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                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

                                   FORM 10-K
(Mark One)
  [X]          ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
               OF THE SECURITIES EXCHANGE ACT OF 1934

                  For the fiscal year ended December 31, 1999

                                      OR

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

               For the Transition period from                to

                        Commission File Number 0-26135

                          PRISM FINANCIAL CORPORATION
            (Exact name of registrant as specified in its charter)


         Delaware                                                36-4279417
  (State or other jurisdiction                                (I.R.S. Employer
of incorporation or organization)                            Identification No.)

                  440 North Orleans, Chicago, Illinois 60610
             (Address of principal executive offices and zip code)

      Registrant's telephone number, including area code: (312) 494-0020
          Securities registered pursuant to Section 12(b) of the Act:
                                     None

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

                                (Title of Class)
                                ----------------
                    Common Stock, par value $0.01 per share
                        Preferred Stock Purchase Rights

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


  Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]

  As of March 27, 2000, the aggregate market value of the voting and non-voting
common equity, consisting of common stock, held by non-affiliates of the
registrant, computed by reference to the closing sales price of the common stock
on that date, was $36,655,696.

  As of March 27, 2000, there were outstanding 14,674,413 shares of Common
Stock, par value $0.01, of the registrant.

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ITEM 1. BUSINESS

  The discussion below contains certain forward-looking statements (as such term
is defined in Section 21E of the Securities Exchange Act of 1934, as amended
(the "Exchange Act")), that reflect the current views of the management of Prism
Financial Corporation and its subsidiaries (collectively, "Prism Financial" or
the "Company"), as well as assumptions made by, and information currently
available to, the Company's management, with respect to future events and
financial performance.  The Company's actual growth, results, performance and
business prospects and opportunities in 2000 and beyond could differ materially
from those expressed in, or implied by, such forward-looking statements. See
"Item 1. Business - Risk Factors" beginning on page 14 and "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Special Note Regarding Forward-Looking Statements" on page 38
for a discussion of risks, uncertainties and other factors that could cause or
contribute to such material differences.


Company Overview

  Prism Financial is a financial services company engaged primarily in
the business of originating, selling and brokering mortgage loans. The Company
operates as both (1) a mortgage banker, underwriting, closing and funding loans,
and (2) a mortgage broker, selling the loan products of over 100 different
lenders. The Company uses its direct consumer access to sell mortgage-related
products, including credit reports, flood certifications, appraisals, mortgage
insurance and title insurance policies. The Company also engages in the
affordable housing and historic rehabilitation tax credit syndication business.

  The Company originated $7.7 billion in residential mortgage loans in 1999
through its network of approximately 1,200 commission-only loan originators
operating out of 159 retail branches in  27 states, as of December 31, 1999.
Through the Company's network of retail branches, as well as its affinity
partnerships and  relationships with operators of leading Internet mortgage web
sites, the Company offers a broad array of residential mortgage products
targeted primarily to high-credit-quality borrowers.

  Since commencing operations in 1992, the Company has focused on growing its
origination volume by building a retail origination network through internal
growth and selective acquisitions. In addition, the Company has leveraged its
state-of-the-art private label mortgage center to target affinity partners on
the Internet and has established relationships with operators of Internet
mortgage web sites to position the Company to take advantage of growth
opportunities provided by this origination channel. Most recently, the Company
has diversified its business through the expansion of its bundled and ancillary
services business, Lender's Mortgage Services, L.L.C. ("LMS"), and through the
acquisition of Apollo Housing Capital, L.L.C. ("Apollo") in September 1999.
Through the Company's 80% interest in Apollo, the Company has expanded its
business to include affordable housing and historic rehabilitation tax credit
syndication.

Industry Overview

  The mortgage banking business consists primarily of two businesses:
origination and servicing. Origination is the process of taking a loan from
application through underwriting and funding and either holding and servicing
the loan or selling the loan into the secondary mortgage market. Mortgage loans
are originated through three primary lending channels: retail, wholesale and
correspondent. Retail originators generate loans through direct contact with the
consumer. Wholesale originators buy application packages from independent
brokers who work directly with consumers. Correspondent lenders buy closed loans
from other originators. Retail originators generally consist of depository banks
and other lenders that market, fund and close their own loan products and
brokers who market the loan products of wholesale originators. Loan servicing
involves the collection of principal, interest and insurance payments,
processing payments and foreclosures and passing the payments through to taxing
authorities, insurance companies and investors for servicing fees. Originators
either retain servicing rights and collect servicing fees or sell the servicing
rights for cash payments in the secondary market.

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  The industry totaled approximately $1.3 trillion in mortgage originations in
1999, down from approximately $1.5 trillion in 1998. Industry analysts estimate
mortgage originations for 2000 will be approximately $985 billion.

  The Internet provides a growing medium for delivering mortgage services
directly to customers. Industry analysts estimate the on-line mortgage market
will increase from approximately $18.7 billion originated in 1999 to over $91.2
billion by 2003.

Business Strategy

  Prism Financial's business objective is to be a leading retail originator of
high-credit-quality mortgages. The principal business strategy elements to
support this objective are:

  Focus primarily on retail channels. The Company's retail focus has two
principal benefits: control over the loan origination process and direct access
to the consumer. By controlling the origination channel, the Company does not
rely on third parties for loan production volume. Direct access to consumers
allows the Company's loan originators to develop relationships with their
customers, which, in turn, lead to increased customer loyalty and new customer
referrals. Direct consumer selling also provides a platform to sell higher
margin mortgage-related products and services. As a retail originator, the
Company is able to develop alliances with consumers, real estate agents and
brokers, homebuilders, corporations, developers and professionals which creates
referral business. In addition, the Company believes that loan servicers will
purchase servicing rights from retail originations at more favorable prices than
servicing rights from wholesale originations.

  Leverage banker/broker structure to offer low prices on a broad array of
products. The Company's banker/broker structure provides its loan originators
access to the products and pricing of over 100 lenders throughout the U.S.,
including the Company's own mortgage bank. As a high-volume mortgage banker, the
Company is able to consistently provide loan originators with competitive prices
on an array of products by matching or beating the prices available to loan
originators by other lenders. The Company's mortgage bank also provides its loan
originators with in-house underwriting capabilities, better execution, fast loan
approvals and reliable service. The Company believes that its brokering
relationships in combination with its mortgage banking capabilities generally
enable it to offer a larger variety of competitively priced products with a
higher level of customer service than is possible for many larger banks and
small brokers. Many large banks typically offer only their own products, and
small brokers typically rely on a limited number of local brokering
arrangements.

  Increase loan volume funded by the Company's mortgage bank. The value of loans
and servicing rights in the secondary market is volume dependent. As a result,
the large loan volume financed by the Company's mortgage bank has led to better
pricing in the secondary mortgage market. The Company intends to leverage the
benefit of these economies by increasing origination volume through its mortgage
bank on existing products and by introducing additional mortgage products.

  Provide superior customer service. The Company believes that providing
superior customer service is a key to product differentiation in today's price-
sensitive market. The Company believes it delivers differentiated service
through a team of highly-skilled management, loan originators and operating
staff with many years of industry-related experience. The Company also strives
to deliver differentiated customer service by continually streamlining the
mortgage process to make obtaining a mortgage loan more convenient and
dependable. Unlike many of the Company's competitors, it operates a
decentralized processing structure that enables it to enhance its customer
service and provide fast decisions. Additionally, during August 1999, the
Company implemented a program that helps loan officers create and maintain
interactive customized web sites to promote efficient and responsive customer
service.

  Provide a "one-stop" source of mortgage-related products. The Company uses its
direct consumer access to sell mortgage-related products that are required in
connection with obtaining a loan. The Company's mortgage-related products
include credit reports, flood certifications, appraisals, mortgage

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insurance and title insurance policies. The Company also intends to continue
marketing additional mortgage-related products and services to its retail
customers.

  Utilize a commission and incentive-based compensation system. The Company has
a compensation system designed to motivate its employees to maximize loan
volume, productivity and profitability. The Company's compensation system
creates a largely variable cost structure that is adaptable over time to changes
in retail origination volume. The Company's net branch structure also helps to
limit the degree to which it incurs overhead costs associated with branches.
Each of the Company's loan originators is compensated entirely by commissions
earned on loans originated. In addition, loan originators are generally
responsible for most of their operating expenses, including health insurance and
other benefits, computers and marketing materials. As a result, the Company's
loan originators essentially operate their own businesses and have the incentive
to maximize revenue, which the Company shares. Additionally, the Company offers
incentive programs to loan officers and branch managers who close loans through
its mortgage bank, which the Company believes will increase its mortgage banking
volume. In addition, the Company's underwriters and processors are compensated,
in part, on the quality of their work product and on the number of files that
they underwrite or process.

  Maintain efficient operations. Since the Company's inception, it has focused
on being a low-cost provider by controlling operating costs and increasing
efficiency. In addition to implementing the Company's incentive-based structure,
the Company continues to invest in process enabling technologies. The Company
widely uses Fannie Mae's Desktop Underwriter system. This system allows the
Company to process loan applications and receive approval/rejection decisions
directly from Fannie Mae within a minute. This capability increases the
Company's productivity and lowers its costs in processing and selling loans to
Fannie Mae. The Company has also implemented laptop origination. This allows the
Company's loan officers to take customers' application anywhere utilizing a
laptop computer. The originator can print out disclosures during the application
process, receive a quick approval of the loan through a link with Desktop
Underwriter, and electronically transmit the application back to a processor to
begin the processing of the loan. The Company is also investing in a web-based
origination system to improve its efficiency and increase its productivity. In
November 1999, the Company upgraded its web-based mortgage centers by adding
automated underwriting and real-time loan status capabilities. The Company's
web-based mortgage centers now enable some borrowers to receive loan approvals
within minutes of submitting their on-line application.

Growth Strategy

  The Company's growth strategy is to continue to increase its loan origination
volume through expanding its presence in existing markets, selectively entering
new geographic markets and increasing the Company's presence on the Internet.
The Company is executing this strategy by growing internally, pursuing selective
acquisitions and developing new Internet relationships.

  Grow internally. Since 1992, the Company has opened 22 company-owned branches
as well as 40 net branches and recruited over 450 new loan originators. The
Company intends to continue to generate internal growth through the recruitment
of additional loan originators in existing branches, expansion of company-owned
branches and expansion of its "net branch" network.

  The Company believes that its attractive compensation system, together with
its broad product offerings of competitively priced products, will continue to
enable it to recruit additional, highly-qualified loan originators and establish
new net branch relationships.

  Pursue selective acquisitions. The Company intends to continue to capitalize
on consolidation opportunities in the mortgage banking industry by selectively
pursuing acquisitions of independent, high-quality mortgage brokers and mortgage
banks. Since 1996, the Company has completed nine acquisitions of mortgage
companies, including Pacific Guarantee Mortgage Corporation ("Pacific
Guarantee") and Mortgage Market, Inc. ("Mortgage Market") in 1998 and First City
Financial Corp. ("First City"), Mortgage Express, Inc. ("Mortgage Express") and
Valley Financial Corporation ("Valley Financial") in 1999. As of their
acquisition dates, these nine acquisitions resulted in the addition of over 800
loan

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originators and 111 branches in 16 states.

  In September 1999, the Company acquired an 80 percent interest in Apollo.
Through this transaction, the Company sought to diversify its revenue and growth
channels. Apollo structures and sells interests in investment portfolios
comprised of affordable housing and historic tax credits. See "Business-Tax
Credit Syndication." The Company believes Apollo's attractive margins, low
operating cost capital structure and earnings cycle complements the Company's
existing retail mortgage origination operations. In addition, the Company
believes there are significant operational and business synergies that can be
achieved. For example, Apollo and Prism Financial share relationships with key
investors, including Fannie Mae, Bank of America and Citibank, N.A. This
acquisition should allow both companies to strengthen these relationships. In
addition, Apollo should benefit from the Company's lower cost of capital.
Apollo's operations, which were immediately accretive, made a significant
contribution to the Company's overall results in the second half of 1999.

  Enhance and expand Internet relationships. The Company believes that the
Internet provides a unique medium to deliver mortgage services. The Company's
objective is to become a leading provider of mortgage products through the
Internet. The Company believes its broad range of competitively priced products
and its strategic relationships with leading Internet mortgage web sites
position it to capitalize on the on-line mortgage origination growth.
International Data Corporation estimates the on-line mortgage market will
increase from approximately $18.7 billion originated in 1999 to over $91.2
billion by 2003. The Company originated approximately $336 million of loans over
the Internet in 1999. The Company's Internet mortgage strategy has three primary
components: (1) strategic relationships with operators of leading Internet
mortgage web sites; (2) affinity relationships with financial institutions,
national corporations, Internet companies, and university and alumni groups to
provide mortgage center technology and back-end fulfillment services; and (3)
interactive mortgage web sites offered to loan officers of the Company.

Origination Channels

  Prism Financial operates primarily as a retail mortgage originator, with two
small wholesale divisions operating in California and Texas.

  Retail origination. In 1999, approximately 98% of the Company's mortgage
originations were generated through its approximately 1,200 loan originators and
Internet mortgage consultants who respond to mortgage inquiries over the
Internet. As of December 31, 1999, the Company's loan originators operated out
of approximately 159 branches, including 85 company-owned branches and 74 net
branches, collectively, located in 27 states.

     .  Company-owned branches. The Company's primary source of business is its
        network of loan originators who cultivate relationships with consumers,
        real estate agents and brokers, homebuilders, corporations, developers
        and professionals in order to generate referrals. The Company generally
        does not engage in advertising, direct marketing or telemarketing
        techniques to generate leads. The Company believes that the direct
        customer contact of retail origination creates the opportunity for
        repeat business and customer referrals and provides it with greater
        control over the lending process. In addition, direct customer contact
        enables the Company to sell mortgage-related products and services to
        its customers. Each loan originator is responsible for most of his or
        her own expenses, excluding office space and office services. In 1999,
        originations generated from company-owned branches represented
        approximately 73% of the Company's total retail originations.

     .  Net branches. "Net branches" are arrangements with branch managers or
        branch operating companies in which the branch manager or operating
        company assumes responsibility for all operating expenses of the branch,
        including rent, employee salaries and overhead. In return, the net
        branch receives a higher commission on loans originated than would a
        loan originator

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        in a company-owned branch. The net branch arrangement shifts to the
        branch manager or branch operating company much of the financial risk
        normally associated with retail expansion. In addition, net branches
        create significant incentives for the branch manager to operate the net
        branch profitably and efficiently. Net branches reduce the Company's
        financial risk and provide easier access to diverse and remote markets.
        The Company targets branch operators with established referral sources
        and familiarity with local lending practices, pricing and
        regulatory/compliance requirements. Net branches also allow easy market
        entry and exit, which gives the Company flexibility in addressing
        changes in the origination market. In addition, net branches offer real
        estate brokers/owners interested in conducting an in-house lending
        operation the ability to provide their customers with high quality
        mortgage products and services without the intensive capital and time
        investments normally associated with establishing a mortgage company. In
        1999, originations generated from net branches represented approximately
        23% of the Company's total retail originations.

     .  Internet. The Company believes that the Internet provides a unique
        medium to deliver mortgage services. In connection with originating on-
        line mortgages, the Company opened an Internet call center that is
        staffed by its own Internet service representatives. The Company's
        Internet service representatives receive on-line generated applications
        and pre-qualified leads and work directly with the consumer to originate
        the loan and sell mortgage-related services. The Company also offers its
        proprietary mortgage center technology and back-end fulfillment services
        through affinity relationships with financial institutions, national
        corporations, Internet companies and university and alumni groups. In
        1999, originations generated over the Internet represented approximately
        4% of the Company's total retail originations.

  Wholesale origination. A small percentage of the Company's business is
generated through its wholesale operations conducted primarily by its wholly-
owned subsidiary, PointSource Financial, L.L.C. In wholesale originations, non-
Prism Financial brokers deal directly with the borrower by assisting in
collecting all necessary documents and information for a complete loan
application. The broker then submits the application to the Company, which makes
an underwriting determination and funds qualified loans. In 1999, approximately
2% of the Company's originations were generated through its wholesale channels.
The Company does not intend to commit significant resources to increase its
wholesale originations.

Mortgage Bank

  The mortgage loans that the Company originates are funded through its mortgage
bank or are brokered to the lender providing the mortgage product. The Company
closed 46% of its loans through its mortgage bank in 1999, as compared to 47% in
1998. The Company's mortgage bank currently offers a full range of single-family
mortgage loan products. Mortgage loan applicants can choose from several
products, including fixed-rate mortgage loans with several different term
options and "balloon" mortgage loans with relatively shorter terms, such as five
or seven years, and longer amortization schedules. An array of adjustable rate
mortgage loans with rates tied to various indices is also available. The Company
offers a wide variety of combinations of interest rates and origination fees
("points") on many of its mortgage loan products. These options enable borrowers
to elect to pay higher points at closing and lower interest over the life of the
mortgage loan, or pay a higher interest rate and reduce or eliminate points
payable at closing. In addition, the Company offers buydown-type mortgage loans.
This type of loan allows a borrower to make lower monthly payments for the first
one, two or three years of the loan.

Mortgage Loan Products

  The Company's mortgage bank offers a variety of mortgage products at
competitive rates. These products can be classified as follows:

  Conforming and government insured mortgage loans. These mortgage loans conform
to the underwriting standards established by one of the government sponsored
mortgage entities, Fannie Mae or Freddie Mac, and are originated and sold
directly to Fannie Mae, Freddie Mac, or Ginnie Mae. This product is limited to
high quality borrowers with good credit records and involves adequate down
payments or mortgage insurance. These loans may qualify for guarantees from the
Federal Housing Authority or

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insurance from the Veterans Administration. Approximately 76% of the number of
loans originated by the Company in 1999 were conforming and government insured
loans.

  Jumbo mortgage loans. These mortgage loans do not satisfy the criteria to be
conforming or government insured mortgage loans solely because they exceed the
maximum loan size. The maximum loan size is currently $252,700 for single-
family, one-unit mortgage loans in the continental United States. The Company
sells all jumbo mortgage loans to a number of national privately sponsored
mortgage conduits. Approximately 17% of the number of loans originated by the
Company in 1999 were jumbo mortgage loans.

  Alternative A mortgage loans. These mortgage loans may fail to satisfy other
elements of the loan underwriting criteria, including those relating to
documentation, employment history, income verification, loan-to-value ratios,
qualifying ratios or required borrower net worth. The Company originates
mortgage loans that do not satisfy one or more of the underwriting criteria but
which, from a credit risk standpoint as determined primarily by credit score and
loan-to-value, present a comparable risk profile. The Company refers to this
category of mortgage loans generally as "alternative A" mortgage loans. The
Company sells all alternative A mortgage loans it originates to national
conduits that pool these loans for securitization. To reduce the risk of sale,
the Company underwrites these loans to the standards of the investor to whom the
loan will be sold. Approximately 4% of the number of loans originated by the
Company in 1999 were alternative A mortgage loans.

  Home equity and second mortgage loans. Home equity and second mortgage loans
are generally secured by second liens on the related property. Home equity
mortgage loans can take the form of a home equity line of credit. Second
mortgage loans are closed-end loans. Both types of loans are designed primarily
for high credit quality borrowers and are underwritten according to the
standards of the investor to whom the loans will be sold. Home equity lines have
a draw period during which the borrower may make cash withdrawals. The draws are
required to be repaid during the repayment period that follows the draw period.
Only interest payments are made during the draw period. Second mortgage loans
are fixed in amount at the time of origination and typically amortize over 30
years with a balloon payment due after 15 years. Home equity lines generally
bear adjustable interest rates while closed-end loans typically bear fixed
interest rates. Both types are frequently originated in conjunction with first-
lien mortgage loans on the related property. Home equity lines and second
mortgage loans represented approximately 2% of the number of loans originated by
the Company in 1999.

  Non-prime mortgage loans. This category consists of mortgage loans for
borrowers who have impaired or limited credit profiles or higher debt-to-income
ratios than would be acceptable for sale of such loans to one of the agencies or
private-sponsored mortgage conduits. Such mortgage loans may also fail to
satisfy the underwriting criteria of the government-sponsored entities in other
ways. The Company categorizes these mortgage loans based on the borrower's
credit profile as "A-", "B" or "C" loans that are generally considered "non-
prime" mortgage loans in the secondary mortgage market. The Company does not
originate mortgage loans that it would categorize as "D" loans. Non-prime loans
are underwritten to the standards of investors to whom the loans will be sold.
During 1999, the Company discontinued the operations of its subsidiary, Infiniti
Mortgage, L.L.C. ("Infiniti"). Infiniti was created to originate and sell non-
prime mortgages. As a result of the discontinuance of Infiniti's operations, the
Company no longer originates loans from specialized retail branches focusing
primarily on non-prime mortgages, but continues to originate non-prime loans on
a limited basis through its traditional retail channels. These loans,
represented approximately 1% of the number of loans originated by the Company in
1999.

Mortgage-Related Loan Products

  The Company generates revenue from appraisals, credit reports, flood
certifications, mortgage insurance and title insurance policies sold in
connection with the loans it originates. In 1999, the Company generated revenue
of over $2.8 million from the sale of these products. The Company intends to use
its loan originators to offer additional mortgage-related products and services
to its retail customers.

Sales of Loans and Servicing Rights

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  Loan sales. The Company customarily sells all loans funded through its
mortgage bank to one of the government-sponsored mortgage entities or to one of
the national privately sponsored mortgage conduits. A primary component of the
Company's business strategy is to seek the most efficient method of selling its
mortgage loans. The Company evaluates the sale of each mortgage loan type and
compares prices available for each alternative method of sale, given current
market conditions at the time and the risk characteristics of the mortgage loan
type to determine which method of sale to utilize. The Company currently sells
its conforming or government insured loans either through co-issue/concurrent
transactions, assignments of trade or whole-loan sales. Co-issue/concurrent
transactions involve a sale of the underlying mortgage loan directly to Fannie
Mae, Freddie Mac or Ginnie Mae with a concurrent sale of the servicing rights to
an independent servicer. Assignment of trade sales are sales of conforming or
government insured loans to a third party who exchanges the loans with Fannie
Mae, Freddie Mac or Ginnie Mae for mortgage-backed securities issued by them. In
a whole-loan sale, individual loans are underwritten to the standards of, and
sold to, a specific buyer on a forward commitment basis. Jumbo and alternative A
mortgage loans are currently sold in whole-loan sales on a forward commitment
basis. The Company sells its non-prime loans and home equity lines and second
mortgage loans through whole-loan sales, bulk sales or flow sales in order to
avoid the credit risk associated with these types of mortgage loans. Bulk sales
are sales of loans underwritten to the Company's underwriting standards that are
pooled and then sold to third parties for cash by the Company. Flow sales are
sales of loans that are underwritten by a third party who commits to purchase
each individual loan its underwriters approve. While the Company currently does
not securitize its loans, if the prices offered for its loans decrease
significantly relative to the value it believes that it could receive by
securitizing such loans, the Company's management would consider securitizing
its loans. In 1999, the Company sold approximately 85% of its loan production
to three entities.

  The sale of mortgage loans may generate a gain or loss to the Company. Gains
or losses result primarily from two factors. First, the Company may originate a
loan at a price (i.e., interest rate and discount) that may be higher or lower
than it would receive if it immediately sold the loan. These pricing differences
occur principally as a result of competitive pricing conditions in the loan
origination market. Second, gains or losses upon the sale of loans may result
from changes in interest rates that cause changes in the market value of the
loans from the time the price commitment is given to the customer until the time
that the loan is sold by the Company to the investor. The Company applies
interest rate risk management techniques to reduce the net effect of interest-
rate changes on the gain and loss on loan sales.

  The Company sells some of its loans on a forward commitment or other deferred
delivery and payment basis and has credit risk exposure to the extent purchasers
are unable to meet the terms of their forward purchase contracts. As is
customary in the marketplace, none of the forward payment obligations of any of
the Company's counterparties is currently secured or subject to margin
requirements. However, the Company attempts to limit its credit exposure on
forward sales arrangements by entering into forward sales contracts solely with
institutions that the Company believes are sound credit risks, and by limiting
exposure to any single counterparty by selling to a number of investors.

  Sales of servicing rights. When a loan is originated, a corresponding right to
service the loan for an annual yield is created. The Company's current strategy
is to realize the value of this right by selling its loans without retaining the
right to service the loan or by selling the servicing rights separately from the
loan to national servicers. As a result, the Company minimizes risk associated
with defaults and early prepayments of those loans. However, the Company
services the loans it closes between the date of funding the loan and the date
it sells the loan and the related servicing. This period averages approximately
30 days. The Company has developed an in-house proprietary system to provide its
loan servicing computing services. The Company will consider selling its loans
and retaining the servicing rights if it believes that the value of the
servicing rights is or may become significantly greater than buyers are then
willing to pay for them. The loss of this servicer or any significant reduction
in the price this buyer is willing to pay for the Company's servicing rights
could have an adverse effect on its business and results of operations.

  Recourse. By selling all the loans the Company closes, it reduces its exposure
to default risk, except the risk of first-payment defaults by customers. These
loan sales also reduce most of the prepayment risk normally inherent in the
mortgage lending business. However, in connection with whole-loan sales and

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exchanges, the Company makes representations and warranties to the buyers
thereof which it believes are customary in the industry relating to, among other
things, compliance with laws, regulations and program standards and accuracy of
information. The borrower provides some of this information. In the event of a
breach of these representations and warranties, the Company may be required to
repurchase these mortgage loans and indemnify the investors for damages caused
by the breach. If a repurchase request is made, the Company would either (1)
attempt to remedy the deficiency and have the investors rescind the rejection of
the mortgage loan or (2) refinance or sell the mortgage loan, sometimes at a
loss. The Company has implemented a stringent quality assurance program
monitoring the most important stages of the mortgage loan origination process to
minimize the number of mortgage loans rejected by investors. In addition, in
connection with some non-prime loan sales, the Company may be required to return
a portion of the premium received upon the sale of the loan if the loan is
prepaid by the customer within the first year after sale.

Mortgage Loan Funding and Borrowing Arrangements

  The Company uses short-term mortgage loan warehouse facilities to fund
mortgage loan originations. The Company repays these borrowings as the loans and
the accompanying servicing rights are sold. Upon the sale of loans and servicing
rights and the subsequent repayment of the borrowings, such credit facilities
become available to fund additional loan closings. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources" for further discussion.

  The Company also makes regular use of Fannie Mae's "As soon as pooled/early
purchase Option" ("ASAP Plus") program, as well as uncommitted lines of credit
and purchase and sale agreements, to provide liquidity for the Company's
mortgage loans held for sale. These facilities permit the Company to diversify
its borrowing resources, while accelerating the turnover of mortgage loans in
inventory, reducing interest costs and permitting greater origination volume.
Under the ASAP Plus program, Fannie Mae funds the Company on the loans it
delivers to the Company on a continual whole-loan basis upon receipt of the
appropriate mortgage collateral. The funding price is determined by the daily
Fannie Mae 30-day cash window price. At such time, the Company agrees to deliver
mortgage loans to Fannie Mae and assigns any related trades. The Company then
redelivers all loans in the ASAP Plus program to reflect related forward pricing
on a monthly basis. Fannie Mae purchases the mortgage loans for cash upon
receipt of complete and accurate mortgage pool and other documentation.

  The uncommitted lines of credit and purchase and sale agreements are provided
by major investment banks. These agreements are not committed facilities and may
be terminated at the discretion of the repurchase investor. Prism Financial
currently has two uncommitted whole-loan repurchase agreements with major
investment banks. Under the terms of these agreements, Prism Financial may
pledge mortgage loans originated to obtain additional liquidity while mortgage
loans are held until sold through whole-loan sales.

Interest Rate Risk Management

  Prior to the sale of originated mortgage loans, the Company bears market risk
on the value of the loans. If prevailing interest rates rise between the time
the Company closes loans and the time it commits to originate a loan at a
specific rate and the time such loans are priced for sale, the spread between
the amount loaned and the amount the purchaser is willing to pay for the loan
narrows, resulting in a loss in value of the loan. To protect against such
losses, the Company currently enters into hedges through a combination of
forward sales of mortgage-backed securities and forward whole-loan sales to fix
the sales price of its loans expected to be closed or to hedge the value of
those loans through periodic purchases of short-duration treasury-based options.
Before entering into forward sales, forward commitments or hedging, the Company
performs an analysis of its loans with committed interest rates, taking into
account such factors as the estimated portion of such loans that will ultimately
be funded, note rate, interest rates, inventories of loans and applications and
other factors to determine the type and amount of forward commitment and hedging
transactions. The Company attempts to make forward commitments for, or hedge
substantially all of its estimated interest rate risk on, its loans. The Company
does not believe that hedging its interest rate risk with respect to its non-
prime loans is cost effective as a result of their generally

                                       9
<PAGE>

higher interest spreads combined with their relative lack of sensitivity to
changes in market interest rates and considering the period during which the
Company intends to accumulate such loans for sale. The Company believes that it
has implemented a cost-effective hedging program to provide a level of
protection against changes in the market value of its fixed-rate mortgage loans
held for sale. Adjustable rate mortgages, second mortgages and home equity lines
are hedged by selling such loans to an investor on a "best efforts basis" at the
time of origination. However, an effective hedging strategy is complex, and no
hedging strategy can completely insulate the Company against such interest rate
changes.

Operations

  In order to offer a broad range of conventional and specialized mortgage loan
products, the Company must deliver mortgage loan products to the branches on a
timely basis and carefully monitor and track the origination process through
delivery of the loans to the ultimate investors. For this reason, the Company
continues to develop its operational and technological capabilities. The Company
has developed a proprietary in-house mortgage banking and administration system
that has largely eliminated many of the manual efforts associated with
underwriting, funding and loan delivery. The Company's enterprise-wide system
provides real-time access to the information used by each department in
operations, as well as the secondary marketing and treasury departments. The
Company's system provides a smooth flow of data from the origination process
until the investor purchases the mortgage loan. The Company's system also
improves data integrity since information is not re-keyed or transferred to
multiple mortgage loan-tracking systems.

  The Company's processing is decentralized to provide fast and efficient
service. Unlike many regional and national banks, the processing of its
customers' loan files are performed in the local branches by processors who work
in teams with one or more loan originators. The Company's underwriting, unlike
that provided by many regional and national banks, is performed regionally at
five sites, including the Company's regional operational centers and certain
large branches. The Company's remaining mortgage banking functions, including
secondary marketing, corporate accounting, quality assurance, systems
programming and support, loan delivery, and servicing are centralized and
maintained at the Company's Chicago headquarters.

