Back to GetFilings.com

United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K

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

             For the fiscal year ended December 31, 2004 or

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

             For the transition period from ___________ to ___________.

Commission File Number: 0-28325
TMSF HOLDINGS, INC.
(Exact name of registrant as specified in its charter)

727 West Seventh Street Suite 850 Los Angeles CA 90017
(Address of principal executive offices and zip code)

(213) 234-2400
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Exchange Act: None

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

                                                                Title of class
                                                                Common Stock, $0.001 par value

              Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

               Yes [x] No [ ]

             Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form  10-K.  [   ]

              Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).

               Yes [ ] No [ ]

     On March 27, 2005 the aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was approximately $5,100,000 based on the closing sales price of common stock on the OTC Bulletin Board of the National Association of Securities Dealers. There were 15,000,000 shares of Common Stock outstanding (0.001 par value).

DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the registrant’s Definitive Proxy Statement issued in connection with the 2004 Annual Meeting of Stockholders of the registrant are incorporated by reference into Part III.

TMSF HOLDINGS, INC.
2004 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS

Table of Contents

PART I

ITEM 1. BUSINESS

Unless the context otherwise requires, the terms “Company,” “we,” “us,” and “our” refer to TMSF Holdings, Inc., a Delaware corporation incorporated in October 2002, and its wholly owned subsidiary, The Mortgage Store Financial, Inc. a California corporation incorporated in 1992 (“The Mortgage Store”). We file our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports filed pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 with the Securities and Exchange Commission (the “SEC”). You can learn more about us by reviewing such filings and other information that we may file or furnish to the SEC at the SEC’s website at www.sec.gov.

Forward-Looking Statements
This annual report on Form 10-K contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements, some of which are based on various assumptions and events that are beyond our control may be identified by reference to a future period or periods or by the use of forward-looking terminology, such as “may,” “will,” “believe,” “expect,” “anticipate,” “continue,” or similar terms or variations on those terms or the negative of those terms. Actual results could differ materially from those set forth in forward-looking statements, including, among other things, failure to achieve projected earning levels, the timely and successful implementation of strategic initiatives, the ability to generate sufficient liquidity, interest rate fluctuations, changes in assumptions regarding estimated loan losses or interest rates, the availability of financing and, if available, the terms of any financing, changes in estimations of origination and resale pricing of mortgages, changes in markets which we serve, including the market for Alt-A and fixed rate mortgages, the inability to originate sub-prime mortgages, changes in general market and economic conditions and other factors described in this annual report. For a discussion of the risks and uncertainties that could cause actual results to differ from those contained in the forward-looking statements see “Risk Factors” and Item 6. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this annual report. We do not undertake, and specifically disclaim any obligation, to publicly release the results of any revisions that may be made to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.

General
We are a financial holding company previously operating as Little Creek, Inc. In November 2002, we acquired The Mortgage Store — a nationwide mortgage lender — and changed our name to TMSF Holdings, Inc. Prior to the acquisition of The Mortgage Store, Little Creek Inc. did not have any significant operational activity. The following discussion pertains to those of The Mortgage Store, our wholly owned subsidiary. We are a nationwide mortgage banker that originates, finances, and sells conforming and non-conforming mortgage loans secured by single-family residences. Upon origination we sell our loans, on a whole loan basis, for cash to investors who either retain these mortgages for their own portfolio or pool them into mortgage backed securities offered in the financial markets. Since 1996, we have been engaged in origination of specialty products commonly known as Alt-A mortgages for residential borrowers. Recently, we expanded our loan programs to include Type-A loans as well as sub-prime mortgages for borrowers with lower credit ratings.

We have a wholesale division that solicits business from mortgage brokers and a retail division that markets directly to general public. There are currently over 2000 approved brokers out of which approximately 500 actively conduct business with us. For the year ended December 31, 2004, we originated approximately $1,031.2 million of mortgage loans, of which approximately $855.1 million were generated through third party brokers.

Loan applications are processed and underwritten by us in accordance with established guidelines acceptable to our investors, and are funded directly through our own credit facility (warehouse line). We do not maintain any loan portfolio for our own account, nor do we service the funded loans. We strive to sell the entire bulk of our funding within 30-60 days to investors for a cash premium price. The premium reflects the risk-adjusted value of the loan and is directly related to interest rates and borrower’s credit rating.

We offer both fixed-rate and adjustable-rate loans, as well as loans with an interest rate that is initially fixed for a period of time and subsequently converts to an adjustable rate. We offer a wide variety of interest rates in combination with points paid, so borrowers can elect to pay higher points at closing to secure a lower rate over the life of loan, or pay a higher interest rate and reduce or eliminate points payable at closing.

- 1 -

Table of Contents

We have traditionally engaged in alternative documentation lending, which in comparison with conventional types of mortgages allow borrowers with better credit ratings to obtain loans based on their good credit history instead of narrower underwriting criteria of full documentation loans. These Alt-A products currently constitute a substantial portion of our loan programs.

We originate mortgage loans, which are secured by a primary deed of trust of the property up to a maximum of 100% of the value. We do not originate stand-alone second trust deed loans or loans with over 100% loan-to-value (“LTV”) ratio. However, we may break a high LTV loan into a primary first trust deed and a concurrent second trust deed. 

We offer a wide range of mortgage products in order to insulate the risk of over dependence on any product type and to increase the volume of production through existing broker relations. These programs include conventional and jumbo full-documentation loans, and sub-prime loans for borrowers with category “B” and “C” credit ratings in addition to Federal Housing Administrative (“FHA”) and Veteran’s Administration Insured (“VA”) loans and hybrid adjustable rate mortgages with initial fixed interest rate period of one, two, three, five, and seven years that subsequently adjust to adjustable rate mortgages.   

We believe that through such varied product mix, we can create a sustained growth through different phases of economic cycles, which affect one category of loans more than others. We further believe that such a strategy would also enhance our relationship with existing brokers who would benefit from one-stop shopping for all of their clients.

Marketing
In the competitive environment of mortgage banking, efficiency in pricing and quality of service are important elements for continued success and growth. Our stated mission is to provide the highest quality of care to every customer and to assist brokers in offering the best programs and speed of closing to their clients. Our marketing strategy is to develop both our wholesale and retail divisions, and to expand the geographic coverage of our activities. We have established an in-house marketing division that continuously is introducing our programs to various participants in the industry.     

Currently, we have a team of in-house account representatives who introduce our programs to an increasing numbers of brokers. We intend to expand our wholesale division as new geographic areas are canvassed and added to our operational territories. Furthermore, we have a group of wholesale field representatives whom we rely on to establish personal relationships with mortgage brokers in their respective territories.    

In order to create a strong retail division, we have introduced an aggressive commission structure for those loan officers who have established a strong track record of successful origination to maximize their income through association with us as a direct lender. Under this program, we have recruited over 100 loan officers that operate throughout California. We intend to develop similar networks in other states where we are licensed as a mortgage broker.     

Additionally, we have established an exclusive arrangement with a mortgage franchisor in Southern California. Through this arrangement, we fund substantially all loans originated by each franchisee in the franchisor’s territory.

Operations
In order to provide the highest quality of service, which entails efficient communication and responsiveness to the needs of customer as well as fast processing and closing of the files, while maintaining prudent underwriting and quality control procedures, we have made substantial investment in technological resources and in our professional staffing.

- 2 -

Table of Contents

By bringing together all aspects of mortgage lending within one organization and nurturing a culture of open access and exchange we believe that we have successfully created an environment in which every employee shares and benefits from the success of the entire company and is motivated to provide care and service to customers.

Generally mortgage brokers submit a loan application to more than one lender at the same time in order to compare rates and terms for the best offer. Our policy is to provide a decision of approval or denial of a loan within 24 hours after submission of the loan application. Upon receipt of a loan package, the borrower’s information and loan data is entered into the mortgage-banking database. Once the loan application is registered, it is reviewed by an underwriting staff to determine that loan parameters conform to program guidelines. The broker is then informed of denial or conditional approval of their loan. The broker at this stage submits the whole application file including required conditions for full review and pricing of the loan. Once the rate and terms of the loan are accepted, the package including pre-funding conditions is submitted for underwriting, quality control, and funding.

It is possible for the broker to follow the progress of the loan application throughout this process by accessing the same loan data residing at our network via the Internet. A loan liaison will also be in continued contact with the broker to update him with the progress of the application package and any additional condition that may become necessary due to full review and quality control examinations of the loan application.

Underwriting
We originate loans for resale to various investors. Therefore, our underwriting guidelines are based on those acceptable to our investors. We use FHA and VA guidelines for loans to be insured by these organizations respectively. All type-A loans are underwritten according to Federal National Mortgage Association (“Fannie Mae”) guidelines. We use established underwriting guidelines for other Alt-A and “B” or “C” programs, and hybrid adjustable mortgages that are approved by our purchasers.

The guidelines for each program establish the requirements under which lenders will approve the loan. These guidelines define the maximum loan-to-value ratio, the maximum amount of loan, required credit scores and borrower’s income and assets to qualify for the loan.

The underwriting guidelines include three levels of applicant documentation requirements, referred to as the “Full Documentation,” “Stated Income Documentation” and “No Documentation” programs. Under Full Documentation and Stated Documentation programs, we review the applicant’s source of income, calculate the amount of income from sources indicated on the loan application or similar documentation, review the credit history of the applicant, calculate the debt service-to-income ratio to determine applicants ability to repay the loan, review the type and use of the property being financed, and review the property. In determining the ability of the applicant to repay the loan, our underwriters use a qualifying rate that is equal to (i) the stated interest on fixed rate loans, (ii) the initial interest rate on loans which provide for two to five years of fixed rate before the initial rate adjustment, or (iii) one percent above the initial interest rate on other adjustable-rate loans.

The underwriting guidelines require that mortgage loans be underwritten in standardized procedure which complies with applicable federal and state laws and regulations and requires our underwriters to be satisfied with the value of the property being financed, as indicated by appraisal and appraisal review. In general the maximum loan amount for mortgage loans originated under our programs is $650,000; however, larger loans may be approved on a case-by-case basis.

The underwriting guidelines for Full Documentation and Stated Income Documentation programs permit one-to-four unit family residential property loans to have loan-to-value ratios at origination of up to 100% for a maximum combined loan amount of $650,000 depending on, among other things, the borrower’s credit score, purpose of mortgage loan, repayment ability and debt service-to-income ratio, income documentation, as well as the type and use of the property.

- 3 -

Table of Contents

Under full documentation programs, applicants are generally required to submit two written forms of verification of stable income for at least 24 months. Under the Stated Income Documentation program an applicant may be qualified based upon monthly income as stated on the mortgage loan application if the applicant meets certain criteria. All the foregoing programs require that with respect to salaried employees there be a telephone verification of the applicant’s employment. Verification of the source of funds required for deposit into escrow in the case of a purchase money loan is generally required for all Full Documentation loans and Stated Income Documentation loans, where the loan-to-value ratio is greater than 80%.

Our categories and criteria for grading the credit history of potential borrowers are set forth in the table below. Generally, borrowers in lower credit grades are less likely to satisfy the repayment of obligations of a mortgage loan, and therefore, are subjected to lower loan-to-value ratios and are charged higher interest rates and loan origination fee. Loans made to lower credit grade borrowers, including credit impaired borrowers, entail a higher risk of delinquency, hence, borrowers are required to maintain a higher equity and pay higher rates to mitigate these risks.

