortgage loans held for sale. Gains or
              losses incurred in completing these commitments offset
              corresponding gains and losses in the items hedged, and are
              deferred and recognized in the statement of income when the
              contract is closed and the related assets are sold. Credit risk on
              these instruments arise when the Company's position in these
              securities becomes positive (i.e. "in-the-money") and the Company
              is a net creditor to the counterparty to the agreement. To manage
              this risk, the Company only enters into these agreements with
              major, well-known financial institutions.

              Standby Letters of Credit - The Company uses standby letters of
              credit as collateral to support sales commitments of financial
              futures. The lender charges a fee to the Company to maintain the
              availability of these letters of credit, which generally are
              matched against the Company's commitments to sell financial
              futures to the lender as part of the Company's hedging strategy.
              The Company closes out their standby letters of credit when the
              related financial futures are closed, and thus is normally not
              required to execute draws or payments on these credit facilities.

         The Company contracts with a hedge management firm to carry out their
         hedge strategy and to track these off-balance sheet financial
         instruments. A market position consisting of Financial Futures and
         Forward Delivery Commitments has been established with characteristics
         that are designed to offset the market risks which exist with certain
         mortgage loans held for sale and commitments to extend credit. All
         derivative financial instruments held or issued by the Company are held
         or issued for purposes other than trading.

         Use of Management Estimates - The preparation of financial statements
         in conformity with generally accepted accounting principles requires
         management to make estimates and assumptions that affect the reported
         amounts on the balance sheet at December 31, 1997 and the statement of
         income for the years ended December 31, 1997 and 1996. Actual results
         could differ significantly from those estimates.



- --------------------------------------------------------------------------------
                                      F-9
<PAGE>
 
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------


Note 1 - Description of Operations and Summary of Significant Accounting
         Policies (continued)

         Adoption of New Accounting Pronouncement - On January 1, 1997, the
         Company adopted Financial Accounting Standards Board ("FASB") Statement
         of Financial Accounting Standard No. 125 ("SFAS 125"), "Accounting for
         Transfers and Servicing of Financial Assets and Extinguishment of
         Liabilities." This Statement provides guidelines for distinguishing
         transfers of financial assets that are sales from transfers that are
         secured borrowings. SFAS 125 supersedes SFAS 76, 77 and 122, while
         amending both SFAS 65 and 115. The Statement is to be applied
         prospectively; however, portions of SFAS No. 125 were deferred under
         SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of
         FASB Statement No. 125" until January 1, 1998. Earlier implementation
         is not permitted.

         Under SFAS 125, a transfer of financial assets in which control is
         surrendered is accounted for as a sale to the extent that consideration
         other than beneficial interest in the transferred assets is received in
         the exchange. Liabilities and derivatives incurred or obtained by the
         transfer of financial assets are required to be measured at fair value,
         if practicable.

         SFAS 125 also requires an assessment of interest-only strips, loans,
         other receivables and retained interests in securitizations. If these
         assets can be contractually prepaid or otherwise settled such that the
         holder would not recover substantially all of its recorded investment,
         the asset will be measured like trading securities. This assessment is
         required for financial assets held on or acquired after January 1,
         1997. Application of the provisions of SFAS 125 did not have a material
         effect on the Company's financial position, results of operations or
         cash flows.

         Basic Earnings Per Share - For the purpose of presenting pro forma
         information, the Company adopted Statement of Financial Accounting
         Standards (SFAS) No. 128, "Earnings per Share." In February 1998, the
         Securities and Exchange Commission (SEC) staff released Staff
         Accounting Bulletin (SAB) No. 98, "Computations of Earnings per Share."
         SAB No. 98 revised prior SEC guidance concerning presentation of
         earnings per share information for companies going public, and requires
         all companies to present earnings per share for all periods for which
         income statement information is presented in accordance with SFAS No.
         128. Basic earnings per share were computed using the pro forma
         weighted average number of common shares outstanding.


- --------------------------------------------------------------------------------
                                      F-10
<PAGE>
 
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------


Note 1 - Description of Operations and Summary of Significant Accounting
         Policies (continued)

         Basis of Note Presentation - The notes to the March 31, 1998 balance
         sheet and the statements of income, changes in stockholders' equity and
         cash flows for the three months ended March 31, 1998 and 1997 do not
         present all disclosures required under generally accepted accounting
         principles but, instead, as permitted by Securities and Exchange
         Commissions regulations, presume that users of the interim financial
         statements have read or have access to the December 31, 1997 audited
         financial statements and that the adequacy of additional disclosure
         needed for a fair presentation may be determined in that context. In
         addition, the accompanying financial statements include all adjustments
         which are, in the opinion of management, necessary to the fair
         presentation of the results of operations for the periods presented.
         All such adjustments are of a normal recurring nature.