Underwriting

  Mortgage loan applications must be approved by the Company's underwriters in
accordance with the underwriting criteria of the entity or the investor to whom
the loan will be sold. These standards include the customer's mortgage,
installment loan and revolving debt payment history, employment history,
capacity to pay, outstanding judgments, charge-offs and repossessions,
involvement in bankruptcies and foreclosures. Since loans are secured by a
mortgage lien, an appraisal of the property securing the loan is also essential.
Furthermore, the Company generally evaluates the applicant's creditworthiness
through the use of a consumer credit report, verification of employment and a
review of the debt-to-income ratio of the customer. In 1998, the Company began
utilizing Fannie Mae's automated underwriting system, Desktop Underwriter. In
less than one minute, this system evaluates and makes a decision on whether a
borrower meets Fannie Mae's guidelines. There are a number of attractive
advantages of utilizing this system. First, it reduces operating costs by
reducing the amount of time an underwriter spends on a file. Second, it reduces
the typical liability associated with underwriting when selling a loan to Fannie
Mae because Fannie Mae will have already approved the loan. Finally, it improves
the Company's customer service by enabling it to approve loans more quickly. The
Company's goal, when not using Desktop Underwriter, is to make an underwriting
determination within 24 to 48 hours after all loan documentation is complete. In
the second quarter of 1999, the Company began utilizing Freddie Mac's Loan
Prospector, which is an automated underwriting system similar to Desktop
Underwriter.

  To maintain the consistency of underwriting quality, the Company's loan
production personnel are not permitted to underwrite the mortgage loan packages
that they originate. Reviews and decisions for loans underwritten by the Company
are made by separate underwriters located at the Company's regional operational
centers and at some of its larger branches. The Company's underwriting manager
is located in

                                       10
<PAGE>

the corporate headquarters in Chicago and is responsible for administering all
underwriting policies. The underwriting manager reports to the Company's senior
officers.

Compliance And Quality Control

  The Company's legal/compliance team is responsible for compliance and quality
control. The Company's centralized compliance function allows it to control and
supervise regulatory compliance and offer consistency to its customers. The
legal/compliance team also helps the servicing team handle delinquencies and
foreclosures that occur before a loan is sold. Quality control personnel also
review loans to identify and communicate existing and potential underwriting and
loan file problems or areas of concern to the legal/compliance team and
management. The quality control personnel review a random, statistically
significant sample of closed loans to monitor, evaluate and improve the overall
quality of loan production. The review includes (1) a credit underwriting
review, (2) a complete loan package re-verification, (3) a loan program
compliance review and (4) a federal regulatory compliance review.

  The Company evaluates its quality control reports on a regular basis and
addresses any deficiencies specified in the reports.

Information Technology and Systems

  The information technology and systems department is responsible for
implementing, supporting and improving the software and hardware technology
employed throughout Prism Financial. Specifically, the information services
department concentrates on the development of new technology to increase
operational efficiencies, applications programming, applications development and
analysis of new software technologies that can be used within the Company's
business to improve information flow and reduce operating costs. For example,
the information services department was responsible for implementing Desktop
Underwriter and Loan Prospector that have greatly improved the Company's
operating efficiency. The information services department also focuses on the
integration and support of hardware technologies including those established in
the branch offices. In addition, the information services department is
currently involved in (1) deploying laptops to the Company's loan originators,
which enables its loan officers to originate a loan anywhere, at any time,
including in a customer's home or office, (2) training loan offices on laptop
origination and (3) automating the Company's underwriting process.

Competition

  Traditional channels. The mortgage lending industry is highly competitive and
fragmented. The Company faces intense competition, primarily from commercial
banks, savings and loan associations, credit unions, insurance companies,
mortgage brokers, mortgage bankers and other consumer finance companies. If the
Company expands into additional geographic markets, it may face competition from
consumer lenders with established positions in such markets. The Company cannot
provide any assurances that it will be able to compete successfully with these
consumer lenders. Competition can take place on various levels, including
convenience in obtaining a loan, service, marketing, pricing (including the
interest rates, closing costs and processing fees charged), and range of
products. The Company believes that pricing, service and product breadth are the
most important competitive factors affecting its business. Many of the Company's
competitors in the mortgage lending industry are better established, larger and
have more capital and other resources than Prism Financial. Barriers to entry
into the mortgage lending industry are low, and the current level of gains
realized by the Company and its existing competitors on the sale of loans has
attracted additional competitors into the market. Increases in the number of
competitors seeking to originate consumer loans could lower the rates of
interest or reduce the amount of origination points and fees the Company can
charge customers, thereby reducing the potential profitability of such loans.
Competition might also reduce the Company's loan origination volume. In
addition, interest rate increases since the second quarter of 1999 have reduced
industry-wide origination volume, particularly refinancing volume. Lower overall
origination volume has significantly increased the level of competition.

  Internet. Mortgage origination over the Internet is relatively new.
Competition over the Internet is intense and rapidly evolving as mortgage
brokers and lenders continue to establish affiliations with current

                                       11
<PAGE>

web sites. Currently, competition is generally based on interest rates and fees
charged and on visibility over the Internet. Similarity of product offerings and
the vast amount of mortgage-related information available over the Internet may
lead to increasing price competition. Industry analysts predict that nearly $100
billion of mortgage originations will be generated over the Internet by 2003.

Tax Credit Syndication

  With the acquisition of Apollo in the third quarter of 1999, the Company is
now a national syndicator of indirect interests in residential real estate
projects qualifying under federal tax laws for low-income housing tax credits
("LIHTCs") and historic rehabilitation tax credits ("HRTCs"). This business is
commonly referred to as "tax credit syndication." In general, Apollo's tax
credit syndication entails the following:

     .  Apollo identifies real estate developers undertaking projects that
        qualify for LIHTCs or HRTCs and contracts with the developers to acquire
        in limited partnerships or limited liability companies that own the
        projects ("Investee Partnerships"). By statute, there is a limited
        supply of LIHTCs, and inherent limitations on the number of restoration
        projects restrict the supply of HRTCs. Consequently, the competition to
        acquire Investee Partnerships is intense. Currently, Apollo finances its
        acquisitions of Investee Partnerships under a line of credit from a
        commercial bank. See "Management's Discussion and Analysis of Financial
        Condition and Results of Operations--Liquidity and Capital Resources"
        for a further discussion.

     .  When Apollo has assembled an appropriate portfolio of Investee
        Partnerships, it transfers them to an investment limited partnership or
        limited liability company (an "Investment Entity"). Apollo serves as the
        general partner or managing member of the Investment Entity, and one or
        more institutional investors comprise the limited partners or non-
        managing members of the Investment Entity.

Investors in the Investment Entities receive direct credits against their
federal income tax liability each year for a 10-year period.

  Because Apollo generally acquires ownership of Investee Partnerships prior to
its syndication of interests in the Investment Entity, Apollo faces potential
loss of principal on its investment in the Investee Partnerships should it be
unable to effect syndication of the Investment Entity interests at the prices or
on the timetable anticipated when the investments in the Investee Partnerships
were made.

  In addition to revenue generated by the spread between the cost of the
Investee Partnerships and the aggregate amount raised through syndication of
interests in the corresponding Investment Entity, the Company typically earns a
fee for providing asset management services to the Investment Entity. These
management services typically include reviewing draw requests and visiting the
properties during construction, monitoring leasing of the properties and
assisting property managers with leasing problems, monitoring financial
information for each Investee Partnership on a quarterly basis, making an annual
site visit to each property to which a Investee Partnership relates and dealing
with any material difficulties as they arise.

Employees

  As of February 29, 2000, the Company had 1,974 full-time employees.
Approximately 300 of the Company's employees were employed at its headquarters
in Chicago, Illinois. The Company's employees are not represented by any
collective bargaining unit. The Company believes that it maintains good
relations with its employees.

Government Regulation

Mortgage Origination and Ancillary Services

                                       12
<PAGE>

  The Company's business is subject to extensive regulation, supervision and
licensing by federal, state and local governmental authorities and will be
subject to various laws and judicial and administrative decisions imposing
requirements and restrictions on part or all of its operations. Regulated
matters include, without limitation, loan origination, marketing efforts, credit
application and underwriting activities, maximum finance and other charges,
disclosure to customers, certain rights of rescission, closing and servicing
loans, collection and foreclosure procedures, qualification and licensing
requirements for doing business in various jurisdictions and other trade
practices. Loan origination activities are subject to the laws and regulations
in each of the states in which those activities are conducted. Lending
activities are also subject to various federal laws. The Truth in Lending Act
("TILA") and Regulation Z promulgated thereunder contain disclosure requirements
designed to provide consumers with uniform, understandable information with
respect to the terms and conditions of loans and credit transactions in order to
give them the ability to compare credit terms. TILA also guarantees consumers a
three-day right to cancel certain credit transactions. If the Company is found
not to be in compliance with TILA, aggrieved customers could have the right to
rescind their loan transactions with the Company and to demand the return of
finance charges paid to the Company, among other remedies. The Company is also
required to comply with the Equal Credit Opportunity Act of 1974, as amended
("ECOA"), and the Fair Housing Act (the "FHA") which prohibit lenders from
discriminating against applicants on the basis of race, color, religion,
national origin, familial status, sex, age, marital status or other prohibited
bases. Regulation B promulgated under ECOA restricts lenders from obtaining
certain types of information from loan applicants. It also requires certain
consumer disclosures, including advising applicants of the reasons for any
credit denial. The Fair Credit Reporting Act of 1970, as amended ("FCRA"),
regulates the use of consumer credit information, and among other things,
requires the lender to supply the applicant with a name and address of the
reporting agency in instances where the applicant is denied credit or the rate
or charge for a loan increases as a result of information obtained from a
consumer credit agency. The Company is also subject to RESPA and the Fair Debt
Collection Practices Act and is required to collect certain applicant
information and file an annual report with HUD pursuant to the Home Mortgage
Disclosure Act ("HMA"). The Company is also subject to the rules and regulations
of, and examinations by, HUD, the Veterans Administration, Fannie Mae, Freddie
Mac and state regulatory authorities with respect to originating, processing,
underwriting, selling and servicing mortgage loans and to various other federal
and state laws, rules and regulations governing among other things, the
licensing of, and procedures that must be followed by, consumer lenders and
servicers, and disclosures that must be made to customers. Various state laws
affect the Company's mortgage banking operations, including licensing
requirements and, in certain instances, state usury statutes.

  In addition, industry participants are frequently named as defendants in
class-action and other litigation involving alleged violations of federal and
state consumer lending laws and regulations. These actions and lawsuits allege
violations of RESPA, TILA, ECOA, FHA and various other federal and state lending
and consumer protection laws. Some of the practices which have been the subject
of lawsuits against other companies include, but are not limited to,
miscellaneous "add on" fees; truth in lending calculations and disclosures;
escrow and adjustable rate mortgage calculations and collections; private
mortgage insurance calculations, disclosures and cancellation; forced-placed
hazard, flood and optional insurance; payoff statement, release and reconveyance
fees; and unfair lending practices. If a significant judgment were rendered
against the Company in connection with any litigation, it could have a material
adverse effect on the Company's business and results of operations.

  Failure to comply with these requirements may lead to civil or criminal
liability, loss of licenses, termination or suspension of servicing contracts
without compensation to the servicer, demands for indemnification or loan
repurchases, rights of rescission for mortgage loans and administrative and
enforcement actions by regulatory authorities.

   In addition, because the Company's business is highly regulated, the laws,
rules and regulations applicable to it are subject to modification and change.
Any changes in such laws, rules and regulations could make compliance much more
difficult or expensive, restrict the Company's ability to originate or sell
loans, limit or restrict the amount of interest and other charges earned on
loans closed or sold by the Company, or otherwise adversely affect its business
or its prospects.

                                       13
<PAGE>

Tax Syndication

  Apollo, a tax credit syndication business, depends on provisions in the
Internal Revenue Code for the availability of LIHTCs and HRTCs for residential
properties. The LIHTC program is administered by the U.S. Department of the
Treasury and the Internal Revenue Service. To qualify for LIHTCs a project is
required to meet certain requirements for low income tenants and also a rent
restriction test. If a project fails to meet these tests, the owners of a
qualified low-income housing project will lose their entitlement to the LIHTCs
and are required to recapture a portion of the credits already taken. HRTCs are
available for any qualified project designated by the Secretary of the Interior
as a historic structure and meets certain Internal Revenue Code requirements.
HRTCs are subject to full or partial recapture if an investor transfers more
than one-third of its interest or the property is disposed of, in each case
within five years from the date the property is placed in service. If the laws
regarding tax credits are changed or tax credits become more limited or
unavailable, the Company's business and financial condition could be materially
and adversely affected.


Risk Factors

  In addition to the risks discussed elsewhere in this Annual Report on Form
10-K, the following risks, uncertainties and other factors could affect the
Company's future business, financial condition and results of operations and
could cause future results to differ materially from historical results or those
anticipated.

If the Company does not manage the Company's growth effectively, the Company's
financial performance could be adversely affected; the Company's historical
growth rates are not likely to reflect the Company's future growth

  The Company has experienced rapid growth since the Company's formation in
1992. The Company's revenues have grown from approximately $200,000 in 1992 to
$151.1 million in 1999. The Company's workforce has grown from five employees to
approximately 2,000 employees during the same period. The Company intends to
continue to grow by adding new loan originators, opening new branches, making
strategic acquisitions and building the Company's Internet origination
capabilities. Future growth will impose significant added responsibilities on
members of management, including the need to identify, recruit, maintain and
integrate additional employees, including management. There can be no assurance
that the Company's systems, procedures and controls will be adequate to support
the Company's operations as they expand. The Company's failure to manage growth
effectively, or the Company's inability to recruit, maintain and integrate
additional qualified employees, could have a material adverse effect on the
Company's business and results of operations. In addition, due to the Company's
rapid growth and recent acquisitions, the Company's historical growth rates are
not likely to accurately reflect the Company's future growth rates or the
Company's growth potential. The Company cannot assure you that the Company's
future revenues will increase or that the Company will continue to be
profitable.

Poor economic conditions affecting the mortgage industry or rising interest
rates could reduce the demand for mortgages and refinancings

  Demand for mortgages will be adversely affected by (i) periods of economic
slowdown or recession which may be accompanied by rising interest rates,
decreasing demand for consumer credit, declining home sales, declining real
estate values and declining ability of borrowers to make loan payments and (ii)
changes in interest rates generally. Changes in the level of consumer
confidence, real estate values, prevailing interest rates and investment returns
expected by the financial community could make mortgage loans of the types
originated by it less attractive to borrowers or investors because, among other
things, the actual rates of delinquencies and foreclosures on those loans could
be higher under adverse economic conditions than those currently experienced in
the mortgage lending industry in general. A material decline in the volume of
sales of residential real estate could also have a material adverse effect on
the Company's business and results of operations. While demand for mortgages in
the U.S. increased approximately 80% from 1997 to 1998 demand for mortgages in
1999 decreased approximately 15% from 1998 levels. In addition, demand for
mortgages in 2000 is expected to decline by approximately 24% from 1999 levels.

                                       14
<PAGE>

  Rising interest rates may also adversely affect demand for refinancings. Since
January 1995, significant declines in interest rates have produced significant
levels of refinance activity, in general, and for the Company in particular. If
interest rates stabilize or rise even moderately, the Company's refinance loan
origination volume is likely to be adversely affected. Since December 31, 1998,
the average interest rate on a new 30-year fixed-rate home mortgage has
increased from 6.7% to 7.8%. The Company estimates that refinancing originations
as a percentage of the Company's total loan origination volume have decreased
from 54% for the year ended December 31, 1998 to 36% for the year ended December
31, 1999. Any material decline in the demand for mortgages or refinancings would
adversely affect the Company's business, financial condition and results of
operations.

The loss of key purchasers of the Company's loans or servicing rights or a
reduction in prices paid could adversely affect the Company's ability to
profitably sell the Company's loans and servicing rights

  The Company currently sells substantially all of the loans the Company funds
to independent whole loan or bulk loan buyers and sells the accompanying
servicing rights to approved servicers. The premium income generated from these
sales represents a primary source of the Company's revenues and earnings.
Further, the Company is dependent on the cash generated from sales of mortgages
and servicing rights to fund the Company's future loan closings, to repay
borrowings under the Company's credit facilities and to fund the Company's other
obligations. In 1999, the Company sold over 85% of the loans funded by the
Company's mortgage bank to three large, national companies. In the event that
any purchasers of a significant amount of loans and/or servicing rights (1)
ceases to buy the Company's loans and/or servicing rights and equivalent
purchasers could not be identified on a timely basis, (2) lowers the price it
pays to the Company or (3) adversely changes the material terms by which it
currently makes purchases, the Company's business and results of operations
would be materially adversely affected.

  The prices for which the Company is able to sell the Company's loans vary from
time to time and may be materially adversely affected by several factors,
including, without limitation, the following:

     . any reduction in the number of potential buyers of the Company's
       loans;
     . any increase in the amount of similar loans available for sale;
     . increased prepayments of, or defaults under, loans in general;
     . the types and volume of loans being sold by the Company;
     . the level and volatility of interest rates; and
     . the quality of loans previously sold by the Company.

  The prices for which the Company is able to sell the Company's mortgage
servicing rights vary from time to time and may be materially adversely affected
by a number of factors, including the general supply of and demand for mortgage
servicing rights and changes in interest rates. Servicing rights for a
particular loan category originated with higher interest rates tend to have a
lower value than those originated with comparatively lower interest rates.

  A reduction in the size of the secondary market for the types of loans funded
by the Company may adversely affect the Company's ability to sell loans and
servicing rights in the secondary market, and accordingly adversely impact the
Company's profitability and ability to fund future loan closings. Any decrease
in the prices paid to the Company upon the sale of the Company's loans or
servicing rights could materially adversely affect the Company's business and
results of operations.

If the Company is unable to maintain adequate credit facilities or access to
funds, the Company's ability to make loans will be limited

  The Company funds substantially all of the Company's loans through borrowings
under the Prism Mortgage warehouse credit facility and through repurchase
agreements and, to a lesser extent, through internally generated funds. The
Company repays borrowings under the warehouse credit facility with the proceeds
received from sales of loans and servicing rights. If the Company is unable to
renew or replace the warehouse facility or repurchase agreements on adequate
terms, are unable to comply with the terms of

                                      15
<PAGE>

the warehouse facility or repurchase agreements, including the financial and
other covenants, or are unable to increase the warehouse facility or expand the
Company's repurchase agreements if required for future growth, the Company's
business and results of operations would be materially adversely affected. If
the Company cannot successfully maintain its existing warehouse facility or
replace it with comparable financing sources, the Company would be required to
curtail the Company's loan origination activities, which would have a material
adverse effect on the Company's business and results of operations. The
Company's principal credit facility provides it with an aggregate borrowing
amount of $250 million, which amount may be increased to $400.0 million, is
renewable annually and expires on March 31, 2000. On March 21, 2000, the Company
extended this credit facility through April 28, 2000. Pursuant to the agreement,
the maximum borrowing base has been reduced from $250 million to $200 million.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources."

The profitability of the Company's loans held for sale could be negatively
affected by an increase in interest rates

  The value of the Company's loans is based, in part, on market interest rates,
and the Company may experience losses on loan sales if interest rates change
rapidly or unexpectedly and the Company is not properly hedged. If interest
rates rise after the Company fixes a price for a loan but before the Company
sells the loan in the secondary market, the value of that loan will decrease. If
the amount the Company receives from originating and selling the loan is less
than the Company's cost of borrowing to finance the loan, the Company could
incur net losses and the Company's business and operating results could be
adversely affected. Although the Company typically knows approximately how long
the Company will keep a loan after funding, there may be unexpected delays that
could increase the Company's interest rate exposure. While the Company uses
various hedging strategies to provide some protection against interest rate
risks, no hedging strategy can completely protect it. The nature and timing of
hedging transactions may influence the effectiveness of hedging strategies and
poorly designed strategies or improperly executed transactions may increase
rather than decrease risk and losses. In addition, hedging strategies involve
transaction and other costs. The Company cannot assure you that the Company's
hedging strategy and the hedges that the Company makes will adequately offset
the risks of interest rate volatility or that the Company's hedges will not
result in losses.

If the Company does not properly execute the Company's acquisition strategy,
including successfully integrating the Company's acquired companies, the
Company's business may suffer

  An element of the Company's growth strategy is to expand the Company's
operations through selective acquisitions of independent mortgage brokers and
bankers. Substantial competition exists for acquisition opportunities in the
mortgage industry. This competition could result in an increase in the price of,
and a decrease in the number of, attractive acquisition targets. As a result the
Company may not be able to successfully acquire attractive targets on terms that
the Company deems acceptable. In addition, there can be no assurance that the
Company will be able to obtain the additional financing the Company will need
for the Company's acquisition program on terms that it deems acceptable and
therefore, its growth through acquisitions would be limited. Acquisitions may
also involve a number of special risks, including adverse short-term effects on
the Company's results of operations, dilution resulting from issuances of the
Company's common stock, diversion of management's time, strain on the Company's
financial and administrative infrastructure, difficulties in integrating
acquired businesses and personnel, loss of personnel and unanticipated legal
liabilities. The Company cannot assure you that the Company will be able to
overcome these acquisition risks or that they will not adversely affect the
Company's business and results of operations.

The Company's recently-acquired tax credit syndication business is subject to a
number of risks that could decrease the Company's profitability

  The Company acquired Apollo, an affordable housing and historic rehabilitation
tax credit syndication business, in September 1999. For the year ended December
31 1999, approximately 26% of the Company's income from continuing operations
before income taxes were attributable to Apollo. The Company expects that Apollo
will continue to be an important source of income for the foreseeable future. A
number of factors, however, including the following, could cause Apollo's
contribution to the Company's earnings to be less than anticipated or even
negative:

                                      16
<PAGE>

     . Apollo has a limited operating history;

     . competition to acquire interests in properties eligible for tax
       credits is intense, and there can be no assurance that Apollo will
       continue to be able to acquire such interests on terms allowing for
       profitable syndication;

     . Apollo's business depends on provisions in the Internal Revenue Code
       of 1986, as amended, for low-income housing tax credits and historic
       rehabilitation tax credits for residential properties. Adverse
       legislative developments could jeopardize Apollo's business;

     . Apollo's competitive position in the tax credit syndication market
       hinges in part on its relationships with developers of eligible
       properties and with the institutional investors to whom syndicated
       tax credits are marketed. The termination of key relationships could
       have an adverse ability on Apollo's ability to compete;

     . Apollo's competitive position depends on its ability to retain its
       key employees; and

     . Appollo's ability to acquire Investee Partnerships and syndicate
       interests is dependent on Appollo's ability to maintain adequate credit
       facilities on acceptable terms.

If any of these factors were to negatively affect Apollo, or if Apollo's
performance were otherwise to deteriorate, the Company's overall business,
financial condition and results of operations could be materially adversely
affected. In addition, because Apollo generally acquires ownership of interests
in real estate projects prior to their syndication, the Company faces potential
loss of principal on the investment in such interests should Apollo be unable to
effect syndication at the prices or on the timetable anticipated when the
investment is made.

If the Company loses the Company's key personnel, the Company may not be able to
replace them with highly experienced personnel

  The Company's future success depends to a significant extent on the continued
services of the Company's senior management, particularly Mark A. Filler,
President and Chief Executive Officer, Terry A. Markus, President of Prism
Illinois, William D. Osenton, President of Pacific Guarantee and Martin E.
Francis, President of Mortgage Market and other senior management at the
Company's key operating subsidiaries. The loss of the services of Mr. Filler,
Mr. Markus, Mr. Osenton, Mr. Francis or other key employees, could have a
material adverse effect on the Company's business and results of operations. The
Company does not maintain "key person" life insurance for any of the Company's
personnel.

If the Company cannot attract or retain qualified loan originators, the
Company's ability to maintain and increase the Company's origination volume will
be adversely affected

  The Company depends on the Company's loan originators to generate customers
by, among other things, developing relationships with consumers, real estate
agents and brokers, builders, corporations and others, leading to repeat and
referral business. Accordingly, the Company must be able to attract, motivate
and retain skilled loan originators. In addition, the Company's growth strategy
contemplates hiring additional loan originators. The market for skilled loan
originators is highly competitive and historically has experienced a high rate
of turnover. Competition for qualified loan originators may lead to increased
costs for such loan originators. If the Company is unable to attract or retain a
sufficient number of skilled loan originators or even if the Company is able to
retain loan originators but the Company's costs increase, the Company's business
and results of operations could be adversely affected.

Intense competition could reduce the Company's market share and harm the
Company's financial performance

  The Company faces competition in the business of originating and selling
mortgage loans. Low barriers to entry result in a steady stream of new
competitors entering the traditional mortgage market and the Internet mortgage
market. In addition, the nature of the mortgage industry is changing as mortgage
products are becoming more commodity-like in nature due to, among other factors,
price and visibility on

                                      17
<PAGE>

the Internet. Mortgage companies must be able to offer a broad range of
attractively priced products to remain competitive. The Company competes with a
wide range of other mortgage lenders, including:

     .  other mortgage banks;
     .  commercial banks, savings and loan associations;
     .  credit unions;
     .  insurance companies and other finance companies; and
     .  Internet mortgage web sites.

  Many of these competitors or potential competitors are better established,
substantially larger and have more capital and other resources than the Company
does. If the Company expands into additional geographical markets, it will face
competition from consumer lenders with established positions in those markets.
In the future, the Company may also face competition from government-sponsored
entities, such as Fannie Mae and Freddie Mac. Competition may lower the rates
the Company can charge borrowers, thereby potentially lowering the amount of
premium income on future loan sales and sales of servicing rights. Increased
competition may also reduce the volume of the Company's loan originations and
loan sales. There can be no assurance that the Company will be able to compete
successfully in this evolving market.

If the Company is unable to implement the Company's Internet strategy
successfully, the Company's ability to grow the Company's overall origination
volume may be negatively affected

  A portion of the Company's growth is dependent on the Company's ability to
originate loans on the Internet. The Company's Internet success will depend, in
part, on the development and maintenance of the Internet's infrastructure and
consumer acceptance of it as a distribution channel for mortgages. There can be
no assurance that consumers will increase their use of the Internet for
obtaining mortgage loans. In order to grow the Company's loan volume on the
Internet, it is dependent on affinity relationships with operators of Internet
mortgage web sites to capture some of the on-line mortgage growth. However, the
Company's ability to significantly increase the number of loans it originates
over the Internet and to continue to originate loans profitably through the
Internet remains uncertain. In addition, many of the Company's agreements with
Internet mortgage web sites and affinity relationships can be terminated with
notice by either party. The Company's business and results of operations may be
materially, adversely affected by the termination of these agreements.

Changes in existing government sponsored and federal mortgage programs could
make selling the Company's loans in the secondary market more difficult

  The Company's ability to generate revenue through the sale of mortgages is
largely dependent upon the continuation of programs administered by Fannie Mae,
Freddie Mac and others that facilitate the issuance of mortgage-backed
securities. A portion of the Company's business is also dependent upon the
continuation of various programs administered by the Federal Housing
Administration and the Veterans Administration. Any discontinuation of, or
significant reduction in, the operation of those programs could have a material
adverse effect on the Company's business and results of operations.

The Company's non-prime mortgage business subjects it to greater risks than the
Company's prime business

  Lenders in the non-prime mortgage banking industry make loans to borrowers who
have impaired or limited credit histories or higher debt-to-income ratios than
traditional mortgage lenders allow. For the year ended December 31, 1999, only
approximately 1% of the dollar amount of the Company's loans originated was
categorized as non-prime. The non-prime mortgage banking industry is a riskier
business than the conforming mortgage business because product offerings for
non-prime mortgages frequently change which may make selling a non-prime loan in
the secondary market more difficult. The Company's failure to adequately address
these and other related risks could have a material adverse effect on the
Company's business and results of operations.

                                      18
<PAGE>

The Company may be required to return proceeds obtained from the sale of loans

  When the Company sells a loan to an investor, it is required to make
unqualified representations and warranties regarding the loan, the borrower and
the property. These representations are made based in part on the Company's due
diligence and information provided to it by borrowers and others. If any of
these representations or warranties are later determined not to be true, the
Company may be required to repurchase the loan from the investor or indemnify
the investor for any damages caused by the breach of such representation or
warranty. In connection with some non-prime loan sales, the Company may be
required to return a portion of the premium paid by the investor for the loan if
the loan is prepaid within the first year after its sale. If, to any significant
extent, the Company is required to repurchase loans, indemnify investors or
return loan premiums, it could have a material adverse effect on the Company's
business and results of operations.

Because the Company's origination volume is geographically concentrated, the
Company's business may be adversely affected by developments in individual
markets

  In 1999, approximately 33%, 27% and 17% of the Company's mortgage loan
originations, as measured by principal balances, were secured by property
located in California, Illinois and the Pacific Northwest, respectively. Should
these states or their surrounding regions experience adverse economic, political
or business developments or suffer natural disasters, the Company's ability to
originate loans would be reduced, and the rates of delinquency and foreclosure
on loans it originates would be higher, than if it has greater geographic
diversification. Moreover, if any of these states' or if the region's real
estate markets should experience an overall decline in property values, the
rates of delinquency, foreclosures, bankruptcies and losses on the loans the
Company originates may be expected to increase substantially, which could
negatively affect the Company's ability to originate loans or to sell the
Company's loans and servicing rights. Unless and until the Company achieves
greater geographic diversification, any disproportionate economic downturn in
these areas could have a material adverse effect on the Company's business and
results of operations.

The Company may not attain investors' expectations due to adverse factors

  The Company's quarterly revenues and net earnings and losses have fluctuated
in the past and are expected to fluctuate in the future as a result of a number
of factors, including the following:

     .  size and timing of sales of loans and servicing rights, as a delay in a
        loan sale from one quarter to the subsequent quarter may lower revenues
        in the quarter from which the sale was delayed;

     .  size and timing of acquisitions and internal expansion, as the timing
        will impact the future amount of revenues, goodwill and other expenses
        recorded by the Company;

     .  the volatility of interest rates, as volatile interest rates could
        impact the Company's ability to profitably originate and sell loans,
        particularly if the Company's hedging strategy is ineffective;

     .  the level of interest rates, as origination volume, particularly with
        respect to refinancings, is interest rate sensitive;

     .  the relative volume of mortgage loan originations, as a decrease in the
        relative volume of originations from one quarter compared to a
        subsequent quarter could negatively affect the revenues in the quarter
        with the lower origination volume;

     .  the Company's ability to offer competitive rates, as the Company's
        failure to offer competitive rates may lower the Company's origination
        volume for a particular quarter;

                                       19
<PAGE>

     .  changes in market rates for origination and processing fees, as a
        decrease in these fees would lower the Company's quarterly revenue from
        these sources; and

     .  the timing of transactions closed by Apollo, which may fluctuate greatly
        between quarters.


  In addition, a delay in closing a sale of loans or servicing rights would
postpone recognition of premium income on these sales to a subsequent quarter.
Unanticipated delays in closing a sale of loans or servicing rights could also
increase the Company's exposure to interest rate fluctuations by lengthening the
period during which the Company's variable rate borrowings under the Company's
credit facilities are outstanding. If the Company were unable to profitably sell
a sufficient number of loans or servicing rights in a particular reporting
period, the Company's revenues for that period would decline. The Company's
quarterly earnings will also be affected by:

     .  the timing of acquisitions and the recognition of costs associated with
        those acquisitions;
     .  the generally lower initial profitability of newly opened branches
        compared to mature branches; and
     .  the success of the Company's hedging strategy.

