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 prepayment speeds 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 Auto Revenues. The weighted average loss rate is based on actual loss experience to date from the seasoned portions of the portfolio. The prepayment speed projects prepayments on a monthly percentage of the original loan balance. All assumptions are monitored over time and are adjusted to reflect actual performance.

Significant components of the provision for income taxes are as follows (in thousands):

                                                                 Years Ended December 31,
                                                           -------------------------------------
                                                              2002         2003         2004
                                                           -----------  -----------  -----------
Federal:
      Current............................................ $        --  $        --  $        --
      Deferred...........................................          --           --           --
                                                           -----------  -----------  -----------
                                                                   --           --           --
                                                           -----------  -----------  -----------
State:
      Current............................................       1,692        1,183          (36)
      Deferred...........................................        (728)         700           --
                                                           -----------  -----------  -----------
                                                                  964        1,883          (36)
                                                           -----------  -----------  -----------
Income tax provision..................................... $       964  $     1,883  $       (36)
                                                           ===========  ===========  ===========

The provision for income taxes was at rates other than the U.S. Federal statutory rate for the following reasons:

                                                                 Years Ended December 31,
                                                           -------------------------------------
                                                              2002         2003         2004
                                                           -----------  -----------  -----------
U.S. Federal statutory rate..............................        34.0%        34.0%        34.0%
State taxes..............................................         6.1%         4.6%         6.0%
Net operating loss utilization...........................       -32.5%       -30.5%       -41.9%
Other....................................................         0.7%        -0.4%        -2.8%
                                                           -----------  -----------  -----------
                                                                  8.3%         7.7% $      -4.7%
                                                           ===========  ===========  ===========

At December 31, 2004, the Company had net operating loss carryforwards of approximately $68 million for federal tax purposes and $56 million for state tax purposes.  The federal carryforwards expire in the years 2013 through 2021. For federal and state tax purposes, a portion of the Company's net operating loss may be subject to certain limitations on annual utilization in case of changes in ownership, as defined by federal and state tax laws. A state tax provision was required, in substantial part, due to the suspension of California state net operating loss carryforwards that was in effect for both 2002 and 2003.  Approximately, $31 million of the net operating loss carryforward will begin expiring in 2006 under California law.

The primary components of temporary differences, which give rise to deferred taxes are as follows (dollars in thousands):

                                                                  December 31,
                                                           ------------------------
                                                              2003         2004
                                                           -----------  -----------
  Deferred tax  assets:
     Net operating loss carryforwards.................... $    24,616  $    26,950
     Reserves and accruals...............................       1,238        1,331
     Fixed assets........................................         794         (264)
     Mark-to-market of securities........................      (1,029)      (1,292)
     Capitalized development costs.......................      (1,511)      (1,878)
     Other...............................................         242          582
                                                           -----------  -----------
           Total deferred tax assets..................... $    24,350  $    25,429
                                                           ===========  ===========

Management evaluates the recoverability of the deferred tax assets and the level of the valuation allowance. Due to the uncertainty surrounding the realization of the favorable tax attributes in future tax returns, the Company has recorded a valuation allowance against its net deferred tax assets at December 31, 2003 and 2004, in the amount of $24.3 million and $25.4 million, respectively. 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. Approximately $2.6 million of the benefits related to net operating loss carryforwards indicated above are attributable to stock-based compensation, and will be recognized as an increase to the Company's additional paid-in capital where realized.

The Company has a warehouse line of credit with GMAC Mortgage Corporation for borrowings of up to $75 million for the interim financing of mortgage loans. The interest rate charged on borrowings against these funds is variable based on LIBOR plus various percentage points. This warehouse line requires the Company to pay GMAC a non-use fee when the average outstanding principal amount of borrowings is less than 50% of the total commitment at a rate of 0.25% per annum on the daily average unutilized commitment. Borrowings are collateralized by the related mortgage loans held-for-sale. This warehouse 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 cash balance of $15.0 million. The Company was in compliance with these covenants during the twelve months ended and at December 31, 2004. The committed line of credit expires on March 31, 2005.

The Company has an agreement with Greenwich Capital to finance up to $500 million of mortgage loan inventory pending sale of these loans to the ultimate mortgage loan purchasers. 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. As part of this agreement the Company had to pay a commitment fee of $1.0 million for the period March 31, 2003 through March 30, 2004. The commitment fee was reduced to $750,000 for the period March 15, 2004 through March 14, 2005. The commitment fee was reduced to $600,000 for the period March 15, 2005 through March 13, 2006. This agreement includes various financial and non-financial covenants. In particular, the Company must maintain a minimum cash and cash equivalents balance of $15 million. Prior to an amendment in March 2004, the Company was required to maintain a restriction of $2.5 million in cash as additional collateral. Subsequent to the amendment, there is no restriction on cash related to this facility. The Company was in compliance with these covenants during the twelve months ended and at December 31, 2004. The line will expire on March 13, 2006.

In addition, the Company has a mortgage loan purchase and sale agreement with Greenwich Capital. Under the terms of this agreement, mortgage loans which are allocated to a mandatory sell forward commitment between the Company and a loan purchaser, but have not yet been settled, may be sold to Greenwich Capital subject to the accompanying trade assignment. Revenue, in the form of a retained interest, derived from sales under this agreement is included as a receivable on the balance sheet until the transaction is settled (see Note 6). The balance of loans sold related to these receivables was $305.1 million and $337.8 million as of December 31, 2003 and December 31, 2004, respectively.

