At June 30, 2003, key valuation assumptions used to value the retained interests and the sensitivity of those assumptions to immediate 10% and 25% adverse changes in those assumptions are as follows:

These sensitivities are hypothetical and should be used with caution. As the figures indicate, changes in fair value of the retained interests based on a variation in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also in the above table, the effect of a variation in a particular assumption on the fair value of the retained interest is calculated without changing any other assumption; in reality, changes in one factor may result in changes in another (for example, increases in market interest rates may result in lower prepayments but increased credit losses), which might magnify or counteract the sensitivities.

The discount rate was determined by assessing the risk related to the asset to account for the present value of the cash flows to be received over the life of the loans. As a result, the retained interest asset is an interest earning asset, with interest income accreted over time at the discount rate and included in Other Income, net. The loss rates were determined by researching existing data on losses obtained from credit rating agencies and analyzed by credit tiers (i.e. credit score ranges) to determine loss rates specific to credit tiers, as opposed to an averaged rate. The Company then compared these rates to those of two major national banks to ensure its loss rates are within a range of what other market participants would estimate. The prepayment speed projects prepayments on a monthly percentage of the original loan balance. All assumptions will be monitored over time and may be updated to reflect actual performance.

On June 30, 2003, the Company obtained a $5 million line of credit from Wells Fargo Bank, National Association to support working capital needs. The interest rate charged on borrowings against these funds is based on LIBOR plus 2% and is payable monthly. The line of credit expires on June 30, 2004.

As of June 30, 2003, the Company had a warehouse line of credit for borrowings of up to $175 million for the interim financing of mortgage loans with GMAC Bank. The interest rate charged on borrowings against these funds is variable based on LIBOR plus various percentage points. Borrowings are collateralized by the related mortgage loans held-for-sale. This line of credit agreement generally requires the Company to comply with various financial and non-financial covenants. In particular, the Company must maintain a minimum unrestricted cash balance of $12.5 million. The Company was in compliance with these covenants during the three and six months ended and at June 30, 2003. The committed line of credit expires on September 30, 2003.

As of June 30, 2003, the Company had a warehouse line of credit for borrowings of up to $75 million for the interim financing of mortgage loans with Residential Funding Corporation. The interest rate charged on borrowings against these funds is variable based on LIBOR plus various percentage points. Borrowings are collateralized by the related mortgage loans held-for-sale. This line of credit agreement generally requires the Company to comply with various financial and non-financial covenants. In particular, the Company must maintain a minimum unrestricted cash balance of $12.5 million. The Company was not in compliance with its current ratio covenant for the months ended April 30 and May 31, 2003 and subsequently obtained a waiver from the lender. The Company was in compliance with all covenants as of June 30, 2003. The committed line of credit expires on December 31, 2003.

As of June 30, 2003, the Company had an agreement to finance up to $475 million of mortgage loan inventory pending sale of these loans to the ultimate mortgage loan investors with Greenwich Capital. Of this amount, $200 million is available in committed funds. This loan inventory financing is secured by the related mortgage loans. The interest rate charged on borrowings against these funds is based on LIBOR plus various percentage points. This agreement includes various financial and non-financial covenants. In particular, the Company must maintain a minimum cash and cash equivalents balance of the higher of $15 million (including Restricted Cash) or the highest amount required by any other lender or agreement. The Company was in compliance with these covenants during the three and six months ended and at June 30, 2003. The line expires on March 30, 2004.

In addition, the Company has an uncommitted mortgage loan purchase and sale agreement with Greenwich Capital. Under the terms of this agreement, mortgage loans which are subject to a mandatory sell forward commitment between the Company and an investor, but have not yet been purchased, may be sold to Greenwich Capital with the accompanying trade assignment. This allows the Company to accelerate turnover and provide additional liquidity to fund additional mortgage loans. Revenue derived from sales under this agreement is included as a receivable on the balance sheet (see Note 5). The balance of loans sold related to these receivables was $48.7 million and $289.2 million as of December 31, 2002 and June 30, 2003, respectively.

As of June 30, 2003, the Company had a $10 million line of credit facility with Merrill Lynch Mortgage Capital, Inc. to support the interim funding of auto loans prior to their sale to the ultimate auto loan purchaser. The interest rate charged on this line is based on LIBOR plus various percentage points. This facility expires on July 13, 2004. This line includes various financial and non-financial covenants. The Company was in compliance with these covenants during the three and six months ended and at June 30, 2003.

The following summarizes warehouse and other lines payable at December 31, 2002 and June 30, 2003 (dollars in thousands):

                                           Dec 31,   June 30,
                                            2002       2003
                                          ---------  ---------
Warehouse lines - GMAC.................. $  68,955  $ 147,324
Warehouse lines - Greenwich.............   311,549    119,213
Warehouse lines - RFC...................        --     20,976
Line of credit - Auto...................     3,143      5,978
                                          ---------  ---------
                                         $ 383,647  $ 293,491
                                          =========  =========

The following summarizes accounts payable, accrued expenses and other current liabilities at December 31, 2002 and June 30, 2003 (dollars in thousands):

                                           Dec 31,   June 30,
                                            2002       2003
                                          ---------  ---------
Accounts payable........................ $   4,637  $   9,167
Accrued compensation....................     2,710      4,717
Income tax payable......................     1,665        454
Other current liabilities...............     1,898        922
Reserves................................       900      2,067
Interest payable........................       529        476
                                          ---------  ---------
                                         $  12,339  $  17,803
                                          =========  =========

Included in other current liabilities is an amount related to the fair value of SFAS 133 derivatives of $1.7 and $0.8 million at December 31, 2002 and June 30, 2003, respectively.

Included in the accounts payable, accrued expenses and other current liabilities is an amount related to reserves the Company established for representation and warranties and premium repayment liability. The Company sells loans to loan purchasers on a servicing released basis without recourse. As such, the risk of loss or default by the borrower has generally been assumed by these purchasers. However, the Company is usually required by these purchasers to make certain representations relating to credit information, loan documentation and collateral. To the extent that the Company does not comply with such representations, or there are early payment defaults, the Company may be required to repurchase loans or indemnify these purchasers for any losses from borrower defaults. In connection with a majority of its loan sale agreements, the Company is also responsible for a minimum number of payments to be made on each loan, or else the Company may be required to refund the premium paid to it by the loan purchaser. As such, the Company records reserves based on certain assumptions in anticipation of future losses as a result of current activity.