Mortgage brokerage regulations or other government regulations could adversely
affect the method by which the Company conducts the Company's business or reduce
the number of loans it originates

  Most states have laws and regulations governing the registration or licensing
and conduct of persons providing mortgage brokerage services. Such laws and
regulations also typically require certain consumer protection disclosures and
compliance with loan solicitation procedures and a variety of other practices,
throughout the various stages of the mortgage solicitation, application and
approval process.

  In addition to state law, mortgage brokerage services are heavily regulated by
federal law. For example, the Real Estate Settlement Procedures Act, prohibits
the payment and receipt of mortgage loan referral fees. The act, however, does
permit persons to be compensated for the fair market value of non-referral
services actually rendered.

  Failure to comply with these requirements can lead to civil and/or criminal
liability, loss of approved status, demands for indemnification or loan
repurchases from buyers in the secondary market, rights of rescission for
mortgage loans, class action lawsuits and administrative and enforcement
actions.

  In addition, members of Congress, government officials and political
candidates from time to time have suggested the elimination of or further
limitation on the mortgage interest deduction for federal income tax purposes
based on borrower income, type of loan or principal amount. Some of the
Company's loans are made to borrowers for the purpose of consolidating consumer
debt or financing other consumer needs. The competitive advantages of tax
deductible interest, when compared with alternative sources of financing, could
be eliminated or seriously impaired by this government action.

  Although the Company believes that it is currently in compliance in all
material respects with applicable federal, state and local laws, rules and
regulations, it cannot assure you that the Company is, or will be, in full
compliance with current laws, rules and regulations; that more restrictive laws,
rules and regulations will not be adopted or promulgated; that existing laws and
regulations will not be interpreted in a more restrictive manner, which could
make compliance substantially more difficult or expensive; or that new laws
reducing or eliminating some of the benefits of purchasing a mortgage will not
be enacted. If the Company is unable to comply with those laws or regulations or
if new laws limit or eliminate some of the benefits of purchasing a mortgage,
the Company's business and results of operations may be materially adversely
affected.

If in the future the Company decides to securitize and/or retain the servicing
rights of the Company's loans, the Company would be subject to additional risks
that it does not currently face

                                      20
<PAGE>

  The Company currently does not securitize the loans that it originates, but
rather sells them to the secondary market. However, in the future if the prices
offered in the secondary market for the Company's loans are significantly lower
than what it could receive through securitization, it would consider
securitizing the Company's loans. If the Company began securitizing the its
loans, it would be subject to numerous additional risks, including:

     .  decreased operating cash flow;
     .  conditions in the general securities and securitization markets;
     .  the need to obtain satisfactory credit enhancements;
     .  the potential of having to write down the value of retained residual
        interests as a result of inaccurate projections regarding the fair value
        of the residual interest; and
     .  increased potential for earnings fluctuations.

  Except during the short period of time before a loan is sold, the Company also
does not retain the servicing rights to the loans it originates. The Company
sells the servicing rights at the same time it sells the loan. However, the
Company would consider retaining the servicing rights to the Company's loans if
it believed that their value was significantly greater than secondary market
buyers were then willing to pay. If the Company started retaining the servicing
rights to the Company's loans, it would be subject to numerous additional risks,
including:

     .  decreased operating cash flow; and
     .  the potential of having to write down the value of the servicing rights
        through a charge to earnings, particularly as a result of changing
        interest rates and alternative financing options which lead to increased
        prepayments.

Pending industry-wide litigation could change the manner in which the Company
does business and subject it to potential liability

  Numerous lawsuits seeking class certification have been filed against mortgage
lenders alleging that a type of direct and indirect payments to mortgage brokers
by those lenders violate the Real Estate Settlement Procedures Act.  These
lawsuits have generally been filed on behalf of a purported nationwide class of
borrowers and allege that various forms of direct and indirect payments to
mortgage brokers are referral fees or unearned fees prohibited under RESPA, or
that consumers were not informed of the brokers' compensation, in violation of
law.  Several federal district courts construing RESPA in these cases have
reached conflicting results.  In the only appellate decision addressing the
issue to date, the United States Court of Appeals for the Eleventh Circuit in
Culpepper v. Inland Mortgage Corporation reversed the lower court's summary
judgment in favor of the lender defendant on the grounds that the lender had
failed to establish that the indirect payment in the form of a "yield spread
premium" made to a broker in a particular transaction was not a referral fee
prohibited by RESPA.  The case was remanded to the district court for further
proceedings.  The Department of Housing and Urban Development, acting upon
Congress' direction, issued a policy statement in January 1999 setting forth its
position that the legality of lender payments to mortgage brokers depends on a
case-by-case analysis that takes into consideration all direct and indirect
compensation received by the mortgage broker to determine whether (1) goods or
facilities have been actually furnished or services performed for the
compensation paid, and (2) the compensation is reasonably related to the value
of the goods or facilities actually furnished or services actually performed.

  The Company receives various forms of direct and indirect payments from
lenders for loans it brokers. If the pending cases on lender payments to brokers
are ultimately resolved against the lenders, it may cause an industry-wide
change in the way independent mortgage brokers are compensated. In addition,
future legislation, regulatory interpretations or judicial decisions may require
the Company to change its broker compensation programs or subject it to material
monetary judgments or other penalties. Any changes or penalties may have a
material adverse effect on the Company's business and results of operations.

The market price of the Company's common stock is highly volatile

                                      21

<PAGE>

  The market price of the Company's common stock is highly volatile and subject
to wide fluctuations in response to numerous factors, including the following:

     .  actual or anticipated fluctuations in the Company's operating results;
     .  changes in expectations as to the Company's future financial
        performance, including financial estimates by securities analysts and
        investors;
     .  the operating and stock performance of the Company's competitors;
     .  announcements by the Company or its competitors of new products or
        services or significant contracts, acquisitions, strategic partnerships,
        joint ventures or capital commitments;
     .  changes in interest rates;
     .  additions or departures of key personnel; and
     .  future sales of the Company's common stock.

  In addition, the stock market from time to time experiences extreme price and
volume fluctuations that may be unrelated or disproportionate to the operating
performance of companies. These broad fluctuations may adversely affect the
trading price of the Company's common stock, regardless of the Company's actual
operating performance. Although an active public market for the Company's common
stock exists, it may not be sustained in the future and trading in the Company's
common stock may be limited.

  In the past, security holders have often brought securities class action
litigation against a company following periods of volatility in the market price
of their securities. The Company may in the future be the target of similar
litigation. Securities litigation could result in substantial costs and divert
management's attention and resources.

The Company's officers elect all of the Company's directors and control
stockholder votes; your interests may not be the same as those of the Company's
officers

  The Company's officers and directors, together with entities related to them,
beneficially own approximately 66% of the Company's outstanding common stock. As
a result, if acting together, these stockholders have the ability to control the
outcome of all matters requiring stockholder approval including:

     .  the election and removal of directors;
     .  amendments to the Company's charter; and
     .  any merger, sale of all or substantially all of the Company's assets or
        other major corporate transactions.

  Such control could discourage others from initiating potential merger,
takeover or other change of control transactions. As a result, the market price
of the Company's common stock could be adversely affected.

Anti-takeover provisions affecting the Company could prevent its stockholders
from obtaining a change of control premium for their shares of the Company's
common stock

  The Company's amended and restated certificate of incorporation and amended
and restated bylaws and Delaware law contain anti-takeover provisions that could
have the effect of delaying or preventing changes in control. The provisions in
the Company's charter documents include the following:

     .  a classified board of directors pursuant to which the Company's
        directors are divided into three classes, with three-year staggered
        terms;

     .  the ability of the Company's board of directors to issue shares of
        preferred stock and to determine the price and other terms, including
        preferences and voting rights, of those shares without stockholder
        approval;

     .  stockholder action to be taken only at a special or regular meeting; and

                                      22
<PAGE>

     .  advance notice procedures for nominating candidates to the Company's
        board of directors.

     .  In addition, the Company adopted a stockholder rights plan in January
        2000, pursuant to which the Company distributed one right for each
        outstanding share of Common Stock. These rights will cause substantial
        dilution to the ownership of a person or group that attempts to acquire
        the Company or a substantial ownership position in the Company on terms
        not approved by the Board of Directors of the Company.

  The foregoing provisions could have the effect of delaying, deferring or
preventing a change in control of Prism Financial; discourage bids for the
Company's common stock at a premium over the market price; or adversely affect
the market price of, and the voting and other rights of the holders of, the
Company's common stock. The Company is subject to certain Delaware laws that
could have similar effects. One of these laws prohibits the Company from
engaging in a business combination with any interested stockholder for a period
of three years from the date the person became an interested stockholder unless
certain conditions are met.

                                      23
<PAGE>

ITEM 2.  PROPERTIES

  The principal executive and administrative offices of Prism Financial occupy
approximately 40,000 square feet of commercial office space in Chicago,
Illinois, under a sublease expiring in 2004. The Company leases the following
properties for the Company's regional operations:

<TABLE>
<CAPTION>
                                                                   Approximate
Location                                                         Square Footage
--------                                                         --------------


<S>                                                               <C>
Pt. Richmond, California......................................          15,000
Englewood, Colorado...........................................          13,990
Lake Oswego, Oregon...........................................           5,189
Cleveland, Ohio...............................................           3,226
</TABLE>

  In addition, The Company leases 155 additional locations in connection with
the Company's branch offices, for lease terms expiring at various dates from
2000 through 2006. The Company does not own any real estate except for the
Company's mortgagee's interests in the ordinary course of business. The Company
intends to lease additional office space in connection with the expansion of its
branch office system.

ITEM 3.  LEGAL PROCEEDINGS

  Prism Financial is involved from time to time in litigation incidental to its
business. The Company is not aware of any pending or threatened claims against
the Company that might materially adversely affect its operating or financial
results.

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

  None.

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

  The Company's Common Stock, $0.01 par value per share (the "Common Stock"), is
traded on the Nasdaq National Market under the symbol "PRFN." The following
table sets forth, for the quarters indicated, the range of high and low closing
sale prices per share for the Common Stock on the Nasdaq National Market.

<TABLE>
<CAPTION>
                                                            High         Low
                                                         ----------   ----------
Year Ended December 31, 1999:
<S>                                                      <C>            <C>
      Second Quarter.................................      21  3/4      18  1/4
      Third Quarter..................................      28 15/16      9  7/8
      Fourth Quarter.................................      13 1/8        4 9/16
</TABLE>

  As of March 27, 1999, the Common Stock was held by 33 holders of record.

  The Company has never declared any cash dividends or distributions on its
capital stock. The Company currently intends to retain its earnings to finance
future growth and therefore does not anticipate paying any cash dividends in the
foreseeable future.

                                      24
<PAGE>

ITEM 6.  SELECTED FINANCIAL DATA

  The following selected financial data for the years ended December 31, 1999
and 1998 and as of December 31, 1999 and 1998 have been derived from Prism
Financial's consolidated financial statements, included elsewhere herein, which
have been audited by PricewaterhouseCoopers LLP, independent accountants. The
following selected financial data for the year ended December 31, 1997 has been
derived from Prism Financial's consolidated financial statements, included
elsewhere herein, which have been audited by McGladrey & Pullen, LLP,
independent public accountants. The following selected financial data for the
years ended December 31, 1996 and 1995 and as of December 31, 1997, 1996 and
1995 have been derived from the audited financial statements of Prism Financial
not included elsewhere herein. The operating data are derived from financial
information compiled by Prism Financial and are unaudited. The following
information is qualified by reference to, and should be read in conjunction
with, Prism Financial's financial statements and related notes and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

<TABLE>
<CAPTION>
                                                       Year Ended December 31,
                                            ---------------------------------------------
                                              1999      1998      1997      1996     1995
                                              ----      ----      ----      ----     ----
<S>                                         <C>        <C>       <C>       <C>      <C>
 (in thousands, except per share data)
Statement of Income Data:
Total revenues............................  $150,659   $85,666   $26,763   $12,201  $7,577
Total expenses............................   142,176    73,570    23,927    11,181   7,354
                                            --------   -------   -------   -------  ------
 Income from continuing operations
  before income taxes.....................     8,483    12,096     2,836     1,020     223
Income tax benefit........................    (1,467)        -         -         -       -
                                            --------   -------   -------   -------  ------
Income from continuing operations.........     9,950    12,096     2,836     1,020     223
Loss from discontinued operations, net (1)    (1,097)   (1,001)     (333)        -       -
                                            --------   -------   -------   -------  ------
Net income................................  $  8,853   $11,095   $ 2,503   $ 1,020  $  223
                                            ========   =======   =======   =======  ======
Earnings per share from continuing
 operations (diluted).....................  $   0.74   $  1.14   $  0.28
                                            ========   =======   =======
                                            $   0.66   $  1.05   $  0.24
Net earnings per share (diluted)..........  ========   =======   =======

Shares used in computing earnings per
 share (diluted)..........................    13,454    10,611    10,269
                                            ========   =======   =======


Pro forma data (unaudited) (2):
Income from continuing operations, net
 of pro forma income taxes................  $  5,175   $ 7,504   $ 1,708
                                            ========   =======   =======
Pro forma earnings per share (diluted)....  $   0.35
Pro forma shares used in computing pro      ========
 forma earnings per share (diluted).......    14,689
                                            ========
</TABLE>
___________

(Footnotes on following page)

                                       25
<PAGE>

<TABLE>
<CAPTION>
                                                                              As of
                                                                           December 31,
                                                          --------------------------------------------
                                                            1999      1998     1997     1996     1995
                                                          --------  --------  -------  -------  ------
<S>                                                       <C>       <C>       <C>      <C>      <C>
                                                                         (in thousands)
Balance Sheet Data:
Cash and cash equivalents............................     $  6,915  $ 12,124  $ 1,164  $ 1,144  $  597
Loans held for sale..................................      198,294   467,254   60,901   17,769   6,016
Properties held for sale.............................       74,070         -        -        -       -
Total assets.........................................      331,603   503,622   65,332   20,100   7,409
Loans sold under agreements to repurchase............       11,934   292,627        -        -       -
Warehouse lines of credit............................      191,603   170,217   59,634   17,595   6,016
Capital contributions payable........................       61,674         -        -        -       -
Total debt...........................................          221     5,027        -        -       -
Total stockholders' equity...........................       42,035    16,203    3,076    1,523     503
</TABLE>

<TABLE>
<CAPTION>
                                                                            Year Ended December 31,
                                                                       ---------------------------------
                                                                        1999     1998     1997     1996
                                                                       -------  -------  -------  ------
<S>                                                                    <C>      <C>      <C>      <C>
                                                                                (in thousands)
Operating Data:
Total mortgage originations (in millions)............................  $ 7,669  $ 5,025  $ 1,469  $  857
Internet mortgage originations (in millions).........................  $   336  $   122  $     -  $    -
Number of loans originated...........................................   46,532   31,943   10,086   5,460
Loan originators at period end.......................................    1,223      749      203     126
Number of branches at period end.....................................      159       95       17      11
</TABLE>

___________

(1)  In July 1999, the Company discontinued the operations of a business segment
     that originated and sold sub-prime mortgages. See Note 8-Discontinued
     Operations in the Notes to the Consolidated Financial Statements included
     elsewhere herein for a more detailed discussion of this transaction.
(2)  Pro forma information is presented to reflect the results of operations as
     if the Company had been taxed as a C corporation since the beginning of
     each period presented and to reflect the pro forma weighted average number
     of shares outstanding as if the shares issued in the initial public
     offering had been issued on January 1, 1999.

                                      26
<PAGE>

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

  The discussion and analysis below contains certain forward-looking statements
(as such term is defined in Section 21E of the Exchange Act) that reflect the
current views of the management of Prism Financial Corporation and subsidiaries
(collectively, "Prism Financial" or the "Company"), as well as assumptions made
by, and information currently available to, the Company's management, with
respect to future events and financial performance. The Company's actual growth,
results, performance and business prospects and opportunities in 2000 and beyond
could differ materially from those expressed in, or implied by, such forward-
looking statements. See "-Special Note Regarding Forward-Looking Statements" on
page 38 and Item 1. Business - Risk Factors beginning on page 14 for a
discussion of risks, uncertainties and other factors that could cause or
contribute to such material differences.

General

  Prism Financial is a leading retail mortgage banking company primarily engaged
in the business of originating, selling and brokering residential mortgage
loans. The Company originated $7.7 billion in loans in 1999. Through the
Company's network of approximately 1,200 commission-only loan originators
operating out of 159 retail branches in 27 states as of December 31, 1999, and
the Company's relationships with operators of leading Internet mortgage web
sites, the Company offers a broad array of residential mortgage products
targeted primarily to high-credit-quality borrowers. The Company operates as
both a mortgage banker, underwriting, closing and funding loans, and a mortgage
broker, selling the loan products of over 100 different lenders.

  Since being founded in 1992, the Company has focused on growing its
origination volume by building a retail origination network through internal
growth and selective acquisitions and, recently, through relationships with
operators of Internet mortgage web sites. In 1999, the Company opened seven
company-owned branches, closed 20 unprofitable branches, opened 28 net branches
and added approximately 70 new loan originators.

  During 1999, the Company continued to selectively pursue acquisitions of
independent, high-quality mortgage brokers and mortgage banks. Since 1996, the
Company has completed nine acquisitions of mortgage companies, including Pacific
Guarantee Mortgage Corporation ("Pacific Guarantee") and Mortgage Market, Inc.
("Mortgage Market") in 1998 and First City Financial Corporation ("First City"),
Mortgage Express, Inc. ("Mortgage Express") and Valley Financial Corporation
("Valley Financial") in 1999. As of the respective acquisition dates, these nine
acquisitions resulted in the addition of over 800 loan originators and 111
branches in 16 states.

  In September 1999, the Company acquired an 80 percent interest in Apollo
Housing Capital, L.L.C. ("Apollo"). Through this transaction, the Company sought
to diversify its revenue and growth channels. Apollo structures and sells
interests in investment portfolios comprised of affordable housing and historic
tax credits.

  The Company believes that the Internet provides a unique medium to deliver
mortgage services. The Company's objective is to become a leading provider of
mortgage products through the Internet. The Company believes its broad range of
competitively priced products, its offering of private label online mortgage
centers to corporations and other organizations, and its strategic relationships
with leading Internet mortgage web sites position it to capitalize on the
anticipated growth in on-line mortgage originations. International Data
Corporation estimates the on-line mortgage market will increase from
approximately $18.7 billion originated in 1999 to over $90 billion by 2003. The
Company originated approximately $336 million of loans over the Internet in
1999.

  Beginning in September 1999, the Company began to see a decline in its
origination volumes. This decline was caused by a combination of rising interest
rates, which led to a sharp decrease in refinance volume, and seasonal factors,
which typically cause a slowdown in purchase volume in the first and fourth
quarters of each year. The result of this decrease in volume was a sharp
reduction in the profitability of the Company beginning in the third quarter of
1999 and increasing in the fourth quarter. The Company responded to this
slowdown by reducing non-loan officer workforce by 24% and 15% in the third and
fourth quarters, respectively.

                                      27
<PAGE>

Termination of S corporation status and income taxes

   Income Taxes and Termination of S Corporation Status. Effective January 1,
1996, Prism Mortgage Company ("Prism Mortgage"), the predecessor to Prism
Financial, with the consent of its stockholders, elected to be treated as an S
corporation for federal and certain state income tax purposes. Accordingly, in
lieu of corporate income taxes, the stockholders separately accounted for their
pro rata share of Prism Mortgage's items of taxable income, deductions, losses
and credits. Therefore, the financial statements for the periods covered by the
S corporation election do not include a provision for corporate income taxes,
except for Illinois personal property replacement taxes and other state income
taxes that may be applicable, which are included in operating expenses.

   Since the completion of the Company's initial public offering (the
"Offering") on May 28, 1999, the Company has been treated as a C corporation and
has been subject to corporate income taxation. The Company recorded an income
tax benefit of $1,228,000 due to the S corporation conversion. Additionally, a
pro forma income tax provision has been presented as if Prism Financial had been
taxable as a C corporation for federal and state income tax purposes for the
entire year of 1999 and for 1998 and 1997.

                                      28
<PAGE>

Results of operations

  The following table sets forth, for the periods indicated, information derived
from the Company's statement of income expressed as a percentage of total
revenues. Economic and interest rate cycles also affect the mortgage industry,
as loan originations typically fall in rising interest rate environments. During
such periods, refinancing originations decrease, as higher interest rates
provide reduced economic incentives for borrowers to refinance their existing
mortgages. Due to the stable and decreasing interest rate environments during
1997, 1998 and the first half of 1999, the Company's historical performance
may not be indicative of results in a rising interest rate environment. In
addition, the Company's recent and rapid growth may distort some of its ratios
and financial statistics and may make period-to-period comparisons difficult. As
a result, the Company's historical earnings performance may be of little
relevance in predicting future performance. Furthermore, the Company's financial
statistics may not be indicative of its results in future periods.

<TABLE>
<CAPTION>
                                                                               Year Ended December 31,
                                                                            -----------------------------
                                                                            1999        1998        1997
                                                                            -----       -----       -----
<S>                                                                         <C>         <C>         <C>
Revenues:
 Loan origination income..............................................       66.7%       73.1%       76.9%
 Net premium income...................................................        9.9        13.8         6.1
 Loan-related fees....................................................       13.3         8.9        13.6
 Net interest income..................................................        3.4         2.1         1.4
 Net syndication income...............................................        2.3           -           -
 Other................................................................        4.4         2.1         2.0
                                                                            -----       -----       -----
                                                                            100.0       100.0       100.0
                                                                            -----       -----       -----
Expenses:
 Commissions..........................................................       40.2        41.7        37.6
 Loan-related expenses................................................        7.6         9.8        14.1
 Salaries and benefits................................................       27.6        20.9        22.9
 General and administrative expenses..................................       16.7        11.6        13.1
 Depreciation and amortization........................................        2.2         1.7         1.2
 Other................................................................        0.1         0.2         0.5
                                                                            -----       -----       -----
                                                                             94.4        85.9        89.4
                                                                            -----       -----       -----
   Income from continuing operations before income taxes..............        5.6        14.1        10.6
                                                                            -----       -----       -----
 Income tax benefit from operations and conversion of "S" corporation.       (1.0)          -           -
                                                                            -----       -----       -----
    Income from continuing operations.................................        6.6        14.1        10.6
                                                                            -----       -----       -----

Discontinued Operations:
 Loss from discontinued operations, net of income taxes...............       (0.1)       (1.1)       (1.2)
                                                                            -----       -----       -----
 Loss on disposal, net of income taxes................................       (0.6)          -           -
                                                                            -----       -----       -----

    Net income........................................................        5.9%       13.0%        9.4%
                                                                            =====       =====       =====

Pro Forma Information (1):
    Income from continuing operations before income taxes.............        5.6%       14.1%       10.6%
    Pro forma provision for income taxes..............................        2.2         5.3         4.2
                                                                            -----       -----       -----
    Income from continuing operations adjusted for pro forma income
     taxes............................................................        3.4%        8.8%        6.4%
                                                                            =====       =====       =====
</TABLE>

(1)  Pro forma information is presented to reflect the results of operations had
     the Company been taxed as a C corporation since the beginning of each
     period presented.

Revenues

  The Company earns revenues from the following sources: retail origination of
loans; mortgage banking activities; the sale of mortgage-related ancillary
services; and tax credit syndication fees. As a retail originator of loans, the
Company generates loan origination income and loan-related fees through funded
and brokered loans. Loan origination income consists of origination points paid
by borrowers or discount points paid by wholesale lenders. Loan-related fees
consist of application, documentation and processing fees paid by borrowers. On
the loans closed through the Company's mortgage bank, the Company generates
revenues from net premium income and net interest income. Net premium income
consists of the net gain on the sale of mortgage loans and mortgage servicing
rights, which are sold generally within 45 days of origination. This net gain is
recognized based upon the difference between the combined selling price of the
loan, and its related servicing rights, and the carrying value of the mortgage

                                      29
<PAGE>

loans and servicing rights sold. Net interest income consists of the net
difference between interest received on the Company's mortgage loans held for
sale and interest expense paid under the Company's warehouse credit facilities.
The Company also generates other revenue from the sale of mortgage-related
services, including mortgage and title insurance policies, appraisals, credit
reports and flood zone determination. Through the acquisition of an 80% interest
in Apollo during the third quarter of 1999, the Company has entered the
affordable housing and historic rehabilitation tax credit syndication business.
Apollo packages interests in investment portfolios comprised of affordable
housing and historic rehabilitation tax credits. Interests in these funds are
then sold to outside investors. Net syndication income represents the revenue
Apollo receives from selling interests in the funds, net of (1) the costs paid
by Apollo to acquire the interests that are syndicated and (2) the direct
expenses associated with the syndication. Apollo also receives fees from the
ongoing management of the investment funds.

  The Company's total revenues increased to $150.7 million in 1999, an increase
of $65.0 million, or 76%, over 1998 total revenues of $85.7 million. Total
revenues in 1998 increased $58.9 million, or 220%, over 1997 revenues of $26.8
million. The increases in total revenues were due primarily to higher loan
origination volume and increased mortgage banking activity during these years.
Additionally, the Company's entrance into the tax syndication business, as well
as the formation of a bundled services business, during 1999 contributed to the
increase in total revenues for 1999, as compared to 1998. The tax credit
syndication business contributed $3.5 million to total revenues in 1999, and the
newly-formed bundled services business contributed $1.9 million to total
revenues in 1999.

  Loan origination volume increased to $7.7 billion in 1999, an increase of $2.7
billion, or 54%, over 1998 loan origination volume of $5.0 billion. Loan
origination volume in 1998 increased $3.5 billion, or 233%, over 1997 loan
origination volume of $1.5 billion. The increases in loan origination volume
during 1999, as compared to 1998, resulted primarily from the full year impact
during 1999 of the Pacific Guarantee and Mortgage Market acquisitions, which
were completed at the end of the third quarter of 1998. To a lesser extent, the
acquisitions of First City in April 1999, Valley Financial in September 1999 and
Mortgage Express also in September 1999, as well as new branch expansion and
recruitment of additional loan originators, also contributed to the growth of
loan origination volume during 1999. This increase was offset partially by a
decrease in loan origination volume during the fourth quarter of 1999 as a
result of the slowdown in the mortgage industry, as discussed above. The
increase in loan origination volume during 1998, as compared to 1997, was due
primarily to the acquisitions of Pacific Guarantee and Mortgage Market, as well
as the overall expansion of new branches and the hiring of additional loan
originators. The Company had 159 retail branches and over 1,200 loan originators
as of December 31, 1999, as compared to 95 retail branches and approximately 750
loan originators as of December 31, 1998 and 17 retail branches and
approximately 200 loan originators as of December 31, 1997. Refinancing activity
accounted for approximately 36% of the Company's origination volume in 1999, as
compared to 54% in 1998 and 31% in 1997. The reduction in refinancing
origination volume during 1999, which is interest-rate sensitive, was
attributable to increasing interest rates during the second half of the year.
The increase in refinancing origination volume during 1998, as compared to 1997,
was attributable to decreasing interest rates during 1998.

  Loan origination income. Loan origination income increased to $100.5 million
in 1999 from $62.6 million in 1998, an increase of $37.9 million, or 61%. Loan
origination income increased $42.0 million, or 204%, over 1997 loan origination
income of $20.6 million. These increases were attributable to the growth in loan
origination volume during these periods, as discussed above.

   Net premium income. Net premium income increased to $14.9 million in 1999
from $11.8 million in 1998, an increase of $3.1 million, or 26%. Net premium
income in 1998 increased $10.2 million, or 638%, over 1997 net premium income of
$1.6 million. As a percentage of total loan origination volume, the Company's
mortgage bank funded 46% of the Company's loan originations in 1999, as compared
to 47% in 1998 and 37% in 1997. The increase in net premium income during 1999,
as compared to 1998, resulted primarily from the higher volume, on an absolute
basis, of loan originations funded through the Company's mortgage bank. Mortgage
loans sold during 1999 increased to $3.8 billion, an increase of $1.8 billion,
or 90%, over mortgage loans sold of $2.0 billion in 1998. This increase was
offset in part by the Company's lower margins realized on mortgage loans sold
during the second half of 1999 due to increasing interest rates. The increase in
net premium income in 1998, as compared to 1997, resulted primarily from the
higher volume of loan originations funded through the Company's mortgage bank,
both on an absolute and percentage basis, and the improved pricing on the
Company's sales of servicing rights resulting from improved market conditions
and larger volume during 1998. Mortgage loans sold in 1998 increased by $1.5
billion, or 303%, over 1997 mortgage loans sold of $495 million. In addition,
the Company increased net premium income in 1998

                                      30
<PAGE>

through improved execution of its loan sales, as it sold a majority of its loans
through bulk sales, assignment of trades and co-issue transactions, rather than
flow sales, which was the principal method used in 1997.

  Loan-related fees. Loan-related fees increased to $20.1 million in 1999 from
$7.7 million in 1998, an increase of $12.4 million, or 161%. The increase in
loan-related fees was due primarily to the increase in loan origination volume.
Additionally, because application and processing fees are often waived on
refinancing transactions, the smaller percentage of refinancing volume during
1999, as compared to 1998, resulted in higher loan-related fees during 1999.
Loan-related fees increased in 1998 by $4.1 million, or 114%, over 1997 loan-
related fees of $3.6 million. Loan-related fees increased in 1998 due to
increased loan origination volume.

  Net interest income. Net interest income in 1999 increased to $5.0 million
from $1.8 million in 1998, an increase of $3.2 million, or 177%. Net interest
income in 1998 increased by $1.4 million, or 386%, over 1997 net interest income
of $363,000. The increases in net interest income during these periods were due
primarily to the following factors: the increase in loans funded by the
Company's mortgage bank; a higher average balance of mortgage loans held for
sale; reduction in the effective rate of interest paid by the Company to finance
loans held for sale attributable to increased usage of repurchase agreements and
other credit lines, including Fannie Mae's "As Soon as Pooled/Early Purchase
Option" (the "ASAP Plus" program); and the increased use of bulk sales and co-
issue transactions, which resulted in an increase in the length of time loans
were held for sale and allowed the Company to further benefit from its positive
net interest margin. Additionally, the Company obtained a new warehouse credit
facility in the first half of 1999, which contributed to the reduction in the
effective rate of interest paid by the Company during 1999.

  Net syndication income. Net syndication income was $3.5 million for 1999.
Because the Company first entered the tax credit syndication business in the
third quarter of 1999 with the acquisition of its 80% interest in Apollo, the
Company did not earn net syndication income during 1998 or 1997.