We evaluate our underwriting guidelines on an ongoing basis and periodically modify the guidelines to reflect The Mortgage Store’s current assessment of various issues related to an underwriting analysis. In addition, we adopt underwriting guidelines appropriate to new loan products that we may offer. The following table summarizes our underwriting guidelines for sub-prime loans:

- 4 -

Table of Contents

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

We have implemented a loan quality control process designed to ensure sound lending practices and compliance with our policies and procedures. Prior to funding of a loan, we perform a “pre-funding quality control audit” which consists of the verification of borrower’s credit and employment, utilizing automated services and verbal verification.

Properties underlying the potential mortgage loans are appraised by an appraiser selected by the submitting broker. We assign all original appraisals for review to an independent appraisal review company, which will perform an enhanced desk or a field review of the subject property to confirm the adequacy of the property as collateral prior to funding.

All loan applications are also subjected to an automated data integrity scoring system (“DISSCO”), which identifies discrepancies in information provided by the borrower on their loan application and those retained by national credit reporting agencies. This system also provides an automated valuation of the property and searches recorded sales transactions on the subject property for the possibility of pricing manipulation through repeated sales in short periods of time, which is referred to as “flipping of properties”.

Subsequent to funding, our quality control department makes a random audit of 10% of closed loans. The department performs a review of documentation for compliance with established underwriting guidelines and lending procedures along with a physical inspection of property and verification of occupancy. All funding documents are reviewed for accuracy, completeness and adherence to corporate, state, and federal requirements. As part of this audit process, deficiencies are reported to our senior management to determine trends and the need for additional training of our personnel.

- 5 -

Table of Contents

Funding and Sales of Mortgage Loans

Warehouse Facilities

As of December 31, 2004 we had loan origination financing facilities with three financial institutions for a total funding capacity of $220 million. This included an Early Purchase facility with maximum concentration amount of $100 million.

Loan Sales

We follow a strategy of selling for cash substantially all of our loan origination through loan sales in which we disposes of our entire economic interest in the loans for a cash price. We sold $863.7 million of loans for 2004 as compared to $663.6 million of loans for 2003 and $275.1 million for 2002. Loan sales are typically made monthly. We did not sell any loans directly through securitization during these periods.     

Mortgage loans we originate conform to general guideline for these type of loans and are sellable to various purchasers. We have been selling our loans to different investors including Bear Stearns, CBASS, DLJ Mortgage Capital, IMPAC Funding Corporation, Lehman Brothers Bank, and UBS Warburg, among others.

Cash gain on sale of mortgage loans represented 81.6% of our total revenue for 2004, as compared to 83.2% and 83.01% of our total revenue for 2003 and 2002 respectively. We maximize our cash gain on sale of mortgage loan revenue by closely monitoring institutional purchaser’s requirements and grouping loan types that meet each investor’s purchase criteria for highest pricing.     

We are required to provide certain representations and warranties to investors who purchase the loans. We may be required to repurchase or substitute a loan if certain representations or warranties are breached. Additionally, we may be required to repurchase or substitute a loan if a payment default occurs within a certain period ranging from one to three months after sales of these loans. We are also required in some cases to repurchase or substitute a loan if the loan documentation is alleged to contain fraudulent misrepresentations made by the borrower. Any claim asserted against us in the future by our loan purchasers may result in liabilities or legal expenses that could have material adverse effect on our results of operations and financial condition.     

During the year ended December 31, 2004, we repurchased three mortgage loans with aggregate principal loan value of $229,500 due to early payment defaults by the borrowers. These mortgages are classified as loans held for sale until we foreclose or otherwise sell them at a price to be determined later. As of December 31, 2004 we had outstanding requests to repurchase loans with an aggregate value of $4,318,283, for which we have taken loss reserves of $475,238.

During the year ended December 31, 2004 in some cases where the purchasers of closed loans required us to repurchase loans due to early payment default, we agreed mutually with the purchaser to change pricing for the purchased loan in lieu of repurchase. The effect of repricing loans have been realized as reduction in our gain from sale of loan during the same period. Subsequently we would not have any obligation to repurchase the same loan for payment default. In other cases we have provided indemnification against losses to the purchaser in lieu of repurchase. We have taken a reserve for losses due to impairment of such assets to the extend that such losses were assessable at the close of reporting period.

- 6 -

Table of Contents

Securitization Capability
While we had not sold loans directly through securitizations, part of our loan sale strategy may include the future sale of loans directly through securitizations in the future if management determines that such sales are more beneficial.

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

Sub-Servicing
While we currently sell substantially all of the mortgage loans we originate servicing released (meaning we do not retain the servicing rights to such loans), we are required to service the loans from the date of funding through the date of sale. Since we strive to conduct whole loan sales monthly, we currently do not have a substantial servicing portfolio.     

To the extent that we decide to retain servicing rights in the future or conduct securitizations, we may contract the sub-servicing of such mortgage loans, which would expose us to more substantial risks associated with contracted sub-servicing. In such event, it is expected that many of our borrowers will require notices and reminders to keep their mortgage loans current and to prevent delinquencies and foreclosures. A substantial increase in our delinquency rate or foreclosure rate could adversely affect our ability to access profitably the capital market for our financing needs, including any future securitizations.

Interest Rate Management
Our profits depend, in part, on the difference, or “spread,” between the effective rate of interest received by us on the loans we originate and the interest rates payable by us under our warehouse facilities ( or for securities issued in any future securitizations ). The spread can be adversely affected because of interest rate increases during the period from the date the loans are originated until the closing of the sale ( or securitization ) of such loans.     

Since we historically have retained loans for a short period of time pending their sales, we have not engaged in hedging activities to date. However, in the future we may hedge our variable-rate mortgage loans ( and any interest only and residual certificates retained in connection with any future securitizations ) with hedging transactions, which may include forward sales of mortgage loans or mortgage-backed securities, interest rate caps and floors and buying and selling of futures and options on futures. The nature and quantity of hedging transactions will be determined by our management based on various factors, including market conditions and the expected volume of mortgage loan originations and purchases. No assurance can be given that any such hedging transactions will offset the risks of changes in the interest rates, and it is possible that there will be periods during which we may incur losses after accounting for our hedging activities.

Competition
We face intense competition in the business of originating and selling conforming and non-conforming mortgage loans. Our competitors in the industry include other consumer finance companies, mortgage banking companies, commercial banks, credit unions, thrift institutions, credit card issuers and insurance finance companies. Many of these entities are substantially larger and have considerably greater financial, technical and marketing resources than us. With respect to other mortgage banking and specially finance companies, there are many larger companies that focus on the same types of mortgage loans with which we directly compete for product. From time to time, one or more of these companies may be dominant in the origination and sale of mortgage loans. In addition, many financial services organizations that are much larger than us have formed national loan origination networks offering loan products that are substantially similar to our loan programs. Competition among industry participants can take many forms, including convenience in obtaining a loan, customer service, marketing and distribution channels, amount and term of the loan, loan origination fees and interest rates. In addition, the current level of gains realized by us and our competitors on the sale of non-conforming loans could attract additional competitors into this market. Additional competition may lower the rates we can charge borrowers, thereby potentially lowering gain on future loan sales and future securitizations. We may in the future also face competition from, among others, government-sponsored entities which may enter the non-conforming mortgage market. Existing or new loan purchase programs may be expanded by the Federal National Mortgage Association (“FNMA”), the Federal Home Loan Mortgage Corporation (“FHLMC”), or the Government National Mortgage Association (“GNMA”) to include non-conforming mortgages, particularly those in the “A-” category, which constitutes a significant portion of our loan production. To the extent any sales competitors significantly expand their activities into our market, we could be materially and adversely affected. Fluctuations in interest rates and general economic conditions may also affect our competition. During periods of rising rates, competitors that have locked in low costs may have a competitive advantage. During periods of declining rates, competitors may solicit our customers to refinance their loans.

- 7 -

Table of Contents

Regulation
The consumer financing industry is a highly regulated industry. Our business is subject to extensive and complex rules and regulations of, and examinations by, various federal, state and local government authorities. These rules impose obligations and restrictions on our loan origination, credit activities and secured transactions. In addition, these rules limit the interest rates, finance charges and other fees that we may assess, mandate extensive disclosure to our customers, prohibit discrimination, and impose multiple qualification and licensing obligations on us. Failure to comply with these requirements may result in, among other things, loss of approved status, class action lawsuits, administrative enforcement actions and civil and criminal liability. We believe that we are in compliance with these rules and regulations in all material respects.

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

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

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

We are also required to comply with the Equal Credit Opportunity Act of 1974, as amended (“ECOA”), and Regulation B promulgated thereunder, the Fair Credit Reporting Act, as amended, the Real Estate Settlement Procedures Act of 1975, as amended, and the Home Mortgage Disclosure Act of 1975, as amended. ECOA prohibits creditors from discriminating against applicants on the basis of race, color, sex, age, religion, national origin or marital status. Regulation B restricts creditors from requesting certain types of information from loan applicants. The Fair Credit Reporting Act, as amended, requires lenders, among other things, to supply an applicant with certain information if the lender denied the applicant credit. RESPA mandates certain disclosure concerning settlement fees and charges and mortgage servicing transfer practices. It also prohibits the payment or receipt of kickbacks or referral fees in connection with the performance of settlement services. In addition, beginning with loans originated in 1977, we must file an annual report with the U.S. Department of Housing and Urban Development (“HUD”) pursuant to the Home Mortgage Disclosure Act, which requires the collection and reporting of statistical data concerning loan transactions.

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

- 8 -

Table of Contents

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

Employees
At December 31, 2004 we had 170 salaried employees and 83 commission based employees. None of our employees are subject to a collective bargaining agreement. We believe that our relations with our employees are satisfactory

In addition to the other information in this annual report on Form 10-K, the following factors should be considered in evaluating us and our business.

RISKS RELATED TO OUR BUSINESS

We finance borrowers with lower credit ratings. The sub-prime loans we originate generally have higher delinquency and default rates than prime mortgage loans, which could result in losses on loans that we are required to repurchase

We are in the business of originating and selling conforming and non-conforming mortgage loans, which include sub-prime mortgage loans. Non-conforming mortgage loans generally have higher delinquency and default rates than prime mortgage loans. Delinquency interrupts the flow of projected interest income from a mortgage loan, and default can ultimately lead to a loss if the net realizable value of the real property securing the mortgage loan is insufficient to cover the principal and interest due on the mortgage loan.

Also, our cost of financing a delinquent or defaulted mortgage loan is generally higher than for a performing mortgage loan. We bear the risk of delinquency and default on mortgage loans beginning when we originate them and continuing even after we sell loans. We also reacquire the risks of delinquency and default for mortgage loans that we are obligated to repurchase. Repurchase obligations are typically triggered in loan sale transactions if a loan becomes more than 30 days delinquent on the loan for the first 90 days after transfer date, or in any sale (or securitization if we engage in securitizations in the future) if the loan materially violates our representations or warranties. At December 31, 2004, there was certain loans with an aggregate amount of $4,318,283 to be repurchased, and a $475,238 provision for losses has been taken by management in this regard. The management believes there is sufficient equity and mortgage insurance coverage for offsetting most of the shortcomings from any forced sales of these properties.

We attempt to manage these risks with risk-based mortgage loan pricing and appropriate underwriting policies and loan collection methods. However, if such policies and methods are insufficient to control our delinquency and default risks and do not result in appropriate loan pricing, our business, financial condition, liquidity and results of operations could be significantly harmed.

Any substantial economic slowdown could increase delinquencies, defaults and foreclosures and reduce our ability to originate loans

Periods of economic slowdown or recession may be accompanied by decreased demand for consumer credit, decreased real estate values, and an increased rate of delinquencies, defaults and foreclosures. Any material decline in real estate values would increase the loan-to-value ratios (“LTVs”) on mortgage loans that we hold pending sale, weaken our collateral coverage and increase the possibility of a loss if a borrower defaults. Many of the mortgage loans that we originate are to borrowers who make little or no down payment, resulting in higher LTVs.