Loss reserves due to violations of representations and warranties are recorded based on a percentage of current month originations. The Company currently calculates this loss rate exposure based on similar lending portfolios. Once the Company has endured a complete economic cycle, the rate will be determined based on actual losses as a percentage of origination volume on a historical basis. Premium repayment reserves, generated through early loan prepayments, are recorded based on a rate determined by calculating actual prepayments as a percentage of originations on a historical basis applied to current month originations. The following illustrates the changes in the reserve balance for the three and six months ended June 30, 2003 by product (in thousands):

                                        Home
                           Mortgage    Equity      Auto       Total
                           ---------  ---------  ---------  ---------
Balance at 1/1/03........ $     618  $     161  $     121  $     900
   Increase to reserve...       743        201        119      1,063
   Losses incurred.......      (285)       (73)       (34)      (392)
                           ---------  ---------  ---------  ---------
Balance at 03/31/03...... $   1,076  $     289  $     206  $   1,571
   Increase to reserve...       455        385         18        858
   Losses incurred.......       (77)      (284)        (1)      (362)
                           ---------  ---------  ---------  ---------
Balance at 06/30/03...... $   1,454  $     390  $     223  $   2,067
                           =========  =========  =========  =========

The following table provides the components of revenues (in thousands):

                                               Three Months Ended     Six Months Ended
                                                     June 30,               June 30,
                                                 2002       2003        2002       2003
                                               ---------  ---------   ---------  ---------
Revenues:
   Mortgage.................................. $  11,738  $  31,505   $  24,553  $  55,356
   Interest income on mortgage loans.........     2,985      5,152       5,975     10,016
   Home equity...............................     3,267      5,334       5,551      9,273
   Interest income on home equity loans......       519        682         757      1,106
   Auto......................................     2,250      2,817       4,548      5,473
   Other.....................................       227        393         368        648
                                               ---------  ---------   ---------  ---------
         Total revenues...................... $  20,986  $  45,883   $  41,752  $  81,872
                                               =========  =========   =========  =========

The following table provides the components of other income, net (in thousands):

                                               Three Months Ended     Six Months Ended
                                                     June 30,               June 30,
                                                 2002       2003        2002       2003
                                               ---------  ---------   ---------  ---------
Interest on short-term investments........... $      55  $      70   $     140  $     102
Interest on retained interest asset..........        --        218          --        448
Interest expense on non-warehouse
   facility borrowings.......................       (16)        (7)       (158)        (7)
Other........................................        --          5          --          5
                                               ---------  ---------   ---------  ---------
                                              $      39  $     286   $     (18) $     548
                                               =========  =========   =========  =========

The following table provides the components of operating expenses (in thousands):

                                               Three Months Ended     Six Months Ended
                                                    June 30,               June 30,
                                                 2002       2003        2002       2003
                                               ---------  ---------   ---------  ---------
Compensation and benefits.................... $   9,457  $  16,713   $  18,680  $  30,199
Processing costs.............................       910        630       1,445      1,491
Advertising and marketing....................     4,938     10,171       9,154     17,436
Professional services........................       648      2,266       1,383      3,485
Occupancy costs..............................     1,006      1,618       1,919      3,119
Computer and internet........................       220        508         507        857
General and administrative...................     1,274      1,944       2,706      3,514
Interest expense on warehouse borrowings.....     1,599      3,205       3,309      6,058
                                               ---------  ---------   ---------  ---------
         Total operating expenses............ $  20,052  $  37,055   $  39,103  $  66,159
                                               =========  =========   =========  =========

Commissions and bonus compensation comprised 21% and 30% of total compensation and benefits in the three months ended June 30, 2002 and 2003. Commissions and bonus compensation comprised 22% and 27% of total compensation and benefits in the six months ended June 30, 2002 and 2003.

The following table provides detail of the operations component of total operating expenses classified by the following revenue-related categories (in thousands):

                                             Three Months Ended      Six Months Ended
                                                   June 30,                June 30,
                                              2002        2003        2002        2003
                                           ----------  ----------  ----------  ----------
Mortgage ................................ $    5,967  $   10,613  $   11,817  $   19,115
Interest expense on mortgage loans.......      1,301       2,505       2,813       4,904
Home equity..............................      1,844       3,170       3,175       6,199
Interest expense on home equity loans....        241         531         351         820
Auto.....................................      1,940       3,702       3,952       6,486
Other....................................         34          --          71          --
                                           ----------  ----------  ----------  ----------
Total operations......................... $   11,327  $   20,521  $   22,179  $   37,524
                                           ==========  ==========  ==========  ==========

E-LOAN originates mortgage and home equity loans and manages the market risk related to these loans through various hedging programs.

The Company originates mortgage loans and sells them primarily through whole loan sales. The market values of mortgage loans are sensitive to changes in market interest rates. If interest rates rise between the time the Company enters into a rate lock with the borrower, the subsequent funding of the loan and the time the mortgage loans are committed for sale, there may be a decline in the market value of the mortgage loans. To protect against such possible declines, the Company has adopted an economic hedging strategy.

Individual mortgage loan risks are aggregated by loan type and pipeline production status and matched, based on duration, with the appropriate hedging instrument, thus mitigating basis risk until closing and delivery. The Company currently hedges its mortgage pipeline through mandatory forward sales of Fannie Mae mortgage-backed securities and both mandatory and non-mandatory forward sale agreements with the ultimate investor. The Company determines which alternative provides the best execution in the secondary market.

The Company believes that it has implemented a cost-effective economic hedging program to provide a high level of protection against changes in the market value of rate-lock commitments. However, an effective strategy is complex and no hedging strategy can completely insulate the Company against such changes.

At June 30, 2003, the Company had provided locks to originate loans amounting to approximately $706.8 million (the "locked pipeline"). At June 30, 2003, the Company had entered into non-mandatory forward loan sale agreements amounting to approximately $531.9 million. These forward loan sale agreements do not subject the Company to mandatory delivery and there is no penalty if the Company does not deliver into the commitment. The Company is exposed to the risk that these counterparties may be unable to meet the terms of these sale agreements. The investors are well-established U.S. financial institutions; the Company does not require collateral to support these commitments, and there has been no failure on the part of the counterparties to meet the terms of these agreements to date.

At June 30, 2003, the Company had entered into mandatory sell forward commitments amounting to approximately $244.8 million. The Company adjusts the amount of mandatory sell forward commitments held to offset changes in the locked pipeline and changes in the market value of unsold loans. At June 30, 2003, the Company had entered into $225.7 million of commitments with third party investors to deliver loans related to funded loans held-for-sale.