Note 2 - Mortgage Loans Held for Sale, Pledged

         The cost of mortgage loans held for sale is the outstanding principal
         balance of the mortgage loan decreased by fees or discounts collected
         and increased by fees and discounts paid, and certain direct costs.
         Fees and costs incurred net of discounts collected are deferred and
         recognized as adjustments to gain or loss when the related loan is
         sold.

         Mortgage loans held for sale consisted of the following at December 31,
         1997:

               Mortgage Loans                              $ 50,154,791
               Deferred Costs, Net of Fees                      133,923
                                                           ------------

                                                           $ 50,288,714
                                                           ============


         Substantially all mortgage loans held for sale are pledged as
         collateral against the Company's warehouse line of credit. The
         collateral is released by the lenders at the time a mortgage loan is
         sold and payment is received.


Note 3 - Notes Receivable

         Notes receivable represent unsecured principal advances to individuals,
         at fixed interest rates of 6% and 8%, due in full in 2000. The advances
         were issued with an original maturity of five years. Notes receivable
         include principal amounts due from employees of $35,819. Accrued
         interest related to these notes totaled $41,763 at December 31, 1997.


- --------------------------------------------------------------------------------
                                      F-11
<PAGE>
 
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------


Note 4 - Note Receivable, Stockholders

         Subsequent to year end, but effective as of December 31, 1997, the
         Company entered into a promissory note agreement with its stockholders.
         The $250,000 note is unsecured, bearing interest at an annual rate of
         6.5%, and is due on or before March 31, 1998. The note was paid in full
         during March 1998.


Note 5 - Real Estate Held for Investment

         Real estate held for investment consists of a residence in Santa Rosa,
         California. The real estate was contributed to the Company during 1995
         by the stockholders and is subject to a mortgage assumed by the
         corporation. The real estate is recorded at the property's estimated
         market value at the date of contribution less accumulated depreciation
         of $12,556. The property is not currently listed for sale. The mortgage
         is due 2018 bearing interest at the 11th District cost of funds. Future
         principal payments are due as follows:

               Year Ending December 31,
               ------------------------
                         1998                         $   3,200
                         1999                             3,500
                         2000                             3,700
                         2001                             4,000
                         2002                             4,300
                      Thereafter                        128,055
                                                      ---------

                                                      $ 146,755
                                                      =========

Note 6 - Warehouse Notes Payable

         The Company maintains various revolving warehouse lines of credit
         agreements, primarily to fund mortgage loan originations. Advances are
         made on the warehouse lines for specific properties which are pledged
         as collateral. The stockholders personally guarantee borrowings under
         the revolving line. Interest accrues monthly on the warehouse lines and
         is due at settlement when the underlying loans are sold. All advances
         are expected to be repaid within one year.


- --------------------------------------------------------------------------------
                                      F-12
<PAGE>
 
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------


Note 6 - Warehouse Notes Payable (continued)

         Warehouse lines available as of December 31, 1997 were as follows:

          $11 million revolving mortgage credit
              facility with Warehouse Lending
              Corporation of America and a temporary
              bulge facility of $44 million, interest
              on outstanding advances at LIBOR + 3.25%.
              The credit facility expires March 15,
              1998.                                            $50,154,791

          $7  million revolving mortgage credit
              facility with PNC Mortgage Bank N.A.,
              interest on outstanding advances at LIBOR
              + 2.5%. The credit facility expires May
              31, 1998.                                                  -

          $3  million revolving mortgage credit
              facility with Pacific Southwest Bank,
              interest on outstanding advances at the
              Prime rate plus 1%. The credit facility
              expires April 30, 1998.                                    -
                                                           ------------------

                                                               $50,154,791
                                                           ==================

         The Company must comply with covenants provided in its credit
         agreements, including restrictions on the payment of dividends and the
         maintenance of certain financial ratios and other conditions such as
         maintaining minimum amounts of stockholders' equity.