  Other income. Other income increased to $6.6 million in 1999 from $1.8 million
in 1998, an increase of $4.8 million, or 267%. Other income in 1998 increased by
$1.3 million, or 238%, over other income of $547,000 in 1997. The increase in
other income during 1999 was due primarily to the Company's formation of
Lender's Mortgage Services, L.L.C. ("LMS"), a bundled services business, in the
second quarter of 1999, an increase in fees earned from the Company's risk-
sharing relationships with certain mortgage insurance companies, and an increase
in volume bonuses on loans brokered to specific institutions. To a lesser
extent, the revenues earned in a full year of operations by Illinois Guaranty
Title, L.L.C. ("IGT"), a title insurance business contributed to the Company by
its principal shareholders in April 1998, contributed to the increase of other
income during 1999. The increase in other income during 1998 was attributable
primarily to income generated by IGT during 1998.

Expenses

  The Company's expenses largely consist of (1) commissions paid to loan
originators on closed loans; (2) loan-related expenses, consisting of fees paid
to third parties for appraisal and credit report services and reserves for
potential loan repurchase and premium recapture obligations; (3) salaries and
benefits paid to employees other than loan originators; (4) general and
administrative expenses, such as occupancy costs, office expenses, travel
expenses and professional services fees; and (5) depreciation and amortization
expenses related principally to the Company's facilities, computers and
intangible assets associated with acquisitions.

  The Company's total expenses increased to $142.2 million in 1999, an increase
of $68.6 million, or 93%, over 1998 total expenses of $73.6 million. Total
expenses in 1998 increased $49.7 million, or 208%, over 1997 expenses of $23.9
million.

  Commissions. Commissions expense increased to $60.5 million in 1999, an
increase of $24.8 million, or 69%, over 1998 commissions expense of $35.7
million. Commissions expense in 1998 increased $25.6 million, or 253%, over 1997
commissions expense of $10.1 million. The increases in commissions expense were
due primarily to higher loan origination volume in each of the periods.
Commissions expense represented 40% of total revenues in 1999, as compared to
42% in 1998 and 38% in 1997. The slight decrease in commission expense

                                       31
<PAGE>

as a percentage of total revenues during 1999, as compared to 1998, was
primarily due to the addition of revenues from the Company's ancillary services
and tax credit syndication segments, which increased the overall revenue base
during 1999. The increase in commissions expense as a percentage of revenues in
1998, as compared to 1997, was primarily due to a higher average commission
percentage as a result of a higher average production per loan officer.

  Loan-related expenses. Loan-related expenses increased to $11.5 million in
1999, an increase of $3.1 million, or 37%, over 1998 loan-related expenses of
$8.4 million. This increase in loan-related expenses was due primarily to
increased loan origination volume. Loan-related expenses represented 8% of total
revenues in 1999, as compared to 10% in 1998. As a percentage of total revenues,
loan-related expenses decreased primarily due to the addition of revenues from
the Company's ancillary services and tax credit syndication segments, as well as
the positive margins earned from LMS.

  Loan-related expenses in 1998 increased $4.6 million, or 121%, over 1997 loan-
related expenses of $3.8 million. The increase in loan-related expenses resulted
primarily from the increased volume of loan closings and additional reserves
established for potential loan repurchase, substitution and premium recapture
obligations during 1998, as compared to 1997. Loan-related expenses represented
10% of total revenues in 1998, as compared to 14% in 1997. This decrease in
loan-related expenses as a percentage of total revenues resulted primarily from
the timing of loan sales at the end of the respective periods. Loans held for
sale were $467.3 million at December 31, 1998, as compared to $60.9 million at
December 31, 1997, an increase of 667%. Because the Company must defer the
revenues and expenses associated with loans closed, but not yet sold, the
greater balance in loans held for sale at December 31, 1998 resulted in a higher
expense deferral in 1998, as compared to 1997.

  Salaries and benefits. Salaries and benefits increased to $41.6 million in
1999, an increase of $23.7 million, or 132%, over 1998 salaries and benefits of
$17.9 million. Salaries and benefits represented 28% of total revenues in 1999,
as compared to 21% in 1998. The increase in personnel expenses, on an absolute
basis and as a percentage of total revenues, related primarily to the full year
impact of the Pacific Guarantee and Mortgage Market acquisitions, which were
consummated in late 1998, and the First City acquisition, which was consummated
in early 1999 and, to a lesser extent, the acquisitions of Valley Financial,
Mortgage Express and Apollo, which were consummated in late 1999. Additionally,
the hiring associated with building the infrastructure to support a
significantly larger, newly-public company contributed to the increases in
salaries and benefits during 1999. This increase in salaries and benefits was
offset partially by the Company's 24% and 15% reductions in its non-loan officer
workforce during the third quarter and fourth quarter, respectively, of 1999.
The Company made these reductions to its non-loan officer workforce in response
to sharp declines in origination volume in the third and fourth quarters of 1999
caused by rising interest rates and typical seasonal factors. As of December 31,
1999, excluding loan originators, the Company employed 878 people, as compared
to 713 people as of December 31, 1998.

  Salaries and benefits in 1998 increased $11.8 million, or 193%, over 1997
salaries and benefits of $6.1 million. Salaries and benefits represented 21% of
total revenues in 1998, as compared to 23% in 1997. The increase in personnel
expenses, on an absolute basis, related primarily to increased staffing at new
branches, as well as the Pacific Guarantee and Mortgage Market acquisitions. As
a percentage of total revenues, salaries and benefits decreased due primarily to
the growth of revenues exceeding the pace of hiring during 1998. As of December
31, 1998, excluding loan originators, the Company employed 713 people compared
to 262 people at December 31, 1997.

  General and administrative expenses. General and administrative expenses
increased to $25.1 million in 1999, an increase of $15.2, or 154%, over 1998
general and administrative expenses of $9.9 million. General and administrative
expenses represented 17% of total revenues in 1999, as compared to 12% in 1998.
The increase in general and administrative expenses, on an absolute basis and as
a percentage of total revenues, was due primarily to the following factors: an
increase in occupancy costs as a result of the opening of new branches during
1999; an increase in general and administrative expenses associated with the
acquisitions completed since the end of the third quarter of 1998, including
Pacific Guarantee, Mortgage Market, First City, Valley Financial, Mortgage
Express and Apollo; and expenses that fluctuate with increases in loan volume,
such as office supplies, telephone and delivery charges. These increases were
offset partially by the Company's closing of unprofitable branches during the
third and fourth quarters of 1999.

                                       32
<PAGE>

  General and administrative expenses in 1998 increased by $6.4 million, or
183%, over 1997 general and administrative expenses of $3.5 million. General and
administrative expenses represented 12% and 13% of total revenues in 1998 and
1997, respectively. The increase in general and administrative expenses, on an
absolute basis, was due primarily to an increase in occupancy costs as a result
of the opening of the Company's new corporate headquarters in Chicago and nine
new company-owned branches in 1998, the Pacific Guarantee and Mortgage Market
acquisitions and expenses that fluctuate with increases in loan volume.

   Depreciation and amortization. Depreciation and amortization increased to
$3.3 million in 1999, an increase of $1.9 million, or 136%, over 1998
depreciation and amortization of $1.4 million. Depreciation and amortization
represented 2% of total revenues in both 1999 and 1998. The increase in
depreciation and amortization was primarily attributable to the following
factors: purchases of additional equipment and leasehold improvements for new
branches opened during 1999; the continued development of the Company's
proprietary in-house mortgage banking system and internet technology; and
additions to fixed assets, as well as goodwill and other intangible assets,
attributable primarily to the Pacific Guarantee, Mortgage Market and First City
acquisitions, and to a lesser extent, to the Mortgage Express, Valley and Apollo
acquisitions. The increase was offset partially by the Company's closing of
unprofitable branches during the third and fourth quarters of 1999.

   Depreciation and amortization in 1998 increased by $1.1 million, or 342%,
over 1997 depreciation and amortization of $322,000. Depreciation and
amortization represented 2% of total revenues in 1998, as compared to 1% in
1997. The increase in depreciation expense was primarily attributable to
purchases of additional equipment and leasehold improvements for new branches
and the Company's new corporate headquarters, the continued development of the
Company's proprietary in-house mortgage banking system, and goodwill
amortization attributed to the 1998 acquisitions.

   Income taxes. The Company recorded an income tax benefit of $239,000 during
1999, representing the tax benefit for the Company's pre-tax loss for the period
from May 28, 1999 (termination of S corporation status) through December 31,
1999. The Company also recorded an income tax benefit of $1.2 million in 1999
due to its conversion from an S corporation to a C corporation.

   Discontinued operations. On July 1, 1999, the Company adopted a plan to
discontinue the operations relating to its subsidiary, Infiniti Mortgage, L.L.C.
("Infiniti"). Infiniti was created to originate and sell non-prime mortgages. As
a result of the discontinuance of Infiniti's operations, the Company no longer
originates loans from specialized retail branches focusing primarily on non-
prime mortgages. The Company has accounted for this business as a discontinued
operation in the accompanying consolidated financial statements for all periods
presented, with a measurement date of July 1, 1999. For 1999, the Company
reported a loss from discontinued operations, net of taxes, of $244,000 and a
loss on disposal of this business, net of income taxes, of $853,000. The Company
reported a loss from discontinued operations, net of income taxes, of $1.0
million for 1998 and $333,000 for 1997. The Company does not anticipate that the
discontinuance of this business will have a material impact on its future
operations.

  Net income. Net income decreased to $8.9 million in 1999, a decrease of $2.2
million, or 20%, as compared to net income of $11.1 million in 1998. Net income
as a percentage of loan origination volume in 1999 dropped to 12 basis points,
as compared to 22 basis points in 1998. The decrease in net income during 1999
was primarily due to interest rate increases in the second half of 1999, which
lowered profit margins realized on loans sold in the secondary market and slowed
origination growth in the second half of 1999. This decrease in net income
during 1999 was offset in part by approximately $1.4 million of net income
contributed by the tax credit syndication business. Net income increased $8.6
million, or 344%, in 1998, from $2.5 million in 1997. Net income as a percentage
of loan origination volume grew to 22 basis points in 1998 from 17 basis points
in 1997 due primarily to the significant increase in the number of loans funded
through the Company's mortgage bank, which generate higher margins than brokered
loans.

Recent Developments

                                       33
<PAGE>

  On March 10, 2000, the Company entered into a merger agreement (the "Merger
Agreement") with Royal Bank of Canada ("RBC") and Prism Acquisition Subsidiary,
Inc., a wholly-owned subsidiary of RBC ("Purchaser"). Pursuant to the Merger
Agreement, Purchaser commenced a tender offer on March 22, 2000 to purchase all
of the issued and outstanding Common Stock of the Company, together with the
associated preferred stock purchase rights, for $7.50 per share in cash.
Consummation of the tender offer is subject to the condition that at least a
majority of the outstanding shares of the Company's Common Stock be validly
tendered and not withdrawn. In connection with the Merger Agreement,
stockholders holding approximately 62% of the issued and outstanding Common
Stock have entered into an agreement with RBC and Purchaser to tender their
shares. Consummation of the tender offer is also subject to the expiration or
termination of any applicable antitrust waiting period and to certain regulatory
approvals and other conditions. Following completion of the tender offer and
subject to certain conditions, Purchaser would be merged with and into the
Company, and the Company would thereby become a wholly-owned, indirect
subsidiary of RBC. Any shares not tendered in the offer would be converted
through the merger into the right to receive the offer price in cash, without
interest. The transaction is expected to be completed in mid-2000.

Liquidity and capital resources

  Cash and cash equivalents decreased to $6.9 million at December 31, 1999, from
$12.1 million at December 31, 1998. Cash provided by operating activities for
1999 was $304.2 million. Cash used in financing and investing activities was
$295.7 million and $13.8 million, respectively.

  The Company's primary uses of cash and cash equivalents during 1999 were as
follows: (1) $306.3 million net repayment of borrowings on the warehouse line of
credit; (2) cash outlay for properties held for sale of $39.5 million in
connection with the acquisition of Apollo; (3) a $21.4 million distribution to S
corporation shareholders; (4) $7.4 million paid in connection with the Company's
acquisitions; (5) $7.3 million repayment of accrued expenses; (6) $6.4 million
paid for purchases of furniture, fixtures and equipment; and (7) $4.8 million
repayment of long-term debt.

  The Company's primary sources of cash and cash equivalents during 1999 were as
follows: (1) $306.5 million net proceeds from the sales of loans; (2) $30.8
million net proceeds from the Offering; (3) increase in capital contributions
payable of $31.6 million; (4) net income of $8.9 million; (5) borrowings of $5.9
million on the Company's operating line of credit; and (6) collection of loan
fees and other receivables of $5.5 million.

  Cash and cash equivalents increased to $12.1 million at December 31, 1998,
from $1.2 million at December 31, 1997. The Company's primary sources of cash
and cash equivalents during 1998 were net borrowings of $336.9 million on
warehouse lines of credit and net income of $11.1 million. The Company's primary
uses of cash and cash equivalents during 1998 were $339.4 million cash outlay
for loans originated, net of loans sold during 1998, and a $10.4 million
increase in loan fees and other receivables.

  Adequate credit facilities and other sources of funding, which permit the
Company to fund the loans it originates, are essential to the Company's ability
to close loans through its mortgage bank. Net working capital was $7.7 million
at December 31, 1999, as compared to $11.8 million at December 31, 1998. After
using available working capital, the Company borrows money to fund the Company's
loan closings and repays these borrowings as the loans and accompanying
servicing rights are sold.

  As of December 31, 1999, the Company utilized one warehouse credit facility
(the "Mortgage Origination Warehouse Facility") with a maximum borrowing amount
of $250 million to fund loan closings through its mortgage bank. Loans under the
Mortgage Origination Warehouse Facility bear interest at rates that vary
depending on the type of underlying loan, and the loans are subject to
sublimits, advance rates and terms that vary depending on the type of underlying
loan and the ratio of the Company's liabilities to the Company's tangible net
worth. The weighted average interest rate on the Mortgage Origination Warehouse
Facility during 1999 was 6.29%, as compared to 7.10% in 1998. The Company is
required to comply with various operating and financial covenants under the
Mortgage Origination Warehouse Facility. As of December 31, 1999, the Company
was in compliance with all operating and financial covenants.

  As of December 31, 1999, the Company's borrowings under its Mortgage
Origination Warehouse Facility increased to $176.1 million, from $170.2 million
as of December 31, 1998. The Company had a maximum of $73.9 million available
for additional borrowings as of December 31, 1999 under its Mortgage Origination
Warehouse Facility. At December 31, 1999, the Company's loans held for sale were
$198.3 million, as compared to $467.3 million at December 31, 1998.

  The Company's Mortgage Origination Warehouse Facility agreement contains a
number of covenants that, among other things, require certain subsidiaries of
the Company to maintain a minimum ratio of total liabilities to tangible net
worth and maintain a minimum level of tangible net worth. This agreement also
contains covenants that limit the Company's ability to (1) transfer or sell
assets; (2) create liens; (3) pay dividends; (4) enter into transactions with
the Company's affiliates; or (5) enter into a merger, consolidation or sale of
substantially all of the Company's assets.

                                       34

<PAGE>

  On March 21, 2000, the Company extended its Mortgage Origination Warehouse
Facility through April 28, 2000. Pursuant to the agreement, the maximum
borrowing base has been reduced from $250 million to $200 million. In the event
that the Company cannot renew the Mortgage Origination Warehouse Facility or
obtain a comparable facility on or before the expiration of the Mortgage
Origination Warehouse Facility, the Company's operations would be materially and
adversely affected.

  Under the ASAP Plus program, Fannie Mae funded the Company on the loans it
delivered to Fannie Mae on a continual, whole-loan basis upon receipt of the
appropriate mortgage collateral. The funding price was determined by the daily
Fannie Mae 30-day cash window price. At such time, the Company agrees to deliver
mortgage loans to Fannie Mae and assign any related trades. The Company then
redelivered all loans in the ASAP Plus program to reflect related forward
pricing on a monthly basis. Fannie Mae purchased the mortgage loans for cash
upon receipt of complete and accurate mortgage pool and other documentation. On
December 31, 1999, the Company had an outstanding balance of approximately $11.9
million on the ASAP Plus line in repurchase agreements with Fannie Mae, with
interest accruing at 5.11%.

  In January 2000, the Company changed the way it sells its loans to Fannie Mae.
Previously, the Company used the ASAP Plus program. Currently, the Company uses
the As Soon As Pooled Sale program ("ASAP Sale"). In accordance with generally
accepted accounting principles, the Company accounted for transactions under the
ASAP Plus program as financing activities. Accordingly, the related assets and
liabilities remained on the Company's balance sheet until the loans were
redelivered on a semi-monthly basis to Fannie Mae, at which point the
corresponding gain or loss was recognized. Transactions under the ASAP Sale
program, however, are considered sales and thus, the related assets and
liabilities are reduced, and the gain or loss is recognized, at the time of the
transactions. Under the ASAP Sale program, Fannie Mae does not fund the
prospective loans to be bought, and therefore the Company no longer records
loans sold under agreements to repurchase.

  The Company also makes regular use of uncommitted lines of credit and purchase
and sale agreements, such as repurchase agreements, provided by major investment
banks. These facilities permit the Company to diversify its borrowing resources,
while accelerating the turnover of mortgage loans in inventory, reducing
interest costs and permitting greater origination volumes. These agreements are
not committed facilities and may be terminated at the discretion of the
repurchase investor. The Company currently has two uncommitted, whole-loan
repurchase agreements with major investment banks. Under the terms of these
agreements, the Company may pledge mortgage loans originated to obtain
additional liquidity while mortgage loans are held until sold through whole-loan
sales. Amounts outstanding under these agreements at December 31, 1999 and
December 31, 1998 were $10.4 million and $29.6 million, respectively.

    Apollo has a warehouse facility to fund its tax credit syndication
business (the "Tax Syndication Warehouse Facility"). The Tax Syndication
Warehouse Facility provides Apollo with a maximum borrowing limit of $30
million, which is secured by investee partnerships of Apollo. The weighted
average interest rate on the Tax Syndication Warehouse Facility during 1999 was
7.55%. The Tax Syndication Warehouse Facility requires Apollo to comply
with various operating and financial covenants. As of December 31, 1999, Apollo
was in compliance with all operating and financial covenants.

  As of December 31, 1999, Apollo's borrowings under its Tax Syndication
Warehouse Facility were $15.5 million. Apollo had a maximum of $5.2 million
available for additional borrowings as of December 31, 1999 under the Tax
Syndication Warehouse Facility. Apollo had irrevocable letters of credit
totaling $9.3 million as of December 31, 1999. In addition, the Tax Syndication
Warehouse Facility has a monthly commitment fee equal to 0.375% of the average
daily unused portion of the facility.

                                       35
<PAGE>

  Apollo's Tax Syndication Warehouse Facility agreement contains a number
of covenants that, among other things, require Apollo to maintain a minimum
ratio of total liabilities to tangible net worth and maintain a minimum level of
tangible net worth. Additionally, Apollo must maintain profitability and a
positive net worth. The credit agreement also contains covenants that limit
Apollo's ability to (1) enter into transactions with Apollo's affiliates
or (2) enter into a merger, consolidation or sale of substantially all of
Apollo's assets.

  The Company has a $10 million operating line of credit, on a revolving basis,
for working capital requirements from a commercial bank. This revolving line of
credit is secured by a pledge of the Company's assets, other than loans securing
the Company's warehouse facilities. As of December 31, 1999, the Company had
approximately $5.9 million outstanding under this revolving line of credit,
which expires on October 5, 2000. In the event that the Company cannot renew the
operating line of credit or obtain a comparable line of credit on or before the
expiration date of the operating line of credit, the Company's operations would
be materially and adversely affected.

  The Company's expected cash flows from operations, existing cash balances, and
funds available under its working capital and warehouse credit facilities are
expected to be sufficient to meet the Company's liquidity requirements during
2000. However, the Company's actual cash needs will depend upon, among other
things, (i) the results of operations, (ii) the level and timing of the
Company's acquisition activity, and (iii) the level and timing of the Company's
investment in its e-commerce and internet-related technology and other systems.
If the Company (i) experiences losses from operations or experiences unforeseen
operational difficulty or obligations, (ii) elects to make acquisitions for cash
or Internet or systems investments which require significant cash outlays, or
(iii) cannot renew or replace its existing warehouse and working capital credit
facilities prior to their expiration on comparable terms, the Company will be
required to arrange for additional sources of capital through the issuance of
debt or equity or additional bank borrowings. If the Company is not able to
obtain any such additional financing at the times required and on terms and
conditions acceptable to the Company, the Company's growth would slow and its
operations and financial condition would be materially and adversely affected.
Any equity issuances by the Company could result in dilution to stockholders.

Year 2000 compliance

  The Company believes that it has successfully rendered its business-critical
computerized applications relating to, among others, loan origination,
servicing, pipeline management, hedging, payroll, financing and financial
accounting and reporting, to be year 2000 compliant. In addition, the Company
has rendered its non business-critical systems and services to be year 2000
compliant. Further, the Company has surveyed the vendors of the third-party
technologies it incorporates into its products and services and applied updates
or arrangements to correct potential year 2000 compliance problems. Since
January 1, 2000, the Company has experienced no disruptions in its business
operations as a result of year 2000 compliance problems or otherwise, and it has
received no reports of any year 2000 compliance problems with its products and
services. The Company is continuing to monitor third-party vendors of
incorporated technologies for additional recommended year 2000 upgrades, which
it will apply as soon as they become available. To date, the total cost of the
Company's efforts to address year 2000 compliance has not been material.

  Nonetheless, some problems related to year 2000 risks may not appear until
several months after January 1, 2000. Year 2000 issues could include problems
with the Company's own products and services or with third-party products or
technologies that the Company uses. Any problems that are not identified and
corrected successfully and completely could adversely affect the Company's
business.

New accounting pronouncements

  In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement
requires that all derivatives be carried on the balance sheet at fair value and
changes in the fair value of derivatives be recognized in income when they
occur, unless the derivatives qualify as hedges in accordance with the standard.
If a derivative qualifies as a hedge, a company can elect to use hedge
accounting. The type of accounting to be applied varies depending upon whether
the nature of the exposure that is being hedged is classified as one of three
hedged risks defined in the statement: change in fair value, change in cash
flows and change in foreign-currency. This statement is effective for fiscal
quarters of fiscal years beginning after June 15, 2000 and cannot be applied
retroactively.

                                       36
<PAGE>

The Company believes that the adoption of this statement will not have a
material effect on the Company's financial position or results of operations.

Quarterly Comparisons

  The following tables set forth an unaudited summary of quarterly financial
data. This quarterly information has been prepared on the same basis as the
annual consolidated financial statements and, in management's opinion, reflect
all adjustments necessary for a fair presentation of the information for the
periods presented. The operating results for any quarter are not necessarily
indicative of results for any future period.

   The mortgage banking industry is generally subject to seasonal trends. These
trends reflect the general national pattern of sales and resales of homes,
although refinancings tend to be less seasonal and more closely related to
changes in interest rates. Sales and resales of homes typically peak during the
spring and summer seasons and decline to lower levels from mid-November through
February.

<TABLE>
<CAPTION>
                                                                                         1999
                                                                                         ----
                                                                   First          Second        Third         Fourth
                                                                  Quarter         Quarter      Quarter       Quarter
                                                                  --------        -------      -------       -------
                                                                       (in thousands, except per share amounts)
                                                                                     (unaudited)
<S>                                                               <C>             <C>          <C>           <C>
Total revenues, as previously reported (1)......................  $39,948         $42,024      $42,276       $28,707
Adjustments (2).................................................   (1,120)         (1,176)          --            --
    Total revenues..............................................   38,828          40,848       42,276        28,707

Income (loss) from continuing operations, as previously
    reported (1)................................................    4,896           5,938        3,618        (4,746)
Adjustments (2).................................................       64             180           --            --
    Income (loss) from continuing operations....................    4,960           6,118        3,618        (4,746)

    Net income (loss)...........................................    4,896           5,938        3,156        (5,137)

Earnings (loss) per share from continuing operations (diluted),
   as previously reported (1)...................................  $  0.42         $  0.46      $  0.25       $ (0.32)
   Earnings (loss) per share from continuing operations
   (diluted)....................................................  $  0.43         $  0.47      $  0.25       $ (0.32)

    Net earnings (loss) per share................................ $  0.42         $  0.46      $  0.22       $ (0.35)

 Shares used in computing earnings (loss) per share (diluted)...   11,556          12,948       14,696        14,625
</TABLE>

<TABLE>
<CAPTION>
                                                                                         1998
                                                                                         ----
                                                                   First          Second        Third         Fourth
                                                                  Quarter         Quarter      Quarter       Quarter
                                                                  --------        -------      -------       -------
                                                                       (in thousands, except per share amounts)
                                                                                     (unaudited)
<S>                                                               <C>             <C>          <C>           <C>
Total revenues, as previously reported (1)......................  $13,883         $13,817      $20,066       $40,422
Adjustments (2).................................................   (1,106)         (1,416)          --            --
    Total revenues..............................................   12,777          12,401       20,066        40,422

Income from continuing operations, as previously reported (1)...    1,650           2,093        3,028         5,093
Adjustments (2).................................................      145              87           --            --
    Income from continuing operations...........................    1,795           2,180        3,028         5,093

    Net income..................................................    1,650           2,093        3,244         4,107

Earnings per share from continuing operations (diluted), as
     previously reported (1)....................................  $  0.16         $  0.20      $  0.29       $  0.46
    Earnings per share from continuing operations (diluted).....  $  0.17         $  0.21      $  0.29       $  0.46

    Net earnings per share......................................  $  0.16         $  0.20      $  0.31       $  0.37

    Shares used in computing earnings per share (diluted).......   10,352          10,410       10,620        10,980
</TABLE>

                                       37
<PAGE>

(1)  As reported under the following for the quarters of 1999 and 1998:
     Consolidated Statements of Income in the Company's Quarterly Reports on
     Form 10-Q for the three months ended September 30, 1999 and 1998 and June
     30, 1999 and 1998 and Consolidated Statements of Income in the Company's
     Registration Statement on Form S-1 for the three months ended March 31,
     1999 and 1998.

(2)  Adjustments reflect the effect of a discontinued operation, which occurred
     in the third quarter of 1999. See Note 8-Discontinued Operations of the
     Notes to the Consolidated Financial Statements included elsewhere herein
     for a more detailed discussion of this transaction.

Special Note Regarding Forward-Looking Statements

  This Form 10-K contains certain statements that are based upon the current
expectations and projections of Prism Financial concerning current events. These
statements are not historical facts and may constitute forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934 and are intended to be
covered by the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Readers can identify these statements from the use of the
words "estimate," "project," "believe," "intend," "anticipate," "expect" and
similar expressions. These forward-looking statements include: statements of the
Company's goals, intentions and expectations; statements regarding the Company's
business plans and growth strategies; statements regarding the asset quality of
the Company's loan and investment portfolios; and estimates of the Company's
risks and future costs and benefits. These forward-looking statements are
subject to certain risks and uncertainties, including the following, which could
cause future results to differ materially from historical results or those
anticipated: (1) the level of demand for mortgage credit and ancillary services,
which is affected by such external factors as the level of interest rates; (2)
the direction of interest rates; (3) the relationship between mortgage interest
rates and the cost of funds; (4) federal and state regulation of mortgage
banking, the Company's ancillary service operations, and affordable housing and
historic tax credits; and (5) competition within the mortgage banking,
affordable housing and historic tax credits and various ancillary service
industries. See also "Business--Risk Factors" above. The Company undertakes no
obligation to publicly update or revise any forward-looking statements, whether
as a result of new information, future events or otherwise.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

  Market risk is the risk that unfavorable changes in net income and in the
value of certain assets and liabilities will result from adverse fluctuations in
market rates and prices. Interest rate volatility is the largest market risk
affecting Prism Financial. The Company utilizes a risk management program to
mitigate exposure resulting from interest rate fluctuations. Accordingly, the
Company continuously hedges the value of mortgage loans held for sale and in its
pipeline, except for non-prime loans.

  In the normal course of business, derivative financial instruments, such as
forward contracts and options, are used to manage interest rate exposure and
resale pricing risk. The Company's management evaluates, on an initial and on-
going basis, the effectiveness of each hedge contract's correlation with an
existing asset. Hedge gains or losses are deferred and recognized as a component
of the gain or loss on the sale of the underlying mortgage loans or mortgage-
backed securities. Hedge losses are immediately recognized if the deferral of
such losses would result in mortgage loans held for sale or mortgage loans in
the pipeline being valued in excess of their estimated net realizable value.
Premiums on option contracts are expensed over the term of the option contract.

  The Company's hedging policies generally require that it hedges the projected
portion of its committed pipeline with forward contracts or with options on
treasury securities. The mortgage loans that are to be delivered under these
contracts are fixed- or adjustable-rate loans, corresponding with the
composition of the Company's inventory and committed pipeline. The Company
hedges its closed loans held for sale by using whole-loan sale commitments to
ultimate investors and forward contracts. The Company does not purchase hedging
instruments for trading purposes nor does it speculate on the direction of
interest rates in its risk management procedures. The Company tests its hedges
on a daily basis to ensure that its maximum exposure does not exceed the limits
set by its senior management.

                                       38
<PAGE>

  While the Company does not anticipate nonperformance by any counterparty, the
Company is exposed to potential credit losses in the event of nonperformance by
the counterparties to the various instruments. The Company manages credit risk
with respect to forward contracts and whole-loan sales commitments through the
following policies: by entering into agreements with entities approved by senior
management; by attempting to limit the Company's credit exposure on forward
sales arrangements through entering into forward sales contracts solely with
institutions that the Company believes are sound credit risks; and by limiting
exposure to any single counterparty by selling to a number of investors. The
Company's exposure to credit risk in the event of default by the counterparty is
the difference between the contract price and the current market price. Since
the Company only purchases options that allow it, at its option, to purchase or
sell a financial instrument, the Company's exposure at any time is limited to
the premium paid to purchase the option.

  The Company evaluates its prescribed risk limits against a +/- two hundred
basis point change in the price of a benchmark mortgage-backed security, which
price moves inversely with market interest rates. On a daily basis, the Company
performs a sensitivity analysis, evaluating its current hedged position of
closed loans and mortgage loans in the pipeline and assessing the net exposure
of these loans against a spectrum of price change scenarios for the benchmark
mortgage-backed security. This modeling technique measures net changes in the
fair value of the loans, as determined by the net exposure of the aggregate face
value of closed loans and loans in the pipeline.