The Company has future payment commitments for leases and non-cancelable TV media aggregating $5.6 million, $5.5 million, $2.7 million and $2.7 million for the years 2003, 2004, 2005 and 2006, respectively. The Company has commitments of $9.3 million for the years 2007 and beyond.

The following discussion of the financial condition and results of operations of the Company should be read in conjunction with the Financial Statements and the related Notes thereto included elsewhere in this Form 10-Q. This discussion contains, in addition to historical information, forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from the results discussed in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below, as well as those discussed below under "Factors Affecting Future Operating Results." The Company disclaims any obligation to update information contained in any forward-looking statement. See "Forward-Looking Statements."

The Company is a consumer direct lender and debt advisor whose revenues are derived primarily from the gain on sale of mortgage, home equity and auto loans that it underwrites, funds and sells. The Company also earns interest income on loans during the brief time they are held pending sale.

MORTGAGE REVENUES

The Company's mortgage revenues are primarily derived from the origination and sale of self-funded loans. In prior years the Company derived a portion of its mortgage revenues from the brokering of loans. Brokered loans are funded through lending partners and the Company never takes title to the mortgage loan. Beginning in 2002, the Company no longer brokered mortgage loans. Self-funded loans are funded through the Company's own warehouse lines of credit and sold to mortgage loan purchasers typically within thirty days. Self-funded loan revenues consist of proceeds in excess of the carrying value of the loan and origination fees less certain direct origination costs. These revenues are recognized at the time the loan is sold.

The Company generates revenues from interest income on self-funded mortgage and home equity loans. The revenues realized are based on the loan amount multiplied by the contractual interest rate from the time of funding by the Company through time of sale. These revenues are recognized as earned during the period from funding to sale.

HOME EQUITY REVENUES

The Company's home equity revenues are derived from the origination and sale of self-funded loans. Self-funded loans are funded through the Company's own warehouse lines of credit and sold to home equity loan purchasers typically within sixty days. Self-funded loan revenues consist of proceeds in excess of the carrying value of the loan, origination fees less certain direct origination costs and other processing fees. These revenues are recognized at the time the loan is sold.

AUTO REVENUES

The Company funds auto loans using a line of credit and then sells them to either earn a gain on sale or a flat fee, depending on who the loans are sold to. Prime auto loans are sold to a qualified special purpose entity (QSPE) as more fully described below. Sub-prime auto loans are sold to sub-prime auto loan purchasers.

In July 2002, the Company began selling self-funded prime auto loans to a QSPE (see "Critical Accounting Policies"). Revenues from these sales consist of the discounted cash flows net of interest, servicing fees and credit losses. Revenues on prime auto loan sales are recognized when the loan is sold to the QSPE.

The Company's auto revenues on sub-prime loans are derived from the origination and sale of self-funded loans and from the brokering of auto loans. Auto brokerage revenues are comprised of a set origination fee. These revenues are recognized at the time a loan is closed. Self-funded loans are funded through an auto line of credit and sold to auto loan purchasers typically within ten business days. In April 2001, the Company began funding its auto loans prior to sale with borrowings against an auto line of credit. Self-funded loan revenues consist of the mark-up to the lending partner's loan price or a set origination fee. These revenues are recognized at the time a loan is sold.

The Company generates revenues from fees paid by various partners in exchange for consumer loan applications generated by advertising such partners' products on the Company's website. The current consumer loan programs offered include credit cards and unsecured personal loans. Additionally, the Company earns revenue from its credit report services. Other revenues generated approximately 1% of the total revenues in the three and six months ended June 30, 2002 and 2003.

The following table sets forth certain items from the Company's statements of operations as a percentage of total revenues for the periods indicated:

                                                            Three Months Ended        Six Months Ended
                                                                  June 30,                  June 30,
                                                            2002         2003         2002         2003
                                                         -----------  -----------  -----------  -----------
Revenues ..............................................         100%         100%         100%         100%

Operating expenses:
    Operations (Note 11)...............................          54%          45%          53%          46%
    Sales and marketing................................          29%          25%          27%          24%
    Technology.........................................           6%           5%           6%           5%
    General and administrative.........................           6%           6%           7%           6%
                                                         -----------  -----------  -----------  -----------
           Total operating expenses....................          95%          81%          93%          81%
                                                         -----------  -----------  -----------  -----------
Income from operations.................................           4%          19%           6%          19%
Other income, net......................................           0%           1%          -0%           1%
                                                         -----------  -----------  -----------  -----------
Income before taxes....................................           5%          20%           6%          20%
Income taxes...........................................          -0%          -2%          -0%          -2%
                                                         -----------  -----------  -----------  -----------
Net income.............................................           4%          18%           6%          18%
                                                         ===========  ===========  ===========  ===========

Revenues increased $24.9 million to $45.9 million for the three months ended June 30, 2003 from $21.0 million for the three months ended June 30, 2002. Revenues increased $40.1 million to $81.9 million for the six months ended June 30, 2003 from $41.8 million for the six months ended June 30, 2002. A significant portion of these increases resulted from growth in the dollar volume of mortgage and home equity loans closed and sold, as well as an increase in mortgage revenue earned per loan. Mortgage revenues increased $19.8 million to $31.5 million for the three months ended June 30, 2003 from $11.7 million for the three months ended June 30, 2002. Mortgage revenues increased $30.8 million to $55.4 million for the six months ended June 30, 2003 from $24.6 million for the six months ended June 30, 2002. Prime refinance mortgages accounted for 75% and 68% of mortgage closed loan volume and 72% and 67% of mortgage revenue in the three months ended June 30, 2002 and 2003, respectively. The Company expects refinance activity to decline in the second half of 2003 and that growth in purchase and non-prime mortgages will help offset the decline in refinance volume. The Company expects mortgage revenue (excluding interest income) in 2003 to exceed 2002 levels. Home equity revenues increased $2.0 million to $5.3 million for the three months ended June 30, 2003 from $3.3 million for the three months ended June 30, 2002. Home equity revenues increased $3.7 million to $9.3 million for the six months ended June 30, 2003 from $5.6 million for the six months ended June 30, 2002. The Company expects that home equity revenues will grow throughout 2003 as volumes increase. Revenues also increased due to an increase in interest income earned on mortgage and home equity loans. Auto revenues increased $0.6 million to $2.8 million for the three months ended June 30, 2003 from $2.2 million for the three months ended June 30, 2002. Auto revenues increased $0.9 million to $5.5 million for the six months ended June 30, 2003 from $4.6 million for the six months ended June 30, 2002. Auto refinance loans accounted for 18% and 40% of auto closed loan volume in the three months ended June 30, 2002 and 2003, respectively. The increase in auto revenues from the three and six months ended June 30, 2002 to the three and six months ended June 30, 2003 is largely a result of the new QSPE structure introduced in June 2002 that improved our ability to offer competitive rates to consumers which increased prime auto loan volume. The Company expects that auto revenues will grow throughout 2003 as prime auto loan volumes increase.