A lack of equity in the home may reduce the incentive a borrower has to meet his payment obligations during periods of financial hardship, which might result in higher delinquencies, defaults and foreclosures. These factors would reduce our ability to originate mortgage loans. In addition, mortgage loans that we originate during an economic slowdown may not be as valuable to us because potential purchasers of our mortgage loans might reduce the premiums they pay for the loans to compensate for any increased risks arising during such periods. Any sustained increase in delinquencies, defaults or foreclosures are likely to significantly harm the pricing of our future mortgage loan sales and also our ability to finance our mortgage loan originations.

- 9 -

Table of Contents

An increase in interest rates could result in a reduction in our mortgage loan origination volumes, an increase in delinquency, default and foreclosure rates and a reduction in the value of and income from our loans

A substantial and sustained increase in interest rates could harm our ability to originate mortgage loans because refinancing an existing mortgage loan would be less attractive and qualifying for a purchase mortgage loan may be more difficult. Existing borrowers with adjustable-rate mortgages may incur higher monthly payments as the interest rate increases, which may lead to higher delinquency and default rates.

If prevailing interest rates increase after we fund a mortgage loan, the value that we receive upon the sale or any securitization of the mortgage loan decreases. Additionally, the cost of financing our mortgage loans prior to sale is based primarily upon the prime rate of interest. The interest rates we charge on our mortgage loans are based, in part, upon prevailing interest rates at the time of origination, and the interest rates on all of our mortgage loans are fixed for at least the first two or three years. If the prime rate of interest increases after the time of loan origination, our net interest income — which represents the difference between the interest rates we receive on our mortgage loans pending sale and our prime rate-based cost of financing such loans — will be reduced. Accordingly, our business, financial condition, liquidity and results of operations may be significantly harmed as a result of increased interest rates.

We face intense competition that could adversely impact our market share and our revenues

We face intense competition from finance and mortgage banking companies, Internet-based lending companies where entry barriers are relatively low, and, to a growing extent, from traditional bank and thrift lenders that have entered the non-conforming and subprime mortgage industry. As we seek to expand our business further, we will face a significant number of additional competitors, many of whom will be well established in the markets we seek to penetrate. Some of our competitors are much larger than we are, have better name recognition than we do, and have far greater financial and other resources.

The government-sponsored entities Fannie Mae and Freddie Mac are also expanding their participation in the mortgage industry. These government-sponsored entities have a size and cost-of-funds advantage that allows them to purchase mortgage loans with lower rates or fees than we are willing to offer. While the government-sponsored entities presently do not have the legal authority to originate mortgage loans, including subprime mortgage loans, they do have the authority to buy mortgage loans. A material expansion of their involvement in the market to purchase non-conforming and subprime mortgage loans could change the dynamics of the industry by virtue of their sheer size, pricing power and the inherent advantages of a government charter. In addition, if as a result of their purchasing practices, these government-sponsored entities experience significantly higher-than-expected losses, such experience could adversely affect the overall investor perception of the subprime mortgage industry.

The intense competition in the non-conforming and subprime mortgage industries has also led to rapid technological developments, evolving industry standards and frequent releases of new products and enhancements. As mortgage products are offered more widely through alternative distribution channels, such as the Internet, we may be required to make significant changes to our current retail and wholesale structure and information systems to compete effectively. Our inability to continue enhancing our current Internet capabilities, or to adapt to other technological changes in the industry, could significantly harm our business, financial condition, liquidity and results of operations.

Competition in the industry can take many forms, including interest rates and costs of a mortgage loan, less stringent underwriting standards, convenience in obtaining a mortgage loan, customer service, amount and term of a mortgage loan and marketing and distribution channels. The need to maintain mortgage loan volume in this competitive environment creates a risk of price competition in the non-conforming and subprime mortgage industries. Price competition could cause us to lower the interest rates that we charge borrowers, which could lower the value of our mortgage loans. If our competitors adopt less stringent underwriting standards we will be pressured to do so as well, which would result in greater loan risk without compensating pricing. If we do not relax underwriting standards in response to our competitors, we may lose market share. Any increase in these pricing and underwriting pressures could reduce the volume of our mortgage loan originations and sales and significantly harm our business, financial condition, liquidity and results of operations.

- 10 -

Table of Contents

Our business may be significantly harmed by a slowdown in the economy of California, where we conduct a significant amount of business

Since inception, a significant portion of the mortgage loans we have originated have been secured by property in California. For the years ended December 31, 2004, 2003, and 2002 approximately 71.4%, 91.4%, and 90.9% respectively, of the loans we originated were collaterized by property located in California. An overall decline in the economy or the residential real estate market, or the occurrence of a natural disaster that is not covered by standard homeowners’ insurance policies, such as an earthquake, in California could decrease the value of mortgaged properties in California. This, in turn, would increase the risk of delinquency, default or foreclosure on mortgage loans in our portfolio or that we have sold to others. This could restrict our ability to originate or sell mortgage loans, and significantly harm our business, financial condition, liquidity and results of operations.

Our business requires a significant amount of cash and if it is not available our business will be significantly harmed

Our primary source of cash is our existing warehouse credit facilities and the proceeds from the sales of our mortgage loans. We require substantial cash to fund our mortgage loan originations, to pay our mortgage loan origination expenses and to hold our mortgage loans pending sale. Our warehouse credit facilities also require us to observe certain financial covenants, including the maintenance of certain levels of cash and general liquidity.

As of December 31, 2004, we financed substantially all of our existing loans through three separate warehouse credit facilities. One of our existing facilities is cancelable by the lender for cause at anytime and has a renewable one-year term. Our two other warehouse lines have expiration dates of February 3, 2005 and May 1, 2005, respectively. Because these are short-term commitments of capital, the lenders may respond to market conditions, which may favor an alternative investment strategy for them, making it more difficult for us to secure continued financing. If we are not able to renew our existing warehouse credit facilities or arrange for new financing on terms acceptable to us, or if we default on our covenants or are otherwise unable to access funds under any of these facilities, we will have to curtail our mortgage loan origination activities. This would result in decreased revenues and profits from mortgage loan sales.

In addition, for the years ended December 31, 2004, 2003, and 2002 we had a negative operating cash flow of $66.7 million, a positive operating cash flow of $40.8 million, and a negative cash flow of $66.9 million respectively, which resulted from the use of $791.6 million (after adjusting for origination under Early Purchase facility), $628.2, and $358 million, respectively, of cash for new loan originations offset by cash proceeds from the sale of loans of $721.6 million (after allowance for transactions under Early Purchase facility), $663.6 million , and $290 million respectively. The timing of our mortgage loan dispositions, which are periodic, is not always matched to the timing of our expenses, which are continuous. This requires us to maintain significant levels of cash to maintain acceptable levels of liquidity. Any decrease in demand in the whole mortgage loan market such that we are unable to timely and profitably sell our mortgage loans would inhibit our ability to meet our liquidity demands.

Our existing warehouse credit facilities contain covenants that restrict our operations and may inhibit our ability to grow our business and increase revenues

Our existing warehouse credit facilities contain extensive restrictions and covenants that, among other things, require us to satisfy specified financial, asset quality and loan performance tests. If we fail to meet or satisfy any of these covenants, we would be in default under these agreements and our lenders could elect to declare all amounts outstanding under the agreements to be immediately due and payable, enforce their interests against collateral pledged under such agreements and restrict our ability to make additional borrowings. Our existing agreements also contain cross-default provisions, so that if a default occurs under any one agreement, the lenders under our other agreements could also declare a default.

The covenants and restrictions in our warehouse credit facilities may restrict our ability to, among other things: incur additional debt; make certain investments or acquisitions; repurchase or redeem capital stock; engage in mergers or consolidations; finance mortgage loans with certain attributes; reduce liquidity below certain levels; and hold mortgage loans for longer than established time periods.

These restrictions may interfere with our ability to obtain financing or to engage in other business activities, which may significantly harm our business, financial condition, liquidity and results of operations.

- 11 -

Table of Contents

If we do not manage our growth effectively, our financial performance could be harmed

In recent years, we have experienced rapid growth that has placed, and will continue to place, certain pressures on our management, administrative, operational and financial infrastructure. As of December 31, 2004, we had 170 full time employees in addition to 83 commission-based employees. Many of our current employees have very limited experience with us and a limited understanding of our systems and controls. The increase in the size of our operations may make it more difficult for us to ensure that we originate quality mortgage loans and that we service them effectively. We will need to attract and hire additional sales and management personnel in an intensely competitive hiring environment in order to preserve and increase our market share. At the same time, we will need to continue to upgrade and expand our financial, operational and managerial systems and controls. We also intend to continue to grow our business in the future, which could require capital, systems development and human resources beyond what we currently have. We cannot assure you that we will be able to:

• meet our capital needs;
• expand our systems effectively;
• allocate our human resources optimally;
• identify and hire qualified employees;
• satisfactorily perform our servicing obligations; or
• incorporate effectively the components of any businesses that we may acquire in our effort to achieve growth.

The failure to manage growth effectively would significantly harm our business, financial condition, liquidity and results of operations.

The inability to attract and retain qualified employees could significantly harm our business

We depend upon our wholesale account executives and retail mortgage loan officers to attract borrowers by, among other things, developing relationships with financial institutions, other mortgage companies and brokers, real estate agents, borrowers and others. We believe that these relationships lead to repeat and referral business. The market for skilled executive officers, account executives and loan officers is highly competitive and historically has experienced a high rate of turnover. In addition, if a manager leaves our company there is an increased likelihood that other members of his or her team will follow. Competition for qualified account executives and loan officers may lead to increased hiring and retention costs. If we are unable to attract or retain a sufficient number of skilled account executives at manageable costs, we will be unable to continue to originate quality mortgage loans that we are able to sell for a profit, which will reduce our revenues.

An interruption in or breach of our information systems may result in lost business

We rely heavily upon communications and information systems to conduct our business. As we implement our growth strategy and increase our volume of mortgage loan production, that reliance will increase. Any failure or interruption or breach in security of our information systems or the third-party information systems on which we rely could cause underwriting or other delays and could result in fewer mortgage loan applications being received and slower processing of applications. We cannot assure you that such failures or interruptions will not occur or if they do occur that they will be adequately addressed by us or the third parties on which we rely. The occurrence of any failures or interruptions could significantly harm our business.

Terrorist attacks or military actions may adversely affect our financial results

The effects that terrorist attacks in the United States or other incidents and related military action, or the result of the military actions by the U.S. and Coalition forces in Iraq or other regions, may have on our ability to originate mortgages on the values of the mortgaged properties can not be determined at this time. As a result of terrorist activity and military action, there may be a reduction in the new mortgages, which will adversely affect our ability to expand our mortgage originations. These potential consequences of terrorist attacks or military action will have an adverse affect on our financial results. Federal agencies and non-governmental lenders have, and may continue to, defer, reduce or forgive payments and delay foreclosure proceedings in respect of loans to borrowers affected in some way be recent and possible future events. In addition, activation of a substantial number of U.S. military reservists or members of the National Guard may significantly increase the proposition of mortgage loans whose mortgage rates are reduced by the application of the Soldiers’ and Sailors’ Civil Relief Act of 1940 or similar state laws, and neither the master service nor the services will be required to advance for any interest shortfall caused by any such reduction.