  As of December 31, 1999, the Company used a 7% Fannie Mae, 30-year security as
its benchmark for performing the sensitivity analysis. The Company assessed its
exposure for loans in the pipeline, which are off-balance sheet, as well as
mortgage loans held for sale, using the price change spectrum discussed above. A
two hundred basis point decrease in the benchmark security would have decreased
the total anticipated gains on loans in the pipeline and loans held for sale by
approximately $182,000, or 9.26 basis points, as of December 31, 1999. A two
hundred basis point increase in the benchmark security would have increased the
total anticipated gains on loans in the pipeline and loans held for sale by
approximately $120,000, or 6.10 basis points, as of December 31, 1999. The
Company does not believe that a swing in interest rates at December 31, 1999
would have materially affected the net fair values recorded for loans held for
sale, or any other financial instruments recorded at that date. This analysis is
limited by the fact that it was performed at a certain point in time and does
not incorporate other market factors at that time.

  At December 31, 1999 and 1998, the Company had open forward commitments with a
total notional amount of approximately $151.4 million and $670.0 million,
respectively, to sell mortgage loans with varying settlement dates up to
February 2000. On December 31, 1999, the Company had two options to buy
treasuries through February 2000, with a total notional amount of approximately
$40.0 million. No options were outstanding at December 31, 1998. The Company
also hedges its loans held for sale by using whole-loan sale commitments to
ultimate investors, which totaled $152.1 million and $28.4 million at December
31, 1999 and 1998, respectively.

ITEM 8. FINANCIAL STATEMENT SUPPLEMENTARY DATA

  The information in response to this item is included in the Company's
consolidated financial statements, together with the reports thereon of
PricewaterhouseCoopers LLP and McGladrey & Pullen, LLP, appearing on pages F-1
through F-31 of this Form 10-K, and in Item 7 under the heading "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Quarterly Comparisons."

ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
        DISLCOSURE

None.

                                       39
<PAGE>

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The table below lists the current Directors and Executive Officers of the
Company:

<TABLE>
<CAPTION>
                                     Position with                          Term
 Name                      Age          Company           Director Since Expiration
 ----                      --- ------------------------   -------------- ----------
 <C>                       <C> <S>                        <C>            <C>
 Richard L. Wellek(1)(2)..  61 Chairman of the Board           1999         2001
 Mark A. Filler...........  39 President and Chief             1999         2002
                               Executive Officer
 Terry A. Markus..........  38 President of Prism              1999         2002
                               Illinois
 Andrew S. Hochberg(1)(2).  37 Director                        1999         2001
 Michael P. Krasny........  46 Director                        1999         2000
 William D. Osenton.......  55 President of Pacific
                               Guarantee Mortgage
                               Corporation ("Pacific
                               Guarantee"), a wholly
                               owned indirect
                               subsidiary of Prism
 Martin D. Francis........  39 President of Mortgage
                               Market, Inc. ("Mortgage
                               Market"), a wholly owned
                               indirect subsidiary of
                               Prism
 David A Fisher...........  30 Senior Vice President,
                               Chief Financial Officer
                               and Secretary
 Edward C. Ahern..........  36 Senior Vice President of
                               Secondary Marketing
 Kevin N. Christopher.....  34 Senior Vice President of
                               Production
 James P. Hayes...........  30 Senior Vice President,
                               Treasurer and Controller
 Laurence E Katz..........  30 Vice President of
                               Electronic Commerce
</TABLE>
--------
(1) Member of Audit Committee.
(2) Member of Compensation Committee.

   Richard L. Wellek. Mr. Wellek was elected as a director in May 1999 and was
elected to the position of Chairman of the Board in December 1999. Mr. Wellek
was Chairman of Varlen Corporation, a leading manufacturer of precision-
engineered transportation products and petroleum analyzers, from May 1997
until August 1999 when Varlen was acquired by Amsted Industries. He served as
Chief Executive Officer of Varlen Corporation from December 1983 through
January 1999 and as President from December 1983 to May 1997. Mr. Wellek holds
a B.S. in industrial management from the University of Illinois.

   Mark A. Filler. Mr. Filler has served as Chief Executive Officer since
December 1999, as President since January 1999 and as a director since
February 1999, when the Company was formed. From June 1994 to January 1999, he
was an Executive Vice President of Prism Mortgage. From mid-1992 to May 1994,
Mr. Filler served as Chief Operating Officer of Uresil Corp., a medical device
business. Prior to 1992, he was employed by The Equity Group, a company
engaged primarily in mergers and acquisitions and associated with Mr. Sam
Zell. Prior to 1990, Mr. Filler was an attorney at the Chicago law firm
Kirkland & Ellis. Mr. Filler holds a B.A. in political science from the
University of Michigan and a J.D. from Harvard University.

   Terry A. Markus. Mr. Markus is a co-founder of the Company and has served
as a director since February 1999, when the Company was formed. He has been
President of Prism Illinois, an operating division of Prism Mortgage, since
January 1999. Previously, Mr. Markus served as an Executive Vice President of
Prism Mortgage from April 1994 to January 1999. Mr. Markus holds a B.S. in
accountancy from the University of Illinois and a J.D. from Northwestern
University. Prior to co-founding the Company, Mr. Markus was an attorney at
the Chicago law firm Bell, Boyd & Lloyd.

   Andrew S. Hochberg. Mr. Hochberg has been a Principal of Next Realty, LLC,
a commercial real estate development company, since February 1998. He has been
a director of Gart Sports Company ("Gart Sports"), a leading full-line
sporting goods retailer, since April 1998, and served as a director for
Strouds, Inc., a bed and bath retailer, from 1996 to 1997. Prior to
establishing Next Realty, LLC, Mr. Hochberg served in various capacities at
Sportmart, Inc. from 1987 to 1998, including Chief Executive Officer from 1996
through January 1998, when Sportmart, Inc. became a subsidiary of Gart Sports.
Mr. Hochberg holds a B.S. in economics from the University of Pennsylvania and
a J.D. from Northwestern University.

                                      40

<PAGE>

   Michael P. Krasny. Michael Krasny is the founder of CDW Computer Centers,
Inc., one of the nation's leading direct marketers of microcomputer products.
He currently serves as CDW Computer Centers, Inc.'s Chairman of the Board and
Chief Executive Officer. Michael Krasny holds a B.S. in finance from the
University of Illinois.

   William D. Osenton. Mr. Osenton has served as President of Pacific
Guarantee since December 1987. Mr. Osenton was Chairman of the Board of
Pacific Guarantee from December 1987 to August 1998. Mr. Osenton served as a
member of Prism's board of directors from October 1998 until March 1999. From
August 1989 until August 1998, he was President of Pacific Guarantee Financial
Services, a residential loan brokerage and loan servicing company, where he
was responsible for overall management. Mr. Osenton holds a B.A. in history
from Boston College and an M.B.A. from Loyola College.

   Martin D. Francis. Mr. Francis is the founder of Mortgage Market and has
served as its President since November 1992. Prior to founding Mortgage
Market, Mr. Francis was a loan originator for several years. Mr. Francis holds
a B.S. in marketing from Southern Oregon State University.

   David A. Fisher. Mr. Fisher has served as Senior Vice President, Chief
Financial Officer and Secretary since January 1999, having been a Vice
President, General Counsel and Assistant Secretary since joining Prism
Financial in October 1997. From September 1994 to October 1997, Mr. Fisher was
an attorney at the Chicago law firm Katten Muchin & Zavis. He holds a B.S. in
finance from the University of Illinois and a J.D. from Northwestern
University.

   Edward C. Ahern. Mr. Ahern has served as Senior Vice President of Secondary
Marketing since January 1999. He joined Prism Financial as a Vice President in
June 1997. From 1993 to June 1997, Mr. Ahern was employed by LaSalle Home
Mortgage Company in Secondary Marketing, with responsibility for risk
management, investor relations and operations. Mr. Ahern holds a B.A. in
business economics from the University of Illinois and an M.B.A. from the
University of Chicago.

   Kevin N. Christopher. Mr. Christopher has served as Senior Vice President
of Production since January 1999 and was a Vice President of Prism Financial
from June 1995 to January 1999. Prior to joining Prism Financial, Mr.
Christopher was a Branch Manager/Level II for Norwest Mortgage. Mr.
Christopher holds a B.A. in liberal arts from the University of Illinois.

   James P. Hayes. Mr. Hayes has served as Senior Vice President since January
1999 and as Treasurer since January 1998. He joined Prism Financial as
Controller in October 1995, a position he currently holds. From September 1991
to October 1995, Mr. Hayes was employed by Arthur Andersen LLP, where he
managed financial audit engagements. He holds a B.S. in accountancy from
Northern Illinois University. He is a certified public accountant.

   Laurence E. Katz. Mr. Katz has served as Vice President for Electronic
Commerce since September 1998. From August 1997 to August 1998, Mr. Katz was a
Senior Research Fellow at Harvard University's Graduate School of Business,
where he was a student in the M.B.A. program beginning in August 1995. From
July 1994 to August 1995, Mr. Katz served as assistant to the chief operating
officer of Delray Farms, Inc., with responsibility for business development.
From August 1991 to June 1994, he was a member of the Corporate Strategic
Planning and Development Department at The Walt Disney Company. Mr. Katz holds
a B.A. in political science from Yale College and an M.B.A. from Harvard
University.

                                      41

<PAGE>

Section 16(a) Beneficial Ownership Reporting Compliance

   Section 16(a) of the Exchange Act ("Section 16(a)") requires Prism's
executive officers and directors and persons who own more than ten percent of
a registered class of Prism's equity securities ("10% Stockholders") to file
reports of ownership on a Form 3 and changes in ownership on a Form 4 or a
Form 5 with the SEC. Such executive officers, directors and 10% Stockholders
are also required by SEC rules to furnish the Company with copies of all
Section 16(a) forms that they file. To the best of Prism's knowledge and
belief, during fiscal 1999, its executive officers, directors and 10%
Stockholders complied with all applicable Section 16(a) filing requirements.


ITEM 11.  EXECUTIVE COMPENSATION


                          Summary Compensation Table

   The following summary compensation table sets forth certain information
concerning the compensation of Prism's chief executive officer and four most
highly compensated executive officers other than the chief executive officer
as of the end of fiscal 1999 (the "Named Executive Officers") for each of the
two fiscal years during the period ended December 31, 1999.

<TABLE>
<CAPTION>
                                                                  Long-Term
                                                 Annual          Compensation
                                            Compensation(1)         Awards
                                          -------------------- ----------------
                                                               Number of Shares
                                                                  Underlying
Name and Principal Position          Year Salary ($) Bonus ($)  Options (#)(2)
---------------------------          ---- ---------- --------- ----------------
<S>                                  <C>  <C>        <C>       <C>
Mark A. Filler*....................  1999  175,000    50,000           --
President and Chief Executive
 Officer                             1998  150,000    25,000           --

Bruce C. Abrams*...................  1999  154,167       --            --
Chairman of the Board of Directors
 and Chief Executive Officer         1998   75,000       --            --

Martin E. Francis..................  1999  150,000    50,000         8,000
President of Mortgage Market         1998   37,500    50,000           --

Kevin N. Christopher...............  1999  110,000    80,000        50,000
Senior Vice President of Production  1998   93,500    66,500           --

David A. Fisher....................  1999  107,545    80,000        75,000
Senior Vice President, Chief
 Financial Officer and Secretary     1998   90,000    60,000           --

Terry A. Markus....................  1999  177,308       --            --
President of Prism Illinois          1998  150,000       --            --
</TABLE>
--------
*   Mr. Filler became Chief Executive Officer of Prism after the death of Mr.
    Abrams on December 12, 1999.
(1) The aggregate amount of perquisites and other personal benefits for each
    of the Named Executive Officers did not equal or exceed the lesser of
    either $50,000 or 10% of the total of such individual's base salary and
    bonus, as reported herein for the applicable fiscal years, and is not
    reflected in the table.
(2) Stock options granted under the 1999 Stock Plan.

Option Grants Table

   The following table provides certain summary information concerning
individual grants of stock options made to Named Executive Officers during the
fiscal year ended December 31, 1999 under the 1999 Stock Plan. Prism had no
stock appreciation rights ("SARs") outstanding and granted no SARs during the
fiscal year ended December 31, 1999. Except as set forth in the table below,
during fiscal year 1999, Prism did not grant any stock options under the 1999
Stock Plan to any of the Named Executive Officers.

                                      42

<PAGE>

<TABLE>
<CAPTION>
                                        Individual Rights                     Potential
                         ------------------------------------------------ Realizable Value
                         Number of  Percent of Total                      at Assumed Rates
                           Shares   Options Granted                        of Stock Price
                         Underlying to Employees in  Exercise  Expiration Appreciation for
                         Grant (#)  Fiscal Year (%)  Price ($)    Date     Option Term(1)
                         ---------- ---------------- --------- ---------- -----------------
                                                                          5% ($)   10% ($)
                                                                          ------- ---------
<S>                      <C>        <C>              <C>       <C>        <C>     <C>
Martin E. Francis.......    8,000          1.2           14     5/24/09    70,436   178,500
Kevin N. Christopher....   50,000          7.2           14     5/24/09   440,226 1,115,620
David A. Fisher.........   75,000         10.8           14     5/24/09   660,339 1,673,430
</TABLE>
--------

(1) Amounts represent hypothetical gains that could be achieved from the
    exercise of the respective stock options and the subsequent sale of the
    Shares underlying such options if the options were exercised at the end of
    the option terms. The gains are based upon assumed rates of stock price
    appreciation of 5% and 10% compounded annually from the date the
    respective options were granted. The rates of appreciation are mandated by
    the rules of the Exchange Act and do not represent Prism's estimate or
    projection of the future Share price.
(2) The stock options reported were awarded pursuant to the 1999 Stock Plan at
    exercise prices equal to the fair market value of the Shares on the date
    of grant. The options vest in specified installments over a four- or five-
    year period after the grant date and terminate ten years after the grant
    date.

Fiscal Year-end Option Values

   No stock options with respect to Shares were exercised by the Named
Executive Officers in 1999. The following table provides certain summary
information concerning the number of unexercised stock options held by the
Named Executive Officers as of December 31, 1999. No information is included
below as to the value of Named Executive Officers' unexercised options because
the closing price per share of Prism common stock on December 31, 1999 was
less than the exercise price per Share of all such unexercised options.

<TABLE>
<CAPTION>
                                                         Number of Unexercised
                                                        Options at Fiscal Year
                                                              End (#)(1)
                                                       -------------------------
      Name                                             Exercisable Unexercisable
      ----                                             ----------- -------------
      <S>                                              <C>         <C>
      Martin E. Francis...............................     --          8,000
      Kevin N. Christopher............................     --         50,000
      David A. Fisher.................................     --         75,000
</TABLE>
--------
(1) Represents the aggregate number of stock options held as of December 31,
    1999 which could and could not be exercised on that date pursuant to the
    terms of the stock option agreements related thereto and the 1999 Stock
    Plan.

Director Compensation

   Under the 1999 Omnibus Stock Incentive Plan (the "1999 Stock Plan"), an
option to acquire 5,000 Shares is granted to each non-employee director upon
his initial election to the Prism Board and an option to purchase 2,500 Shares
is awarded to each non-employee director serving on the Prism Board on the day
immediately following Prism's annual meeting of stockholders, provided that
the non-employee director has served in such capacity for at least the
preceding six months. Directors who are employees of Prism or its affiliates
do not receive additional compensation for services as a director of Prism.
All directors are reimbursed for actual expenses incurred in connection with
attending meetings.

Employment and Consulting Agreements with Prism

   The following is a summary of certain employment and consulting agreements
to which Prism or a subsidiary of Prism is a party. Such summary does not
include any of the arrangements entered into by Prism employees in connection
with Purchaser's acquisition of Prism pursuant to the Offer and the Merger.
For a discussion of these arrangements, see Item 3 under "Arrangements with
Executive Officers, Directors or Affiliates of Prism" in the Schedule 14D-9 of
which this Information Statement forms a part.

                                      43

<PAGE>

   Prism's subsidiary Pacific Guarantee has an employment agreement with Mr.
Osenton under which (1) Pacific Guarantee agrees to employ Mr. Osenton as
President through May 31, 2003, provided that Pacific Guarantee may terminate
Mr. Osenton's employment at any time for cause, and provided further that Mr.
Osenton may terminate his employment at any time after July 31, 1999, (2) Mr.
Osenton receives an annual salary of $180,000, is eligible each calendar year
for a bonus of $70,000 if Pacific Guarantee's pre-tax income exceeds $1
million for the calendar year and receives employee benefits which are in
effect from time to time for Pacific Guarantee's management and (3) Mr.
Osenton agrees, during and after his employment with Pacific Guarantee, not to
disclose or use for his own benefit confidential information regarding Pacific
Guarantee and its affiliates.

   Prism's subsidiary Mortgage Market has an employment agreement with Mr.
Francis under which (1) Mortgage Market agrees to employ Mr. Francis through
July 31, 2000 as President of Mortgage Market, subject to renewal for one-year
terms by Mr. Francis and Mortgage Market, provided that Mortgage Market may
terminate Mr. Francis' employment for cause, (2) Mr. Francis receives an
annual salary of $150,000, is eligible for a bonus of $50,000 if Mortgage
Market's pre-tax income exceeds $1 million for the calendar year, and receives
health and medical benefits and a company car and (3) Mr. Francis agrees,
during and after his employment with Mortgage Market, not to disclose or use
for his own benefit confidential information regarding Mortgage Market and its
affiliates.

Compensation Committee Interlocks and Insider Participation

   The Compensation Committee currently consists of Messrs. Hochberg and
Wellek. No member of Prism's Compensation Committee is a current or former
officer or employee of Prism or any of its subsidiaries. There are no
compensation committee interlocks between Prism and any other entities
involving any of the executive officers or directors of such other entities.

   During fiscal year 1999, Bruce C. Abrams was a member of the Compensation
Committee while serving as Chairman of the Board and Chief Executive Officer
of Prism.

                                      44

<PAGE>

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

   According to information furnished to Prism as of March 15, 2000, the
directors of Prism, Prism's "named executive officers" (the "Named Executive
Officers") within the meaning of Item 402(a)(3) of Regulation S-K, and all
directors and executive officers as a group, beneficially owned shares of
Prism common stock as set forth below. Beneficial ownership has been
determined for purposes herein in accordance with Rule 13d-3 of the Exchange
Act under which a person is deemed to be the beneficial owner of securities if
such person has or shares voting power or investment power in respect of such
securities or has the right to acquire beneficial ownership within 60 days of
March 15, 2000.

<TABLE>
<CAPTION>
                                Number of Common       Approximate Percentage of
Name                      Shares and Share Equivalents Outstanding Common Shares
----                      ---------------------------- -------------------------
<S>                       <C>                          <C>
Mark A. Filler(1).......           1,966,671                     13.2
Terry A. Markus(2)......           1,673,150                     11.3
Martin E. Francis.......                   0                       *
David A. Fisher(3)......              86,813                       *
Kevin N. Christopher....               2,000                       *
Andrew S. Hochberg(4)...              10,000                       *
Michael P. Krasny.......              20,000                       *
Richard L. Wellek.......              13,147                       *
All directors and
 executive officers as a
 group (12 persons)(1)(2)
 (3)(4).................           4,426,190                     29.3
</TABLE>
--------
*   Represents less than 1%
(1) Includes 100,000 Shares which may be acquired upon the exercise of stock
    options held by Mr. Filler which vest upon a change of control of the
    Company. Also includes 466,669 shares held by the Filler Growth and
    Retention Fund I LP, a family limited partnership, of which Mr. Filler is
    the sole general partner.
(2) Includes 836,575 Shares held by the Markus Growth and Retention Fund I LP,
    a family limited partnership, of which Mr. Markus is the sole general
    partner.
(3) Includes 83,333 Shares which may be acquired upon the exercise of stock
    options held by Mr. Fisher which vest on April 30, 2000.
(4) Excludes 317,529 Shares owned by Abrams Capital Trust, a trust established
    by Mr. Abrams for the benefit of his wife and all of his children, over
    which Mr. Hochberg, as trustee, has investment and voting control. Mr.
    Hochberg disclaims beneficial ownership of these shares. See "Security
    Ownership of Certain Beneficial Owners," Footnote (1).

Security Ownership of Certain Beneficial Owners

   The following table sets forth information with respect to the persons
other than Named Executive Officers or directors known to Prism to
beneficially own more than five percent (5%) of the Shares, as of March 15,
2000:

<TABLE>
<CAPTION>
Name and Address of                    Amount and Nature of
Beneficial Owner                       Beneficial Ownership Percentage of Class
-------------------                    -------------------- -------------------
<S>                                    <C>                  <C>
Nancy C. Abrams, as executor of the
 estate of Bruce C. Abrams(1).........      5,503,745              37.2
c/o Mayer Brown & Platt
190 S. LaSalle
Chicago, Illinois 60603

Markus Growth and Retention Fund I
 LP(2)................................        836,575               5.7
3448 Dauphine Avenue
Northbrook, Illinois 60062-2264
</TABLE>

                                      45

<PAGE>

--------
(1) Does not include 317,529 shares held by the Abrams Capital Trust.
    According to a Schedule 13D filed February 2, 2000, Nancy C. Abrams,
    individually, is a beneficiary of the Abrams Capital Trust, which holds
    317,529 Shares. The Schedule 13D states that Ms. Abrams does not have
    voting or investment power with respect to such Shares and, accordingly,
    disclaims beneficial ownership of such Shares.
(2) Mr. Markus, as the sole general partner of Markus Growth and Retention
    Fund I LP, has sole voting and investment power with respect to all such
    shares.


ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

   In January 1996, the Company loaned $100,000 each to Mr. Filler and Mr.
Markus to purchase outstanding common shares of the Company from another
stockholder. From January 1, 1997, the loans accrued interest at 8.25%
annually. The principal was payable in five annual installments of $20,000,
plus interest, beginning December 31, 1997. Each stockholder repaid the
remaining principal and accrued interest balance of the loans to the Company
in May 1999.

   The Company paid management fees for shared services of approximately
$115,000 to LR Development Company in 1999. LR Development Company was
controlled by Bruce C. Abrams, Chief Executive Officer and Chairman of the
Board of Directors of Prism, until his death in December 1999.

   The estate of Bruce C. Abrams owns a one-third equity interest, and Mr.
Hochberg has an indirect equity interest, in Winners Limited Partnership, an
Illinois limited partnership, which is the landlord under the lease of an
office building in Chicago, Illinois that is subleased by Prism. Mr. Hochberg
is also on the board of directors of the company from which Prism subleases
the office space. The Company made sublease payments of approximately $422,000
to the sublessor during 1999. The sublease, which extends through August 30,
2004, was negotiated on an arm's-length basis.

   Prism acquired 80 percent of the membership interests of Apollo Housing
Capital, L.L.C. ("Apollo"), a tax credit syndication business, in September
1999 for approximately $1.64 million in cash, net of cash acquired in the
acquisition. Fifty percent of the interests in Apollo were owned by Vision
AHC, L.L.C. ("Vision"), an entity formerly controlled by the late Mr. Abrams
and now controlled by Mr. Abrams' estate. Vision did not receive any cash from
the Company upon the closing of the transaction. However, Vision is entitled
to receive initial consideration of up to $3.25 million in cash only if Apollo
satisfies conditions relating to available cash flows of Apollo following the
closing. In addition, Vision will receive a percentage of Apollo's 1999 net
cash flow following the acquisition and contingent consideration equal to a
percentage of Apollo's pre-tax net income in each of the years 2000 through
2007.

   At the time of the closing of Prism Financial's acquisition of Apollo,
Apollo had outstanding obligations of $500,000 under a promissory note payable
to Vision. The note was paid in full in the third quarter of 1999.

   As of December 31, 1999, the Company, through Apollo, owned limited
partnership interests valued at $18.7 million in two investee partnerships
that were purchased in 1999 from LR Development Company, formerly controlled
by the late Bruce C. Abrams. Additionally, the Company owed capital
contribution notes totaling $17.1 million as of December 31, 1999 in
connection with its acquisition of such limited partnership interest.

                                      46

<PAGE>

   On March 6, 1998, prior to its acquisition by Prism, Pacific Guarantee
issued a subordinated promissory note to Mr. Osenton in the amount of $200,000
which, together with interest of 10% per annum, was due on or before March 31,
2000. Interest-only payments were payable monthly on unpaid principal and were
due on the first day of each month beginning on April 30, 1998. This note was
repaid in 1999.

   On June 30, 1997, prior to its acquisition by Prism, Pacific Guarantee
issued a subordinated promissory note to Mr. Osenton and his wife in the
amount of $400,000, which, together with interest of 10% per annum, was due on
or before June 30, 2002. Interest-only payments were payable monthly on unpaid
principal and were due on the first day of each month beginning August 1,
1997. This note was repaid in 1999.

   Mr. Abrams, Mr. Filler, Mr. Markus, Mr. Osenton, an affiliate of Mr.
Abrams, and affiliates of Penny S. Pritzker, a Prism Board member from May
1999 until January 2000, entered into a registration rights agreement with
Prism in May 1999 pursuant to which they received shelf, demand and piggyback
rights to register their restricted Shares. The registration rights agreement
has been filed as Exhibit 18 to this Schedule 14D-9 and is incorporated herein
by reference.

   CDW Computer Centers, Inc., of which Mr. Krasny is Chairman of the Board
and Chief Executive Officer, sold $140,778 worth of computer equipment to
Prism in 1999. These purchases were negotiated on an arm's-length basis.

   In connection with the termination of the Company's S corporation status
for federal and certain state income tax purposes in conjunction with the
Company's initial public offering, the Company issued promissory notes (the "S
Corporation Distribution Notes") to all of the Company's stockholders prior to
the initial public offering, including Mr. Abrams, an affiliate of Mr. Abrams,
Messrs. Filler and Markus, affiliates of Ms. Penny S. Pritzker and Mr.
Osenton, in the amount of their respective undistributed accumulated S
corporation earnings for the period ending on the termination date. In
accordance with the Company's S Corporation status, all earnings of the
Company during this period were taxed directly to these stockholders rather
than to the Company. The initial amount owed under the S Corporation
Distribution Notes upon issuance was $20.8 million including $10.7 million,
$3.6 million, $3.6 million, $942,842, $944,309 and $564,551 to Mr. Abrams, Mr.
Markus, Mr. Filler, an affiliate of Mr. Abrams, affiliates of Ms. Pritzker and
Mr. Osenton, respectively. As of December 31, 1999, the respective amounts
outstanding under the S Corporation Distribution Notes were $675,574,
$245,663, $245,663, $61,415, $68,708 and $36,771 plus accrued but unpaid
interest.

                                      47

<PAGE>

                                    PART IV

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

  (a) 1. The following consolidated financial statements and notes thereto, and
the related independent auditors' report, are included on pages F-1 through
F-31 of this Form 10-K:

     Report of Independent Accountants

     Independent Auditors' Report

     Consolidated Balance Sheets as of December 31, 1999 and 1998

     Consolidated Statements of Income for the Years Ended December 31, 1999,
     1998 and 1997

     Consolidated Statements of Changes In Stockholders' Equity for the Years
     Ended December 31, 1999, 1998 and 1997

     Consolidated Statements of Cash Flows for the Years Ended December 31,
     1999, 1998 and 1997

     Notes to Consolidated Financial Statements

  2. The following financial statement schedule of the Company and the related
     report of independent auditors are included on pages S-1 and S-2 of this
     Form 10-K:

     Independent Auditors' Report


     Schedule II - Valuation and Qualifying Accounts

     All other financial statement schedules are omitted because such schedules
are not required or the information required has been presented in the
aforementioned financial statements.

                                      48

<PAGE>

     3. The following exhibits are filed with this Form 10-K or incorporated by
reference as set forth below:

Exhibit 2.1    Share Exchange Agreement (incorporated herein by reference to
               Exhibit 3 to the Company's Registration Statement on Form 8-A/A
               filed with the Securities and Exchange Commission (the "SEC") on
               March 24, 2000 (the "Registration Statement" on Form 8-A/A)).

Exhibit 2.2    Merger Agreement, dated as of March 10, 2000, among Royal Bank of
               Canada, Prism Acquisition Subsidiary, Inc., formerly known as
               Rainbow Acquisition Subsidiary, Inc., and the Company
               (incorporated herein by reference to Exhibit 1 to the Company's
               Schedule 14D-9 filed with the SEC on March 22, 2000, as filed
               with Amendment No. 1 to such Schedule 14D-9 on March 27, 2000).

Exhibit 3.1    Amended and Restated Certificate of Incorporation of the
               Registrant (incorporated herein by reference to Exhibit 4 to the
               Registration Statement on Form 8-A/A).

Exhibit 3.2    Second Amended and Restated Bylaws of the Registrant
               (incorporated herein by reference to Exhibit 5 to the
               Registration Statement on Form 8-A/A).

Exhibit 4.1    Specimen Certificate for the Registrant's Common Stock
               (incorporated herein by reference to Exhibit 6 to the
               Registration Statement on Form 8-A/A).

Exhibit 4.2    Registration Rights Agreement (incorporated by reference to
               Exhibit 4.3 to the Company's Registration Statement on Form S-1,
               as amended (Registration No. 333-74883)).

Exhibit 4.3    Rights Agreement, dated as of January 27, 2000, between the
               Company and LaSalle Bank National Association, as Rights Agent,
               which includes as Exhibit A the Certificate of Designations,
               Preferences and Rights of Series A Junior Participating Preferred
               Stock and as Exhibit B the Form of Rights Certificate
               (incorporated by reference to Exhibit 4.3 to the Company's
               Current Report on Form 8-K filed with the SEC on February 8,
               2000).

Exhibit 4.4    First Amendment to Rights Agreement, dated as of March 10, 2000,
               between Prism Financial Corporation and LaSalle Bank National
               Association, as Rights Agent (incorporated herein by reference to
               Exhibit 2 to the Company's Registration Statement on Form 8-A/A).

Exhibit 4.5    Share Exchange Agreement (see Exhibit 2.1).

Exhibit 10.1   1999 Omnibus Stock Incentive Plan (incorporated herein by
               reference to Exhibit 16 to the Company's Schedule 14D-9 filed
               with the SEC on March 22, 2000, as filed with Amendment No. 1 to
               such Schedule 14D-9 on March 27, 2000).**

Exhibit 10.2*  Agreement for the Purchase and Sale of the Capital Stock of
               Pacific Guarantee Mortgage Corporation, dated as of July 31,
               1998, by and between Prism Mortgage Company and William D.
               Osenton and Bruce P. Barbera (incorporated herein by reference to
               Exhibit 10.2 to the Company's Registration Statement on Form S-1,
               as amended (Registration No. 333-74883)).

Exhibit 10.3*  Agreement for the Purchase and Sale of the Capital Stock of
               Mortgage Market, Inc., dated as of September 30, 1998, by and
               among Prism Mortgage Company and Martin E. Francis, Kenneth
               Bartley, Melissa Stashin and Curt Vanderzanden (incorporated
               herein by reference to Exhibit 10.3 to the Company's Registration
               Statement on Form S-1, as amended (Registration No. 333-74883)).