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 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 requires the Company to pay an unused line fee equal to 0.50% per year on the average daily unused line balance. This facility expires on July 13, 2007. This line includes various financial and non-financial covenants. The Company was in compliance with these covenants during the twelve months ended and at December 31, 2004.

The Company has an uncommitted warehouse line of credit agreement with Merrill Lynch Mortgage Capital Inc. for borrowings of up to $100 million for the interim financing of mortgage loans. 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 uncommitted warehouse line of credit expires on February 4, 2006. 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. 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 these covenants during the twelve months ended and at December 31, 2004.

The following summarizes warehouse and other lines payable at December 31, 2003 and 2004 (dollars in thousands):

                                                                  December 31,
                                                           ------------------------
                                                              2003         2004
                                                           -----------  -----------
Warehouse lines - GMAC................................... $     8,066  $       210
Warehouse lines - Greenwich..............................      31,462       10,040
Warehouse lines - Merrill (Mortgage)                               --          877
Line of credit - Merrill (Auto)..........................       4,755        3,608
                                                           -----------  -----------
                                                          $    44,283  $    14,735
                                                           ===========  ===========

The following summarizes accounts payable, accrued expenses and other liabilities at December 31, 2003 and 2004 (dollars in thousands):

                                                                  December 31,
                                                           ------------------------
                                                              2003         2004
                                                           -----------  -----------
Accounts payable......................................... $     5,398  $     9,421
Accrued compensation.....................................       1,987        2,433
Income tax payable.......................................        (579)         (21)
Other liabilities........................................       3,011        5,670
Reserves.................................................       2,386        2,333
Interest payable.........................................         347          640
                                                           -----------  -----------
                                                          $    12,550  $    20,476
                                                           ===========  ===========

Included in other liabilities is an amount related to the fair value of SFAS 133 derivatives of $0.9 million and $0.2 million at December 31, 2003 and 2004, respectively.

Included in the accounts payable, accrued expenses and other current liabilities is an amount related to reserves the Company established for representations and warranties and premium repayment liability. The Company sells loans to loan purchasers on a servicing released basis subject to certain representations and warranties from the Company to the purchaser. As such, the risk of loss or default by the borrower has generally been assumed by these purchasers. However, the Company is generally required by these purchasers to make certain representations relating to borrower creditworthiness, 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 ensuring that the borrower makes 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 sales activity.

Loss reserves due to breaches of representations and warranties are recorded based on a percentage of current month sales. The Company currently calculates this loss rate exposure based on its historical loss rates as well as similar lending portfolios. Once the Company has endured a complete economic cycle, the rate will be adjusted based on actual losses as a percentage of origination volume on a historical basis. Premium repayment reserves, generated through early loan prepayments related to loans sold to loan purchasers, are recorded based on a rate determined by calculating actual prepayments as a percentage of sales on a historical basis applied to current month sales. The following illustrates the changes in the reserve balances for the years ended December 31, 2002, 2003 and 2004 by product (in thousands):

                                Mortgage    Home Equity     Auto         Total
                               -----------  -----------  -----------  -----------
Balance at 1/1/02............ $       369  $        36  $        74  $       479
   Increase to reserve.......         535          294          193        1,022
   Losses incurred...........        (286)        (169)        (146)        (601)
                               -----------  -----------  -----------  -----------
Balance at 12/31/02.......... $       618  $       161  $       121  $       900
                               ===========  ===========  ===========  ===========

Balance at 1/1/03............ $       618  $       161  $       121  $       900
   Increase to reserve.......       1,459        1,852          147        3,458
   Losses incurred...........        (768)      (1,047)        (157)      (1,972)
                               -----------  -----------  -----------  -----------
Balance at 12/31/03.......... $     1,309  $       966  $       111  $     2,386
                               ===========  ===========  ===========  ===========

Balance at 1/1/04............ $     1,309  $       966  $       111  $     2,386
   Increase to reserve.......         886        1,541           19        2,446
   Losses incurred...........      (1,201)      (1,228)         (70)      (2,499)
                               -----------  -----------  -----------  -----------
Balance at 12/31/04.......... $       994  $     1,279  $        60  $     2,333
                               ===========  ===========  ===========  ===========

On June 30, 2003, the Company obtained a $5 million line of credit from Wells Fargo Bank, N.A. 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 was originally scheduled to expire on June 30, 2004. However, on December 11, 2003, the agreement was amended to reduce the line of credit to $2,350,000 and extend the expiration date to June 30, 2005. As part of the amendment, the Company was required to provide restricted cash as collateral for this line of credit (see Note 2). Currently, the line of credit is being utilized to support letters of credit related to the Pleasanton, California facility as well as a letter of credit related to the Company's surety bonds. The Company was in compliance with these covenants during the twelve months ended and at December 31, 2004. No balance was outstanding on this line as of December 31, 2003 and December 31, 2004.

As of December 31, 2004, the Company was authorized to issue 150,000,000 shares of common stock and 5,000,000 shares of preferred stock. As of December 31, 2004 the 5,000,000 shares of preferred stock are undesignated.