- 12 -

Table of Contents

The success and growth of our business will depend upon our ability to adapt to and implement technological changes

Our mortgage loan origination business is currently dependent upon our ability to effectively interface with our brokers, borrowers and other third parties and to efficiently process loan applications and closings. The origination process is becoming more dependent upon technological advancement, such as the ability to process applications over the Internet, accept electronic signatures, provide process status updates instantly and other customer-expected conveniences that are cost-efficient to our process. Implementing this new technology and becoming proficient with it may also require significant capital expenditures. As these requirements increase in the future, we will have to fully develop these technological capabilities to remain competitive or our business will be significantly harmed.

If we are unable to maintain and expand our network of independent brokers, our loan origination business will decrease

A significant majority of our originations of mortgage loans comes from independent brokers. For the year 1,130 brokers from a list of 2,200 approved brokers; no broker represented more than 5% of our loan originations. Our brokers are not contractually obligated to do business with us. Further, our competitors also have relationships with our brokers and actively compete with us in our efforts to expand our broker networks. Accordingly, we cannot assure you that we will be successful in maintaining our existing relationships or expanding our broker networks, the failure of which could significantly harm our business, financial condition, liquidity and results of operations.

Our financial results fluctuate as a result of seasonality and other timing factors, which makes it difficult to predict our future performance and may affect the price of our common stock

Our business is generally subject to seasonal trends. These trends reflect the general pattern of housing sales, which typically peak during the spring and summer seasons. Our quarterly operating results have fluctuated in the past and are expected to fluctuate in the future, reflecting the seasonality of the industry. Further, if the closing of a sale of mortgage loans is postponed, the recognition of gain from the sale is also postponed. If such a delay causes us to recognize income in the next quarter, our results of operations for the previous quarter could be significantly depressed. If our results of operations do not meet the expectations of our stockholders and securities analysts, then the price of our common stock may decrease.

We are subject to losses due to fraudulent and negligent acts on the part of loan applicants, mortgage brokers, other vendors and our employees

When we originate mortgage loans, we rely heavily upon information supplied by third parties including the information contained in the mortgage loan application, property appraisal, title information and employment and income documentation. If any of this information is intentionally or negligently misrepresented and such misrepresentation is not detected prior to mortgage loan funding, the value of the mortgage loan may be significantly lower than expected. Whether a misrepresentation is made by the loan applicant, the mortgage broker, another third party or one of our own employees, we generally bear the risk of loss associated with the misrepresentation. A mortgage loan subject to a material misrepresentation is typically unsaleable or subject to repurchase if it is sold prior to detection of the misrepresentation. Even though we may have rights against persons and entities who made or knew about the misrepresentation, such persons and entities are often difficult to locate and it is often difficult to collect any monetary losses that we have suffered from them.

We have controls and processes designed to help us identify misrepresented information in our loan origination operations. We cannot assure you, however, that we have detected or will detect all misrepresented information in our loan originations. We are subject to losses due to fraudulent and negligent acts in other parts of our operations. If we experience a significant number of such fraudulent or negligent acts, our business, financial condition, liquidity and results of operations would be significantly harmed.

- 13 -

Table of Contents

Defective mortgage loans may harm our business

In connection with the sale of our mortgage loans, we are required to make a variety of customary representations and warranties regarding our company and the mortgage loans. We are subject to these representations and warranties for the life of the mortgage loan and they relate to, among other things:

• compliance with laws;
• regulations and underwriting standards;
• the accuracy of information in the mortgage loan documents and mortgage loan file; and
• the characteristics and enforceability of the mortgage loan.

A mortgage loan that does not comply with these representations and warranties may be unsaleable or saleable only at a discount, and, if such a mortgage loan is sold before we detect a non-compliance, we may be obligated to repurchase the mortgage loan and bear any associated loss directly, or we may be obligated to indemnify the purchaser against any such losses. We believe that we have qualified personnel at all levels and have established controls to ensure that all mortgage loans are originated to the market’s requirements, but we cannot assure you that we will not make mistakes, or that certain employees will not deliberately violate our lending policies. We seek to minimize losses from defective mortgage loans by correcting flaws if possible and selling or re-selling such mortgage loans. We also create allowances to provide for defective mortgage loans in our financial statements. We cannot assure you, however, that losses associated with defective mortgage loans will not harm our results of operations or financial condition.

If the prepayment rates for our mortgage loans are higher than expected, our results of operations may be significantly harmed. When a borrower pays off a mortgage loan prior to the loan’s scheduled maturity, the impact on us depends upon when such payoff or “prepayment” occurs. Our prepayment losses generally occur after we sell (or securitize in the future) our mortgage loans and the extent of our losses depends on when the prepayment occurs. If the prepayment occurs within 12 to 18 months following a whole mortgage loan sale, we may have to reimburse the purchaser for all or a portion of the premium paid by the purchaser for the mortgage loan, again resulting in a loss of our profit on the mortgage loan.

Prepayment rates on mortgage loans vary from time to time and tend to increase during periods of declining interest rates. We seek to minimize our prepayment risk through a variety of means, including originating a significant portion of mortgage loans with prepayment penalties with terms of two to five years. No strategy, however, can completely insulate us from prepayment risks, whether arising from the effects of interest rate changes or otherwise. See ” Statutory and Regulatory Risks ” below for a discussion of statutes related to prepayment penalties.

We are exposed to environmental liabilities, with respect to properties that we take title to upon foreclosure, that could increase our costs of doing business and harm our results of operations

In the course of our activities, we may foreclose and take title to residential properties and become subject to environmental liabilities with respect to those properties. We may be held liable to a governmental entity or to third parties for property damage, personal injury, investigation and clean-up costs incurred by these parties in connection with environmental contamination, or may be required to investigate or clean up hazardous or toxic substances, or chemical releases at a property. The costs associated with investigation or remediation activities could be substantial. Moreover, as the owner or former owner of a contaminated site, we may be subject to common law claims by third parties based upon damages and costs resulting from environmental contamination emanating from the property. If we ever become subject to significant environmental liabilities, our business, financial condition, liquidity and results of operations would be significantly harmed.

If financial institutions face exposure stemming from legal violations committed by the companies to which they provide financing or underwriting services, this could potentially expose us to liability in our warehouse lending operations; it could also increase our borrowing costs and negatively affect the market for whole-loans and mortgage-backed securities

In June 2003, a California jury found a warehouse lender and securitization underwriter liable in part for fraud on consumers committed by a lender to whom it provided financing and underwriting services. The jury found that the investment bank was aware of the fraud and substantially assisted the lender in perpetrating the fraud by providing financing and underwriting services that allowed the lender to continue to operate, and held it liable for 10% of the plaintiff’s damages. This is the first case we know of in which an investment bank was held partly responsible for violations committed by a mortgage lender customer. Shortly after the announcement of the jury verdict in the California case, the Florida Attorney General filed suit against the same financial institution, seeking an injunction to prevent it from financing mortgage loans within Florida, as well as damages and civil penalties, based on theories of unfair and deceptive trade practices and fraud. The suit claims that this financial institution aided and abetted the same lender involved in the California case in its commission of fraudulent representations in Florida. As of the date of this report, there has been no ruling in this case. If other courts or regulators adopt this “aiding and abetting” theory, investment banks may face increased litigation as they are named as defendants in lawsuits and regulatory actions against the mortgage companies with which they do business. Some investment banks may exit the business, charge more for warehouse lending and reduce the prices they pay for whole-loans in order to build in the costs of this potential litigation. This could, in turn, have a material adverse effect on our results of operations, financial condition and business prospects. In addition, similar theories could be asserted against us in connection with our warehouse lending operations, which again could have a material adverse effect on our results of operations, financial condition and business prospects.

- 14 -

Table of Contents

We are still exposed to potential risks from recent legislation requiring companies to evaluate controls under Section 404 of the Sarbanes-Oxley Act of 2002

While we believe that we currently have adequate internal control procedures in place, we are evaluating our internal control systems in order to allow management to report on, and our independent auditors to attest to, our internal controls, as required by Section 404 of the Sarbanes-Oxley Act of 2002. During this process, we will identify what might be deemed to be potential control deficiencies and will establish a process to investigate and, as appropriate, remediate such matters before the required deadline. While we do not believe that any of these issues constitute a material weakness, this is the first year of implementation of Section 404 and the compliance standards are not fully known. We like all other public companies are incurring additional expenses and management’s time in a effort to comply with Section 404. Although we have made this project a top priority for our company we cannot provide any assurances that all potential control deficiencies will be remediated before the mandated deadline or that we will receive an unqualified opinion from our external auditors regarding our internal controls over financial reporting.

STATUTORY AND REGULATORY RISKS

The nationwide scope of our operations exposes us to risks of noncompliance with an increasing and inconsistent body of complex laws and regulations at the federal, state and local levels

Because we originate mortgage loans on a national basis, we must comply with a multitude of extensive federal and state laws and regulations, as well as judicial and administrative decisions of all jurisdictions. The volume of new or modified laws and regulations has increased in recent years, and, in addition, individual cities and counties have begun to enact laws that restrict sub-prime mortgage loan origination activities in those cities and counties. The laws and regulations of each of these jurisdictions are different, complex and, in some cases, in direct conflict with each other. As our operations continue to grow, it may be more difficult to comprehensively identify, to accurately interpret and to properly program our technology systems and effectively train our personnel with respect to all of these laws and regulations, thereby potentially increasing our exposure to the risks of noncompliance with these laws and regulations. At the federal level, these laws and regulations include:

• the Equal Credit Opportunity Act;
• the Federal Truth in Lending Act and Regulation Z;
• the Home Ownership and Equity Protection Act; o the Real Estate Settlement Procedures Act;
• the Fair Credit Reporting Act;
• the Fair Debt Collection Practices Act;
• the Home Mortgage Disclosure Act;
• the Fair Housing Act; and
• the Gramm-Leach-Bliley Act.

These laws and regulations among other things:

• impose licensing obligations and financial requirements on us;
• limit the interest rates, finance charges, and other fees that we may charge; o prohibit discrimination;
• impose underwriting requirements;
• mandate disclosures and notices to consumers; and
• in some cases, impose assignee liability on the entities that purchase our mortgage loans or on us for loans we purchase.

Our failure to comply with these laws can lead to:

• civil and criminal liability;
• loss of approved status;
• demands for indemnification or loan repurchases from purchasers of our loans;
• class action lawsuits; and
• administrative enforcement actions.

- 15 -

Table of Contents

Although we have systems and procedures directed to compliance with these legal requirements and believe that we are in material compliance with all applicable federal, state and local statutes, rules and regulations, we cannot assure you that more restrictive laws and regulations will not be adopted in the future, or that governmental bodies will not interpret existing laws or regulations in a more restrictive manner, which could make compliance more difficult or expensive. These applicable laws and regulations are subject to administrative or judicial interpretation, but some of these laws and regulations have been enacted only recently or may be interpreted infrequently. As a result of infrequent or sparse interpretations, ambiguities in these laws and regulations may leave uncertainty with respect to permitted or restricted conduct under them. Any ambiguity under a law to which we are subject may lead to regulatory investigations, governmental enforcement actions or private causes of action, such as class action lawsuits, with respect to our compliance with applicable laws and regulations.

We are subject to significant legal and reputational risks and expenses under federal and state laws concerning privacy, use and security of customer information

The federal Gramm-Leach Bliley financial reform legislation imposes significant privacy obligations on us in connection with the collection, use and security of financial and other nonpublic information provided to us by applicants and borrowers. In addition, California and Vermont have enacted, and several other states are considering enacting, even more stringent privacy or customer-information-security legislation, as permitted under federal law. Because laws and rules concerning the use and protection of customer information are continuing to develop at the federal and state levels, we expect to incur increased costs in our effort to be and remain in full compliance with these requirements. Nevertheless, despite our efforts we will be subject to legal and reputational risks in connection with our collection and use of customer information, and we cannot assure you that we will not be subject to lawsuits or compliance actions under such state or federal privacy requirements. To the extent that a variety of inconsistent state privacy rules or requirements are enacted, our compliance costs could substantially increase.