         The weighted average nominal interest rate on loans at December 31,
         1997 is 9.09%. Interest expense amounted to $1,570,489 and $660,860 for
         the years ended December 31, 1997 and 1996, respectively.


Note 7 - Financial Instruments

         The following disclosure of the estimated fair value of financial
         instruments at December 31, 1997 is made in accordance with the
         requirements of SFAS No. 107, "Disclosures about Fair Value of
         Financial Instruments." The estimated fair value amounts have been
         determined by the Company using available market information and
         appropriate valuation methodologies. However, considerable judgment is
         necessary to interpret market data in the development of the estimates
         of fair value. These estimates are not necessarily indicative of the
         amounts the Company could realize in a current market exchange, and the
         use of different market assumptions and/or estimation methodologies
         could significantly affect the estimates.


- --------------------------------------------------------------------------------
                                      F-13
<PAGE>
 
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------


Note 7 - Financial Instruments (continued)

                                                                Estimated
                                               Carrying            Fair
                                                 Value             Value
                                             ------------        ---------
Financial Assets
   Cash and equivalents                      $    482,558        $    482,558
   Certificates and deposits                 $    272,298        $    272,298
   Mortgage Loans held for sale, pledged     $ 50,288,714        $ 50,700,000
   Notes receivable                          $    135,819        $    110,000
   Note receivable, stockholders             $    250,000        $    250,000

Financial Liabilities
   Warehouse notes payable                   $ 50,154,791        $ 50,154,791
   Real estate mortgage note                 $    146,755        $    146,755

Off-Balance-Sheet Instruments
   Committments to extend credit             $          -        $    300,000
   Financial futures                         $          -        $    (65,000)
   Foreward delivery committments            $          -        $      5,000
   Standby letters of credit                 $          -        $          -

         The notional amount of the Company's commitments to
         extend credit at fixed interest rates were approximately $52,000,000 at
         December 31, 1997. The Company also made commitments as of December 31,
         1997 to deliver $13,500,000 in loans and $12,000,000 in mortgage backed
         securities to various investors, all at fixed interest rates. The
         Company has standby letters of credit up to $38,000,000 as of December
         31, 1997, of which $12,000,000 are allocated in support of open
         financial futures positions.

         The fair values presented above represent the Company's best estimate
         of fair value using the methodologies discussed below:

         Cash and Equivalents and Certificates of Deposit - Due to the
         relatively short period of time between the origination of these
         instruments and their expected realization, the carrying amount is
         estimated to approximate market value.

         Notes Receivable - The fair value of notes receivable is estimated by
         discounting the future cash flows using current interest rates at which
         similar loans would be made to borrowers.


- --------------------------------------------------------------------------------
                                      F-14
<PAGE>
 
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------


Note 7 - Financial Instruments (continued)

         Mortgage Loans Held for Sale - Fair values for mortgage loans covered
         by investor commitments are based on commitment prices. Fair values for
         uncommitted loans are based on management's assessment of current
         prices offered for similar loans sold in conjunction with the Company's
         own secondary market transactions, adjusted for differences in loan
         characteristics. Management's determination of fair value includes
         consideration of commitment prices which clearly represent market
         conditions at the balance sheet date and market prices and yields
         sought by the Company's permanent investors, or other public market
         quotations for long-term mortgage loan rates.

         Financial Liabilities - The fair value of financial liabilities is
         believed to approximate the carrying amount because the terms of the
         debt are similar to terms currently offered by lenders, or the interest
         rates are variable based on current market rates.

         Off-Balance-Sheet Instruments - The fair value of off-balance-sheet
         instruments is determined by management's assessment of current prices
         offered for similar loans sold in conjunction with the Company's own
         secondary market transactions, adjusted for related mandatory forward
         commitments and risks associated with borrowers ability to complete
         their commitments. The Company also employs pricing models and various
         other techniques to determine the fair value of their forward delivery
         and futures contracts.


Note 8 - Significant Group Concentrations of Credit Risk

         Substantially all of the Company's business activity is with customers
         located within the San Francisco Bay area. The loans and commitments
         extended to these customers are expected to be repaid from proceeds of
         the sale of these loans in the secondary market and are secured by real
         estate. The Company's access and rights to this collateral vary and are
         legally documented to the extent practicable. Sales agreements with
         secondary market investors include limited recourse provisions which
         may require the Company to repurchase the loans sold in the event of
         certain conditions, the most restrictive of which includes the default
         or delinquency of borrowers under the terms of the loan agreements.
         Recourse obligations arising pursuant to these agreements are recorded
         at estimated fair value using the best information available in the
         circumstances when the loans are sold. The Company has not been
         required to repurchase any loans sold during the years ended December
         31, 1997 and 1996.