On April 25, 2000, the Company issued two warrants to purchase up to 13.1 million shares of common stock to The Charles Schwab Corporation pursuant to a marketing agreement with Schwab. The total valuation of both of these warrants was determined to be $12.5 million. The assumptions used to value the warrants are addressed in Note 18. The amount was recorded as a contra-equity item called marketing services receivable and was expensed over a one-year term based on the Company's unilateral cancellation right on or before the end of the agreement's first year. The marketing services receivable concluded amortization on June 30, 2001 (see Note 19). On July 12, 2001 the Company exchanged the warrant to purchase 6,600,000 shares at $15 per share for a new warrant to purchase 1,389,000 shares at $5 per share (see Note 19). On June 27, 2003, this warrant was exercised on a net exercise basis and 254,566 shares of common stock were issued to complete the settlement.

In February 2001, the Company issued a warrant to purchase 300,000 shares of common stock to Greenwich Capital in connection with a warehouse agreement at an exercise price of $1.55 per share until February 23, 2006. In July 2003, Greenwich Capital assigned a portion of the warrant to an institutional investor in the amount of 150,000 common shares. At December 31, 2004, both warrants remain outstanding.

In June 2002, the Company issued a warrant to purchase 800,000 shares of common stock to Merrill Lynch Mortgage Capital, Inc. in connection with a line of credit agreement at an exercise price of $1.22 per share until June 1, 2005. At December 31, 2004 this warrant remained outstanding. In January 2005, Merrill exercised the warrant on a net exercise basis and 505,752 shares of common stock were issued to complete the settlement.

The Company has a savings plan that qualifies as a deferred salary arrangement under Section 401(k) of the Internal Revenue Code (the "401(k) Plan"). Under the 401(k) Plan, participating employees may defer a percentage of their eligible pretax earnings up to the Internal Revenue Service's annual contribution limit. All employees of the Company age 18 years or older are eligible to participate in the 401(k) Plan. The Company did not match employee contributions during the years ended December 31, 2002, 2003 or 2004.

As of December 31, 2004, the Company had reserved up to 18,898,375 shares of common stock issuable upon exercise of options issued to certain employees, directors, and consultants pursuant to the Company's 1997 Stock Option Plan. Such options were exercisable at fair market value prices established at the date of grant (based on the closing price of the Company's stock on date of grant), and have a term of ten years. Initial optionee grants have a vested interest in 25% of the option shares upon the optionee's completion of one year of service measured from the grant date. The balance will vest in equal successive monthly installments of 1/48 upon the optionee's completion of each of the next 36 months of service. If an option holder ceases to be employed by the Company, vested options held at the date of termination may be exercised within three months. Options under the plan may be either Incentive Stock Options, as defined under Section 422 of the Internal Revenue Code, or Nonstatutory Options. During the years ended December 31, 2002, 2003 and 2004, 1,922,450, 2,205,750, and 3,349,000 options had been granted and at December 31, 2004, 2,723,992 options were still available for grant under the Company's stock option plan.

In March 1999, the Company adopted the 1999 Employee Stock Purchase Plan (the "Purchase Plan") under which 1,500,000 shares of common stock were reserved for issuance. In October 2004, the Purchase Plan was terminated. The Purchase Plan provided for an annual automatic increase in the number of shares of common stock reserved under the Purchase Plan by an amount equal to the lesser of 1,500,000 shares, 2% of the then outstanding shares, or a lesser amount determined by the Company's Board of Directors. Since the initial registration of 1,500,000 shares under the Purchase Plan, an additional 1,068,984 shares were added to the 1999 Purchase Plan by the automatic increase mechanism. Employees who participated in the Purchase Plan were eligible to have up to 15% of their earnings withheld and used to purchase shares of common stock on specified dates as determined by the Board. The price of common stock purchased under the Purchase Plan was equal to 85% of the lower of the fair market value of the common stock, at the commencement date or the ending date of each 24-month offering period. Each offering period included four six-month purchase periods. No compensation expense is recorded in connection with this plan.

Sales under the Purchase Plan for the years ended December 31, 2003 and 2004 were 905,722 and 805,328 shares of common stock at an average price of $1.10 and $1.36, respectively. As of December 31, 2004, due to the termination of the Purchase Plan, all unissued shares were released from reserve and no shares of the Company's common stock remained reserved and available for issuance under this plan.

The following information concerning the Company's stock option plan and employee stock purchase plan was provided in accordance with SFAS No. 123, Accounting for Stock-Based Compensation. As permitted by SFAS No. 123, the Company accounted for such plans in accordance with APB No. 25 and related interpretations. The fair value of each stock option was estimated on the date of grant using the minimum value and fair value option-pricing models with assuming no expected dividends and the following weighted average assumptions.

                                                Years Ended December 31,
                                          -------------------------------------
                                             2002         2003         2004
                                          -----------  -----------  -----------
Stock option plan:
   Expected stock price volatility......       90.00 %      67.62 %      58.19 %
   Risk-free interest rate..............        3.86 %       2.97 %       2.76 %
   Expected life of options (years).....           5            3            3

Stock purchase plan:
   Expected stock price volatility......       87.00 %      82.64 %      72.10 %
   Risk-free interest rate..............        2.90 %       2.23 %       1.93 %
   Expected life of options (years).....           2            2            1

As a result of the above assumptions, the weighted average fair value of options granted during the years ending December 31, 2002, 2003 and 2004 was $1.05, $1.64, and $1.08 respectively. The weighted average fair value of stock purchased during the three years ending December 31, 2002, 2003 and 2004 was $0.94, $1.03, and $1.02 respectively.