Exhibit 10.4*  Prism Equity Value Plan, effective as of August 31, 1998, by
               Prism Mortgage Company and by personnel of Pacific Guarantee
               Mortgage Corporation (incorporated herein by reference to Exhibit
               10.4 to the Company's Registration Statement on Form S-1, as
               amended (Registration No. 333-74883)).**

Exhibit 10.5*  Executive Employment Agreement, dated as of July 31, 1998, by and
               between Pacific Guarantee Mortgage Corporation and William D.
               Osenton (incorporated herein by reference to Exhibit 10.5 to the
               Company's Registration Statement on Form S-1, as amended
               (Registration No. 333-74883)).**

Exhibit 10.6*  Executive Employment Agreement, dated as of September 30, 1998,
               by and between Mortgage Market, Inc. and Martin E. Francis
               (incorporated herein by reference to Exhibit 10.6 to the
               Company's Registration Statement on Form S-1, as amended
               (Registration No. 333-74883)).**

Exhibit 10.7   Prism 2000 Profit Sharing Plan (incorporated herein by reference
               to Exhibit 10.7 to the Company's Registration Statement on Form
               S-1, as amended (Registration No. 333-74883)).**

                                      49

<PAGE>

Exhibit 10.8   Credit Agreement, dated as of March 31, 1999, among Prism
               Mortgage Company and its subsidiaries, the lending institutions
               listed on the signature pages thereto and The First National Bank
               of Chicago, as Agent (the "First National Bank of Chicago Credit
               Agreement") (incorporated herein by reference to Exhibit 10.8 to
               the Company's Registration Statement on Form S-1, as amended
               (Registration No. 333-74883)).

Exhibit 10.9*  First Amendment to Purchase and Sale Agreement, entered into on
               April 25, 1999, by and among Bruce Barbera and William Osenton
               and Prism Mortgage Company (incorporated herein by reference to
               Exhibit 10.9 to the Company's Registration Statement on Form S-1,
               as amended (Registration No. 333-74883)).

Exhibit 10.10  Second Amendment to Purchase and Sale Agreement, entered into on
               April 27, 1999, by and among Bruce Barbera and William Osenton
               and Prism Mortgage Company (incorporated herein by reference to
               Exhibit 10.10 to the Company's Registration Statement on Form
               S-1, as amended (Registration No. 333-74883 )).

Exhibit 10.11  Third Amendment to Purchase and Sale Agreement, entered into as
               of May 11, 1999, by and among Bruce Barbera and William Osenton
               and Prism Mortgage Company (incorporated herein by reference to
               Exhibit 10.11 to the Company's Registration Statement on Form
               S-1, as amended (Registration No. 333-74883)).

Exhibit 10.12  Fourth Amendment to Purchase and Sale Agreement, entered into as
               of May 19, 1999, by and among Bruce Barbera and William Osenton
               and Prism Mortgage Company (incorporated herein by reference to
               Exhibit 10.12 to the Company's Registration Statement on Form
               S-1, as amended (Registration No. 333-74883)).

Exhibit 10.13  Prism Financial Corporation Amended and Restated 1999 Employee
               Stock Purchase Plan (incorporated herein by reference to Exhibit
               99.3 to the Company's Registration Statement on Form S-8
               (Registration No. 333-81889)).**

Exhibit 10.14  Loan and Security Agreement, dated as of October 7, 1999, by and
               between Prism Financial Corporation and LaSalle Bank National
               Association (incorporated herein by reference to Exhibit 10.1 to
               the Company's Quarterly Report on Form 10-Q for the quarter ended
               September 30, 1999 (the "September 1999 10-Q").

Exhibit 10.15  First Amendment, dated as of May 24, 1999, to the First National
               Bank of Chicago Credit Agreement (incorporated herein by
               reference to Exhibit 10.2 to the September 1999 10-Q).

Exhibit 10.16  Second Amendment, dated as of October 7, 1999, to the First
               National Bank of Chicago Credit Agreement (incorporated by
               reference to Exhibit 10.3 to September 1999 10-Q).

Exhibit 10.17  Credit Agreement, dated as of September 30, 1999, among Apollo
               Housing Capital, L.L.C., LaSalle Bank National Association and
               Bank of America, National Association.

Exhibit 10.18  2000 Stock Option Plan (incorporated herein by reference to
               Exhibit 17 to the Company's Schedule 14D-9 filed with the SEC on
               March 22, 2000 as filed with Amendment No. 1 to such Schedule
               14D-9 on March 27, 2000).**

Exhibit 10.19  Third Amendment, dated as of February 11, 2000, to the Bank One,
               N.A. Credit Agreement (f/k/a First National Bank of Chicago
               Credit Agreement) (the "Bank One Credit Agreement").

Exhibit 10.20  Fourth Amendment, dated as of March 21, 2000, to the Bank One
               Credit Agreement.

Exhibit 11     Statement Regarding Computation of Per Share Earnings.

Exhibit 16     Letter Regarding Change in Certified Independent Auditors
               (incorporated herein by reference to Exhibit 16.1 to the
               Company's Registration Statement on Form S-1, as amended
               (Registration No. 333-74883)).

Exhibit 21     Subsidiaries of Prism Financial Corporation.

Exhibit 23.1   Consent of PricewaterhouseCoopers LLP.

Exhibit 23.2   Consent of McGladrey & Pullen, LLP.

Exhibit 27     Financial Data Schedule.

*  Portions of this exhibit have been omitted pursuant to a confidential
treatment request filed with, and granted by, the Securities and Exchange
Commission.

** Management contract or compensatory plan or arrangement required to be
included as an exhibit to this Annual Report on Form 10-K.

                                      50

<PAGE>

(b)  Reports on Form 8-K:

The Company filed a Current Report on Form 8-K dated December 12, 1999 to report
the death of the Company's Chairman and Chief Executive Officer, Bruce C.
Abrams.

                                      51

<PAGE>

                       Report of Independent Accountants

To the Board of Directors and Stockholders
of Prism Financial Corporation

   In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, of changes in stockholders' equity
and of cash flows present fairly, in all material respects, the financial
position of Prism Financial Corporation and its subsidiaries (the "Company")
at December 31, 1999 and 1998, and the results of their operations and their
cash flows for each of the two years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
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 audits. We conducted our audits of these statements in accordance
with auditing standards generally accepted in the United States, which 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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.

PricewaterhouseCoopers LLP
Chicago, Illinois

February 21, 2000, except for
 Note 27, as to which the date
 is March 21, 2000

                                      F-1
<PAGE>

                         Independent Auditors' Report

To the Board of Directors
Prism Financial Corporation
Chicago, Illinois

   We have audited the accompanying consolidated statement of income,
stockholders' equity and cash flows of Prism Financial Corporation and
subsidiaries for the year ended December 31, 1997. These financial statements
are the responsibility of Prism Financial Corporation'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 audit provides a reasonable basis
for our opinion.

   In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows of Prism Financial Corporation and subsidiaries for the year ended
December 31, 1997 in conformity with generally accepted accounting principles.

McGladrey & Pullen, LLP
Schaumburg, Illinois

March 27, 1998

                                      F-2
<PAGE>

                  PRISM FINANCIAL CORPORATION AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS

                        As of December 31, 1999 and 1998

<TABLE>
<CAPTION>
                                                          1999          1998
                                                      ------------  ------------
                       ASSETS
                       ------
<S>                                                   <C>           <C>
Cash and cash equivalents...........................  $  6,914,661  $ 12,123,893
Loans held for sale, at lower of cost or market.....   198,293,952   467,254,128
Loan fees and other receivables, net of allowance of
 $1,280,000 and $350,000                                14,316,347    14,206,790
Furniture, fixtures and equipment, net..............    11,185,212     4,284,214
Intangible assets, net..............................    15,131,073     2,920,336
Investments in and advances to affiliates...........           --         67,419
Properties held for sale............................    74,069,713           --
Other assets........................................     9,918,354     2,765,314
Net assets of discontinued operations...............     1,773,410           --
                                                      ------------  ------------
    Total assets....................................  $331,602,722  $503,622,094
                                                      ============  ============
<CAPTION>
        LIABILITIES AND STOCKHOLDERS' EQUITY
        ------------------------------------
<S>                                                   <C>           <C>
Liabilities:
  Loans sold under agreements to repurchase.........  $ 11,933,790  $292,626,673
  Warehouse lines of credit.........................   191,602,770   170,217,137
  Operating line of credit..........................     5,922,742           --
  Current portion of long-term debt.................       145,567       729,249
  Commissions payable...............................     3,184,193     4,290,899
  Accounts payable..................................     2,674,328     2,548,732
  Accrued interest payable..........................     2,701,051     2,153,402
  Payable to affiliates.............................           --        148,562
  Capital contribution notes payable................    61,674,051           --
  Accrued expenses and other liabilities............     8,213,732    10,406,306
  S corporation distribution notes..................     1,375,000
  Long-term debt....................................        75,675     4,297,836
  Minority interest.................................        65,012           --
                                                      ------------  ------------
    Total liabilities...............................   289,567,911   487,418,796
                                                      ------------  ------------
Commitments and contingencies.......................           --            --
Stockholders' equity:
  Preferred stock, $0.01 par value per share,
   10,000,000 shares authorized, no shares issued
   and outstanding..................................           --            --
  Common stock, $0.01 par value; 100,000,000 shares
   authorized; 14,625,171 and 11,495,297 shares
   issued and outstanding...........................       146,252       114,953
  Additional paid-in capital........................    41,956,374     4,002,779
  Accumulated (deficit) retained earnings...........       (67,815)   12,085,566
                                                      ------------  ------------
    Total stockholders' equity......................    42,034,811    16,203,298
                                                      ------------  ------------
    Total liabilities and stockholders' equity......  $331,602,722  $503,622,094
                                                      ============  ============
</TABLE>

    The accompanying notes are an integral part of the financial statements.

                                      F-3
<PAGE>

                  PRISM FINANCIAL CORPORATION AND SUBSIDIARIES

                       CONSOLIDATED STATEMENTS OF INCOME

              For the years ended December 31, 1999, 1998 and 1997

<TABLE>
<CAPTION>
                                             1999         1998         1997
                                         ------------  -----------  -----------
<S>                                      <C>           <C>          <C>
Revenues:
  Loan origination income..............  $100,514,238  $62,615,836  $20,573,280
  Net premium income...................    14,915,116   11,805,047    1,640,078
  Loan-related fees....................    20,097,986    7,661,829    3,639,867
  Net interest income..................     5,037,978    1,783,734      362,626
  Net syndication income...............     3,518,601          --           --
  Other................................     6,574,636    1,799,469      547,459
                                         ------------  -----------  -----------
                                          150,658,555   85,665,915   26,763,310
                                         ------------  -----------  -----------
Expenses:
  Commissions..........................    60,489,612   35,722,206   10,070,864
  Loan-related expenses................    11,508,863    8,391,163    3,763,578
  Salaries and benefits................    41,620,586   17,884,170    6,121,136
  General and administrative expenses..    25,124,450    9,939,096    3,500,736
  Depreciation and amortization........     3,262,728    1,432,985      321,908
  Other................................       169,321      200,154      148,499
                                         ------------  -----------  -----------
                                          142,175,560   73,569,774   23,926,721
                                         ------------  -----------  -----------
    Income from continuing operations
     before income taxes...............     8,482,995   12,096,141    2,836,589
                                         ------------  -----------  -----------
Income tax benefit.....................      (238,599)         --           --
Income tax benefit due to conversion of
 "S" corporation.......................    (1,228,381)         --           --
                                         ------------  -----------  -----------
    Income from continuing operations..     9,949,975   12,096,141    2,836,589
                                         ------------  -----------  -----------
Discontinued operations:
Loss from discontinued operations, net
 of income taxes.......................      (243,629)  (1,001,563)    (333,330)
Loss on disposal, net of income taxes..      (853,186)         --           --
                                         ------------  -----------  -----------
    Net income.........................  $  8,853,160  $11,094,578  $ 2,503,259
                                         ============  ===========  ===========
Earning per share--Basic:
  Earnings per share from continuing
   operations..........................  $       0.74  $      1.14  $      0.28
                                         ============  ===========  ===========
  Loss per share from discontinued
   operations..........................  $      (0.08) $     (0.09) $     (0.04)
                                         ============  ===========  ===========
  Net earnings per share...............  $       0.66  $      1.05  $      0.24
                                         ============  ===========  ===========
Earning per share--Diluted:
  Earnings per share from continuing
   operations..........................  $       0.74  $      1.14  $      0.28
                                         ============  ===========  ===========
  Loss per share from discontinued
   operations..........................  $      (0.08) $     (0.09) $     (0.04)
                                         ============  ===========  ===========
  Net earnings per share...............  $       0.66  $      1.05  $      0.24
                                         ============  ===========  ===========
Weighted average number of shares
 outstanding:
  Basic................................    13,390,371   10,567,995   10,269,000
                                         ============  ===========  ===========
  Diluted..............................    13,453,826   10,610,714   10,269,000
                                         ============  ===========  ===========
Pro forma data (unaudited):
  Income from continuing operations
   before income taxes.................  $  8,482,995  $12,096,141  $ 2,836,589
  Pro forma provision for income taxes.     3,308,368    4,591,695    1,128,111
                                         ------------  -----------  -----------
  Pro forma income from continuing
   operations..........................  $  5,174,627  $ 7,504,446  $ 1,708,478
                                         ============  ===========  ===========
Pro forma earnings per share from
 continuing operations
  Basic................................  $       0.35
                                         ============
  Diluted..............................  $       0.35
                                         ============
Pro forma weighted average number of
 shares outstanding....................
  Basic................................    14,625,171
                                         ============
  Diluted..............................    14,688,625
                                         ============
</TABLE>

    The accompanying notes are an integral part of the financial statements.

                                      F-4
<PAGE>

                  PRISM FINANCIAL CORPORATION AND SUBSIDIARIES

           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

              For the years ended December 31, 1999, 1998 and 1997

<TABLE>
<CAPTION>
                                  1999                    1998                   1997
                         ----------------------  ----------------------  ---------------------
                           Shares     Amount       Shares     Amount       Shares     Amount
                         ---------- -----------  ---------- -----------  ---------- ----------
<S>                      <C>        <C>          <C>        <C>          <C>        <C>
Common stock:
  Balance at beginning
   of period............ 11,495,297 $   114,953  10,269,000 $   102,690  10,269,000 $  102,690
  Stock issued for
   initial public
   offering.............  2,500,000      25,000         --          --          --         --
  Stock issued for
   acquisitions as
   additional
   consideration and
   deferred
   compensation.........    629,874       6,299     548,851       5,489         --         --
  Capital contribution..        --          --      574,756       5,748         --         --
  Other issuance of
   common stock.........        --          --      102,690       1,026         --         --
                         ---------- -----------  ---------- -----------  ---------- ----------
    Balance at end of
     period............. 14,625,171     146,252  11,495,297     114,953  10,269,000    102,690
                         ========== -----------  ========== -----------  ========== ----------
Additional paid-in
 capital:
  Balance at beginning
   of period............              4,002,779                 (52,690)               (52,690)
  Stock issued for
   initial public
   offering, net of
   underwriting
   discounts............             32,525,000                     --                     --
  Stock issued for
   acquisitions as
   additional
   consideration and
   deferred
   compensation.........              8,811,943               1,494,511                    --
  Capital contribution..                 99,998               2,494,252                    --
  Distribution notes
   payable to
   S corporation
   stockholders in
   connection with
   conversion to a
   C corporation........             (1,375,000)                    --                     --
  Cash distributions to
   S corporation
   stockholders.........               (406,460)                    --                     --
  Initial public
   offering costs.......             (1,701,886)                    --                     --
  Other issuance of
   common stock.........                    --                   66,706                    --
                                    -----------             -----------             ----------
    Balance at end of
     period.............             41,956,374               4,002,779                (52,690)
                                    -----------             -----------             ----------
Accumulated (deficit)
 retained earnings:
  Balance at beginning
   of period............             12,085,566               3,025,707              1,473,443
  Net income............              8,853,160              11,094,578              2,503,259
  Cash distributions to
   S corporation
   stockholders.........            (21,006,541)             (2,034,719)              (950,995)
                                    -----------             -----------             ----------
    Balance at end of
     period.............                (67,815)             12,085,566              3,025,707
                                    -----------             -----------             ----------
Total stockholders'
 equity.................            $42,034,811             $16,203,298             $3,075,707
                                    ===========             ===========             ==========
</TABLE>

    The accompanying notes are an integral part of the financial statements.

                                      F-5
<PAGE>

                  PRISM FINANCIAL CORPORATION AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

              For the years ended December 31, 1999, 1998 and 1997

<TABLE>
<CAPTION>
                                    1999             1998            1997
                               ---------------  ---------------  -------------
<S>                            <C>              <C>              <C>
Cash flows from operating
 activities:
Net income...................  $     8,853,160  $    11,094,578  $   2,503,259
Adjustments to reconcile net
 income to net cash provided
 by (used in) operating
 activities:
  Depreciation and
   amortization..............        3,262,728        1,472,985        326,626
  Provision for loan and
   servicing losses..........          606,504          900,000            --
  Equity in net income of
   affiliates................           (8,916)        (269,481)      (511,806)
  Stock-based compensation...          368,877           67,732            --
Distributions from
 affiliates..................           76,335          245,163        480,266
Proceeds from sales of loans.    3,845,350,347    2,028,124,503    495,046,464
Loans originated.............   (3,538,836,812)  (2,367,554,285)  (538,177,870)
Changes in assets and
 liabilities, net of
 acquisitions:
  Loan fees and other
   receivables...............        5,520,568      (10,435,890)    (1,172,906)
  Properties held for sale...      (39,497,872)             --             --
  Other assets...............       (2,501,268)      (1,404,192)      (115,859)
  Commissions payable........       (1,973,343)       3,439,275        525,583
  Accounts payable...........       (1,357,383)       1,937,137        246,078
  Accrued interest payable...          268,920        2,025,360        127,993
  Payable to affiliates......         (148,562)          63,583        (34,198)
  Capital contributions
   payable...................       31,594,857              --             --
  Accrued expenses and other
   liabilities...............       (7,342,621)       2,182,443        774,707
                               ---------------  ---------------  -------------
    Net cash provided by
     (used in) operating
     activities..............      304,235,519     (328,111,089)   (39,981,663)
                               ---------------  ---------------  -------------
Cash flows from investing
 activities:
Purchases of furniture,
 fixtures and equipment, net.       (6,354,910)      (3,330,683)    (1,087,004)
Net cash (paid) received for
 acquisitions................       (7,435,092)       1,772,705            --
                               ---------------  ---------------  -------------
    Net cash used in
     investing activities....      (13,790,002)      (1,557,978)    (1,087,004)
                               ---------------  ---------------  -------------
Cash flows from financing
 activities:
(Repayments of) borrowings on
 warehouse lines of credit,
 net.........................     (306,300,728)     336,937,102     42,039,244
Borrowings on operating line
 of credit, net..............        5,922,742              --             --
Proceeds from issuance of
 bridge notes................              --         2,500,000            --
Repayments of bridge note....              --        (1,250,000)           --
Proceeds from capital
 contribution................           99,998        1,250,000            --
Borrowings of long-term debt.              --         3,425,000            --
Repayments of long-term debt.       (4,811,874)        (198,394)
Proceeds from initial public
 offering, net of issuance
 costs.......................       30,848,114              --             --
Cash distributions to S
 corporation stockholders....      (21,413,001)      (2,034,719)      (950,995)
                               ---------------  ---------------  -------------
    Net cash (used in)
     provided by financing
     activities..............     (295,654,749)     340,628,989     41,088,249
                               ---------------  ---------------  -------------
Net (decrease) increase in
 cash and cash equivalents...       (5,209,232)      10,959,922         19,582
Cash and cash equivalents:
Beginning of period..........       12,123,893        1,163,971      1,144,389
                               ---------------  ---------------  -------------
End of period................  $     6,914,661  $    12,123,893  $   1,163,971
                               ===============  ===============  =============
</TABLE>

    The accompanying notes are an integral part of the financial statements.

                                      F-6
<PAGE>

                 PRISM FINANCIAL CORPORATION AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1--NATURE OF BUSINESS

   Prism Financial Corporation and its subsidiaries (collectively the
"Company" or "Prism Financial") is a retail mortgage banking company primarily
engaged in the business of originating, selling and brokering residential
mortgage loans. The Company operates as both (1) a mortgage banker,
underwriting, closing and funding loans, and (2) a mortgage broker, selling
the loan products of over 100 different lenders. The Company uses its direct
consumer access to sell mortgage-related products, including credit reports,
flood certifications, appraisals, mortgage insurance and title insurance
policies. The Company also engages in the affordable housing and historic tax
credit syndication business. The Company currently operates under three
operating segments: mortgage origination, ancillary services and tax credit
syndication.

NOTE 2--SIGNIFICANT ACCOUNTING POLICIES

 Principles of consolidation

   The consolidated financial statements include the accounts of the Company.
All significant intercompany accounts and transactions have been eliminated in
consolidation.

 Basis of financial statement presentation

   The accounting and reporting polices of the Company conform to generally
accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities, the disclosure of contingent
assets and liabilities and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from these
estimates.

 Cash and cash equivalents

   The Company considers all demand deposits and money market fund investments
with original maturities of 90 days or less to be cash equivalents. The
Company invests daily excess cash in money market funds through a sweep
mechanism.

 Loans held for sale

   The Company sells all of the loans it originates, generally between 10 and
45 days after closing. Loans held for sale consist primarily of mortgage loans
made to individuals that are collateralized by residential real estate. Loans
held for sale are carried at the lower of aggregate cost or market. Market
value is determined based on the contractually established prices at which the
loans will be sold, or if the loans are not committed for sale, current market
prices for loans with similar characteristics. Fair value for purposes of
lower of cost or market analysis includes the valuation of all outstanding
purchase and sale commitments.

 Loan fees receivable

   Loan fees receivable represent fees on brokered loans which have closed,
but for which the Company has not yet received the loan origination fees due
from investors. An allowance is established for fees which may not be fully
collectible.

 Furniture, fixtures and equipment, net

   Furniture, fixtures and equipment are stated at cost less accumulated
depreciation. For fixed assets purchased since January 1, 1999, depreciation
is computed using the straight-line method based on the estimated useful
lives, generally five years. For fixed assets purchased prior to 1999, the
Company used the double-declining-balance method of depreciation. See Note 3--
Change in Accounting Method.

                                      F-7
<PAGE>

                 PRISM FINANCIAL CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


 Intangible assets, net

   Intangible assets are primarily comprised of goodwill, representing the
excess of the purchase price over the fair value of the identifiable net
assets acquired at the date of acquisition. Goodwill is amortized from the
date of acquisition by systematic charges on a straight-line basis against
income over the expected period to be benefited, but not exceeding 20 years.
The measurement of possible impairment is based primarily on the ability to
recover the balance of the goodwill from expected future operating cash flows.
In management's opinion, no impairment exists at December 31, 1999.

 Investments in and advances to affiliated business arrangements

   During 1999, the Company terminated its participation in affiliated
business arrangements ("ABAs"), and thus no related balance is recorded at
December 31, 1999. For the years ended December 31, 1998 and 1997, the Company
accounted for its investments in ABAs using the equity method of accounting,
under which the Company's equity in the net income or loss of the affiliates
was recognized in its statement of income and added to or deducted from its
investment in the affiliates. Distributions received from affiliates were
treated as reductions of the investment in the ABAs.

 Properties held for sale

   The Company owns limited interests in various limited partnerships and
limited liability companies which were formed to acquire, develop, own,
construct, renovate, lease and operate property as qualified low income
housing or qualified historic tax credit structures ("investee partnerships")
within the meaning of Section 42 or Section 47 of the Internal Revenue Code,
respectively. The Company accounts for its investments in these investee
partnership interests using the equity method.

 Capital contribution notes payable

   Capital contributions payable represent obligations owed to the investee
partnerships in which the Company holds limited partnership interests. These
obligations will ultimately be assumed by the third party investors at the
time of syndication, and the Company's balance sheet will reflect a
corresponding reduction of capital contributions payable when syndication is
complete. These obligations are secured by their respective limited
partnership interests including, without limitation, the Company's rights to
profits, losses, tax credits and other items allocated by such investee
partnerships.

 Loan origination income

   For brokered loans, revenues consisting of loan origination, processing and
application fees are recognized at the time of closing. For loans funded by
the Company, loan origination, processing and application fees received are
recorded as an adjustment to the cost basis of the loans and are recognized
when the mortgages are sold to investors.

 Net premium income

   Net premium income represents the difference between the sales price and
the allocated cost basis of the loans sold to investors, which is the par
value of the loan plus the premium paid to the origination source of the loan.
Loans and servicing rights are generally sold to investors within 10 to 45
days of initial losing.

 Loan-related fees

   Loan-related fees consist of application, documentation and processing fees
paid by borrowers.

                                      F-8
<PAGE>

                 PRISM FINANCIAL CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


 Net interest income

   Net interest income primarily consists of the net difference between
interest received on the Company's mortgage loans held for sale and the
interest expense paid under the Company's bank credit facilities.

 Net syndication income

   Net syndication income represents the revenue the Company receives from
selling interests in the investment funds, net of (1) the costs paid by the
Company to acquire the partnership interests that are syndicated and (2) the
direct expenses associated with the syndication.

 Provisions for loan and servicing losses

   The provision for loan losses relates to expenses or losses incurred due to
the potential repurchase of loans or indemnification of losses based on
alleged violations of representations and warranties at the time of loan sale.
The provision for losses is charged to net premium income, and a reserve is
recorded in other liabilities. Management believes the reserve recorded at
December 31, 1999 is adequate based upon its evaluation of the potential
exposure related to actual activity and interpretations of the loan sale
agreements.

   The provision for servicing losses relates to potential uncollectible
servicing payments. The provision for servicing losses is charged to net
interest income, and a credit is recorded to the allowance for loan fees and
other receivables. Management believes the allowance is adequate based upon
its evaluation of the potential uncollectible servicing payments.

 Income taxes

   Effective January 1, 1996, Prism Mortgage Company ("Prism Mortgage"), the
predecessor to Prism Financial, with the consent of its stockholders, elected
to be treated as an S corporation for federal and certain state income tax
purposes. Accordingly, in lieu of corporate income taxes, the stockholders
separately accounted for their pro rata share of Prism Mortgage's items of
taxable income, deductions, losses and credits. Therefore, the financial
statements for the periods covered by this election do not include a provision
for corporate income taxes, except for Illinois personal property replacement
taxes and other state income taxes that may be applicable, which are included
in operating expenses.

   Since the completion of its initial public offering (the "Offering") on May
28, 1999, the Company has been treated as a C corporation and has been subject
to corporate income taxation. Therefore, an income tax benefit has been
reflected in the accompanying financial statements relating to the pre-tax
losses incurred from the closing of the Offering through December 31, 1999, as
well as an income tax benefit due to the S corporation conversion. A pro forma
income tax provision has been presented as if Prism Financial had been taxable
as a C corporation for federal and state income tax purposes for the entire
year ended December 31, 1999 and for the years ended December 31, 1998 and
1997.

   The Company uses the asset and liability method of accounting for income
taxes. Under the asset and liability method, deferred tax assets and
liabilities are recognized for the future tax consequence attributable to
differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rate is recognized in income in the period of enactment.

 Discontinued operations

   The Company adopted a plan to discontinue the operations relating to its
subsidiary, Infiniti Mortgage, L.L.C. ("Infiniti") on July 1, 1999. In
accordance with Accounting Principles Board Opinion ("APB") No. 30,

                                      F-9
<PAGE>

                 PRISM FINANCIAL CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

"Reporting the Results of Operations--Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions," the Company's statements of income for the years
ended December 31, 1999, 1998 and 1997 reflect the results of operations, net
of taxes, for Infiniti under the caption "Discontinued Operations," thereby
excluding Infiniti's results of operations from continuing operations. The net
assets of Infiniti are segregated on the balance sheet as of December 31,
1999. The Company did not retroactively adjust the balance sheet as of
December 31, 1998 to segregate the net assets of Infiniti. The statements of
cash flows for the years ended December 31, 1999, 1998 and 1997 include
Infiniti's results of operations and changes in financial position. See Note
8--Discontinued Operations.

 Derivative financial instruments

   The Company utilizes a risk management program to mitigate the exposure
resulting from interest rate fluctuations. Accordingly, the Company
continuously hedges a percentage of the value of its mortgage loans held for
sale and in its pipeline, except for sub-prime loans. Derivative financial
instruments, such as forward contracts and options, are used to manage the
Company's interest rate exposure and resale pricing risk. These instruments
are accounted for under hedge accounting. Management designates the contracts
as hedges and evaluates on an initial, and ongoing basis, the effectiveness of
the derivative contract's correlation with an existing asset. Hedge gains or
losses are deferred and recognized as a component of the gain or loss on the
sale of the underlying mortgage loans or mortgage-backed securities. Hedge
losses are recognized immediately if the deferral of such losses would result
in mortgage loans held for sale and in the pipeline being valued in excess of
their estimated net realizable value. Premiums on options contracts are
amortized over the term of the option contract.

 Impairment of long-lived assets

   Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of," establishes the accounting relating to the impairment of long-
lived assets. The Company has adopted SFAS 121 for all periods presented.
Management reviews long-lived assets and certain intangibles assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The Company determined
that the carrying values of these assets as of December 31, 1999 are
recoverable in future periods.

 Accounting for transfers and servicing of financial assets and extinguishment
 of liabilities

   SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishment of Liabilities" as amended by SFAS No. 127, "Deferral of
the Effective Date of Certain Provisions," distinguishes transfers of
financial assets that are sales from transfers that are secured borrowings. A
transfer of financial assets in which the transferor surrenders control over
those assets is accounted for as a sale to the extent that consideration other
than beneficial interests in the transferred assets is received in exchange.
SFAS No. 125 also establishes standards on the initial recognition and
measurement of servicing assets and other retained interests and servicing
liabilities, and their subsequent measurement. The Company's adoption of SFAS
No. 125 on January 1, 1997 has not had a material impact on its consolidated
financial statements as of and for the years ended December 31, 1999, 1998 and
1997.

                                     F-10
<PAGE>

                 PRISM FINANCIAL CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


 Earnings per common share

   Basic earnings per common share are computed by dividing net income by the
weighted average number of common shares outstanding during the year. Diluted
earnings per share are computed by dividing net income by the weighted average
number of common shares outstanding, including the dilutive effect of common
stock equivalents. For the periods presented, common stock equivalents consist
of restricted stock granted to a key employee.