         The Company has a concentration of credit risk with respect to cash
         deposited with a commercial bank in excess of federally insured limits.


- --------------------------------------------------------------------------------
                                      F-15
<PAGE>
 
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------


Note 9 - Commitments and Contingencies

         Operating Leases - The Company has entered into various operating lease
         agreements for the rental of office space. The following represents
         aggregate future minimum lease payments under these agreements:

               Year Ending December 31,
               ------------------------
                         1998                            $ 150,765
                         1999                               88,150
                         2000                               74,940
                         2001                               50,640
                                                         ---------

                                                         $ 364,495
                                                         =========

         Litigation - The Company is involved in legal proceedings arising in
         the ordinary course of business. The ultimate outcome of these
         proceedings can not be determined because of the uncertainties that
         exist. In the opinion of management, the disposition of matters that
         are pending or asserted will not have a materially adverse effect on
         the financial position, results of operations or cash flows of the
         Company.

Note 10 - Prior Period Adjustment

         Loan origination fees, net of certain direct loan origination costs,
         are required to be deferred and recognized as an adjustment of yield on
         the related loans, using the interest method, or recognized when the
         related loan is sold. During 1996, the Company determined that loan
         fees and certain direct loan origination costs from prior years were
         not properly accounted for in accordance with generally accepted
         accounting principles. Accordingly, the Company's financial statements
         as of December 31, 1995 have been restated to reflect these
         requirements. The effect of the restatement is as follows:

                                              As Previously          As
                                                 Reported         Restated
                                              -------------      ---------

Retained earnings as of December 31, 1995      $     16,663      $       -
                                              =============      =========

Additional paid-in-capital                     $    922,779      $ 858,090
                                              =============      =========
Net income for the nine months ended
   December 31,1995 (unaudited)                $    220,919      $ 139,567
                                              -------------      ---------
Net income per share for the nine months
   ended December 31, 1995 (unaudited)         $       0.09      $    0.06
                                              =============      =========




- --------------------------------------------------------------------------------
                                      F-16
<PAGE>
 
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------


Note 11 - New Accounting Standards

         In June 1997, the Financial Accounting Standards Board ("FASB") issued
         SFAS No. 130, "Reporting Comprehensive Income," which establishes
         standards for reporting comprehensive income and its components
         (revenues, expenses, gains and losses) in financial statements. SFAS
         No. 130 requires classification of other comprehensive income in a
         financial statement, and the display of the accumulated balance of
         other comprehensive income separately from retained earnings and
         additional paid-in capital. SFAS No. 130 is effective for fiscal years
         beginning after December 15, 1997. The Company believes this
         pronouncement will not have a material effect on its financial
         statements.

         In June 1997, the FASB also issued SFAS No. 131, "Disclosures about
         Segments of an Enterprise and Related Information," which established
         standards for reporting information about operating segments in annual
         financial statements and requires that enterprises report selected
         information about operating segments in interim financial reports to
         stockholders. SFAS No. 131 also establishes standards for related
         disclosures about products and services, geographic areas and major
         customers. SFAS No. 131 is effective for fiscal years beginning after
         December 15, 1997, although earlier application is encouraged. The
         Company believes this pronouncement will not have a material effect on
         its financial statements.

Note 12 - Year 2000

         The Company recognizes the need to ensure its operations will not be
         adversely impacted by Year 2000 software failures. Accordingly, over
         the next few years, management may incur additional expenditures to
         modify its software to operate correctly for the year 2000. While
         considered to be immaterial by management, the Company has not yet
         quantified such costs, which will be expensed as incurred. If the
         Company or other entities not affiliated with the Company do not
         address this issue successfully, the Company's business could be
         materially affected.

Note 13 - Credit Facilities

         Subordinated Debt - In order to obtain additional capital, the Company
         has obtained a $1,000,000 short-term note from a bank, subordinated to
         warehouse lenders. The note bears interest at the Prime Rate plus 2%,
         and is due in full on the earlier of December 31, 1998 or the closing
         of an initial public offering of Company stock. The note is
         collateralized by a first priority security interest in all of the
         stock owned by the stockholders.