The following table summarizes dollar volume of loans closed and sold and the revenue in both dollars and average basis points ("BPS") (dollars in thousands except BPS):

                                              Three Months Ended      Six Months Ended
                                                   June 30,                June 30,
                                              2002        2003        2002        2003
                                           ----------  ----------  ----------  ----------
Mortgage
$ Volume                                  $  766,494  $1,214,742  $1,683,296  $2,324,750
Revenue                                   $   11,738  $   31,505  $   24,553  $   55,356
BPS                                              153         259         146         238

Home Equity
$ Volume                                  $  124,125  $  192,169  $  221,773  $  359,958
Revenue                                   $    3,267  $    5,334  $    5,551  $    9,273
BPS                                              263         278         250         258

Auto
$ Volume                                  $  150,733  $  164,729  $  291,196  $  332,835
Revenue                                   $    2,250  $    2,817  $    4,548  $    5,473
BPS                                              149         171         156         164

The following table reflects the percentages of the Company's mortgage closed loan volume from purchase and refinance loans as compared to the total market (according to Mortgage Bankers Association of America) through 2003. The Mortgage Bankers Association of America data for the second quarter of 2003 below represents its estimate as of July 14, 2003:

                    2000      2001      2002      Q1 03     Q2 03
                  --------- --------- --------- --------- ---------
E-LOAN Mortgage*
    Purchase         61%       16%       21%       25%       32%
    Refinance        39%       84%       79%       75%       68%

Total Market*
    Purchase         81%       43%       41%       29%       32%
    Refinance        19%       57%       59%       71%       68%

Total Operating Expenses. Total operating expenses increased $17.0 million to $37.1 million for the three months ended June 30, 2003 from $20.1 million for the three months ended June 30, 2002. Total operating expenses increased $27.1 million to $66.2 million for the six months ended June 30, 2003 from $39.1 million for the six months ended June 30, 2002. The increase was primarily due to increases in interest expense on warehouse borrowings, due to higher volumes, as well as increases in compensation and benefits due to growth in headcount. Total operating expenses also increased due to additional advertising and marketing spend.

The following table provides detail of the Company's operations expenses classified by the following revenue-related categories (dollars in thousands):

                                             Three Months Ended      Six Months Ended
                                                  June 30,                June 30,
                                              2002        2003        2002        2003
                                           ----------  ----------  ----------  ----------
Mortgage ................................ $    5,967  $   10,613  $   11,817  $   19,115
Interest expense on mortgage loans.......      1,301       2,505       2,813       4,904
Home equity..............................      1,844       3,170       3,175       6,199
Interest expense on home equity loans....        241         531         351         820
Auto.....................................      1,940       3,702       3,952       6,486
Other....................................         34          --          71          --
                                           ----------  ----------  ----------  ----------
Total operations......................... $   11,327  $   20,521  $   22,179  $   37,524
                                           ==========  ==========  ==========  ==========

Operations expense increased $9.2 million to $20.5 million for the three months ended June 30, 2003 from $11.3 million for the three months ended June 30, 2002. Operations expense increased $15.3 million to $37.5 million for the six months ended June 30, 2003 from $22.2 million for the six months ended June 30, 2002. Operations expense decreased as a percentage of revenue from 54% to 45% and 53% to 46% for the three and six months ended June 30, 2002 and 2003, respectively. The increase in absolute dollars is primarily due to increases in mortgage, home equity and auto operations expenses, due to higher volumes. In the quarter, auto operations expense included expenses of approximately $1.0 million related to the one-time transition of auto operations from Florida to California. The Company completed the transition in June, which resulted in a total expense of $1.3 million for the six months ended June 30, 2003.

Direct Margin. Direct margin is defined as revenue minus operations expense, which includes variable and fixed expenses.

The following table provides detail of the Company's direct margin classified by the following revenue-related categories (dollars in thousands):

                                              Three Months Ended      Six Months Ended
                                                  June 30,                June 30,
                                              2002        2003        2002        2003
                                           ----------  ----------  ----------  ----------
Mortgage................................. $    5,771  $   20,892  $   12,737  $   36,241
Mortgage interest margin.................      1,684       2,647       3,162       5,112
Home equity..............................      1,423       2,164       2,376       3,074
Home equity interest margin..............        278         151         406         286
Auto.....................................        310        (885)        588      (1,013)
Other....................................        193         393         304         648
                                           ----------  ----------  ----------  ----------
Total direct margin...................... $    9,659  $   25,362  $   19,573  $   44,348
                                           ==========  ==========  ==========  ==========

Direct margin increased $15.7 million to $25.4 million for the three months ended June 30, 2003 from $9.7 million for the three months ended June 30, 2002. Direct margin increased $24.8 million to $44.3 million for the six months ended June 30, 2003 from $19.5 million for the six months ended June 30, 2002. The growth in direct margin is due largely to the contribution from mortgage volume coupled with technology and process improvements. Additionally, the increase in direct margin is due to the positive spread of interest income over interest expense. The Company anticipates that mortgage revenue per loan and the spread of interest income over interest expense will decline throughout 2003, as the overall level of refinance activity declines and competitive pricing pressure increases. Auto direct margin was negative in the three and six months ended June 30, 2003 due to the one-time expense of approximately $1.0 million and $1.3 million for the three and six months ended June 30, 2003 related to the transition of auto operations from Florida to California.

Sales and Marketing. Sales and marketing expense is primarily comprised of expenses related to advertising, promotion and distribution partnerships and employee compensation and other expenses related to personnel. Sales and marketing expense increased $5.3 million to $11.4 million for the three months ended June 30, 2003 from $6.1 million for the three months ended June 30, 2002. Sales and marketing expense increased $8.6 million to $19.9 million for the six months ended June 30, 2003 from $11.3 million for the six months ended June 30, 2002. Sales and marketing expense decreased as a percentage of revenue from 29% to 25% for the three months ended June 30, 2002 and 2003, respectively, and decreased as a percentage of revenue from 27% to 24% for the six months ended June 30, 2002 and 2003, respectively. Sales and marketing expenses are expected to increase to approximately 26% of total revenues in the latter half of 2003.