<TABLE>
<CAPTION>
                                                                           Per
                                                                          Share
                                                 Income       Shares
                                               (numerator) (denominator) Amounts
                                               ----------- ------------- -------
                                                (in thousands, except per share
                                                             data)
<S>                                            <C>         <C>           <C>
For the year ended December 31, 1999:
  Net income per common share--basic..........   $ 8,853      13,390      $0.66
                                                 =======                  =====
  Effect of dilutive securities...............                    64
                                                              ------
  Net income per common share--diluted........   $ 8,853      13,454      $0.66
                                                 =======      ======      =====
Pro forma: (Unaudited)
  Income from continuing operations per
  common share--basic.........................   $ 5,175      14,625      $0.35
                                                 =======                  =====
  Effect of dilutive securities...............                    64
                                                              ------
  Income from continuing operations per
  common share--diluted.......................   $ 5,175      14,689      $0.35
                                                 =======      ======      =====
For the year ended December 31, 1998:
  Net income per common share--basic..........   $11,095      10,568      $1.05
                                                 =======                  =====
  Effect of dilutive securities...............                    43
                                                              ------
  Net income per common share--diluted........   $11,095      10,611      $1.05
                                                 =======      ======      =====
For the year ended December 31, 1997:
  Net income per common share--basic..........   $ 2,503      10,269      $0.24
                                                 =======                  =====
  Effect of dilutive securities...............                   --
                                                              ------
  Net income per common share--diluted........   $ 2,503      10,269      $0.24
                                                 =======      ======      =====
</TABLE>

   On May 21, 1998, Prism Financial's board of directors declared a 1,000 for
one split of Prism Financial's common stock, effective May 31, 1998.
Immediately prior to the Offering, each stockholder of Prism Mortgage
exchanged all of his/her shares of common stock of Prism Mortgage for shares
of common stock of Prism Financial at an exchange ratio of one share of Prism
Mortgage common stock for 102.69 shares of common stock of Prism Financial. In
addition, the par value of Prism Financial's common stock was changed from no
par value per share to $0.01 per share, and authorized shares of common stock
were increased from one thousand to 100 million shares. All references in the
consolidated financial statements to shares and related prices, weighted
average number of shares and per share amounts have been adjusted to reflect
the split and the exchange.

   The pro forma financial information has been presented to show the effect
on the historical results of operations of the Company had it been treated as
a C corporation for federal and state income tax purposes as of the beginning
of the earliest period presented. The pro forma earnings per share has been
presented as if the shares issued at the time of the Offering were outstanding
as of January 1, 1999.

                                     F-11
<PAGE>

                 PRISM FINANCIAL CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


 Segment Reporting

   Effective January 1, 1998, the Company adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information." This statement
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to stockholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. This statement affects only financial
statement presentation. Management has determined that the Company currently
operates in the following three segments: mortgage origination, ancillary
services and tax credit syndication. See Note 9--Segment Information.

 Net Working Capital

   The Company prepares its consolidated financial statements using an
unclassified balance sheet presentation, as is customary in the mortgage
origination industry. A classified balance sheet presentation would have
aggregated current assets, current liabilities and net working capital as
follows:

<TABLE>
<CAPTION>
                                                              December 31,
                                                           --------------------
                                                             1999       1998
                                                           ---------  ---------
                                                             (in thousands)
      <S>                                                  <C>        <C>
      Current assets...................................... $ 297,118  $ 494,755
      Current liabilities.................................  (289,427)  (482,972)
                                                           ---------  ---------
      Net working capital................................. $   7,691  $  11,783
                                                           =========  =========
</TABLE>

 Stock-Based Compensation

   In connection with the Offering, the Company adopted SFAS No. 123,
"Accounting for Stock-Based Compensation," which permits entities to recognize
the compensation expense associated with the fair value of all stock-based
awards on the date of grant. Alternatively, SFAS No. 123 allows entities to
continue to apply the provisions of APB No. 25, "Accounting for Stock Issued
to Employees," and to provide pro forma disclosures as if the fair value
method defined in SFAS No. 123 had been applied. The Company has elected to
apply the provisions of APB Opinion No. 25 and provide the pro forma
disclosures of SFAS No. 123. See Note 19--Stock Options and Employee Stock
Purchase Plan.

 Accounting for the Cost of Computer Software Developed for Internal Use

   In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed for Internal Use" ("SOP 98-1"), which became effective for
the calendar year 1999. On January 1, 1999, the Company adopted SOP 98-1,
which requires the capitalization of eligible costs of specified activities
related to computer software developed or obtained for internal use.

 Prior year reclassifications

   Certain items from prior years have been reclassified to conform with the
current year presentation.

                                     F-12
<PAGE>

                 PRISM FINANCIAL CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


Recently issued accounting pronouncements

 Accounting for Derivative Instruments and Hedging Activities

   In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement
requires that all derivatives be carried on the balance sheet at fair value
and changes in the fair value of derivatives be recognized in income when they
occur, unless the derivatives qualify as hedges in accordance with the
standard. If a derivative qualifies as a hedge, a company can elect to use
hedge accounting. The type of accounting to be applied varies depending upon
whether the nature of the exposure that is being hedged is classified as one
of three hedged risks defined in the statement: change in fair value, change
in cash flows and change in foreign currency. This statement is effective for
fiscal quarters of fiscal years beginning after June 15, 2000 and cannot be
applied retroactively. The Company believes that the adoption of this
statement will not have a material effect on its financial position or results
of operations.

NOTE 3--CHANGE IN ACCOUNTING METHOD

   For furniture, fixtures and equipment purchased since January 1, 1999, the
Company has changed from a double-declining-balance method of depreciation to
the straight-line method of depreciation. This change did not have a material
effect on net income for the year ended December 31, 1999. The Company changed
its depreciation method because management believes that the straight-line
method provides a better matching of costs and revenues, and the straight-line
method is consistent with the depreciation methods used by other companies in
the industry, including the Company's recently acquired businesses.

NOTE 4--INITIAL PUBLIC OFFERING AND RELATED MATTERS

   On May 28, 1999, the Company completed the Offering of 2.5 million shares
of common stock, $0.01 par value ("Common Stock"), at a price of $14.00 per
share. The net proceeds from the Offering, after deducting the underwriting
discount and the expenses of the Offering, were approximately $30.8 million.

   The Company's December 31, 1999 balance sheet reflects the following in
connection with the Offering: (1) the increase in the Common Stock and
additional paid-in capital in connection with the shares sold in the Offering,
net of underwriting discounts and Offering expenses; (2) the payment of a
$20.0 million distribution, with respect to the Company's retained earnings
through March 31, 1999, including approximately $12.8 million paid out of the
net proceeds from the Offering, to the stockholders of record prior to the
closing of the Offering; (3) the issuance of S corporation distribution notes
of approximately $2.8 million, and subsequent payment of approximately $1.4
million of the notes in the fourth quarter, with corresponding reductions of
retained earnings and additional paid-in capital of approximately $969,000 and
$1,781,000, respectively, relating to the distribution of the Company's
earnings from April 1, 1999 through the closing of the Offering; (4) the
establishment of a deferred tax asset of approximately $1,228,000 in
connection with the termination of the Company's S corporation status; and (5)
the repayment of long-term debt of $7.5 million and partial repayments of
obligations under the Company's then-outstanding warehouse credit facilities.

NOTE 5--ACQUISITIONS

   On April 30, 1998, Prism Financial's principal stockholders contributed to
Prism Financial 100 percent of the shares of Illinois Guaranty Title ("IGT"),
a wholly-owned subsidiary. See Note 7--Related Party Transactions for more
details of the transaction.

   On September 1, 1998, Prism Financial acquired all of the outstanding
shares of Pacific Guarantee Mortgage Corporation ("Pacific Guarantee"), a
California-based mortgage banking company. The purchase price paid at closing
was approximately $4.9 million, net of approximately $3.6 million in cash
acquired in the transaction.

                                     F-13
<PAGE>

                 PRISM FINANCIAL CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   On September 30, 1998, Prism Financial acquired all of the outstanding
shares of Mortgage Market, Inc. ("Mortgage Market"), a mortgage banking
company with offices in Oregon and Washington, for approximately $1.4 million
in cash, net of approximately $2.6 million in cash acquired in the
transaction.

   At the time of the Offering, the Company issued 404,029 shares of Common
Stock, valued at approximately $5.7 million, as contingent consideration with
respect to the acquisition of Pacific Guarantee. This amount was recorded as
goodwill in the second quarter of 1999 and will be amortized over 20 years. In
addition, 44,892 shares of Common Stock, valued at approximately $628,000,
were issued and accounted for as deferred compensation with respect to the
acquisition of Pacific Guarantee. This amount will be amortized over five
years. The Company also issued 127,411 and 53,542 shares of Common Stock,
valued at approximately $1.8 million and $750,000, respectively, to the equity
value plans of Pacific Guarantee and Mortgage Market at the time of the
Offering. These amounts were accounted for as deferred compensation and will
be amortized over five years. The purchase agreements for Pacific Guarantee
and Mortgage Market provide for the payments of additional consideration and
compensation based on the future results of Pacific Guarantee, Mortgage Market
and the Company. The amount of future additional payments of consideration and
compensation cannot currently be determined.

   In April 1999, the Company acquired First City Financial Corp. ("First
City"), a Denver-based mortgage banking company, for approximately $1.8
million in cash, net of approximately $950,000 in cash acquired in the
transaction. The purchase agreement provides for contingent consideration in
each of the five years following the acquisition based on First City's net
income, if any, in each of those five years. The contingent consideration is
payable in cash or Common Stock. The amount of contingent consideration, if
any, cannot currently be determined.

   In May 1999, the Company acquired the Mid-Atlantic portion of the mortgage
banking business of a depository bank for approximately $515,000 in cash.

   In September 1999, the Company acquired Valley Financial Corporation
("Valley Financial"), a leading mortgage banker and broker in northern
California, for approximately $600,000 in cash, net of approximately $650,000
in cash acquired in the transaction. The purchase agreement provides for
contingent consideration in each of the five years following the acquisition
based on Valley Financial's net income, if any, in each of those five years.
The Company has the option to pay up to 50 percent of the contingent
consideration in Common Stock. The amount of contingent consideration, if any,
cannot currently be determined.

   In September 1999, a newly-formed subsidiary of the Company acquired
substantially all of the assets of Mortgage Express, Inc. ("Mortgage
Express"), a mortgage brokerage business in Florida, for approximately
$950,000 in cash, net of approximately $250,000 in cash acquired in the
transaction. The purchase agreement provides for contingent consideration in
each of the seven years following the acquisition based on Mortgage Express'
net income, if any, in each of those seven years. The Company has the option
to pay up to 50 percent of the contingent consideration in Common Stock. The
amount of contingent consideration, if any, cannot currently be determined.

   Also in September 1999, the Company acquired an 80 percent interest in
Apollo Housing Capital, L.L.C. ("Apollo") for approximately $1.6 million in
cash, net of approximately $380,000 in cash acquired in the transaction.
Apollo structures and sells interests in investment portfolios composed of
affordable housing and historic rehabilitation tax credits. The Company also
agreed to pay an additional $3.3 million of initial consideration, contingent
upon the attainment of various cash flow targets by Apollo following the
closing of this acquisition. In addition, the purchase agreement provides for
contingent consideration in each of the eight years following the acquisition
based on Apollo's net income, if any, in each of those eight years. The 20
percent interest in Apollo not acquired by the Company is currently held by
AHC Holdings, L.L.C. ("AHC"). AHC has

                                     F-14
<PAGE>

                 PRISM FINANCIAL CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

the right to require the Company to purchase the remaining 20 percent interest
in Apollo beginning on January 1, 2004 or upon a change of control of Prism
Financial. If AHC exercises this right, the Company would pay a purchase price
based on a multiple of Apollo's average earnings during certain historical
periods. If AHC requires the Company to purchase all or part of its remaining
interest in Apollo, the Company will have the right to pay up to 50 percent of
the purchase price in shares of its Common Stock.

   Each of the Company's acquisitions discussed above has been accounted for
using the purchase method of accounting. Accordingly, the accompanying
consolidated statements of income do not include any revenues or expenses of
the acquired companies prior to the respective closing dates of the
acquisitions.

   For the year ended December 31, 1998, the Company recorded goodwill of
approximately $2.9 million related to the acquisitions of Pacific Guarantee
and Mortgage Market. For the year ended December 31, 1999, the Company
recorded goodwill of approximately $12.7 million, of which approximately $8.3
million related to additional purchase price paid for 1998 acquisitions,
including $5.7 million of contingent consideration issued to Pacific Guarantee
in conjunction with the Offering, and approximately $4.4 million related to
1999 acquisitions.

   The following unaudited pro forma summary presents the Company's results of
operations as if the acquisitions accounted for using the purchase method had
occurred at the beginning of each period presented. This summary is provided
for informational purposes only. It does not necessarily reflect the actual
results that would have occurred had the acquisition been made as of those
dates or of results that may occur in the future:

<TABLE>
<CAPTION>
                                                                1999     1998
                                                              -------- --------
                                                               (in thousands,
                                                              except per share
                                                                  amounts)
      <S>                                                     <C>      <C>
      Revenues............................................... $168,744 $183,781
      Net income.............................................   10,796   15,176
      Net income per share--diluted.......................... $   0.80 $   1.43
</TABLE>

NOTE 6--INVESTMENTS IN AFFILIATED BUSINESS ARRANGEMENTS AND INVESTEE
        PARTNERSHIPS

   During 1999, the Company terminated its participation in ABAs, which
previously provided certain mortgage origination services and were organized
as limited liability corporations and joint ventures. The Company previously
owned interests, ranging up to 50 percent, in several ABAs. Under these
arrangements, the Company was reimbursed for certain operating costs incurred.

   Condensed financial information of the combined ABAs as of and for the
years ended December 31, 1998 and 1997 is as follows:

<TABLE>
<CAPTION>
                                                                    1998   1997
                                                                   ------ ------
                                                                        (in
                                                                    thousands)
      <S>                                                          <C>    <C>
      Assets...................................................... $  344 $  110
                                                                   ====== ======
      Liabilities................................................. $    9 $  --
      Members' equity.............................................    335    110
                                                                   ------ ------
                                                                   $  344 $  110
                                                                   ====== ======
      Revenue..................................................... $1,434 $3,070
      Expenses....................................................    980  2,046
                                                                   ------ ------
      Net income.................................................. $  454 $1,024
                                                                   ====== ======
</TABLE>

   As of December 31, 1999, the Company owned limited partner interests in 22
investee partnerships, which were formed to acquire, develop, own, construct,
renovate, lease and operate property as qualified low income housing or
qualified historic tax credit structures. The Company's interests in these
partnerships ranged between 98.99% and 99.99%.

                                     F-15
<PAGE>

                 PRISM FINANCIAL CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   Presented below is condensed financial information of the investee
partnerships as of and for the year ended December 31, 1999.

<TABLE>
<CAPTION>
                                                                       1999
                                                                  --------------
                                                                  (in thousands)
      <S>                                                         <C>
      Assets.....................................................    $124,037
                                                                     ========
      Liabilities................................................      48,772
      Partners' capital..........................................      75,265
                                                                     --------
                                                                     $124,037
                                                                     ========
      Revenue....................................................    $    246
      Expenses...................................................          88
                                                                     --------
      Net income.................................................    $    158
                                                                     ========
</TABLE>

   As of December 31, 1999, the Company held the following investments through
its investee partnerships:

<TABLE>
<CAPTION>
                                                                     As of
                                                               December 31, 1999
                                                               -----------------
                                                                (in thousands)
      <S>                                                      <C>
      Jefferson Chase Limited Partnership, Columbus, OH......       $ 2,723
      Emmetsburg Partners L.P., Emmetsburg, IA...............           892
      Dickson Partners, L.P., Dickson, TN....................         1,685
      Watseka Senior Apartments Limited Partnership, Wateska,
       IL....................................................         1,854
      Montgomery Housing Partners I, Ltd., Montgomery, AL....         1,878
      Cedarburg Seniors Apartments II, LLC, Cedarburg, WI....         2,028
      Robins Housing Partners I, Ltd., Warner Robins, GA.....           604
      Belmont Village, L.P., Chicago, IL.....................         5,758
      Cedar Wood Limited Partnership, Mansfield, OH..........         2,291
      Oak Wood Limited Partnership, Lexington, OH............         2,013
      River Chase Limited Partnership, Chillicothe, OH.......         1,957
      Sycamore Creek Limited Partnership, Sydney, OH.........         2,183
      Mercy Franciscan at Winton Woods I, L.P., Cincinnati,
       OH....................................................         4,314
      Coulter Court Limited Partnership, Aurora, IL..........         3,729
      Shepherd Hills Apartments Limited Partnership, Las
       Vegas, NV.............................................         5,237
      Cultural Campus Limited Partnership, Hot Springs, AZ...         2,425
      Timberlake Limited Partnership, Vandalia, OH...........         3,639
      Goodell Place Limited Partnership, Maywood, IL.........         1,577
      Madison Park Place Limited Partnership, Springfield,
       IL....................................................        12,271
      Union Square Limited Partnership, Springfield, IL......         6,453
      Huffman Senior Apartments Limited Partnership, Dayton,
       OH....................................................         4,631
      Brenwood Park Senior Community LLC, Franklin, WI.......         3,928
                                                                    -------
          Total..............................................       $74,070
                                                                    =======
</TABLE>

NOTE 7--RELATED PARTY TRANSACTIONS

   In January 1996, the Company loaned $100,000 each to two of its
stockholders to purchase outstanding common shares of the Company from another
stockholder. Since January 1, 1997, the loans accrued interest at 8.25%
annually. The principal was payable in five annual installments of $20,000,
plus interest, beginning December 31, 1997. At December 31, 1998, the balance
due from the two stockholders on these loans was $120,000. Each stockholder
repaid the remaining principal and accrued interest balance of the loans to
the Company in May 1999.

                                     F-16
<PAGE>

                 PRISM FINANCIAL CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   On April 30, 1998, IGT became a wholly-owned subsidiary of Prism Financial
as a result of the transfer of stockholders' interests in IGT to Prism
Financial. The stockholders of IGT received no consideration for this
transaction. Prior to this transaction, IGT stock was fully held by Prism
Financial's principal stockholders. IGT is a full-service provider of
residential title services to in-house and third party customers. Under
generally accepted accounting principles, transfers of assets between
companies under common control are valued at the predecessor basis. The net
book value of the assets transferred at April 30, 1998 was zero.

   The Company paid management fees for the expense of shared services in
1999, 1998 and 1997 of approximately $115,000, $187,000 and $55,000,
respectively, to a company formerly controlled by the late Bruce C. Abrams,
Chief Executive Officer and Chairman of the Board of Directors of Prism
Financial, which is now controlled by Mr. Abrams' estate.

   The estate of Bruce C. Abrams owns a one-third equity interest, and a
director of the Company has an indirect equity interest, in an Illinois
limited partnership, which is the landlord of an office building in Chicago,
Illinois that is leased by the Company. This board member of Prism Financial
is also on the board of directors for the company from which Prism Financial
subleases the office space. The Company paid sublease payments of
approximately $422,000 to the sublessor during 1999.

   Prism Financial acquired 80 percent of the membership interests of Apollo
in September 1999. See Note 5--Acquisitions. Fifty percent of the interests in
Apollo were owned by AHC and 50 percent were owned by Vision AHC, L.L.C.
("Vision"), an entity formerly controlled by the late Bruce C. Abrams and now
controlled by Bruce C. Abrams' estate. Vision did not receive any cash from
the Company upon the closing of the transaction. Vision is entitled to receive
initial consideration of up to $3.3 million in cash only if Apollo satisfies
conditions relating to available cash flows following the closing. In
addition, Vision will receive a percentage of Apollo's net cash flow in 1999
following the acquisition and will receive contingent consideration equal to a
percentage of Apollo's pre-tax net income in each of the years 2000 through
2007.

   At the time of the closing of Prism Financial's acquisition of Apollo,
Apollo had outstanding obligations of $500,000 under a promissory note payable
to Vision. The note was paid in full in the third quarter of 1999.

   During 1999, the Company made $21.4 million in distributions to
stockholders of record prior to the closing of the Offering, relating to the
Company's retained earnings through May 28, 1999 (the termination of the S
corporation status). The Company also recorded a note payable of $1.4 million
to reflect the undistributed S corporation earnings as of December 31, 1999.

   As of December 31, 1999, the Company owned limited partnership interests in
two investee partnerships that were purchased from a real estate development
company formerly controlled by the late Bruce C. Abrams totaling $18.7
million. This real estate development company sold limited interests in low-
income housing properties to Apollo in 1999, with one of these transactions
occurring before the Company's acquisition of Apollo. See Note 6--Investments
in Affiliated Business Arrangements and Investee Partnerships for further
discussion of investee partnerships. Additionally, the Company owed capital
contribution notes totaling $17.1 million as of December 31, 1999 pursuant to
limited partnership interests in the two investee partnerships discussed
above. See Note 15--Capital Contributions Payable for further discussion of
capital contribution notes.

NOTE 8--DISCONTINUED OPERATIONS

   On July 1, 1999, the Company adopted a plan to discontinue the operations
relating to its subsidiary, Infiniti. Infiniti was created to originate and
sell sub-prime mortgages. As a result of the discontinuance of Infiniti's
operations, the Company no longer originates loans from specialized retail
branches focusing primarily on sub-prime mortgages. The Company has accounted
for this business as a discontinued operation in the accompanying consolidated
financial statements for all periods presented, with a measurement date of
July 1, 1999. For the year ended December 31, 1999, the Company reported a
loss on disposal of this business, net of income taxes, of approximately
$853,000.

                                     F-17
<PAGE>

                 PRISM FINANCIAL CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   The following table presents approximate revenues and net loss for the non-
prime business segment for the period of January 1, 1999 to June 30, 1999 and
for the years ended December 31, 1998 and 1997:

<TABLE>
<CAPTION>
                           January 1, 1999     Year Ended        Year Ended
                           to June 30, 1999 December 31, 1998 December 31, 1997
                           ---------------- ----------------- -----------------
                                              (in thousands)
      <S>                  <C>              <C>               <C>
      Revenues............      $2,297           $ 5,176            $ 590
                                ======           =======            =====
      Net loss............      $ (244)          $(1,001)           $(333)
                                ======           =======            =====
</TABLE>

   The Company sold no assets to outside parties and was relieved of no
liabilities in conjunction with the discontinuance of the sub-prime business
segment in 1999. The following table presents the summarized financial
position of the sub-prime business segment as of December 31, 1999:

<TABLE>
<CAPTION>
                                                              As of December 31,
                                                                     1999
                                                              ------------------
                                                                (in thousands)
      <S>                                                     <C>
      Loans held for sale....................................       $3,347
      Loan fees and other receivables, net...................          263
      Deferred tax asset.....................................          589
      Other assets...........................................            8
      Furniture, fixtures and equipment, net.................          132
      Warehouse lines of credit..............................       (1,645)
      Interest payable.......................................          (23)
      Accrued expenses and other liabilities.................         (898)
                                                                    ------
      Net assets of discontinued operations..................       $1,773
                                                                    ======
</TABLE>

                                     F-18
<PAGE>

                 PRISM FINANCIAL CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


NOTE 9--SEGMENT INFORMATION

   The Company operates primarily in the mortgage origination industry. The
Company has two subsidiaries that provide mortgage-related ancillary services.
As discussed in Note 7--Related Party Transactions, IGT provides title
services to in-house and third party customers and was contributed to Prism
Financial by the Company's principal stockholders on April 30, 1998. Lender's
Mortgage Services, L.L.C. ("LMS") sells products and services necessary in
obtaining a loan, such as appraisals, credit reports, flood zone determination
and title insurance. The Company formed LMS during the second quarter of 1999.
Additionally, as discussed in Note 5--Acquisitions, the Company owns an 80%
interest in Apollo, which is an affordable housing and historic rehabilitation
tax credit syndication business. Selected financial information of the
mortgage origination, ancillary services and tax credit syndication businesses
is presented below.

<TABLE>
<CAPTION>
                           Mortgage   Ancillary Tax Credit
                          Origination Services  Syndication Adjustments Consolidated
                          ----------- --------- ----------- ----------- ------------
                                                (in thousands)
<S>                       <C>         <C>       <C>         <C>         <C>
Revenues:
For the year ended
 December 31, 1999......   $146,544    $2,843     $ 3,519     $(2,247)    $150,659
For the year ended
 December 31, 1998......     84,848       818         --          --        85,666
For the year ended
 December 31, 1997......     26,763       --          --          --        26,763
Income from continuing
operations before income
taxes:
For the year ended
 December 31, 1999......   $  4,727    $1,438     $ 2,318     $   --      $  8,483
For the year ended
 December 31, 1998......     11,530       566         --          --        12,096
For the year ended
 December 31, 1997......      2,837       --          --          --         2,837
Identifiable assets:
At December 31, 1999....   $251,310    $  860     $80,024     $  (591)    $331,603
At December 31, 1998....    503,100       522         --          --       503,622
</TABLE>

   The adjustments reflected above relate to the following: (1) fees charged
for ancillary services provided to the Company's mortgage origination segment
by LMS in the amount of $1,911,000 for 1999; (2) management fee of $336,000
charged to Apollo by the mortgage origination segment for 1999; and (3) a
receivable of $591,000 due to LMS by the mortgage origination segment as of
December 31, 1999.

   The Company operates entirely in North America. Accordingly, no information
on geographic segments is presented.

                                     F-19
<PAGE>

                  PRISM FINANCIAL CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


NOTE 10--FURNITURE, FIXTURES AND EQUIPMENT

   Furniture, fixtures and equipment consisted of the following at December 31,
1999 and 1998:

<TABLE>
<CAPTION>
                                                                  1999    1998
                                                                 ------- ------
                                                                 (in thousands)
      <S>                                                        <C>     <C>
      Furniture and equipment..................................  $ 3,771 $2,405
      Leasehold improvements...................................    1,543    897
      Computer equipment and software..........................   10,318  2,956
                                                                 ------- ------
                                                                  15,632  6,258
      Less accumulated depreciation............................    4,447  1,974
                                                                 ------- ------
          Total................................................  $11,185 $4,284
                                                                 ======= ======
</TABLE>

   Depreciation expense for the years ended December 31, 1999, 1998 and 1997
was $2,664,000, $1,429,000 and $326,000, respectively.

NOTE 11--OTHER ASSETS

   Other assets as of December 31, 1999 and 1998 were comprised of the
following:

<TABLE>
<CAPTION>
                                                                  December 31,
                                                                  -------------
                                                                   1999   1998
                                                                  ------ ------
                                                                       (in
                                                                   thousands)
      <S>                                                         <C>    <C>
      Restricted cash............................................ $1,202 $1,000
      Notes and interest receivable..............................    --     441
      Security deposits..........................................    522    265
      Prepaid expenses...........................................  1,420  1,039
      Deferred compensation, net.................................  2,793    --
      Deferred tax assets........................................  3,079    --
      Other......................................................    902     20
                                                                  ------ ------
                                                                  $9,918 $2,765
                                                                  ====== ======
</TABLE>

                                      F-20
<PAGE>

                 PRISM FINANCIAL CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


NOTE 12--WAREHOUSE LINES OF CREDIT AND OTHER SHORT-TERM BORROWINGS:

   As of December 31, 1999, the Company had two warehouse lines of credit with
financial service companies, which have been used for warehousing loans prior
to sale to investors (the "Mortgage Origination Warehouse Facility") and
acquiring investee partnerships (the "Tax Syndication Warehouse Facility").
The Company had several warehouse lines of credit that expired, and were not
renewed, during 1999 and 1998. The balances in the Company's lines of credit
as of December 31, 1999 and 1998 are presented below:

<TABLE>
<CAPTION>
                                                                1999     1998
                                                              -------- --------
                                                               (in thousands)
<S>                                                           <C>      <C>
Advances under $250,000,000 Mortgage Origination Warehouse
 Facility, paying monthly interest at the Federal Funds
 Funding Rate plus 1.125%, expiring March 31, 2000..........  $176,116 $    --
Advances under $30,000,000 Tax Syndication Warehouse
 Facility, paying monthly interest at either the bank's
 Prime Rate or LIBOR plus 2.25%, expiring June 30, 2001.....    15,487      --
Advances under $15,600,000 warehouse line of credit, paying
 monthly interest at LIBOR plus 1.75%, expired June 1, 1999
 and no additional loans have been funded from this line
 since maturity.............................................       --       183
Advances under $50,000,000 warehouse line of credit, paying
 monthly interest at GE commercial paper rate + 1.25%,
 expired April 30, 1999 and no additional loans have been
 funded from this line since maturity.......................       --    92,490
Advances under $50,000,000 warehouse line of credit, paying
 monthly interest at average LIBOR + 1.50%, expired May 31,
 1999 and no additional loans have been funded from this
 line since maturity........................................       --    46,095
Advances under $5,900,000 warehouse line of credit, paying
 monthly interest at Bank of America prime rate, expired May
 31, 1999 and no additional loans have been funded from this
 line since maturity........................................       --     1,557
Advances under $13,205,000 warehouse line of credit, paying
 monthly interest at Prime Rate. The line of credit expired
 on November 30, 1998 and no additional loans have been
 funded from this line since maturity.......................       --     8,815
Advances under $25,000,000 warehouse line of credit, paying
 monthly interest at LIBOR plus 2.50%. The line of credit
 expired March 31, 1999 and no additional loans have been
 funded from this line since maturity.......................       --     3,657
Advances under $25,000,000 Warehouse Line of Credit, paying
 monthly interest at GE commercial paper rate + 1.25%,
 expired April 30, 1999 and no additional loans have been
 funded from this line since maturity.......................       --    17,420
                                                              -------- --------
    Total...................................................  $191,603 $170,217
                                                              ======== ========
</TABLE>

   The weighted average interest rate of the Mortgage Origination Warehouse
Facility in 1999 and 1998 was 6.29% and 7.10%, respectively. The weighted
average interest rate of the Tax Syndication Warehouse Facility in 1999 was
7.55%.

   Under the terms of the Mortgage Origination Warehouse Facility, borrowings
have no stated maturity other than the repayment of obligations coincident
with the principal payments of the underlying loans. Mortgage loans held for
sale are pledged as collateral on this line of credit. Upon the sales of the
mortgage loans, the warehouse lines of credit are repaid. This agreement
contains various financial covenants, and as of December 31, 1999, the Company
was in compliance with all covenants relating to this outstanding line of
credit.


                                     F-21
<PAGE>

                 PRISM FINANCIAL CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

   In addition, the Tax Syndication Warehouse Facility had irrevocable letters
of credit totaling $9,287,000 outstanding as of December 31, 1999. Pursuant to
the agreement, any and all limited partnership interests purchased by the
Company using this facility are pledged as collateral on this line of credit.
The Company is required to repay each borrowing within a stated amount of time
pursuant to the agreement. This agreement contains various financial
covenants, and as of December 31, 1999, the Company was in compliance with all
covenants relating to this outstanding line of credit. The Tax Syndication
Warehouse Facility has a monthly commitment fee based on 0.375% of the average
daily unused portion of the facility.

   The Company also has a $10,000,000 operating line of credit on a revolving
basis from a commercial bank. This revolving line of credit is secured by a
pledge of the Company's assets, other than loans securing the warehouse
facilities. As of December 31, 1999, the Company had approximately $5,923,000
outstanding under this revolving line of credit, which expires on October 5,
2000.