The increasing number of federal, state and local “anti-predatory lending” laws may restrict our ability to originate or increase our risk of liability with respect to certain mortgage loans and could increase our cost of doing business

Several federal, state and local laws, rules and regulations have been adopted, or are under consideration, that are intended to eliminate so-called “predatory” lending practices. The federal Home Ownership and Equity Protection Act (“HOEPA”) identifies a category of mortgage loans and subjects such loans to restrictions not applicable to other mortgage loans. Loans subject to HOEPA consist of loans on which certain points and fees or the annual percentage rate (“APR”) exceed specified levels. Liability for violations of applicable law with regard to loans subject to HOEPA would extend not only to us, but to the purchasers of our loans as well. We generally do not make loans that are subject to HOEPA because the purchasers of our loans and/or the lenders that provide financing for our loan origination operations do not want to purchase or finance such loans. On October 1, 2002, the APR and “points and fees”thresholds for determining loans subject to HOEPA were lowered, thereby expanding the scope of loans subject to HOEPA. We anticipate that we will continue to avoid making loans subject to HOEPA, and the lowering of the thresholds beyond which loans become subject to HOEPA may prevent us from making certain loans and may cause us to reduce the APR or the points and fees on loans that we do make. If we decide to relax our restrictions on loans subject to HOEPA because the purchasers of our loans and/or the lenders that provide financing for our loan origination operations relax their restrictions, we will be subject to greater risks for actual or perceived non-compliance with HOEPA and other applicable laws, including demands for indemnification or loan repurchases from our lenders and loan purchasers, class action lawsuits and administrative enforcement actions.

Laws, rules and regulations have been adopted, or are under consideration, at the state and local levels that are similar to HOEPA in that they impose certain restrictions on loans on which certain points and fees or the APR exceeds specified thresholds. The restrictions include prohibitions on “steering”borrowers into loans with high interest rates and away from more affordable products, selling unnecessary insurance to borrowers, “flipping” or repeatedly refinancing loans and making loans without a reasonable expectation that the borrowers will be able to repay the loans. Compliance with some of these restrictions requires lenders to make subjective judgments, such as whether a loan will provide a “net tangible benefit” to the borrower. These restrictions expose a lender to risks of litigation and regulatory sanction no matter how carefully a loan is underwritten. The remedies for violations of these laws are not based on actual harm to the consumer and can result in damages that exceed the loan balance. Liability for violations of HOEPA, as well as violations of many of the state and local equivalents, could extend not only to us, but to our secured warehouse lenders, institutional loan purchasers and securitization trusts that hold our loans, regardless of whether a lender or purchaser knew of or participated in the violation.

- 16 -

Table of Contents

We have generally avoided originating loans that exceed the APR or “points and fees”thresholds of these laws, rules and regulations, because the companies that buy our loans and/or provide financing for our loan origination operations generally do not want to buy or finance such loans. To the extent we do have financing and purchasers for such loans, we have, on a limited basis, begun to make loans which exceed the APR or “points and fees” thresholds of these laws, rules and regulations. The continued enactment of these laws, rules and regulations may prevent us from making certain loans and may cause us to reduce the APR or the points and fees on loans that we do make. In addition, the difficulty of managing the risks presented by these laws, rules and regulations may decrease the availability of warehouse financing and the overall demand for subprime loans, making it difficult to fund, sell or securitize any of our loans. If we decide to further relax our restrictions on loans subject to these laws, rules and regulations, we will be subject to greater risks for actual or perceived non-compliance with such laws, rules and regulations, including demands for indemnification or loan repurchases from our lenders and loan purchasers, class action lawsuits, increased defenses to foreclosure of individual loans in default, individual claims for significant monetary damages and administrative enforcement actions. If nothing else, the growing number of these laws, rules and regulations will increase our cost of doing business as we are required to develop systems and procedures to ensure that we do not violate any aspect of these new requirements.

On July 1, 2002, “predatory” lending legislation of the type described above became effective in California. As with other “predatory”lending laws, the California legislation imposes restrictions on loans which exceed “points and fees”or APR thresholds defined in the law. As of the date of this report, this law had not had, and in the future we do not expect it to have, a significant impact on the value or volume of our loan production in California.

Local anti-predatory lending ordinances were passed in the cities of Oakland and Los Angeles California in 2001 and 2002, respectively. Each of these ordinances imposes additional and limitations and requirements that go significantly beyond those imposed under HOEPA and California’s anti-predatory lending statutes. The American Financial Services Association (“AFSA”) brought an action against the City of Oakland, alleging that the Oakland ordinance is preempted by California’s law. Both the trial court and the appellate court held in favor of the City of Oakland. The matter was appealed to the California Supreme Court, which heard arguments on November 4, 2004 and reversed the lower court’s decision. The City of Los Angeles has not yet issued regulations implementing its ordinance, which regulations are necessary before the ordinance becomes effective. However, many other jurisdictions have indicated their intent to enact similar ordinances. It is possible that these ordinances might impair our ability or willingness to make loans in those jurisdictions, which in turn might result in a significant reduction in the value or volume of loans we make in those jurisdictions.

Some of our competitors that are national banks or federally chartered thrifts and their operating subsidiaries may not be subject to these laws by virtue of federal preemptions. As a mortgage lender that is generally subject to the laws of each state in which we do business, except as may specifically be provided in federal rules applicable to all lenders, we may be subject to state legal requirements and legal risks under state laws to which these federally regulated competitors are not subject, and this disparity may have the effect of giving those federal entities legal and competitive advantages. Passage of additional laws in other jurisdictions could increase compliance costs, lower fee income and lower origination volume, all of which would have a material adverse effect on our business, results of operations and financial condition.

The United States Congress is also considering legislation, such as the Ney-Lucas Responsible Lending Act introduced in 2003, which would limit fees that a lender is permitted to charge, including prepayment fees, restrict the terms lenders are permitted to include in their loan agreements and increase the amount of disclosure required to be given to potential borrowers. We cannot predict whether or in what form Congress or the various state and local legislatures may enact legislation affecting our business. We are evaluating the potential impact of these initiatives, if enacted, on our lending practices and results of operations. As a result of these and other initiatives, we are unable to predict whether federal, state or local authorities will require changes in our lending practices in the future, including reimbursement of fees charged to borrowers, or will impose fines. These changes, if required, could adversely affect our profitability, particularly if we make such changes in response to new or amended laws, regulations or ordinances in California or any other state where we originate a significant portion of our mortgage loans.

- 17 -

Table of Contents

New regulatory laws affecting the mortgage industry may increase our costs and decrease our mortgage origination and acquisition

The regulatory environments in which we operate have an impact on the activities in which we may engage, how the activities may be carried out, and the profitability of those activities. Therefore, changes to laws, regulations or regulatory policies can affect whether and to what extent we are able to operate profitably. For example, recently enacted and proposed local, state and federal privacy laws and laws prohibiting or limiting marketing by telephone, facsimile, email and the Internet may limit our ability to market and our ability to access potential loan applicants. The recently enacted Can Spam Act of 2003 establishes the first national standards for the sending of commercial email allowing, among other things, unsolicited commercial email provided it contains certain information and an opt-out mechanism. Similarly, the federal Telephone Consumer Protection Act and Telemarketing Consumer Fraud and Abuse Prevention Act statutes, designed to restrict unsolicited advertising using the telephone and facsimile machine, regulate unwanted telephone solicitations and the use of automated telephone dialing systems, prerecorded or artificial voice messages, and telephone facsimile machines. In 2003, The Federal Communications Commission and the United States Federal Trade Commission, or FTC, have responsibility adopted “do-not-call” registry requirements, which, in part, mandate that companies such as us maintain and regularly update lists of consumers who have chosen not to be called. These requirements also mandate that we do not call consumers who have chosen to be on the list. These federal laws and regulations also prohibit, under certain circumstances, a business from sending unsolicited facsimiles to other businesses, including mortgage brokers and real estate professionals. Many states have adopted similar laws, with which we may also be required to comply. We cannot provide any assurance that the proposed laws, rules and regulations, or other similar laws, rules or regulations, will not be adopted in the future. Adoption of these laws and regulations could have a material adverse impact on our business by substantially increasing the costs of compliance with a variety of inconsistent federal, state and local rules, or by restricting our ability to charge rates and fees adequate to compensate us for the risk associated with certain loans.

We make “yield spread premium” payments to mortgage brokers on many of our loans, and the uncertainty of the federal judicial interpretation of the legality of these payments may increase our exposure to litigation, related defense expenses and adverse judgments.

A substantial portion of our mortgage loans are originated through independent mortgage brokers. Mortgage brokers provide valuable services in the loan origination process and are compensated for their services by receiving fees on loans. Brokers may be paid by the borrower, the lender or both. If a borrower cannot or does not want to pay the mortgage broker’s fees directly, the loan can be structured so that the mortgage broker’s fees are paid from the proceeds of the loan, or the loan can provide for a higher interest rate or higher fees to the lender. The increased value of a loan with a higher interest rate enables the lender to pay all or a portion of the broker’s compensation. This form of compensation is often referred to as a “yield spread premium.” Regardless of its label or method of calculation, the payment is intended to compensate the broker for the services actually performed and the facilities actually provided.

Competitive forces currently demand that we pay mortgage brokers yield spread premiums on many of the loans we originate. The federal Real Estate Settlement Procedures Act (“RESPA”) prohibits the payment of fees for the mere referral of real estate settlement service business. This law does permit the payment of reasonable value for services actually performed and facilities actually provided unrelated to the referral. On September 18, 2002, the Eleventh Circuit Court of Appeals issued a decision in Heimmermann v. First Union Mortgage Corp. which reversed the court’s earlier decision in Culpepper v. Irwin Mortgage Corp. in which the court found the yield spread premium payments received by a mortgage broker to be unlawful per se under RESPA. Subsequent appellate court decisions have held similarly. The Department of Housing and Urban development (“HUD”) had responded to the Culpepper decision by issuing a policy statement (2001-1) taking the position that lender payments to mortgage brokers, including yield spread premiums, are not per se illegal. The Heimmermann decision eliminated a conflict that had arisen between the Eleventh Circuit and the Eighth and Ninth Circuit Courts of Appeals, with the result that all federal circuit courts which have considered the issue have aligned with the HUD policy statement and found that yield spread premiums are not prohibited per se. If other circuit courts that have not yet reviewed this issue disagree with the Heimmermann decision, there could be a substantial increase in litigation regarding lender payments to brokers and in the potential costs of defending these types of claims and in paying any judgments that might result.

Stockholder refusal to comply with regulatory requirements may interfere with our ability to do business in certain states

Some states in which we operate may impose regulatory requirements on our officers and directors and persons holding certain amounts, usually 10% or more, of our common stock. If any person holding such an amount of our stock fails to meet or refuses to comply with a state’s applicable regulatory requirements for mortgage lending, we could lose our authority to conduct business in that state.