A summary of the status of the Company's stock option plan and changes during those periods is presented below:

                                                        Weighted
                                                         average
                                           Number of    exercise
                                            Shares        price
                                          -----------  -----------
Outstanding as of December 31, 2001.....  10,572,959  $      3.25
 Granted................................   1,922,450         1.50
 Exercised..............................    (173,402)        1.02
 Terminated/forfeited...................    (848,671)        3.87
                                          -----------
Outstanding as of December 31, 2002.....  11,473,336         2.95
 Granted................................   2,205,750         3.50
 Exercised..............................  (1,583,658)        1.34
 Terminated/forfeited...................  (1,511,320)        3.53
                                          -----------
Outstanding as of December 31, 2003.....  10,584,108         3.22
 Granted................................   3,349,000         2.58
 Exercised..............................  (1,529,241)        1.40
 Terminated/forfeited...................  (1,523,461)        4.01
                                          -----------
Outstanding as of December 31, 2004.....  10,880,406  $      3.17
                                          ===========

The following table summarizes information about stock options outstanding at December 31, 2004:

                           Options Outstanding         Options Exercisable
                    --------------------------------- ----------------------
                                            Weighted
                                 Weighted   Average                Weighted
                                  Average  Remaining                Average
    Range of          Number     Exercise  Contractual  Number     Exercise
 Exercises Prices   Outstanding    Price      Life    Exercisable    Price
- ------------------- -----------  --------- ---------- -----------  ---------
$  0.05  - $  1.65   2,745,806  $    1.19       6.33   2,318,639  $    1.17
$  1.67  - $  2.19   2,735,209  $    2.00       6.19   1,841,535  $    1.97
$  2.22  - $  3.00   2,812,464  $    2.66       8.89     587,663  $    2.66
$  3.04  - $ 33.00   2,586,927  $    7.05       6.86   1,789,328  $    8.55
                    -----------                       -----------
                    10,880,406  $    3.17       7.08   6,537,165  $    3.55
                    ===========                       ===========

SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information", establishes standards for reporting information regarding operating segments in annual financial statements and requires selected information for those segments to be presented in interim financial reports issued to stockholders. SFAS No. 131 also establishes standards for related disclosures about products and services and geographic areas. Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision-maker, or decision-making group, in making decisions how to allocate resources and assess performance. The Company's chief decision-maker(s), as defined under SFAS No. 131, are the Chief Executive Officer and the executive team. The Company has determined that it operates in a single reportable operating segment: online consumer direct lending, specializing in mortgage, home equity and auto loans.

All of the Company's revenues are generated from transactions originating in the United States.

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

                                                    Years Ended December 31,
                                               -------------------------------
                                                 2002       2003       2004
                                               ---------  ---------  ---------
Revenues:
   Mortgage.................................. $  61,212  $  97,327  $  63,950
   Interest income on mortgage loans.........    15,093     15,477      7,734
   Home equity...............................    13,176     24,149     42,219
   Interest income on home equity loans......     2,379      2,998      3,939
   Auto......................................    10,609     11,415     12,161
   Closing services..........................        --                 3,907
   Other.....................................       846      1,341      1,183
                                               ---------  ---------  ---------
                                              $ 103,315  $ 152,707  $ 135,093
                                               =========  =========  =========

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

                                                   Years Ended December 31,
                                               -------------------------------
                                                 2002       2003       2004
                                               ---------  ---------  ---------
Interest income on short-term investments.... $     240  $     184  $     120
Interest expense on non-warehouse
   facility borrowings.......................      (160)       (44)       (33)
Other........................................        --         --         --
                                               ---------  ---------  ---------
                                              $      80  $     140  $      87
                                               =========  =========  =========

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

                                                   Years Ended December 31,
                                               -------------------------------
                                                 2002       2003       2004
                                               ---------  ---------  ---------
Compensation and benefits.................... $  39,373  $  55,641  $  55,811
Processing costs.............................     9,987     11,407     12,484
Advertising and marketing....................    20,707     36,649     42,825
Occupancy and administration.................    11,770     15,098     17,165
Interest expense on warehouse borrowings.....     9,943      9,548      6,109
                                               ---------  ---------  ---------
         Total operating expenses............ $  91,780  $ 128,343  $ 134,394
                                               =========  =========  =========

Commissions and bonus compensation comprised 29%, 25%, and 23% of total compensation and benefits in the years ended December 31, 2002, 2003, and 2004 respectively. Net occupancy costs comprised 12%, 16%, and 21% of total occupancy and administration in the years ended December 31, 2002, 2003, and 2004, respectively.