NOTE 13--LOANS SOLD UNDER AGREEMENTS TO REPURCHASE

   The Company delivers loans to Fannie Mae under its "As soon as pooled/early
purchase Option" ("ASAP Plus"). Under the ASAP Plus program, Fannie Mae funds
the Company on a continual, whole-loan basis upon receipt of mortgage
collateral (note assignment). The funding price is determined by the daily
Fannie Mae 30-day cash window price. The Company agrees to deliver mortgage
loans to Fannie Mae and assigns any related trades. The Company then
redelivers all loans in the ASAP Plus program to reflect related forward
pricing on a semi-monthly basis. Fannie Mae purchases the mortgage loans for
cash upon receipt of complete and accurate mortgage pool documentation and
other documentation required by Fannie Mae for the forward trade.

   On December 31, 1999, Prism Financial had an outstanding balance of
approximately $11.9 million on the ASAP Plus line in repurchase agreements
with Fannie Mae, with interest accruing at 5.11%. The underlying loans were
sold during 2000.

NOTE 14--LONG-TERM DEBT

   Long-term debt outstanding at December 31, 1999 and 1998 consisted of the
following:

<TABLE>
<CAPTION>
                                                                     1999  1998
                                                                     ---- ------
                                                                         (in
                                                                     thousands)
<S>                                                                  <C>  <C>
Term note with a commercial bank, maturing July 2003...............  $--  $3,425
Notes payable to stockholders, with maturities ranging from 2000 to
 2002, paying monthly interest at a fixed rate of 10.00%,
 unsecured.........................................................   --     850
Notes payable to private investors, maturing in 2002, paying
 monthly interest at a fixed rate of 10.00%, unsecured.............   --     400
Notes payable to various lending institutions with maturities
 ranging from 2000 to 2003, paying monthly interest ranging from
 6.30% to 33.92%, collateralized by various equipment..............   222    352
                                                                     ---- ------
    Total..........................................................   222  5,027
    Less: current portion of long-term debt........................   146    729
                                                                     ---- ------
                                                                     $ 76 $4,298
                                                                     ==== ======
</TABLE>

   Long-term debt principal repayments are due as follows:


<TABLE>
<CAPTION>
      Years ending December 31:                                        Amount
      -------------------------                                    --------------
                                                                   (in thousands)
      <S>                                                          <C>
      2000........................................................      $146
      2001........................................................        59
      2002........................................................        14
      2003........................................................         3
                                                                        ----
          Total...................................................      $222
                                                                        ====
</TABLE>


                                     F-22
<PAGE>

                 PRISM FINANCIAL CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

NOTE 15--CAPITAL CONTRIBUTION NOTES PAYABLE

   The Company has entered into capital contribution notes pursuant to the
purchase of its limited partnership interests in certain investee
partnerships. See Note 6--Investments in Affiliated Business Arrangements and
Investee Partnerships. These notes are secured by the respective limited
partnership interests including, without limitation, the Company's rights to
profits, losses, tax credits and other items allocated by such investee
partnerships.

   As of December 31, 1999, the Company had non-interest bearing notes payable
for capital contributions as follows:

<TABLE>
<CAPTION>
                                                                    As of
                                                              December 31, 1999
                                                              -----------------
                                                               (in thousands)
      <S>                                                     <C>
      Jefferson Chase Limited Partnership, Columbus, OH.....       $ 1,973
      Emmetsburg Partners L.P., Emmetsburg, IA..............           310
      Dickson Partners, L.P., Dickson, TN...................         1,685
      Watseka Senior Apartments Limited Partnership,
       Wateska, IL..........................................           360
      Montgomery Housing Partners I, Ltd., Montgomery, AL...         1,502
      Cedarburg Seniors Apartments II, LLC, Cedarburg, WI...         1,318
      Robins Housing Partners I, Ltd., Warner Robins, GA....           469
      Belmont Village, L.P., Chicago, IL....................           688
      Cedar Wood Limited Partnership, Mansfield, OH.........         2,291
      Oak Wood Limited Partnership, Lexington, OH...........         2,013
      River Chase Limited Partnership, Chillicothe, OH......         1,957
      Sycamore Creek Limited Partnership, Sydney, OH........         2,183
      Mercy Franciscan at Winton Woods I, L.P., Cincinnati,
       OH...................................................         4,314
      Coulter Court Limited Parnership, Aurora, IL..........         3,247
      Shepherd Hills Apartments Limited Partnership, Las
       Vegas, NV............................................         5,237
      Cultural Campus Limited Partnership, Hot Springs, AZ..         2,425
      Timberlake Limited Partnership, Vandalia, OH..........         3,639
      Goodell Place Limited Partnership, Maywood, IL........         1,183
      Madison Park Place Limited Partnership, Springfield,
       IL...................................................        11,748
      Union Square Limited Partnership, Springfield, IL.....         5,314
      Huffman Senior Apartments Limited Partnership, Dayton,
       OH...................................................         4,631
      Brenwood Park Senior Community LLC, Franklin, WI......         3,187
                                                                   -------
          Total.............................................       $61,674
                                                                   =======
</TABLE>

NOTE 16--CAPITAL TRANSACTIONS

   On October 2, 1998, Prism Financial issued five bridge notes totaling $2.5
million. One $1.25 million note was issued to GEM Value/Prism L.L.C. The
remaining four notes were issued to a group of private investors. The funds
from the bridge notes were used for certain acquisitions, as described in Note
5--Acquisitions. On December 31, 1998, Prism Financial received from the
private investor group a capital infusion of $1.25 million and converted the
group's $1.25 million bridge note into common shares. Prism Financial issued
574,756 shares to this private investor group in exchange for their aggregate
investment of $2.5 million. The capital infusion was used to repay the GEM
Value/Prism L.L.C. $1.25 million bridge note.

                                     F-23
<PAGE>

                 PRISM FINANCIAL CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


NOTE 17--LEASE COMMITMENTS

   The Company leases its offices under various noncancelable agreements that
expire through 2006 and require various minimum annual rental payments. The
Company also leases office equipment under operating leases expiring through
2004. The total future minimum lease payments under these leases are as
follows:

<TABLE>
<CAPTION>
      Years ending December 31:                                        Amount
      -------------------------                                        ------
                                                                   (in thousands)
      <S>                                                          <C>
      2000........................................................    $ 6,538
      2001........................................................      5,276
      2002........................................................      3,764
      2003........................................................      2,118
      2004........................................................        480
      Thereafter..................................................        159
                                                                      -------
          Total...................................................    $18,335
                                                                      =======
</TABLE>

   Total expense under all operating leases for 1999, 1998 and 1997 was
$8,253,000, $3,249,000 and $897,000, respectively.

NOTE 18--OFF-BALANCE-SHEET RISK AND CONTINGENCIES

   The Company enters into commitments to fund mortgage loans, whole-loan sale
commitments, forward contracts on mortgage loans and option contracts on
Treasury securities in the normal course of business. These financial
instruments involve, to varying degrees, elements of credit and interest-rate
risk in excess of the amount recorded on the balance sheet.

 Commitments to fund mortgage loans

   The Company regularly enters into commitments to fund mortgage loans at a
future date, subject to compliance with stated conditions. The commitments, if
funded, are collateralized primarily by residential real estate. The
obligation to lend may be voided if the customer's financial condition
deteriorates or if the customer fails to meet certain conditions. Commitments
to originate mortgage loans do not necessarily reflect future cash
requirements since some of the commitments will not be drawn upon before
expiration. The total contract amount for commitments to fund mortgage loans
(committed pipeline) as of December 31, 1999 and 1998 was $156.7 million and
$268.8 million, respectively.

   The Company evaluates each customer's credit worthiness and obtains
appraisals to support the value of the underlying collateral. Commitments to
originate mortgage loans have off-balance-sheet risk to the extent the Company
does not have matching commitments to sell loans. In a rising interest rate
environment, the Company is exposed to lower of cost or market valuation
adjustments. The Company reduces interest rate exposure by limiting these
commitments to varying periods of less than 60 days.

 Derivative financial instruments

   In order to offset the risk that a change in interest rates will result in
a decrease in the value of the Company's current mortgage loan inventory or
its loan commitments, the Company enters into hedging transactions. The
Company's hedging policies generally require that the maximum portion of its
committed pipeline that may close be hedged with forward contracts for the
delivery of loans or options on Treasury securities. The mortgage loans that
are to be delivered under these contracts are fixed or adjustable-rate,
corresponding with the composition of the Company's inventory and committed
pipeline. At December 31, 1999 and 1998, the Company had open forward
commitments with a total notional amount of approximately $151.4 million and
$670.0 million, respectively, to sell mortgage loans with varying settlement
dates not extending beyond February 2000. On December 31, 1999, the Company
had two call options to buy Treasuries through February 2000, with a total
notional amount of $40.0 million. No options were outstanding at December 31,
1998. The Company also hedges some of its loans held for sale by using whole-
loan sale commitments to ultimate investors, which totaled $152.1 million and
$28.4 million at December 31, 1999 and 1998, respectively.

                                     F-24
<PAGE>

                 PRISM FINANCIAL CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   While the Company does not anticipate nonperformance by any counterparty,
it is exposed to potential credit losses in the event of nonperformance by the
counterparties to the various instruments. The Company manages credit risk
with respect to forward contracts and whole-loan sale commitments by entering
into agreements with entities approved by senior management. These entities
include Wall Street firms having primary dealer status, money center banks and
other nationally recognized financial institutions. The Company's exposure to
credit risk in the event of default by the counterparty is the difference
between the contract price and the current market price.

   Since the Company only purchases options that allow it, at its option, to
purchase or sell a financial instrument, the exposure of the Company at any
time is limited to the premium paid to purchase the option.

 Mortgage loans sold with recourse

   Through the Company's various correspondent agreements with financial
institutions, it may be required to repurchase mortgage loans sold to a
financial institution if significant defects in the loan documentation are
subsequently discovered by the financial institution or if the borrower
defaults on the first payment. If a repurchase request is made, the Company
will either attempt to remedy the deficiency and have the investors rescind
the rejection of the mortgage loans, or refinance or sell the mortgage loan,
sometimes at a loss.

   Additionally, in connection with some sub-prime loan sales, the Company may
be required to refund a portion of the gain recognized on the sale of a loan
to investors if the loan is repaid within one year of sale.

 Litigation

   The Company is a defendant in a number of legal proceedings arising in the
normal course of business. Management believes, based on the opinion of legal
counsel, that the final disposition of these matters will not have a material
adverse effect on the Company's financial position or results of operations.

NOTE 19--STOCK OPTIONS AND EMPLOYEE STOCK PURCHASE PLAN

   In March 1999, the Company's board of directors adopted the 1999 Omnibus
Stock Incentive Plan (the "1999 Omnibus Plan") and the Company's employee
stock purchase plan (the "Stock Purchase Plan"). Prior to the Offering in May
1999, the Company's stockholders approved the 1999 Omnibus Plan, with an
aggregate of 1,500,000 shares of Common Stock reserved for issuance, as well
as the Stock Purchase Plan, with an aggregate of 750,000 shares of Common
Stock reserved for issuance.

   The 1999 Omnibus Plan provides for the issuance of stock-based incentive
awards, including stock options, stock appreciation rights, limited stock
appreciation rights, restricted stock, deferred stock and performance shares.
Stock options issued under this plan have an exercise price equal to the
closing market price of the Common Stock on the date of grant and have a legal
life of ten years. The stock options granted in 1999 vest annually over a
period ranging from two to five years, beginning one year from the date of
grant.

   The Company applies APB Opinion No. 25 in accounting for the 1999 Omnibus
Plan and the Stock Purchase Plan. Accordingly, no compensation cost has been
recognized for the Company's issuance of options to employees pursuant to the
1999 Omnibus Plan or in conjunction with the Stock Purchase Plan.

                                     F-25
<PAGE>

                 PRISM FINANCIAL CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   Had compensation cost for the 1999 Omnibus Plan and the Stock Purchase Plan
been determined consistent with SFAS No. 123, the Company's net income and net
earnings per share would have been the pro forma amounts indicated below for
the year ended December 31, 1999:

<TABLE>
<CAPTION>
                                                                   1999
                                                           ---------------------
                                                           (in thousands, except
                                                              per share data)
      <S>                                                  <C>
      Net income
        As reported.......................................        $8,853
        Pro forma.........................................         3,513
      Net earnings per share, basic
        As reported.......................................        $ 0.66
        Pro forma.........................................          0.26
      Net earnings per share, diluted
        As reported.......................................        $ 0.66
        Pro forma.........................................          0.26
</TABLE>

   Under SFAS No. 123, the pro forma compensation expense related to the 1999
Omnibus Plan and Stock Purchase Plan, before the effects for income taxes, was
approximately $8,750,000 for 1999.

   In 1999, the Company began offering the Stock Purchase Plan to its
employees who work more than 20 hours a week, work more than five months a
year and receive a Form W-2 from the Company. Under this plan, the Company is
authorized to issue up to 750,000 shares of Common Stock, plus annual
increases beginning in or after 2000 equal to the lesser of 500,000 shares, 3%
of the outstanding shares on such date, or a lesser amount determined by the
board of directors. Under the terms of the Stock Purchase Plan, employees may
elect two times a year to withhold between one and 10 percent of their
eligible compensation through regular payroll deductions to purchase Common
Stock, subject to limitations of the Stock Purchase Plan and Internal Revenue
Service. The purchase price is 90 percent of the lower of the price at the
grant date, which is the beginning of a six month deduction period (February 1
or August 1) or the purchase date, which is the end of a six month deduction
period (January 31 or July 31). As of December 31, 1999, approximately seven
percent of eligible employees were participating in the Stock Purchase Plan.
The first purchase date for the Stock Purchase Plan was January 31, 2000.

   The fair value of the stock option grants is estimated using the Black-
Scholes option-pricing model, with the following weighted-average assumptions
used for stock option grants in 1999: weighted average option price, which
equals the fair market value at date of grant, of $11.82; expected dividend
yield of 0%; expected volatility of 121.74%; risk-free interest rate of 6.50%;
and expected life of six years. The fair value of the employees' purchase
rights pursuant to the Stock Purchase Plan are estimated using the Black-
Scholes option-pricing model, with the following weighted-average assumptions
used for purchase rights granted in 1999: average fair market value of $8.89;
expected dividend yield of 0%; expected volatility of 121.74%; average risk-
free interest rate of 4.79%; and the expected life of six months.

   Stock option plan activity during the year ended December 31, 1999 was as
follows:

<TABLE>
<CAPTION>
                                                                       Weighted
                                                                       Average
                                                                       Exercise
                           Fixed Options                      Shares    Price
                           -------------                      -------  --------
      <S>                                                     <C>      <C>
      Outstanding at beginning of year.......................     --    $  --
      Granted................................................ 734,210    13.70
      Exercised..............................................     --       --
      Canceled............................................... (40,570)   13.99
                                                              -------
      Outstanding at end of year............................. 693,640    13.69
                                                              =======
      Options exercisable at year-end........................     --
                                                              =======
      Weighted-average fair value of options granted during
       the year.............................................. $ 11.82
</TABLE>


                                     F-26
<PAGE>

                 PRISM FINANCIAL CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

   The following table summarizes information about fixed stock options
outstanding at December 31, 1999:

<TABLE>
<CAPTION>
                                  Options outstanding           Options exercisable
                          ----------------------------------- -----------------------
                                  Weighted-avg.
                          Number    Remaining   Weighted-avg.           Weighted-avg.
                            of     contractual    exercise     Number     exercise
Range of Exercise prices  Shares      life          price     of Shares     price
------------------------  ------  ------------- ------------- --------- -------------
<S>                       <C>     <C>           <C>           <C>       <C>
$ 5.6250-$ 9.7500.......   14,600     10.00        $ 5.63        --         $--
$10.0000-$12.7500.......   20,710      9.86         10.00        --          --
$12.8125-$13.7500.......   11,830      9.83         12.81        --          --
$14.0000-$17.6250.......  646,500      9.40         14.00        --          --
</TABLE>

NOTE 20--EMPLOYEE BENEFITS

 Defined Contribution Plan

   The Company has a defined contribution retirement plan covering
substantially all employees. Participants may elect to contribute a percentage
of their annual compensation up to limits established by the Internal Revenue
Service. The Company may, at its discretion, make contributions to the plan.
The Company did not make any contributions to the plan during 1999, 1998 or
1997.

 Profit Sharing Plan

   On January 31, 1998, the Company adopted a profit sharing plan. Under this
plan, the Company awards qualified employees a specified number of incentive
share units ("ISUs"), contingent upon reaching predefined performance goals
over a period of three years. The Company deemed these goals to be met as of
January 2000. The maximum total award, which could be paid out under the plan,
is $3.2 million. ISUs are credited to the qualified employees based on
commissions or compensation earned during the three-year period, as defined in
the plan agreement. Qualified employees are fully vested in their incentive
share units over three years of subsequent service, as defined in the plan
agreement. This vesting may be accelerated by one year based on the attainment
of an additional performance goal. For the years ended December 31, 1999 and
1998, no compensation expense was recognized under the plan.

NOTE 21--INCOME TAXES

   Total income tax benefit for the period from May 28, 1999 (termination of S
corporation status) through December 31, 1999 was allocated as follows:
<TABLE>
<CAPTION>
                                                                      1999
                                                                 --------------
                                                                 (in thousands)
      <S>                                                        <C>
      Loss from continuing operations...........................     $  239
      Income tax benefit due to conversion from an "S" corpora-
       tion.....................................................      1,228
                                                                     ------
        Tax benefit from continuing operations..................      1,467
                                                                     ------
      Loss from discontinued operations.........................        585
                                                                     ------
        Tax benefit.............................................     $2,052
                                                                     ======
</TABLE>

   Income tax benefit for the year ended December 31, 1999 consisted of the
following:

<TABLE>
<CAPTION>
                                                                       1999
                                                                  --------------
                                                                  (in thousands)
      <S>                                                         <C>
      Current:
        Federal..................................................     $  --
        State....................................................        --
      Deferred:
        Federal..................................................      1,653
        State....................................................        399
                                                                      ------
                                                                      $2,052
                                                                      ======
</TABLE>


                                     F-27
<PAGE>

                 PRISM FINANCIAL CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

   The reconciliation of the income tax benefit computed using the federal
statutory rate of 34 percent to the income tax benefit from continuing
operations as reflected in the financial statements is as follows for the year
ended December 31, 1999:

<TABLE>
<CAPTION>
                                                                       1999
                                                                  --------------
                                                                  (in thousands)
      <S>                                                         <C>
      Computed "expected" tax from continuing operations........     $ 2,884
      State and local income taxes, net of federal income taxes.         424
      Tax on S corporation income, taxable to S corporation
       shareholders.............................................      (3,428)
      Establishment of deferred tax asset due to S corporation
       conversion                                                     (1,228)
      Permanent differences, net................................        (119)
                                                                     -------
      Effective tax benefit.....................................     $(1,467)
                                                                     =======
</TABLE>

   As discussed in Note 2--Significant Accounting Policies, the Company was an
S corporation prior to the consummation of the Offering, and accordingly, no
federal or state income tax expense has been provided for this period. The pro
forma provision for income taxes of $3.3 million differs from the expected
provision due to state and local income taxes, net of federal income tax
benefit.

   The tax effects of temporary differences and carryforwards that give rise
to deferred tax assets and liabilities at December 31, 1999 were as follows:

<TABLE>
<CAPTION>
                                                                       1999
                                                                  --------------
                                                                  (in thousands)
      <S>                                                         <C>
      Deferred tax assets:
        Allowance for loan and servicing losses..................     $  499
        Accrued expenses and other...............................         19
        Net operating loss carryforwards.........................      2,908
      Other......................................................        331
                                                                      ------
      Total deferred tax asset...................................     $3,757
                                                                      ======
      Deferred tax liabilities:
        Deferred compensation....................................     $ (352)
        Depreciation and amortization............................       (326)
                                                                      ------
      Total deferred tax liabilities.............................       (678)
                                                                      ------
      Net deferred tax asset.....................................     $3,079
                                                                      ======
</TABLE>

   During the year ended December 31, 1999, the Company acquired several
businesses for which deferred taxes were established to account for the
differences in the book and tax bases of assets acquired and liabilities
assumed. The tax benefit of approximately $1.6 million attributable to these
acquisitions was allocated directly to goodwill.

   At December 31, 1999, the Company had net operating loss carryforwards for
federal income tax purposes of $8.4 million, which are available to offset
future federal taxable income and expire in the years 2017 through 2020. The
Company also has an alternative minimum tax credit carryforward of
approximately $24,000, which has no expiration date.

   In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that any portion of the deferred tax assets
will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable
income, and tax planning strategies in making this assessment. Based upon the
projections for future taxable income over the periods in which the deferred
tax assets are deductible, management believes it is more likely than not that
the Company will realize the benefits of these deductible differences.

                                     F-28
<PAGE>

                 PRISM FINANCIAL CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


NOTE 22--CONCENTRATION RISK

   The Company has over 150 branches located in 27 states, which principally
grant residential first and second mortgage loans. For the years ended
December 31, 1999 and 1998, 25% and 32%, respectively, of the Company's loans
were originated by branches in Chicago, Illinois, and its surrounding
communities ("Chicagoland"). As of December 31, 1999 and 1998, the Company had
seven branches in Chicagoland.

   In 1999, the Company sold approximately 85% of its loan production to three
entities, and in 1998, the Company sold approximately 60% of its loan
production to two entities.

NOTE 23--ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS

   In accordance with SFAS No. 107, "Disclosures About Fair Value of Financial
Instruments," a summary of the estimated fair value of the Company's financial
instruments as of December 31, 1999 and 1998 is presented below. The estimated
fair value amounts have been determined by management using available market
information and appropriate valuation methodologies. However, considerable
judgment is necessary in order to interpret market data and develop the
estimates of fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts that the Company could realize in a
current market exchange. The use of different assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
SFAS No. 107 excludes certain financial instruments and all nonfinancial
assets and liabilities from its disclosure requirements. Accordingly, the
aggregate fair value amounts presented below do not represent the underlying
value of the Company.

<TABLE>
<CAPTION>
                                               1999                1998
                                        ------------------- -------------------
                                        Carrying Estimated  Carrying Estimated
                                         Amount  Fair Value  Amount  Fair Value
                                        -------- ---------- -------- ----------
                                                    (in thousands)
      <S>                               <C>      <C>        <C>      <C>
      Assets:
        Cash and cash equivalents.....  $  6,915  $  6,915  $ 12,124  $ 12,124
        Loans held for sale...........   198,294   198,685   467,254   470,419
        Loan fees and other
         receivables, net.............    14,316    14,316    14,207    14,207
        Options contracts.............        88        38       --        --
      Liabilities:
        Loans sold under agreements to
         repurchase...................    11,934    11,934   292,627   292,627
        Warehouse lines of credit.....   191,603   191,603   170,217   170,217
        Operating line of credit......     5,923     5,923       --        --
        Current portion of long-term
         debt.........................       146       146       729       729
        Long-term debt, less current
         portion......................        76        76     4,298     4,298
        Capital contributions payable.    61,674    61,674       --        --
      Gain (loss) on derivative
       financial instruments:
        Whole-loan sale commitments...       --        730       --        155
        Forward contracts.............       --        380       --     (1,290)
</TABLE>

   The fair value of cash and cash equivalents, loan fees and other
receivables, loans sold under agreements to repurchase, warehouse lines of
credit, operating line of credit, long-term debt and capital contributions
payable approximate their carrying amounts. The fair value of mortgage loans
held for sale is based on the estimated value at which the loans could be sold
in the secondary market.

                                     F-29
<PAGE>

                 PRISM FINANCIAL CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   For derivative financial instruments, the fair value is defined as the
amount that the Company would receive or pay to terminate the contracts at the
reporting date. The fair value of whole-loan sale commitments is estimated by
taking into account the rates being demanded on similar types of mortgage
loans. The fair value of option agreements is based upon quoted market values.
The fair value of forward contracts is calculated from quoted market rates.

NOTE 24--SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

<TABLE>
<CAPTION>
                                                        1999      1998     1997
                                                      --------  --------  ------
                                                           (in thousands)
      <S>                                             <C>       <C>       <C>
      Cash paid during the year for interest........  $ 19,363  $ 10,471  $2,452
                                                      ========  ========  ======
      Cash paid during the year for income taxes....  $    296  $    --   $  --
                                                      ========  ========  ======
      Detail of acquisitions:
        Fair value of assets acquired, including
         goodwill...................................  $ 94,181  $ 74,526  $  --
        Liabilities assumed.........................   (86,746)  (74,799)    --
        Common stock issued.........................       --     (1,500)    --
                                                      --------  --------  ------
          Net cash paid (acquired) for acquisitions.     7,435    (1,773)    --
        Cash acquired in acquisition................     2,238     6,603     --
                                                      --------  --------  ------
          Gross cash paid for acquisitions..........  $  9,673  $  4,830  $  --
                                                      ========  ========  ======
      Non-cash transaction:
        Conversion of bridge note into common
         shares.....................................  $    --   $  1,250  $  --
                                                      ========  ========  ======
</TABLE>

NOTE 25--UNAUDITED PRO FORMA FINANCIAL INFORMATION

   The pro forma financial information has been presented to show the effect
on the historical results of continuing operations of the Company had it been
treated as a C corporation for federal and state income tax purposes for the
entire period ended December 31, 1999 and for the years ended December 31,
1998 and 1997.

   The pro forma earnings per share has been presented as if the shares issued
at the time of the Offering, including the shares issued to Pacific Guarantee
and Mortgage Market, were outstanding as of January 1, 1999.

NOTE 26--INCORPORATION TRANSACTIONS

   In February 1999, Prism Financial was formed as a holding company for Prism
Mortgage Company and its subsidiaries. Immediately prior to the Offering, the
previous stockholders of Prism Mortgage exchanged their shares for an
aggregate of 11,495,297 shares of Prism Financial Common Stock. As a result of
these transactions, immediately prior to the Offering, the former stockholders
of Prism Mortgage owned all of the issued and outstanding shares of Prism
Financial, and Prism Financial owned all of the outstanding shares of Prism
Mortgage. Prior to the Incorporation Transactions, Prism Financial did not
conduct any business and had no assets or liabilities. The legal name of Prism
Financial has been retroactively applied to all periods presented in these
financial statements.

NOTE 27--SUBSEQUENT EVENTS

   In March 2000, Mark Filler, President and Chief Executive Officer, and
Terry Markus, President of Prism Illinois, and the estate of Bruce C. Abrams
loaned money to the Company for working capital purposes. The aggregate amount
loaned to the Company was approximately $1.2 million. The loans accrue
interest at 6.25%, with no set repayment terms, and are expected to be repaid
by the end of 2000.

                                     F-30
<PAGE>

                 PRISM FINANCIAL CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   On March 10, 2000, the Company and Royal Bank of Canada ("RBC") announced
the execution of a merger agreement pursuant to which RBC has agreed to
acquire the Company through a cash tender offer. Under the terms of the
agreement, RBC will offer to purchase all outstanding shares of the Company's
Common Stock for $7.50 per share. Consummation of the tender offer is subject
to certain conditions, including the condition that at least a majority of the
outstanding shares of the Company's Common Stock be tendered and not
withdrawn. Consummation of the tender offer is also subject to the expiration
or termination of any applicable antitrust waiting period. Following
completion of the tender offer and subject to certain conditions, the Company
will be a wholly-owned subsidiary of RBC. The transaction is expected to be
completed in mid-2000.

   On March 21, 2000, the Company extended its Mortgage Origination Warehouse
Facility through April 28, 2000. Pursuant to the agreement, the maximum
borrowing base has been reduced from $250.0 million to $200.0 million.

                                     F-31
<PAGE>

                      Report of Independent Accountants on
                          Financial Statement Schedule


To the Board of Directors and Stockholders
of Prism Financial Corporation:


Our audits of the consolidated financial statements referred to in our report
dated February 21, 2000, except for Note 27, as to which the date is March 21,
2000 appearing in the 1999 Annual Report on Form 10-K of Prism Financial
Corporation also included an audit of the financial statement schedule listed in
Item 14(a)(2) of this Form 10-K. In our opinion, this financial statement
schedule presents fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements.


PricewaterhouseCoopers LLP

February 21, 2000

                                      S-1
<PAGE>

                                  Schedule II

                 Prism Financial Corporation and Subsidiaries

                       Valuation and Qualifying Accounts
<TABLE>
<CAPTION>

                                                              Beginning             Additions                          Ending
Description                                                    Balance        Provision     Other       Decrease       Balance
                                                              ----------------------------------------------------------------
<S>                                                            <C>             <C>         <C>          <C>            <C>
Allowance for loan fees and
miscellaneous receivables
     Year ended December 31, 1999                              $      -        $505,000    $120,000     $      -       $625,000
     Year ended December 31, 1998                                     -               -           -            -              -
     Year ended December 31, 1997                                     -               -           -            -              -

Allowance for servicing losses
     Year ended December 31, 1999                               350,000         456,504           -      151,504        655,000
     Year ended December 31, 1998                                     -         350,000           -            -        350,000
     Year ended December 31, 1997

Allowance for potential repurchase of loans
     Year ended December 31, 1999                               550,000         150,000           -      430,000        270,000
     Year ended December 31, 1998                                     -         550,000           -            -        550,000
     Year ended December 31, 1997                                     -               -           -            -             -
</TABLE>
     Other additions represent reserves acquired as part of acquisitions.

                                      S-2









<PAGE>

                                   SIGNATURES


Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on the 30th day of March
2000.


                                  PRISM FINANCIAL CORPORATION


                                  By:       /s/ MARK A. FILLER
                                     -----------------------------------
                                   President and Chief Executive Officer

  Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
                     Signature                                       Title                             Date
                    ----------                                       -----                             ----
<S>                                                   <C>                                          <C>

              /s/ MARK A. FILLER                      President and  Chief Executive               March 30, 2000
--------------------------------------------------    Officer
                 Mark A. Filler



              /s/ DAVID A. FISHER                     Senior Vice President, Chief
--------------------------------------------------      Financial Officer and Secretary            March 30, 2000
                 David A. Fisher                        (Principal Financial Officer)




              /s/ JAMES P. HAYES                      Senior Vice President, Treasurer and         March 30, 2000
--------------------------------------------------      Controller (Chief Accounting
                 James P. Hayes                         Officer)




              /s/ TERRY A. MARKUS                     President of Prism Illinois                  March 30, 2000
--------------------------------------------------
                 Terry A. Markus


                                                      Chairman of the Board of Directors
--------------------------------------------------
                 Richard L. Wellek


                                                      Director
--------------------------------------------------
                 Michael P. Krasny


              /s/ ANDREW S. HOCHBERG                  Director                                     March 30, 2000
---------------------------------------------------
                 Andrew S. Hochberg
</TABLE>