- --------------------------------------------------------------------------------
                                      F-17
<PAGE>
 
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------


Note 13 - Credit Facilities (continued)

         The note is guaranteed by the stockholders and secured by Company
         accounts, equipment and general intangibles as defined in the
         agreement. An equity participation fee of $100,000 is due when the loan
         matures.

         The loan agreement requires the Company to comply with certain
         covenants, the most restrictive of which include minimum required
         amounts of capital and the maintenance of certain financial ratios and
         other conditions.

         Loan Participation and Custodian Agreement - During January 1998, the
         Company entered into a loan participation and custodian agreement with
         a bank to fund the origination and sale of mortgage loans. Under the
         terms of the agreement, the bank will purchase from the Company a 100%
         loan participation interest and the related firm purchase commitment
         obtained from permanent investors. The Company accounts for the
         transfer of such loans pursuant to this agreement as sales, and records
         the gain or loss at the settlement date, which is the date that the
         loan is purchased by the investor. The bank charges the Company
         transaction fees on the transfer of each loan and also requires payment
         of interest at the rate of prime plus .25% on the outstanding balance
         of loans purchased. Recourse provisions require the Company to
         reacquire these loans in the event of certain conditions of default as
         defined in the agreement. The Company records the estimated fair value
         of the recourse obligation when the loans are sold.

Note 14 - Capital Stock

         Stock Split and Preferred Stock Authorization - On March 17, 1998, the
         Company's Board of Directors amended the Company's Articles of
         Incorporation to authorize up to 10,000,000 shares of Common Stock and
         approved a 2,468.75 for 1 split, in the form of a stock dividend, of
         the Company's outstanding Common Stock. All common shares and per share
         amounts in the accompanying financial statements have been adjusted
         retroactively to give effect to the stock split. In addition, the
         Company's Board of Directors amended the Company's Articles of
         Incorporation to authorize up to 2,000,000 shares of Preferred Stock.
         On May 1, 1998, two individuals were granted, in total, 31,250
         shares of Common Stock for services rendered in connection with the
         initial Public Offering of the Company's stock.



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                                      F-18
<PAGE>
 
NOTES TO FINANCIAL STATEMENTS
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Note 15 - Subsequent Events

         Employment Agreements - Subsequent to year end, the Company entered
         into employment agreements with two senior executives of the Company
         who were the sole stockholders. The agreements commenced on May 1,
         1998, and extend through December 31, 1999. Compensation for the senior
         executives shall be $250,000 and $150,000 annually. The agreements
         include bonus provisions for additional payments to the executives
         based on 10% of pretax income up to $150,000 per year for the Chief
         Executive Officer and 60 basis points of the mortgage loans originated
         by her plus 10 basis points on the mortgage loans originated by the
         retail division of the Company in excess of $150,000 for the President.

         In addition, employment agreements were entered into with three other
         executives during March, April and May 1998 extending through December
         31, 1999. Aggregate annual base salaries total $284,000 plus an
         incentive performance bonus of $50,000 for one of the executives. All
         three executives were granted options to acquire 15,000 shares of stock
         each at the initial public offering price pursuant to the Company's
         Incentive Stock Option Plan. The options vest at 20% per year beginning
         on the date of the closing of the Offering.

         In defined circumstances, the agreements also provide severance
         payments of up to two times the executive's annual base salary upon
         termination and immediate vesting of any stock options outstanding.

         Stock Option Plan - On April 20, 1998, the Company's Board of Directors
         approved the 1998 Stock Compensation Plan (the "1998 Plan"), which
         permits the granting of options to employees of the Company. As of June
         2, 1998, a total of 300,000 shares of Common Stock were reserved for
         future grants of options under the 1998 Plan. The Company has granted
         options for an aggregate of 45,000 shares of Common Stock to certain
         employees of the Company, subject to the closing of the Offering. All
         of these options will be forfeited if the Offering is not consummated.
         The options vest at 20% per year beginning on the date of the closing
         of the Offering and have an exercise price equal to the initial public
         offering price. No options shall be granted under the plan after April
         2008.