- 18 -

Table of Contents

We may be subject to fines or other penalties based upon the conduct of our independent brokers

The mortgage brokers from which we obtain loans have parallel and separate legal obligations to which they are subject. While these laws may not explicitly hold the originating lenders responsible for the legal violations of mortgage brokers, increasingly federal and state agencies have sought to impose such assignee liability. Recently, for example, the United States Federal Trade Commission (“FTC”) entered into a settlement agreement with a mortgage lender where the FTC characterized a broker that had placed all of its mortgage loan production with a single lender as the “agent” of the lender; the FTC imposed a fine on the lender in part because, as “principal,” the lender was legally responsible for the mortgage broker’s unfair and deceptive acts and practices. The United States Justice Department in the past has sought to hold a subprime mortgage lender responsible for the pricing practices of its mortgage brokers, alleging that the mortgage lender was directly responsible for the total fees and charges paid by the borrower under the Fair Housing Act even if the lender neither dictated what the mortgage broker could charge nor kept the money for its own account. Accordingly, we may be subject to fines or other penalties based upon the conduct of our independent mortgage brokers. Effective July 1, 2003, we are no longer able to rely on the Alternative Mortgage Transactions Parity Act to preempt certain state law restrictions on prepayment penalties. This may result in our inability to compete effectively with financial institutions that are exempt from such restrictions.

We are no longer able to rely on the Alternative Mortgage Transactions Parity Act to preempt certain state law restrictions on prepayment penalties, and we may be unable to compete effectively with financial institutions that are exempt from such restrictions

The value of a mortgage loan depends, in part, upon the expected period of time that the mortgage loan will be outstanding. If a borrower pays off a mortgage loan in advance of this expected period, the holder of the mortgage loan does not realize the full value expected to be received from the loan. A prepayment penalty payable by a borrower who repays a loan earlier than expected helps offset the reduction in value resulting from the early payoff. Consequently, the value of a mortgage loan is enhanced to the extent the loan includes a prepayment penalty, and a mortgage lender can offer a lower interest rate and/or lower loan fees on a loan which has a prepayment penalty. Prepayment penalties are an important feature to obtain value on the loans we originate.

Certain state laws restrict or prohibit prepayment penalties on mortgage loans, and we have relied on the federal Alternative Mortgage Transactions Parity Act (the “Parity Act”) and related rules issued in the past by the Office of Thrift Supervision (the “OTS”) to preempt state limitations on prepayment penalties. The Parity Act was enacted to extend to financial institutions, other than federally chartered depository institutions, the federal preemption which federally chartered depository institutions enjoy with respect to alternative mortgage transactions, such as adjustable-rate mortgage loans. However, on July 1, 2003, a new OTS rule took effect that reduced the scope of the Parity Act preemption and, as a result, we are no longer able to rely on the Parity Act to preempt state restrictions on prepayment penalties. The elimination of this federal preemption requires us to comply with state restrictions on prepayment penalties. These restrictions prohibit us from charging any prepayment penalty on first mortgages or second mortgages in several states, and restrict the amount or duration of prepayment penalties that we may impose in several states, as well. State laws regulating prepayment fees vary widely from state to state. Generally speaking, these laws fall into the following four categories: (a) prohibiting prepayment fees for all mortgage loans or certain mortgage loans; (b) authorizing prepayment fees subject to certain conditions, such as the creditor being licensed for certain loans, or pursuant to a certain formula for a certain period of time; (c) prohibiting or restricting prepayment fees for mortgage loans covered under the state’s anti-predatory lending law, but not for other mortgage loans; and (d) including prepayment fees in the calculation of points and fees for purposes of determining whether a loan is covered by an anti-predatory lending law.

      Prohibited Prepayment Fees

     Blanket prohibitions on imposing prepayment fees may arise under one of two types of laws. First, some state licensing laws prohibit licensees from charging prepayment fees on loans that they originate. Alabama’s Consumer Finance Act is one such licensing law. Second, in the limited number of states that have enacted a version of the Uniform Consumer Credit Code, prepayment fees for mortgage loans covered by such laws are often prohibited, but prepayment fees for mortgage loans that are not covered by such laws may not be prohibited. Colorado is one such example.

- 19 -

Table of Contents

      Authorized Prepayment Fees Subject to Certain Restrictions

     California’s Civil Code is an example of a law of general applicability that authorizes fees subject to certain conditions. The Civil Code permits most lenders to contract for a prepayment fee within the first five years of the loan’s repayment. A prepayment fee may be imposed on any amount prepaid in any twelve-month period in excess of 20% of the original principal loan amount, which prepayment fee cannot exceed an amount equal to the payment of six month’s advance interest on the amount prepaid in excess of such 20%. Licensed real estate brokers in California, however, are authorized under the Civil Code to contract for such a prepayment fee within the first seven years of the loan’s repayment.

     Prepayment Fee Provisions Under State Anti-Predatory Lending Laws (i) Prohibiting or Restricting such Fees or (ii) Including such Fees in the Points and Fees Test

     Over the past few years, states have begun to adopt anti-predatory lending laws. These anti-predatory lending laws typically address prepayment fees in one of two ways: (i) in definitions of loans covered by the law; or (ii) in the prohibited terms and practices for such loans. With respect to defining the loans covered by the law, several laws include prepayment fees in the calculation of “points and fees”for purposes of determining whether a loan is covered by the anti-predatory loan provisions. For example, in New Jersey, lenders must include in the calculation: (i) the maximum amount of prepayment fees and penalties that may be charged or collected under the terms of the loan documents; and (ii) all prepayment fees or penalties that are incurred by the borrower if the loan refinances a previous loan made or currently held by the same creditor or an affiliate of the creditor. With respect to regulated practices, some predatory lending laws prohibit or severely restrict a lender’s ability to contract for a prepayment fee on loans covered by the law. For example, in Georgia, for any loan that constitutes a “high cost home loan,” a lender may not include a prepayment fee after two years or that exceed in the aggregate: (i) in the first 12 months of the loan, more than 2% of the loan amount prepaid; or (ii) in the second 12 months of the loan, more than 1% of the loan amount prepaid.

     This may place us at a competitive disadvantage relative to financial institutions such as national banks and federally-chartered thrifts that will continue to enjoy federal preemption of such state restrictions. Such institutions generally will be able to charge prepayment penalties without regard to state restrictions and, as a result, may be able to offer loans with interest rate and loan fee structures that are more attractive than the interest rate and loan fee structures that we are able to offer.

Our business could be harmed if courts rule that the OTS exceeded its statutory authority in adopting regulations in 1996 that allowed lenders such as us to rely on the Parity Act to preempt state restrictions on prepayment penalties for adjustable-rate mortgages

A New Jersey state appellate court departed from prior decisions in other jurisdictions to hold that the OTS did not have the authority to adopt regulations in 1996 that allowed lenders like us to rely on the Parity Act to preempt state limitations on prepayment penalties with respect to adjustable-rate mortgages. Although the New Jersey Supreme Court reversed the appellate court decision in May 2004, that reversal could be appealed, and if it were appealed successfully or if courts in other jurisdictions reach similar conclusions to those reached by the New Jersey state appellate court, we could face litigation regarding the enforceability of prepayment penalties on our outstanding adjustable-rate loans originated prior to July 1, 2003. We could also be subject to similar litigation relating to charges that were imposed on our customers who paid prepayment penalties in connection with prepayments of loans prior to July 1, 2003. We could also face contractual claims from our institutional loan purchasers stemming from representations we made regarding the enforceability of our prepayment penalties. Such litigation and claims could have a material adverse effect on our business, results of operations and financial condition.

- 20 -

Table of Contents

RISKS RELATED TO OUR CAPITAL STRUCTURE

Because there historically has been a limited amount of trading in our common stock, there can be no assurance that our stock price will not decline

Although our common stock trades on the OTC Bulletin Board, the public market for our common stock historically has not been very liquid and a regular trading market for the securities may not be sustained in the future. NASDAQ has enacted recent changes that limit quotations on the OTC Bulletin Board to securities of issuers that are current in their reports filed with the Securities and Exchange Commission. The effect on the OTC Bulletin Board of these rule changes and other proposed changes can not be determined at this time. The OTC Bulletin Board is an inter-dealer, over-the-counter market that provides significantly less liquidity than the NASDAQ’s automated quotation system (the “NASDAQ Stock Market”). Quotes for stocks included on the OTC Bulletin Board are not listed in the financial sections of newspapers, as are those for the NASDAQ Stock Market. Therefore, prices for securities traded solely on the OTC Bulletin Board may be difficult to obtain and holders of common stock may be unable to resell their securities at or near their original offering price or at any price.

Our quarterly revenues and operating results fluctuate as a result of a variety of factors that may result in volatility of our stock price

Our quarterly revenues and operating results have varied in the past and can be expected to fluctuate in the future due to a number of factors, many of which are beyond our control, including:

• the issuance of new equity securities pursuant to a future, offering;
• changes in interest rates;
• competitive developments, including announcements by us or our competitors of new products or services or significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments;
• variations in quarterly operating results;
• change in financial estimates by securities analysts; o the depth and liquidity of the market for our common stock;
• investor perceptions of our company and the non-conforming and subprime mortgage industries generally; and
• general economic and other national conditions.

As a result of these specific and other general factors, our operating results will likely vary from quarter to quarter and the results for any particular quarter may not be necessarily indicative of results for the full year. Any shortfall in revenues or net income from levels expected by securities analyst and investors could cause a decrease in the share price of our common stock.

Sales of additional common stock may adversely affect our market price

The sale or the proposed sale of substantial amounts of our common stock in the public market could materially adversely affect the market price of our common stock or other outstanding securities. As of March 31, 2005, Raymond Eshaghian, our Chief Executive Officer, beneficially owned 9,268,350 shares of our common stock and two other stockholders, including M. Aaron Yashouafar, one of our directors, beneficially owned 3,765,750 shares of our common stock, and these three stockholders have the right to require us to register their respective shares. The sale of a large amount of shares by one or more of the three stockholders, or the perception that such sales may occur, could adversely affect the market price for our common stock. In addition, we expect that the legal, accounting, and other costs associated with the registration of those shares will be substantial.

Our common stock is considered a “penny stock”

Our common stock is considered to be a “penny stock” because it meets one or more of the definitions in Rules 15g-2 through 15g-6 promulgated under Section 15(g) of the Securities Exchange Act of 1934, as amended. These include but are not limited to the following: (i) the stock trades at a price less than five dollars ($5.00) per share; (ii) it is NOT traded on a “recognized” national exchange; (iii) it is NOT quoted on the NASDAQ Stock Market, or even if so, has a price less than five dollars (5.00) per share; or (iv) is issued by a company with net tangible assets less than $2,000,000, if in business more than a continuous three years, or with average revenues of less than $6,000,000 for the past three years. The principal result or effect of being designated a “penny stock” is that securities broker-dealers cannot recommend the stock but must trade it on an unsolicited basis.

- 21 -

Table of Contents

Broker-dealer requirements may affect trading and liquidity

Section 15(g) of the Securities Exchange Act of 1934, as amended, and Rule 15g-2 promulgated thereunder by the SEC require broker-dealers dealing in penny stocks to provide potential investors with a document disclosing the risks of penny stocks and to obtain a manually signed and dated written receipt of the document before effecting any transaction in a penny stock for the investor’s account.

Potential investors in our common stock are urged to obtain and read such disclosure carefully before purchasing any shares that are deemed to be “penny stock.” Moreover, Rule 15g-9 requires broker-dealers in penny stocks to approve the account of any investor for transactions in such stocks before selling any penny stock to that investor. This procedure requires the broker-dealer to (i) obtain from the investor information concerning his or her financial situation, investment experience and investment objectives; (ii) reasonably determine, based on that information, that transactions in penny stocks are suitable for the investor and that the investor has sufficient knowledge and experience as to be reasonably capable of evaluating the risks of penny stock transactions; (iii) provide the investor with a written statement setting forth the basis on which the broker-dealer made the determination in (ii) above; and (iv) receive a signed and dated copy of such statement from the investor, confirming that it accurately reflects the investor’s financial situation, investment experience and investment objectives. Compliance with these requirements may make it more difficult for investors in our common stock to resell their shares to third parties or to otherwise dispose of them in the market or otherwise.