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

                                                   Years Ended December 31,
                                               -------------------------------
                                                 2002       2003       2004
                                               ---------  ---------  ---------
Mortgage .................................... $  26,045  $  34,775  $  27,300
Interest expense on mortgage loans...........     7,986      7,427      3,956
Home equity..................................     8,534     14,819     21,811
Interest expense on home equity loans........     1,367      1,724      2,077
Auto.........................................     8,842     10,971      7,535
Closing services.............................        --         --      3,529
Other........................................        80         --         --
                                               ---------  ---------  ---------
Total operations............................. $  52,854  $  69,716  $  66,208
                                               =========  =========  =========

The fair value of a financial instrument is the amount for which the instrument could be exchanged in a current transaction between willing parties, other than in a forced liquidation sale. Fair value estimates are subjective in nature and involve uncertainties and therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

The fair value of loans held-for-sale includes the expected gain on those loans upon sale to the loan purchaser (see Note 3). The carrying value of the Company's other financial instruments, including cash and cash equivalents, accounts receivable, derivatives, warehouse lines, and all other financial assets and liabilities approximate their fair value because of the short-term maturity of those instruments or because they carry interest rates which approximate market.

The Company leases office space under an operating leases, which expires June 2010. Rent expense under operating leases amounted to $1.5 million, $2.4 million, and $3.0 million for the years ended December 31, 2002, 2003 and 2004, respectively. The Company's lease obligations under operating leases are as follows (in thousands):

       Years Ending December 31,
 2005................................................... $   2,658
 2006...................................................     2,658
 2007...................................................     2,658
 2008...................................................     2,658
 2009 and thereafter....................................     3,987
                                                          ---------
Total minimum lease payments............................ $  14,619
                                                          =========

The Company had no capital lease obligations outstanding as of December 31, 2004.

The Company has an available line of credit in the amount $2,350,000. The Company is required to provide restricted cash as collateral for this line of credit (see Note 2). Currently, the line of credit is being utilized to support letters of credit related to the Pleasanton, California facility as well as a letter of credit related to the Company's surety bonds.

The Company has been named as a defendant in five related lawsuits filed in the Federal District Court for the Southern District of New York between August 10, 2001 and September 25, 2001. The lawsuits purport to be class actions filed on behalf of the plaintiffs and others similarly situated. They name as defendants E-LOAN, Christian Larsen, Janina Pawlowski, Frank Siskowski, The Goldman Sachs Group, Inc., FleetBoston Robertson Stephens, Inc., Merrill Lynch Pierce Fenner & Smith, Inc., Credit Suisse First Boston Corp. and J.P. Morgan Chase & Co., some of which were involved in the Company's initial public offering. The complaints have since been consolidated into a single action. The Consolidated Amended Complaint alleges, among other things, that the underwriters of the Company's initial public offering violated Section 12(a) of the Securities Act of 1933 by receiving excessive and undisclosed commissions and fees, and by entering into unlawful private agreements with brokers' customers, and that all defendants violated Section 11 of the Securities Act of 1933, and Section 10(b) and Rule 10b-5 under the Securities Exchange Act of 1934 by making material false and misleading statements in the Company's initial public offering prospectus concerning brokers' commissions and private agreements with brokers' customers. The plaintiffs seek to recover damages on behalf of all those who purchased or otherwise acquired E-LOAN securities during the respective class period. Similar complaints have been filed against over 300 other issuers that have had initial public offerings since 1998 and all such actions have been included in a single coordinated proceeding. On October 9, 2002, the Company's individual defendants were dismissed, without prejudice, from the lawsuit, pursuant to a stipulated agreement with the plaintiffs.

On June 25, 2003, a committee of the Company's Board of Directors conditionally approved a proposed partial settlement with the plaintiffs in this matter. The settlement would provide, among other things, a release of the Company and of the individual defendants for the conduct alleged in the action to be wrongful in the Amended Complaint. The Company would agree to undertake other responsibilities under the partial settlement, including agreeing to assign away, not assert, or release certain potential claims the Company may have against its underwriters. Any direct financial impact of the proposed settlement is expected to be borne by the Company's insurers. The committee agreed to approve the settlement subject to a number of conditions, including the participation of a substantial number of other Issuer Defendants in the proposed settlement, the consent of the Company's insurers to the settlement, and the completion of acceptable final settlement documentation.

In June 2004, an agreement of settlement was submitted to the court for preliminary approval. The court granted the preliminary approval motion on February 15, 2005, subject to certain modifications. The parties are directed to report back to the court regarding the modifications. If the parties are able to agree upon the required modifications, and such modifications are acceptable to the court, notice will be given to all class members of the settlement, a "fairness" hearing will be held and if the court determines that the settlement is fair to the class members, the settlement will be approved. Due to the inherent uncertainties of litigation, and because the settlement approval process is at a preliminary stage, the ultimate outcome of the matter cannot be predicted.

On March 1, 2005, Thomas A. Murray filed a complaint against the Company in the U.S. District Court for the Northern District of Illinois, Eastern Division, as case no. 05C-1219. The complaint alleges that the Company violated the federal Fair Credit Reporting Act in connection with a direct mailing sent to Mr. Murray. The complaint seeks damages in an unspecified amount, attorneys' fees, litigation expenses and costs of suit. The complaint purports to be a class action filed on behalf of all persons with Illinois addresses who received the mailing. The Company has not yet filed a response to the complaint. Seven similar complaints were recently filed in the district court against other parties, and on March 17, 2005 the district court denied the plaintiff's motion to reassign the cases to the judge who was presiding over a similar case that was filed in 2002. The case is pending. Due to the inherent uncertainties of litigation, the ultimate outcome of this matter cannot be predicted.