Technology. Technology expense includes employee compensation, the introduction of new technologies and the support of E-LOAN's existing technological infrastructure. Technology expense increased $1.1 million to $2.3 million for the three months ended June 30, 2003 from $1.2 million for the three months ended June 30, 2002. Technology expense increased $1.3 million to $4.0 million for the six months ended June 30, 2003 from $2.7 million for the six months ended June 30, 2002. Technology expense decreased as a percentage of revenue from 6% to 5% for the three and six months ended June 30, 2002 and 2003, respectively. Technology expenses are expected to stay fairly constant in absolute dollars in the upcoming quarters.

General and Administrative. General and administrative expense is primarily comprised of employee compensation and professional services. General and administrative expense increased $1.5 million to $2.8 million for the three months ended June 30, 2003 from $1.3 million for the three months ended June 30, 2002. General and administrative expense increased $1.7 million to $4.7 million for the six months ended June 30, 2003 from $3.0 million for the six months ended June 30, 2002. General and administrative expense remained constant as a percentage of revenue at 6% for the three months ended June 30, 2002 and 2003, respectively and decreased as a percentage of revenue from 7% to 6% for the six months ended June 30, 2002 and 2003, respectively. General and administrative expenses are expected to stay fairly constant in absolute dollars in the upcoming quarters.

Other Income, net. Other income, net, increased $0.2 million to $0.3 million for the three months ended June 30, 2003 from income of $0.1 million for the three months ended June 30, 2002. Other income, net, increased $0.5 million to $0.5 million for the six months ended June 30, 2003 from income of $0 million for the six months ended June 30, 2002. The increase is primarily attributable to the interest income generated from the retained interest asset.

The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the U.S., which require the Company to make estimates and assumptions (see Note 2 to the consolidated financial statements). The Company believes that of its significant accounting policies (see Note 3 to the consolidated financial statements), the following may involve a higher degree of judgment and complexity.

Retained interest in auto loans. On June 17, 2002, the Company entered into an arrangement to sell auto loan receivables to a qualified special purpose entity (QSPE), E-Loan Auto Fund One, LLC ("E-Loan Auto"). These transactions involve the Company surrendering control over these assets to assure that the sold assets have been isolated from the Company and its creditors. As E-Loan Auto has met the appropriate tests to be considered a QSPE the assets and liabilities of E-Loan Auto are appropriately not consolidated in financial statements of the Company. E-Loan Auto has obtained a secured borrowing facility from Merrill Lynch Bank USA to finance all purchases of loans from the Company. The Company recognizes a gain on the sale of auto loan receivables to E-Loan Auto in the period in which the sale occurs, which represents the difference between the sale proceeds to the Company and the Company's net carrying value of the receivables. Included in the proceeds received by the Company from the sale of loans is a beneficial interest related to loans owned by the QSPE, which is reflected on the Company's balance sheet as a retained interest asset. These retained interest assets are recorded on the balance sheet at fair value as trading assets, and are marked to market at each subsequent reporting period. In order to determine the fair value management estimates future excess cash flows to be received by the Company over the life of the loans. The Company makes various assumptions in order to determine the fair value of the estimated future excess cash flows to be generated by the auto loans sold to the QSPE. The most significant assumptions are the cumulative credit losses to be incurred on the pool of auto loan receivables sold, prepayment rates of the auto loans and the rate at which the estimated future excess cash flows are discounted. The assumptions used represent the Company's best estimates, and the use of different assumptions could produce different financial results. The Company will continue to monitor and may update its assumptions over time.

The Company's management has made complex judgments in their application of SFAS 133. The judgments include the identification of hedging instruments, hedged items, nature of the risk being hedged, and how the hedging instrument's effectiveness will be assessed. The Company designates forward delivery commitments, where the company intends to deliver the underlying loan into the commitment, as a fair value SFAS 133 hedge at the commitment date. In addition, the Company designates all non-mandatory forward sale agreements as fair value SFAS 133 hedges for underlying loans at funding date. The Company does not designate mandatory sell forward agreements as SFAS 133 hedges but does utilize them to economically hedge the changes in fair value of rate lock commitments with borrowers for which a non-mandatory forward sale agreement has not been obtained. The Company did not have a material gain or loss representing the amount of hedge ineffectiveness related to non-mandatory forward sale agreements or delivery commitments during the three and six months ended June 30, 2003.

Capitalized software. In 1999, the Company adopted SOP 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use, which requires that the Company expense computer software costs as they are incurred in the preliminary project stage. Once the capitalization criteria of the SOP have been met, external direct costs of materials and services consumed in developing or obtaining internal-use computer software and payroll and payroll related costs for employees who are directly associated with and who devote time to the internal-use computer software are capitalized. Capitalized costs are generally amortized over one to three years on a straight-line basis. As of June 30, 2003, the Company had capitalized approximately $6.3 million in internally developed software costs of which $3.2 million had been amortized.

Reserves for loan originations. The Company sells loans to loan purchasers on a servicing released basis without recourse. As such, the risk of loss or default by the borrower has generally been assumed by these purchasers. However, the Company is usually required by these purchasers to make certain representations relating to credit information, loan documentation and collateral. To the extent that the Company does not comply with such representations, or there are early payment defaults, the Company may be required to repurchase loans or indemnify these purchasers for any losses from borrower defaults. In connection with a majority of its loan sales agreements, the Company is also responsible for a minimum number of payments to be made on each loan, or else the Company may be required to refund the premium paid to it by the loan purchaser. As such, the Company records reserves based on certain assumptions in anticipation of future losses as a result of current activity.

Loan loss reserves due to violations of representations and warranties are recorded based on a percentage of current month originations. The Company currently calculates this loss rate exposure based on similar lending portfolios. Once the Company has endured a complete economic cycle, the rate will be determined based on actual losses as a percentage of origination volume on a historical basis. Premium repayment reserves, generated through early loan prepayments, are recorded based on a rate determined by calculating actual prepayments as a percentage of originations on a historical basis applied to current month originations.

Stock Compensation. The Company accounts for stock-based employee compensation arrangements in accordance with the provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees and related interpretations, and complies with the disclosure requirements of SFAS No. 123, Accounting for Stock-Based Compensation. Under APB No. 25, compensation expense is based on the excess of the estimated fair value of the Company's stock over the exercise price, if any, on the date of grant. The Company accounts for stock issued to non-employees in accordance with the provisions of SFAS No. 123 and the Emerging Issues Task Force Consensus in Issue No. 96-18, Accounting for Equity Instruments That Are Issued to Non-Employees for Acquiring, or in Conjunction with Selling, Goods or Services.