The shares of our common stock will be subordinate to the rights of our wholly owned operating subsidiary’s existing and future creditors

We are a holding company and our only assets are the shares of capital stock of our wholly owned operating subsidiary, The Mortgage Store. As a holding company without independent means of generating operating revenues, we depend upon dividends and other payments from The Mortgage Store to fund our obligations and meet our cash needs. Our expenses may include the salaries of our executive officers, insurance and professional fees. Financial covenants under the existing or future loan agreements of The Mortgage Store, or provisions of the California Corporations Code, may limit The Mortgage Store’s ability to make sufficient dividend or other payments to us to permit us to fund our obligations or meet our cash needs, in whole or in part. By virtue of this holding-company structure, the shares of our common stock purchased in this offering will be structurally junior in right of payment to all existing and future liabilities of The Mortgage Store.

We may be subject to unknown liabilities as a result of reverse merger

We became a publicly traded company through a reverse merger with an unrelated company, which had prior operations in an unrelated business. There may be potential liabilities incurred by the prior business, which are unknown to us for which we may be held liable. We have no insurance for liabilities incurred as a result of business conducted prior to the reverse merger.

Control by officer, director and majority stockholder

We are controlled by Raymond Eshaghian, who beneficially owns 62.0% of our outstanding common stock as of March 21, 2005. Mr. Eshaghian serves as our Chief Executive Officer and a member of our Board of Directors. As a result, Mr. Eshaghian is able to (i) elect a majority of our Board of Directors, (ii) approve the sale of our assets, mergers and other business combination transactions and (iii) direct and control our operations, policies, and business decisions.

Some provisions of our Certificate of Incorporation and Bylaws may deter takeover attempts, which may limit the opportunity of our stockholders to sell their shares at a favorable price.

Some of the provisions of our Certificate of Incorporation and Bylaws could make it more difficult for a third party to acquire us, even if doing so might be beneficial to our stockholders by providing them with the opportunity to sell their shares possibly at a premium over the then market price.

- 22 -

Table of Contents

For example, our Certificate of Incorporation authorizes our Board of Directors to issue up to 10,000,000 shares of preferred stock. The preferred stock may be issued in one or more series, the terms of which may be determined at the time of issuance by our Board of Directors without further action by the stockholders. These terms may include voting rights including the right to vote as a series on particular matters, preferences as to dividends and liquidation, conversion rights, redemption rights and sinking fund provisions. No shares of preferred stock will be outstanding upon the closing of this offering and we have no present plans for the issuance of any preferred stock. The issuance of any preferred stock, however, could diminish the rights of holders of our common stock, and therefore could reduce the value of our common stock. In addition, specific rights granted to future holders of preferred stock could be used to restrict our ability to merge with, or sell assets to, a third party. The ability of our Board of Directors to issue preferred stock could make it more difficult, delay, discourage, prevent or make it more costly to acquire or effect a change in control, thereby preserving the current stockholders’ control.

In addition, we are also subject to Section 203 of the Delaware General Corporation Law that, subject to certain exceptions, prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years following the date that the stockholder became an interested stockholder. The preceding provisions of our Certificate of Incorporation and Bylaws, as well as Section 203 of the Delaware General Corporation Law, could discourage potential acquisition proposals, delay or prevent a change of control and prevent changes in our management, even if such things would be in the best interests of our stockholders.

ITEM 2. PROPERTIES

     Our primary executive and administrative offices are located in Los Angeles, California. We have a three-year lease expiring November 30, 2005. The current aggregate annual rent for the leased property is approximately $412,860.

ITEM 3. LEGAL PROCEEDINGS

      We are not a party to any material legal proceedings with respect to us, our subsidiary, or any of our properties.

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

     On June 11, 2004, we held our annual meeting of stockholders. Of 15,000,000 shares eligible to vote, 14,400,200 votes were returned, or 96%, formulating a quorum. At the annual stockholders meeting, the following matters were submitted to stockholders for vote: Proposal I — Election of Directors, Proposal II — Ratification of the appointment of Singer Lewak Greenbaum & Goldstein, LLP (“SLGG”) as our independent auditors for the year ending December 31, 2004.

Proposal I — Election of Directors.

     The following individuals were elected to serve as our directors at the annual stockholders’ meeting, and to serve until their successors are elected and qualified at the next annual meeting of stockholders or until death, resignation or removal.

Proposal II — Ratification of the appointment of Singer Lewak Greenbaum & Goldstein, LLP (“SLGG”) as our independent auditors for the year ending December 31, 2004. This proposal was approved with 14,400,200 shares voted for, 0 voted against, and 599,800 votes withheld.

- 23 -

Table of Contents

PART II

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

     Our Common Stock is currently quoted on the OTC Bulletin Board under the symbol “TMFZ.” Although shares of our Common Stock have been quoted on the OTC Bulletin Board since April 24, 2001, there has not been any public market activity prior to the quarter ending December 31, 2002. No assurance can be given that any public market activity for our Common Stock will continue to develop or be maintained. During the year ending December 31, 2004, the high and low bid price of our Common Stock was $2.85 and $0.60, respectively. Such quotations reflect inter-dealer prices, without retail mark-ups, mark-downs or commissions and may not necessarily represent actual transactions in an established trading market.

     As of March 27, 2004, there were 92 holders of record of our Common Stock (including holders who are nominees for an undetermined number of beneficial owners). These figures do not include beneficial owners who hold shares in nominee name.

     We have not declared or paid any cash dividends on our Common Stock. Our current policy is to retain all of our earnings to finance the growth and development of our business.

EQUITY COMPENSATION PLAN INFORMATION

Our equity compensation plan information is provided as set forth in Part III, Item 11 herein.

- 24 -

Table of Contents

ITEM 6. SELECTED FINANCIAL DATA

The following table sets forth our results of operations for the years indicated. All figures except number of shares and earning per share are in $000

- 25 -

Table of Contents

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT OF OPERATIONS

The following discussion should be read in conjunction with our Condensed Consolidated Financial Statements and Notes thereto appearing elsewhere in this annual report on Form 10-K.

This annual report may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements with regard to descriptions of our plans or objectives for future operations, products or services, and forecasts of our revenues, earnings or other measures of economic performance. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include the words “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate,” or words of similar meaning, or future or conditional verbs such as “will,” “would,” “should,” “could,” or “may.”

Forward-looking statements, by their nature, are subject to risks and uncertainties. A number of factors — many of which are beyond our control — could cause actual conditions, events or results to differ significantly from those described in the forward-looking statements and reported results should not be considered an indication of our future performance. Some of these risk factors, include, among others certain credit, market, operational, liquidity and interest rate risks associated with our business and operations, changes in business and economic conditions, accounting estimates and judgments and legislation including the Sarbanes-Oxley Act of 2002. These risk factors are not exhaustive, and additional factors that could have an adverse effect on our business and financial performance are set forth under “Risk Factors” and elsewhere in this quarterly report.

Forward-looking statements speak only as of the date they are made. We do not undertake to update forward-looking statements to reflect circumstances or events that occur after the date forward-looking statements are made.

General
We are a financial holding company that through our wholly owned subsidiary, The Mortgage Store Financial, Inc. is engaged in nationwide mortgage banking to originate, finance, and sell conforming and non-conforming mortgage loans secured by single-family residences.

We originate our loans primarily through independent mortgage brokers across the United States and, to a lesser extent, through our direct sales force in our retail offices. We primarily sell our loans in whole loan transactions and currently do not retain any interest in the servicing of the loans.

Revenue Model Our operations generate revenues in three ways:

• Income from sales of loans. We generate income from selling the loans we originate for a premium to originate. This accounts for a substantial percentage of our revenues.
• Mortgage interest income. We earn mortgage interest income on loans held for sale from the time we originate the loan until the time we sell the loan. This income is partially offset by our borrowing costs under our warehouse borrowing facilities.
• Commission fee income. To a lesser extent we generate commission fee income from our retail origination and lending activities.
• Escrow services income. We earn a fee for services we provide through our escrow division.

- 26 -

Table of Contents

Financial Highlights
Our operations consist primarily of originating loans that we pool and sell in the secondary markets. We analyze and group our loans together to maximize our profit from the sale of each class of mortgages. To date all of our loan sales are structured as whole loan sales where we dispose of our entire interest in the loans and produce immediate cash revenues. However, in the future we may determine that other strategies such as securitization or retaining servicing rights may be more profitable and we may begin to engage in those activities.

Net Income. For the year ended December 31, 2004 we realized income of $14.4 million before provision for income tax. The net income after provision for income tax was $8.6 million or $0.58 per basic and $0.56 per fully diluted shares.

Loan originations. For the year ended December 31, 2004 we funded $1,031.2 million of mortgage loans compared to $628.2 million for 2003. Purchase money mortgages accounted for 71.2% of our originations during the year ended December 31, 2004 compared to 33.3% for the same period in 2003. Our wholesale channel, which originates loans through independent mortgage brokers, accounted for 82.9% of our origination during the year ended December 31, 2004 compared to 69.9% in 2003.

We continued to expand our geographical reach and increased origination throughout the country. During the year ended December 31, 2004 we had loan originated in 38 states with California accounting for 71.4% of our total origination volume, compared to 91.4% in 2003. During the year ended December 31, 2003 origination from 34 states outside of California accounted for 8.6% of total funding.

Whole loan sales — cash income from sale. For the year ended December 31, 2004 we sold $863.7 million of loans (excluding loans funded under our Early Purchase facility) compared to $663.6 million during comparable period in 2003. Our revenue from sales of loans was $42.4 million during year ended December 31, 2004 compared to $22.5 million for the same period in 2003. During the year ended December 31, 2004 we continued to benefit from the higher premiums which we received from sales of Alt-A type mortgage loans. The weighted average premium collected from sales of loans in this period was 3.49% compared to 2.28% in 2003. During the year ended December 31, 2004 the cost of origination which represents the rebate of yield spread premium to the loan originators was 0.76% compared to 0.82% for the same period in 2003.

For the year ended December 31, 2004 we had operating income of $14,339,594 and income before provision for income tax of $14,371,902. The net income available to common shareholders after provision for income tax was $8,635,258 or $0.58 per share and $0.56 per share fully diluted.

Our cash and cash equivalent as of December 31, 2004 was $8,565,215 compared to $2,843,172 at December 31, 2003.

As of December 31, 2004 the company had loan origination financing facilities with three financial institutions for a total funding capacity of $220 million. This included an Early Purchase facility with a maximum concentration amount of $100 million. This facility was subsequently increased to $150 million in March 2005. The cost of borrowing on these lines are a variable rate equal to 1 month LIBOR plus a margin between 2.25% and 3.75%. As of year ended December 31, 2003 we had a warehouse line in the amount of $50 million with IMPAC Warehouse Lending Group. The interest rate on this line was prime plus 0.5% subject to increase based on the length of time loans are held on the warehouse line.

Accounting for Our Loan Sales
When we sell our mortgage loans in whole loan sale transactions, we dispose of our entire interest in the loans. We recognize revenue at the time of the sale of loans. The revenue consists of pricing premiums from sales less cost of financing origination of loans. The lender and retail origination fees are also recognized at the time we sell the loans. Lender fees and origination fees that are payable to third party brokers and which are paid by borrowers on mortgage loans held for sale are deferred as a balance sheet item and are recaptured as revenue in the statements of operations when the related loans are sold.