Both cases discussed above have been considered in light of Statement of Financial Accounting Standards (SFAS) No. 5, "Accounting for Contingencies", and no litigation reserves were deemed necessary.

The Company is subject to various other legal proceedings and claims, either asserted or unasserted, which arise in the ordinary course of business. While the outcome of these claims cannot be predicted with certainty, management does not believe that the outcome of any of these legal matters will have a material adverse effect on the Company's results of operations, financial position or liquidity.

As of December 31, 2004, the Company carried a mortgage bankers' blanket bond and errors and omissions insurance coverage for $5.0 million. The premiums for the bond and insurance coverage are paid through September 2005.

The Company has entered into fixed contracts to purchase national television spots through the third quarter of 2004. The Company pays for this media in monthly installments, generally thirty days in advance of the scheduled start date of the media. Future minimum payments under these contracts amount to approximately $6.4 million for 2004.

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 and product demand. 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 appropriate economic hedging strategy.

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

At December 31, 2004, the Company had extended locks to originate mortgage and home equity loans amounting to approximately $216.6 million (the "locked pipeline"). At December 31, 2004, the Company had entered into best efforts forward loan sale agreements amounting to approximately $38.5 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 counterparty risk. However, it is the Company's policy and practice to use well-established U.S. financial institutions to mitigate that risk; 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 December 31, 2004, the Company had entered into mandatory sell forward commitments amounting to approximately $80.2 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 December 31, 2004, the Company had entered into $7.1 million of commitments with loan purchasers to deliver loans related to funded loans held-for-sale.

The Company issues auto loan approvals on its prime loan production. Approved auto loan applicants are provided a guaranteed rate for up to a 45-day period. At December 31, 2004, the Company had entered into amortizing swap contracts in the amount of $18.3 million, as an economic hedge of anticipated funded loans from auto loan approvals.

During 2003, the Company contributed approximately $600,000 to Californians for Privacy Now, a Recipient Committee advocating enhancement of consumer financial privacy rights. The contribution was authorized by the Company's Board of Directors, after a determination that the promotion and enhancement of consumer financial privacy rights is in the best interests of the Company. Christian A. Larsen served as the Treasurer of Californians for Privacy Now from July 2, 2002 until June 28, 2003, when he relinquished his title as Treasurer and became Executive Director of the Recipient Committee.

Common Stock Purchase

On April 25, 2000, the Company sold 2,666,666 shares of its common stock to The Charles Schwab Corporation (Schwab) at a purchase price of $3.75 per share. The sale was part of a $40 million private placement sale of the Company's common stock. Following the purchase of shares, Schwab beneficially owned approximately 5% of the Company's outstanding shares of common stock.

On April 25, 2000, the Company entered into a four-year Marketing Agreement with Schwab to become the exclusive provider of mortgage loans to the Schwab customer base through a co-branded website at http://schwab.eloan.com. In consideration, the Company agreed to pay Schwab cash marketing fee payments and to issue to Schwab warrants to purchase shares of its common stock. This agreement was terminated in November 2002. As part of the Marketing Agreement, Daniel O. Leemon, a member of Schwab's management committee, was nominated to the Company's board of directors and served until October 2002.

The Company recorded revenue earned from the sale of loans attributable to the marketing agreement of $7,485,000, $0, and $0 for the twelve months ended December 31, 2002, 2003 and 2004, respectively. The volume of loans associated with the above revenue was $349.5 million for the twelve months ended December 31, 2002.

The original marketing agreement mentioned above stipulated that Schwab would receive cash marketing fees in the amount of $929,000, $3,547,000, $11,100,000 and $13,284,000 for each of the four years of the agreement, respectively. The escalating payments correlated to the anticipated future benefit from the marketing agreement as of April 2000. Through an amendment to the agreement, the Company obtained a unilateral right to cancel the agreement on or before June 30, 2001, which if exercised, no marketing fees would be owed for years 2 through 4 of the agreement. Also as an amendment to the agreement, the first year payment of $929,000 was reduced to $779,000. Based on the Company's ability to cancel, the first year's cash marketing fee payment of $779,000 was amortized ratably over the first year of the agreement.

Through a series of subsequent amendments, the marketing fees payable to Schwab were reduced to better match the then anticipated future benefit from the marketing agreement. The Company recorded cash marketing costs of $972,000, $0, and $0 for the twelve months ended December 31, 2002, 2003 and 2004, respectively.

In addition to marketing fees paid to Schwab, the Company incurred other advertising expense directed toward the Schwab customer base known as co-op marketing costs. The co-op marketing costs covered such items as direct mail pieces sent to Schwab customers. There was no minimum co-op marketing expense required under the agreement. The co-op marketing costs were a pass through of expenses and did not represent revenue for Schwab. The Company recorded co-op marketing costs of $91,000, $0, and $0 for the twelve months ended December 31, 2002, 2003 and 2004, respectively.