Deferred Tax Asset. The Company accounts for income taxes using the liability method in accordance with SFAS No. 109, Accounting for Income Taxes. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. Management evaluates the recoverability of the deferred tax assets and the level of the valuation allowance. At such time as it is determined that it is more likely than not that the deferred tax asset will be realizable, the valuation allowance will be reduced. Due to the uncertainty surrounding the realization of favorable attributes in future tax returns, the Company has recorded a valuation allowance against its net deferred tax assets at June 30, 2003. The Company did not set up a valuation allowance against the state deferred tax asset that arose in 2002 because it is expected to be fully realized in 2003. The provision for income tax expense represents taxes payable for the current period, plus the net change in deferred tax assets and liabilities.

The Company's sources of cash include cash from the sale of mortgage, home equity and auto loans, borrowings under warehouse lines of credit and other credit facilities, brokerage fees, interest income, credit card referrals and the sale of debt and equity securities in both private and public transactions. The Company's uses of cash include the funding of mortgage, home equity and auto loans, repayment of amounts borrowed under warehouse lines of credit, operating expenses, payment of interest, and capital expenditures primarily comprised of furniture, fixtures, computer equipment, software and leasehold improvements.

Net cash provided by operating activities was $69.7 million and $96.8 million for the six months ended June 30, 2002 and 2003, respectively. Net cash provided by operating activities during the six months ended June 30, 2002 and 2003 was primarily due to the cash provided from the decrease in loans held-for-sale plus net income, off-set by the use of cash due to the increase of the retained interest in auto loans. The decrease in loans held-for-sale as of June 30, 2002 and 2003 is due to the amount of loan sales in the quarter exceeding the amount of loans funded. A funded loan remains held-for-sale until it is sold. During the six months ended June 30, 2003, the Company sold substantially all of the loans included in the loan balance at December 31, 2002, as well as substantially all of the loans funded during the six months ended June 30, 2003. This had a positive impact on revenue in the current quarter as we recognize revenue on self-funded loans at time of sale.

Net cash used in investing activities was $1.7 million and $4.7 million for the six months ended June 30, 2002 and 2003, respectively. Net cash used in investing activities was primarily for the purchase of software, furniture, equipment and leasehold improvements.

The Company has a warehouse line of credit for borrowings of up to $175 million for the interim financing of mortgage loans with GMAC Bank. The interest rate charged on borrowings against these funds is variable based on LIBOR plus various percentage points. Borrowings are collateralized by the related mortgage loans held-for-sale. The committed line of credit expires on September 30, 2003. Upon expiration, management believes it will either renew its existing line or obtain sufficient additional lines. This line of credit agreement generally requires the Company to comply with various financial and non-financial covenants. In particular, the Company must maintain a minimum unrestricted cash balance of $12.5 million in addition to the requirement that the Company maintain at least one other warehouse facility of no less than $100 million. Failure to comply with these, or any other covenants, could result in the obligation to repay all amounts then outstanding. The Company was in compliance with all covenants for this agreement during the three and six months ended and at June 30, 2003.

The Company has a warehouse line of credit for borrowings of up to $75 million for the interim financing of mortgage loans with Residential Funding Corporation. The interest rate charged on borrowings against these funds is variable based on LIBOR plus various percentage points. Borrowings are collateralized by the related mortgage loans held-for-sale. The committed line of credit expires on December 31, 2003. Upon expiration, management believes it will either renew its existing line or obtain sufficient additional lines. This line of credit agreement generally requires the Company to comply with various financial and non-financial covenants. In particular, the Company must maintain a minimum unrestricted cash balance of $12.5 million in addition to the requirement that the Company maintain at least one other warehouse facility of no less than $100 million. Failure to comply with these, or any other covenants, could result in the obligation to repay all amounts then outstanding. The Company was not in compliance with its current ratio covenant for this agreement for the months ended April 30, and May 31, 2003, and subsequently obtained a waiver from the lender. The Company was in compliance with all covenants as of June 30, 2003.

The Company has an agreement to finance up to $475 million of mortgage loan inventory pending sale of these loans to the ultimate mortgage loan investors with Greenwich Capital. Of this amount, $200 million is available in committed funds. This loan inventory financing is secured by the related mortgage loans. The interest rate charged on borrowings against these funds is based on LIBOR plus various percentage points. The line requires the restriction of $2.5 million in cash as additional collateral. The line expires March 30, 2004. Upon expiration, management believes it will either renew its existing line or obtain sufficient additional lines. This agreement includes various financial and non-financial covenants. In particular, the Company must maintain a minimum cash and cash equivalents balance of the higher of $15 million (including Restricted Cash) or the highest amount required by any other lender or agreement. Additionally, the Company is required to maintain at least one other warehouse facility of no less than $50 million. Failure to comply with these, or any other covenants, could result in the obligation to repay all amounts then outstanding. The Company was in compliance with all debt covenants for this agreement during the three and six months ended and at June 30, 2003.

In addition, the Company has an uncommitted mortgage loan purchase and sale agreement with Greenwich Capital. Under the terms of this agreement, mortgage loans which are subject to a "take-out" commitment between the Company and an investor, but have not yet been purchased, may be sold to Greenwich Capital with the accompanying trade assignment. This allows the Company to accelerate turnover and provide additional liquidity to fund additional mortgage loans.

The Company has a $10 million line of credit facility with Merrill Lynch Mortgage Capital, Inc. to support the interim funding of auto loans prior to the sale to the ultimate auto loan purchaser. The interest rate charged on this line is based on LIBOR plus various percentage points. This facility expires on July 13, 2004. Upon expiration, management believes it will either renew its existing line or obtain sufficient additional lines. The Company was in compliance with all debt covenants for this agreement during the three and six months ended and at June 30, 2003.

In 2002, the Company sold the majority of its sub-prime auto loans to three auto loan purchasers, Americredit Financial Inc. ("Americredit"), Triad Financial Corporation d.b.a. Roadloans and Transouth Financial Corporation. In October 2002, the Company terminated its agreement with Americredit, its largest sub-prime auto loan purchaser. The Company subsequently entered into an agreement with Household Automotive Credit Corporation as a sub-prime auto loan purchaser to replace Americredit. However, the Company's management does not anticipate that its current sub-prime auto loan purchasers, without Americredit, will support the same loan volume.