         The Financial Accounting Standards Board issued Statement of Financial
         Accounting Standards No. 123 (SFAS 123), Accounting for Stock-Based
         Compensation. Under SFAS 123, a fair value method is used to determine
         compensation cost for stock options or similar equity instruments.
         Compensation is measured at the grant date and is recognized over the
         service or vesting period. The standard also allows the Company to
         account for stock-based compensation under the intrinsic value based
         method, with disclosure of the effect of the new standard. Under the
         accounting standard used by the Company, compensation cost is the
         excess, if any, of the quoted market price of the stock at a
         measurement date over the amount that must be paid to acquire the
         stock.


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                                      F-19
<PAGE>
 
NOTES TO FINANCIAL STATEMENTS
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Note 16 - Pro Forma Information (Unaudited)

         Income Taxes - As discussed in Note 1, the Company is an S corporation
         for federal and California tax purposes. Accordingly, the accompanying
         financial statements do not include a provision for income taxes, with
         the exception of the 1.5% California tax on S corporations. Effective
         April 30, 1998, the Company terminated its S status and become a C
         corporation for tax purposes. The Company will be subject to federal
         and state income taxes and will recognize deferred taxes in accordance
         with Statement of Financial Accounting Standards (SFAS) No. 109,
         "Accounting for Income Taxes." SFAS No. 109 requires companies subject
         to income taxes to adjust their deferred tax assets and liabilities
         based on temporary differences between financial statement and tax
         basis of assets and liabilities using enacted tax rates in effect in
         the years in which the differences are expected to reverse. For
         informational purposes, the statement of income includes an unaudited
         pro forma income tax provision on income before income taxes for
         financial reporting purposes using federal and state rates that would
         have resulted if the Company had filed corporate tax returns during the
         period presented.

         Earnings Per Share - Pro forma earnings per share is computed by
         dividing pro forma net income by the pro forma number of shares of
         common stock outstanding during the respective period. The pro forma
         number of shares of common stock outstanding represents the number of
         shares of common stock outstanding after giving retroactive effect to
         the stock split and issuance of 31,250 shares of common stock.

         Balance Sheet - Pursuant to the reporting requirements of the
         Securities and Exchange Commission, a pro forma balance sheet is
         presented as of March 31, 1998 which reflects an assumed distribution
         of approximately $459,000 of S corporation dividends, representing the
         accumulated undistributed earnings of the Company from April 1, 1994
         through March 31, 1998. Distributions of approximately $313,000 were
         made related to previous S corporation earnings during the period from
         April 1, 1998 to May 31, 1998. The pro forma balance sheet also
         reflects the reclassification of approximately $146,000 of remaining
         undistributed S corporation earnings from retained earnings to
         additional paid-in capital. For the purposes of the pro forma balance
         sheet presentation, the above amounts were assumed to have been funded
         from the Company's cash balance of $1,649,752 at March 31, 1998.


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                                      F-20
<PAGE>
 
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- -------------------------------------------------------------------------------
 
  NO DEALER, SALES PERSON, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFER CONTAINED HEREIN, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE SHARES OF
COMMON STOCK OFFERED HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER
OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH SOLICITATION OR OFFER. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY
SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS
OF ANY TIME SUBSEQUENT TO ITS DATE.
 
                               -----------------
 
                               TABLE OF CONTENTS
<TABLE>
<CAPTION>
                                                                            PAGE
                                                                            ----
<S>                                                                         <C>
Additional Information.....................................................   2
Prospectus Summary.........................................................   3
Risk Factors...............................................................   6
Use of Proceeds............................................................  12
Dividend Policy............................................................  12
Dilution...................................................................  13
Capitalization.............................................................  14
Management's Discussion and Analysis of
 Financial Condition and Results of Operations.............................  15
Business...................................................................  17
Management.................................................................  22
Principal and Selling Shareholders.........................................  25
Certain Relationships and Related Transactions.............................  26
Description of Securities..................................................  27
Shares Eligible for Future Sale............................................  28
Underwriting...............................................................  29
Legal Matters..............................................................  31
Experts....................................................................  31
Index to Financial Statements..............................................  33
</TABLE>
 
  UNTIL JULY 19, 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK, 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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                               1,200,000 SHARES
 
                      TRANSNATIONAL FINANCIAL CORPORATION
 
                                 COMMON STOCK
 
 
                               -----------------
 
                                  PROSPECTUS
 
                               -----------------
 
 
                         TEJAS SECURITIES GROUP, INC.
 
                                (214) 692-3544
 
                                 JUNE 24, 1998
 
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