In addition to the cash compensation under the Marketing Agreement, the Company issued two warrants to purchase 13.1 million shares of common stock to Schwab. The first warrant to purchase 6,500,000 shares of common stock at an exercise price of $3.75, had a three-year term and expired on April 25, 2003, unexercised. Half of the 6,500,000 shares under the warrant were exercisable following the one year anniversary of the date of grant, and all of the shares were exercisable following the two year anniversary, if immediately prior to exercise the Company's stock had traded at $5.75 for five consecutive days. Once exercised, the shares would have been subject to a one-year holding period before they were saleable. The second warrant to purchase 6,600,000 shares of common stock at an exercise price of $15.00, had a three and a quarter year term and an expiration date of July 25, 2003. The second warrant did not contain the same restrictions included in the first warrant, and was net exercised by Schwab on June 27, 2003 for 254,566 shares of common stock. The warrants were not subject to cancellation when the Marketing Agreement was terminated. The average of the high and low price of the Company's common stock as reported by the Nasdaq National Market on April 24, 2000 (prior to date of issuance), and April 25, 2000 (the date of issuance of the warrants and the public announcement of the agreement) was $4.16 and $7.60 per share, respectively. Following the issuance of the warrants on April 25, 2000 (and shares acquired in the private placement), Schwab beneficially owned approximately 16% of the Company's outstanding shares of common stock. Beneficial ownership includes shares directly held and those issuable under warrants that are exercisable within sixty days of April 25, 2000, regardless of whether the warrant exercise price is less that the market price.

The total valuation of both of these warrants was determined to be $12,460,000. The first warrant was valued using the Black-Scholes option pricing model with the following assumptions: risk-free interest rate of 6.0%, term of three years and volatility of 80%.  The second warrant was also valued using the Black-Scholes option pricing model with the following assumptions: risk-free interest rate of 6.0%, term of three and 1/4 years and volatility of 70%. The difference between the total valuation of the warrants and the Black-Scholes option pricing model output is primarily attributable to discounts relating to both the dilution impact from the potential issuance of the shares of common stock underlying the warrants and the restrictions upon the exercise of the first warrant and the ability to sell the shares issuable upon exercise of that warrant. The total valuation was recorded as a contra-equity item called marketing services receivable and was expensed over a one-year term, consistent with the treatment of the first year cash payment due to the unilateral cancellation right.  The Company recorded $6.0 million in non-cash marketing costs in the year ended December 31, 2001 related to the issuance of these warrants. As of December 31, 2001, the warrants were fully amortized.

On July 12, 2001, the Company sold a $5 million convertible note to The Charles Schwab Corporation, which was convertible into shares of its common stock at a conversion price of $1.06 per share and which was scheduled to mature on January 19, 2003. The Company issued the note for general corporate purposes and in order to obtain adequate excess cash reserves above its minimum cash covenant requirements under its warehouse lines of credit. As the convertible feature was issuable in the Company's stock, no value was ascribed to the convertible feature of the note at the time it was issued (in accordance with APB 14 and SFAS 133). The convertible note bore interest at a rate of 8% per annum and was payable quarterly. Schwab beneficially owned approximately 19% of the Company's outstanding shares at the time the note was issued on July 12, 2001 (after giving effect to the warrant exchange described below). Beneficial ownership includes shares directly held and those issuable under warrants that are exercisable within sixty days of July 12, 2001, regardless of whether the warrant exercise price is less than the market price. Schwab received a total of $183,000 and $113,000 in interest payments on this note for the years ended December 31, 2001 and 2002, respectively.

On April 12, 2002, Schwab exercised its option to convert the amount due under the $5 million convertible note into 4,716,981 shares of the Company's common stock, in lieu of repayment, and therefore the note was converted rather than redeemed. Following conversion of the convertible note on April 12, 2002, Schwab beneficially owned 15,272,647 shares of our common stock which equaled approximately 23% of our total outstanding shares of common stock. Beneficial ownership includes shares directly held and those issuable under warrants that are exercisable within sixty days of April 12, 2002, regardless of whether the warrants exercise price is less than the market price.

On July 12, 2001, the Company issued a $5.0 million convertible note to Schwab, convertible into shares of the Company's common stock at a conversion price of $1.06 per share. In order to facilitate Schwab's purchase of the convertible debt and to meet its requirement that its fully diluted percent ownership in the Company be less than 25%, on July 12, 2001 Schwab surrendered its warrant to purchase 6,600,000 shares of common stock at an exercise price of $15.00 ("surrendered warrant") and the Company issued Schwab a new warrant to purchase 1,389,000 shares of common stock at an exercise price of $5.00 and with an expiration date of July 25, 2003 ("exchange warrant"). At the time of the exchange, the Company determined the value of the surrendered warrant and the exchange warrant to be of equal value (approximately $240,000). The surrendered warrant was valued using the Black-Scholes option pricing model with the following assumptions: risk-free interest rate of 3.95%, remaining term of 2 years and volatility of 98%.  The exchange warrant was also valued using the Black-Scholes option pricing model with the following assumptions: risk-free interest rate of 3.95%, remaining term of 2 years and volatility of 98%.  The difference between the valuation of each warrant and its respective Black-Scholes option pricing model output is primarily attributable to discounts which were applied to reflect liquidity and dilution. A liquidity discount was applied to both warrants to estimate the discount to market that would be required for the holder to try and recognize the value through open market sales. A second discount was applied to the surrendered warrant to reflect the dilution impact from the potential issuance of the shares of common stock underlying the warrant. This dilution discount was not applied to the exchange warrant because of the smaller number of shares it represented.  In valuing the surrendered warrant as part of the warrant exchange, we updated assumptions that change over time (e.g. risk-free interest rate, volatility, remaining term of set expiration date) from those used in its original valuation in April 2000. As each warrant was determined to be of approximate equal value, no additional value was recorded at the time of exchange. The Company incurred additional costs related to legal, accounting and filing fees to register the shares underlying the exchange warrant. The Company derived a benefit in the warrant exchange, since the exchange enabled Schwab to participate in the convertible note issuance. As a result of the exchange, Schwab reduced the number of shares it was entitled to purchase, but increased the likelihood that at some point in the future the exercise price would be less than the market price of the Company's common stock. The exchange warrant was net exercised by Schwab on June 27, 2003, for 254,566 shares of common stock. The average of the high and low price of the Company's common stock as reported by the Nasdaq National Market on July 12, 2001 (the date of issuance of the exchange warrant) was $1.02 per share.