In June 2002, the Company created a qualified special purpose entity, E-Loan Auto Fund One, LLC ("E-Loan Auto"), which purchases prime auto loans from the Company and then holds the loans. E-Loan Auto finances its purchases through a $800 million credit facility with Merrill Lynch Bank USA, which can support originations through July 13, 2005. Borrowings are collateralized by the related auto loans held by E-Loan Auto. The Company is not obligated to repay any balance outstanding under the credit facility that exists between E-Loan Auto and Merrill Lynch Bank USA. Upon expiration, the Company anticipates that E-Loan Auto will either renew its existing line or obtain sufficient additional lines.

On June 30, 2003, the Company obtained a $5 million line of credit from Wells Fargo Bank, National Association. The interest rate charged on borrowings against these funds is based on LIBOR plus 2% and is payable monthly. The line expires on June 30, 2004.

The Company believes that its existing cash and cash equivalents as of June 30, 2003 will be sufficient to fund its operating activities, capital expenditures and other obligations for the next twelve months. However, if during that period or thereafter the Company is not successful in generating sufficient cash flow from operations, or in raising additional funds when required in sufficient amounts and on terms acceptable to the Company, it could have a material adverse effect on the Company's business, results of operations and financial condition. If additional funds are raised through the issuance of equity securities, the percentage ownership of its then- current stockholders would be reduced.

The statements contained in this Report that are not historical facts are "forward-looking statements" (as such term is defined in Section 27A of the Securities Act of 1933 and section 21E of the Securities Exchange Act of 1934), which can be identified by the use of forward-looking terminology such as "estimated," "projects," "anticipated," "expects," "intends," "believes," or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy that involve risks and uncertainties. These forward-looking statements, such as the Company's plans to increase the number of purchase loans, the relative importance of loans E-LOAN originates and sells and growth in the number of applications received, statements regarding development of E-LOAN's business, future operating results, anticipated capital expenditures, the expectations as to the use of capital resources and the availability of additional financing, and other statements contained in this Report regarding matters that are not historical facts, are only estimates or predictions and cannot be relied upon. No assurance can be given that future results will be achieved; actual events or results may differ materially as a result of risks facing the company or actual results differing from the assumption underlying such statements. Such risks and assumptions include, but are not limited to, E-LOAN's ability to access additional debt or equity financing in the future, secure replacement lines of credit for mortgage and auto loans, respond to increasing competition, secure additional loan purchasers, manage growth of E-LOAN's operations, as well as regulatory, legislative, and judicial developments that could cause actual results to vary materially from the future results indicated, expressed or implied in such forward-looking statements. All written and oral forward-looking statements made in connection with this Report which are attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the "Factors Affecting Future Operating Results" and other cautionary statements included herein. The Company disclaims any obligation to update information contained in any forward-looking statement.

The following important factors, among others, could cause actual results to differ materially from those contained in forward-looking statements made in this report or presented elsewhere by management from time to time.

While we achieved our first profitable year during 2002, we have an accumulated deficit of $191.8 million, as of June 30, 2003. Because we expect that our operating costs will increase to accommodate expected growth in loan applications, we will need to generate significant revenues to maintain profitability. We may not sustain or increase profitability on a quarterly or annual basis in the future. If revenues grow more slowly than we anticipate, or if operating expenses exceed our expectations or cannot be adjusted accordingly, our business, results of operations and financial condition will be adversely affected.

We were incorporated in August 1996, initiated our online mortgage operations in June 1997 and acquired our online auto operations in September 1999. We cannot assure you that we will be able to operate successfully if a downturn in the mortgage or auto business occurs. As a result of our limited operating history, our recent growth and our reporting responsibilities as a public company, we may need to expand operational, financial and administrative systems and control procedures to enable us to further train and manage our employees and coordinate the efforts of our underwriting, accounting, finance, marketing, and operations departments.

Our revenues and operating results may vary significantly from quarter to quarter due to a number of factors. Certain months or quarters have historically experienced a greater volume of purchase money mortgage and auto loan applications and funded loans. As a result, we believe that quarter-to-quarter comparisons of our operating results are not a good indication of our future performance. It is possible that in some future periods our operating results may be below the expectations of public market analysts and investors. In this event, the price of our common stock may fall.

A significant percentage of our mortgage customers use our services to refinance existing mortgages and they are motivated to do so primarily when interest rates fall below the rates of their existing mortgages. In the event interest rates significantly increase, consumers' incentive to refinance will be greatly reduced and the number of loans that we originate could significantly decline.

The mortgage loan purchase commitments we obtain are contingent upon our delivery of the relevant loans to the purchasers within specified periods. To the extent that we are unable to deliver the loans within the specified periods and interest rates increase during those periods, we may experience no gain or even a loss on the sale of these loans. In addition, any increase in interest rates will increase the cost of maintaining our warehouse and repurchase lines of credit on which we depend to fund the loans we originate. The interest direct margin earned on loans held-for-sale significantly benefited from the spread between long-term and short-term interest rates starting in 2001 and continuing through the second quarter of 2003. Based on historical trends, we would not expect the same level of benefit from interest rate spreads in a normal market. We have implemented a hedging program to manage the risk of loss due to fluctuations in interest rates, but our hedging efforts may not be successful, and no hedging strategy can completely eliminate interest rate risk. A sharp decrease in interest rates over a short period may cause customers who have interest rates on mortgage loans committed through us to either delay closing their loans or refinance with another lender. If this occurs in significant numbers, it may have an adverse effect on our business or quarterly results of operations.

We attempt to manage our interest rate risk exposure through hedging transactions using a combination of forward sales of mortgage-backed securities and forward whole-loan sales to fix the sales price of loans we expect to fund. An effective hedging strategy is complex, and we have limited experience administering a hedging program. A successful hedging program depends in part on our ability to properly estimate the number of loans that will actually close and is subject to fluctuations in the prices of mortgage-backed securities, which do not necessarily move in tandem with the prices of loans we originate and close. To the extent that we implement a hedging strategy but are unable to effectively match our purchases and sales of mortgage-backed securities with the sale of the closed loans we have originated, our gains on sales of mortgage loans will be reduced, or we will experience a net loss on those sales. In addition, we currently do not hedge the interest rate exposure related to our auto loan approvals. Approved auto loan applicants are provided a guaranteed rate for up to a 45 day period. Based upon a variety of factors, we determined that the cost to hedge the potential interest rate risk was not proportional to the benefit derived. In the event we experience dramatic increases in short term (generally two year term) interest rates, it is possible that we could experience a net loss on those loan approvals.

The time between the date an application for a mortgage loan is received from a customer and the date the loan closes can be lengthy and unpredictable. The loan application and approval process is often delayed due to factors over which we have little or no control, including the timing of the customer's decision to commit to an available interest rate, the close of escrow date for purchase loans, the timeliness of appraisals and the adequacy of the customer's own disclosure documentation. Purchase mortgage loans generally take longer to close than refinance loans as they are tied to the close of the property sale escrow date. This uncertain timetable can have a direct impact on our revenue and profitability for any given period. We may expend substantial funds and management resources supporting the loan completion process and never generate revenue from closed loans. Therefore, our results of operations for a particular period may be adversely affected if the mortgage loans applied for during that period do not close in a timely manner or at all.

Over the past two years we have experienced significant growth, which has placed a strain on our resources and will continue to do so in the future. Our failure to manage this growth effectively could adversely affect our business. We may not be successful in managing or expanding our operations or maintaining adequate management, financial and operating systems and controls. Our headcount has grown substantially. At June 30, 2002 and 2003, we had 524 and 762 full-time employees, respectively.

Our success will depend in large part on widespread consumer acceptance of obtaining mortgage and auto loans online. Increased consumer use of the Internet to provide for their lending needs is subject to uncertainty. The development of an online market for mortgage and auto loans has only recently begun, is rapidly evolving and likely will be characterized by an increasing number of market entrants. If consumer acceptance of the Internet as a source for mortgage, home equity and auto loans does not increase, our business, results of operations and financial condition will be adversely affected. A number of factors may inhibit Internet usage by consumers, including privacy and security concerns regarding their personal information. The adoption of online lending requires the acceptance of a new way of conducting business, exchanging information and applying for credit by consumers that have historically relied upon traditional lending methods. As a result, we cannot be sure that we will be able to compete effectively with traditional borrowing and lending methods.

We rely on Internet marketing agreements with other companies to direct a significant number of prospective customers to our website. During the three months ended June 30, 2003, in the aggregate, approximately 32%, 26% and 67% of our mortgage, home equity and auto loan applications, respectively, were derived from Internet marketing agreements. Our marketing agreements are typically short-term, less than one year in length, and most can be terminated for any reason upon 30 to 60 days prior written notice. We cannot assure you that any or all of these agreements will not be terminated or will be renewed or extended past their current expiration dates. If a number of our significant marketing agreements were to be terminated or were to lapse without extension, we could lose a considerable number of loan applications and our business could be adversely affected.

We currently sell the majority of our sub-prime auto loans to three auto loan purchasers, Household Automotive Credit Corporation, Triad Financial Corporation d.b.a. Roadloans and Transouth Financial Corporation. In addition, we currently sell all of our prime auto loans to a qualified special purpose entity (QSPE). The QSPE is dependent on Merrill Lynch Bank USA to provide the necessary financing to continue purchasing loans from us. If any of the current auto loan purchasers are unable or unwilling to purchase our auto loans, we may experience delays in our ability to accept or process auto loan applications.

We rely on other companies to perform services related to the loan underwriting process, including appraisals, credit reporting and title searches. Any interruptions or delays in the provision of these services may cause delays in the processing and closing of loans for our customers. If we are unsuccessful in managing the timely delivery of these services we will likely experience increased customer dissatisfaction and our business and reputation could be adversely affected.

We depend on automated underwriting and other services offered by government sponsored and other mortgage investors, including Fannie Mae and Freddie Mac ("Agencies"), to help ensure that our mortgage services can be offered efficiently and on a timely basis. We currently have an agreement with the Agencies that authorizes our use of their automated underwriting services and enables us to sell qualified first mortgages to these Agencies. We cannot assure you that we will remain in good standing with the Agencies or that the Agencies will not terminate our relationship. We expect to continue to process a significant portion of our conforming mortgage loans using the Agencies' systems. Our agreement with the Agencies can be terminated by either party. The termination of our agreements with the Agencies would adversely affect our business by reducing our ability to streamline the mortgage origination process.

Our website has in the past and may in the future experience slower response times or decreased traffic for a variety of reasons. In addition, our users depend on Internet service providers, online service providers and other website operators for access to our websites. Many Internet users have experienced significant outages in the past, and could experience outages, delays and other difficulties due to system failures unrelated to our systems. Additionally, the Internet infrastructure may not be able to support continued growth in its use. Any of these problems could adversely affect our business.

Internet usage could decline if any well-publicized compromise of security occurred. We may incur significant costs to protect against the threat of security breaches or to alleviate problems caused by any breaches that occur. We also retain on our premises personal financial documents that we receive from prospective borrowers in connection with their loan applications. These documents are highly sensitive and if a third party were to misappropriate our customers' personal information, customers could possibly bring legal claims against us. We cannot assure you that our privacy policy will be deemed sufficient by our prospective customers or compliant with any federal or state laws governing privacy, which may be adopted in the future.

Interest rate movements significantly impact our volume of closed loans and represent the primary component of market risk to us. In a higher interest rate environment, consumer demand for mortgage loans, particularly refinancing of existing mortgages, declines. Interest rate movements affect the interest income earned on loans held for sale, interest expense on the warehouse lines payable, the value of mortgage loans held for sale and ultimately the gain on sale of mortgage loans.

We attempt to minimize the interest rate risk associated with the time lag between when loans are rate-locked and when they are committed for sale or exchanged in the secondary market, through our hedging activities. Individual mortgage loan risks are aggregated by loan type and pipeline production status, and are then matched, based on duration, with the appropriate hedging instrument, thus mitigating basis risk until closing and delivery. We currently hedge our mortgage pipeline through mandatory forward sales of Fannie Mae mortgage-backed securities and both mandatory and non-mandatory forward loan sale agreements with the ultimate investor. We determine which alternative provides the best execution in the secondary market. In addition, we do not believe our net interest income would be materially affected as a result of concurrent changes in long-term and short-term interest rates due to the short duration of time loans are held on the balance sheet prior to being sold (typically under thirty days).

We believe that we have implemented a cost-effective hedging program to provide a high level of protection against changes in the market value of rate-lock commitments. However, an effective strategy is complex and no hedging strategy can completely insulate the Company against such changes.

As of June 30, 2003, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Exchange Act Rule 13a-14(c)). Based upon that evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective in timely alerting them to material information relating to the Company that is required to be included in the Company's periodic filings with the Securities and Exchange Commission. There have been no significant changes in the Company's internal controls or, to the Company's knowledge, in other factors that could significantly affect those internal controls subsequent to the date the Company carried out its evaluation, and there have been no corrective actions with respect to significant deficiencies and material weaknesses.

The Company's management, including the Chief Executive Officer and Chief Financial Officer, do not expect that the Company's disclosure controls or internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.