Under Section 402 of the Sarbanes-Oxley Act of 2002, certain extensions of credit to directors and executive officers of publicly traded and reporting companies are prohibited effective July 30, 2002. Personal loans in existence prior to July 30, 2002 may continue in effect, provided there is no material modification to any term or renewal of such loan. However, the Act provides an exception for consumer credit loans that are (i) made or provided in the ordinary course of the consumer credit business of the issuer, (ii) of a type that is generally made available by such issuer to public, and (iii) made by such issuer on market terms, or terms that are no more favorable than those offered by the issuer to the general public for such extensions of credit.

The Company, like many financial institutions, has followed a policy of granting mortgage, home equity and auto loans to its directors and executive officers and members of their immediate families in the ordinary course of the Company's business. During the fiscal year ended December 31, 2004, the Company did not grant loans to any of its executive officers and directors. At the end of the fiscal year ended December 31, 2004, no loans from any such persons were held by the Company.

The Company has a limited operating history and its prospects are subject to the risks, expenses and uncertainties frequently encountered by companies in the new and rapidly evolving markets for internet products and services. These risks include the failure to develop and extend the Company's online service brands, the rejection of the Company's services by consumers, vendors and/or advertisers, the inability of the Company to maintain and increase the levels of traffic on its online services, as well as other risks and uncertainties.

Additionally, in the normal course of business, companies in the mortgage banking and auto finance industries encounter certain economic and regulatory risks. Economic risks include interest rate risk, credit risk and market risk. The Company is subject to interest rate risk to the extent that in a rising interest rate environment, the Company will generally experience a decrease in loan production, which may negatively impact the Company's operations. Credit risk is the risk of default, primarily in the Company's loan portfolio that result from borrowers' inability or unwillingness to make contractually required payments. Market risk reflects changes in the value of loans held-for-sale and in commitments to originate loans. Regulatory risks include administrative enforcement actions and/or civil or criminal liability resulting from the Company's failure to comply with the laws and regulations applicable to the Company's business.

The Company depends on three warehouse credit facilities to finance the mortgage loan inventory pending ultimate sale to mortgage loan investors. The warehouse credit facilities include both committed and uncommitted lines of credit. The Company also has a line of credit to finance the auto loan inventory pending ultimate sale to auto investors. All of these facilities have operating and financial covenants including the requirement that the Company maintain two mortgage warehouse facilities (with minimum borrowing capacity limits) and the maintenance of certain financial ratios. In particular, the Company must maintain a minimum cash and cash equivalents balance of the higher of $15 million. Failure to comply with these covenants on either or both lines could result in the obligation to repay all amounts outstanding at the time of termination. In the past, the Company has obtained waivers from these lenders due to failure to comply with certain covenants.

Typically, the Company sells its loans on a servicing released basis without recourse. By doing so, it reduces its risk of loss or default by the borrower, except that it may be required to repurchase the loan in the event of an early payment default. Although loans are sold without recourse, the Company may be required to repurchase the loan if it breaches the representations or warranties that it makes in connection with the sale of the loan, or if the loan does not comply with the underwriting standards or other requirements of the ultimate loan purchaser.

While the Company achieved its first profitable year during 2002, the Company experienced a pre-tax loss of $1.5 million in the fourth quarter of 2003 and for the first nine months of 2004. The Company may not regain or increase profitability on a quarterly or annual basis in the future. If revenues grow more slowly than anticipated, or if operating expenses exceed expectations or cannot be adjusted accordingly, the business, results of operations and financial condition will be adversely affected. Management believes that its cash and cash equivalents held at December 31, 2004 will be sufficient to fund its operating activities and capital expenditures, and meet all other obligations including its minimum cash and cash equivalent covenants through at least December 31, 2005.

Effective January 1, 2005, the Company's Board of Directors authorized an increase of 1,000,000 shares to the number of shares authorized for issuance under the Company's 1997 Stock Plan, in accordance with the annual automatic increase provision contained in the Plan.

In January 2005, the Company entered into an agreement for a warehouse line of credit for borrowings of up to $150 million for the interim financing of mortgage loans with JPMorgan Chase Bank, N.A. 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 January 3, 2006. 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 cash balance of $12.5 million. Failure to comply with these, or any other covenants, could result in the obligation to repay all amounts then outstanding.