We separately record mortgage interest income on loans we hold from the date of origination to the date of sale.

- 27 -

Table of Contents

Critical Accounting Policies
The preparation of our financial statements requires us to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although we base our estimates and assumptions on historical experience and on various other factors that we believe to be reasonable under the circumstances, our management exercises significant judgment in the final determination of our estimates. Actual results may differ from these estimates.

Pursuant to our critical accounting policies the following reflect significant judgments by management:

• Income from sale of mortgage loans
• Provision for losses
• Interest rate risk, derivatives and hedging

Accounting for income taxes.
As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves us estimating our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items, such as deferred revenue, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance in a period, we must include an expense within the tax provision in the statement of operations.

Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. The net deferred tax liability and asset as of December 31, 2004 was $102,709 and $439,701, respectively.

Income from Sales of Loans
To date our income from sales of mortgage loans has consisted primarily of cash gain that resulted from whole loan sales. To date, we have sold all of our loans on a servicing released basis. Currently, we do not retain servicing rights. However, in the future we may decide to retain the right to service any of the loans that we have sold, in which case we may also record non-cash sales related to the value of those servicing rights.

Gain on Sale
Gains or losses resulting from our loan sales are recorded at the time of sale. At the closing of a sale we remove the mortgage loans held for sale and related warehouse debt from our books and record the net gain or loss to our income statement.

Accordingly, our financial results are significantly impacted by the timing of our loan sales. If we hold a significant pool of loans at the end of a reporting period, those loans will remain on our balance sheet, along with the related debt used to fund the loans. The revenue that we generate from those loans will not be recorded until the subsequent reporting period when we sell the loans.

A number of factors influence the timing of our loan sales and our targeted disposition strategy, including the current market demand for our loans, liquidity needs, and our strategic objectives. We have, from time to time, delayed the sale of loans to a later period, and may do so again in the future.

Under term of an Early Purchase agreement with a financial institution, we sell certain qualifying loans to the financial institution immediately upon origination. The Company retains the right to service the loans, which will be sold to a Takeout investor within 90 days . The Company recognizes revenue from this transaction to the extent of difference between the price at which loans are acquired by the institution and the funding amount. We recognize additional revenue (loss) equal to the difference between Take-out investor’s price and the acquisition price by the institution at the time that the institution releases its interest to the Take-out investor . Although this transaction is treated as a sale and loans are not hold on the Company’s balance sheet, the Company may face losses due to change in the value of servicing right for such notes.

- 28 -

Table of Contents

Provisions for Losses
We may make market valuation adjustments on certain non-performing loans, other loans we hold for sale and real estate owned. These adjustments are based upon our estimate of expected losses and are based upon the value that we could reasonably expect to obtain from a sale. An allowance for losses on loans held for sale is recorded in an amount sufficient to maintain adequate coverage for probable losses on such loans. However, we do not record a reserve for liabilities associated with loans sold which we may be requested to repurchase due to breaches of representations and warranties and early payment defaults. Our estimate of expected losses could increase or decrease if our actual loss experience or repurchase activity is different than originally estimated, or if economic factors change the value we could reasonably expect to obtain from a sale. In particular, if actual losses increase or if values reasonably expected to be obtained from a sale decrease, the provision for losses would increase. Any increase in the provision for losses could adversely affect our results of operations.

Interest Rate Risk, Derivatives and Hedging
We face two primary types of interest rate risk: during the period from approval of a loan application through loan funding, and on our loans held for sale from the time of funding to the date of sale. Interest rate risk exists during the period from approval of a loan application through loan funding and from the time of funding to the date of sale because the premium earned on the sale of these loans is partially contingent upon the then-current market rate of interest for loans as compared to the contractual interest rate of the loans. In the past we have attempted to minimize such risk through forward commitments and other such strategies.

As part of our interest rate management process, we may use derivative financial instruments such as options and futures. The use of derivatives is intended to mitigate volatility of earnings associated with fluctuations in the gain on sale of loans due to changes in the current market rate of interest. We do not intend to use derivatives to speculate on interest rates. For derivative financial instruments designated as hedge instruments, we will evaluate the effectiveness of these hedges against the mortgage loans being hedged to ensure that there remains a highly effective correlation in the hedge relationship. To hedge the adverse effect of interest rate changes on the fair value of mortgage loans held for sale we will use derivatives as fair value hedges under SFAS No. 133. Once the hedge relationship is established, the realized and unrealized changes in fair value of both the hedge instrument and mortgage loans will be recognized in the period in which the changes occur. The net amount recorded in our consolidated statements of operations will be referred to as hedge ineffectiveness. Any change in the fair value of mortgage loans recognized as a result of hedge accounting will be reversed at the time we sell the mortgage loans. This will result in a correspondingly higher or lower gain on sale revenue at such time. For derivative financial instruments not designated as hedge instruments, realized and unrealized changes in fair value will be recognized in the period in which the changes occur or when such instruments are settled.

Since the compositions of the Company’s loan origination has shifted from fixed term loans to short term adjustable rate mortgages which are less sensitive to interest rate risk, a hedging position with securities that match the characteristics of short term ARMs was determined to be less cost effective.

Results of operations for the year ended December 31, 2004 compared to the same period in 2003

Loan income
Total revenue. Total revenue increased 92.2% to $51.9 million for year ended December 31, 2004 from $27.0 million for the year ended December 31, 2003. This increase was due to increases in income from sales of loans of $42.4 million and mortgage interest income of $8.7 million for the year ended December 31, 2004 compared to $22.5 million and $4.2 million respectively for the same period in 2003.

Income from sales of mortgage loans. Income from sales of loans for the year ended December 31, 2004 increased 88.4% to $42.4 million from $22.5 million for the same period in 2003 due to higher margins and volume of whole loan sales. Total whole loan sales increased 30.1% to $863.6 million for the year ended December 31, 2004 compared to $663.6 million for the same period in 2003. This increase was due to increased loan originations during the year ended December 31, 2004 compared to the same period in 2003. The weighted average premium for whole loan sales for the year ended December 31, 2004 was 3.5% compared to 2.3% for comparable period in 2003.

The higher weighted average premium we received from sales of loans in the year ended December 31, 2004 reflect the shift in our mortgage product origination with larger volume of Alt-A type programs.

Interest income on loans held for sale. Mortgage interest income increased 108.3% to $8.7 million for the year ended December 31, 2004 from $4.2 million for the comparable period in 2003. The increase in interest income was due to increase in the volume of loans originated in 2004 compared to 2003.

- 29 -

Table of Contents

Commission fee income. To lesser extent, we earn commission fees on loans that we broker out to other lenders. The mortgage origination fees earned by us for retail loans are recognized at the time of sale of those mortgage loans and are included in the income from sale of loans. Commission fee income increased to $777,000 for year ended December 31, 2004 from $77,000 in 2003.

Escrow fee income. We discontinued our escrow division in 2004. Income from escrow and other fees was $85,000 for the year ended December 31, 2004 down from $268,000 for the same period in 2003.

Cost of loan origination and sale of mortgage

Commission Expense. Commission expenses for mortgage loans sold during year ended December 31, 2004 increased 55.8% to $14.8 million from $9.5 million in the year ended December 31, 2003. This increase was due to an increased volume of origination. Commission expense, which is primarily pricing rebate paid by the company and origination fee deducted from borrower’s fund at origination, are recognized at the time of sale to correspond with the recognition of income for the same loan. The commissions paid for loans which are held for sale are included in the value of loans held for sale on our balance sheet. As of December 31, 2004, we had paid $1.5 million in commissions for loans held for sale.

Warehouse interest expense. Warehouse interest expense represents the interest incurred on all financing associated with use of our warehouse credit facilities during the time our loans are on the line prior to their sale. Interest expense increased 79.0% to $5.7 million for the year ended December 31, 2004 from $3.2 million for the same period in 2003. The increase in interest expense was due to the increase in our volume of borrowing offset partially by lower cost of financing. Our daily average warehouse borrowing increased 67.5% from $63.8 million in 2003 to $112.3 million in 2004. The weighted average number of days we held loans before sale was 48 and 37 days respectively. The interest rate for our warehouse financing is a variable rate equal 1 month LIBOR plus a margin ranging between 2.25% and 2.75%.

Reserve for impairment of mortgage loans. As of December 31, 2004 we have made reserve against impairment of mortgages in the amount of $519,000. We had not made any provision for losses as of December 31, 2003.

Other closing expenses. Other closing expenses related to closing of loans, including credit check expenses, appraisal and appraisal review fees and closing expenses, increased 6.3% to $1.7 million for the year ended December 31, 2004 from $1.6 million for the comparable period in 2003. This increase reflects the additional cost related to increased volume loan origination offset by improved pricing for services used in loan origination.

Operating expenses

Total operating expenses. Total operating expenses increased 60.4% to $14.9 million for the year ended December 31, 2004 compared to $9.3 million for the year ended December 31, 2003. The increase was the result of higher salaries, wages, and benefits expense, and increases in other variable operating expenses associated with growth in mortgage loan volume and in the number of employees.

Salaries and wages. Salaries and wages increased 52.0% to $9.6 million for the year ended December 31, 2004 from $6.3 million for the year ended December 31, 2003. The increase was due to growth in the number of our employees, as well as higher commission and bonus expenses related to loan production. The total number of employees at December 31, 2004 was 255 including 83 commission based employees in our retail and wholesale divisions compared to 206 at December 31, 2003 which included 136 commission based employees.

- 30 -

Table of Contents

Occupancy. Occupancy expense decreased 32.0% to $413,000 for the year ended December 31, 2004 from $607,000 for the year ended December 31, 2003. The decrease resulted from reduction in number of loan officers in our main office. The occupancy expense in 2003 also included cost of leasehold improvements for office space which we occupied on a month-to-month basis and discontinued to use when we reduced our retail sale operation after the rise in mortgage rates and lower refinancing activity in later part of 2003.

General and administrative. General and administrative expenses increased 105.3% to $5.0 million for the year ended December 31, 2004 from $2.4 million for the year ended December 31, 2003. This increase was due to an increase in mortgage loan origination volume, increased marketing expenses, and an increase in the number of employees.

Loss from real estate owned. While we sell all of our loans for a cash price with servicing rights released, under terms of our agreements with various purchasers, we make certain representations and warranties to the purchaser, which we are obligated to satisfy or correct even after completion of sale transaction. For example we agree to repurchase loans where borrowers default on their payments within 90 days from date of transfer of servicing.

As of December 31, 2004, we had received requests to repurchase an aggregate of $4,318,283 in loans previously sold due to early payment defaults. While, at December 31, 2003 we had outstanding requests from purchasers of our closed loans to repurchase total amount of $584,250 due to early payment default. At December 31, 2004 we have made provision for losses from Real Estate Owned or loans in default in the amount of $475,238.

During the year ended December 31, 2004 we sold all properties previously held as REO at no loss. Gains from sales of these properties as well as recaptured losses for a loan for which we had previously recognized losses for are realized as non-operating income in our statement of operations.

Provision for income tax. Provision for income tax increased to $5.7 million for the year ended December 31, 2004 from $1.3 million for year ended December 31, 2003. This increase was a result of the increase in our income before taxes to $14.3 million for the year ended December 31, 2004 from $3.5 million for the year ended December 31, 2003.

- 31 -

Table of Contents

The following table sets forth our results of operations as a percentage of total revenue for the years ended December 31, 2004, 2003, and 2002:

- 32 -

Table of Contents

Results of operations for year ended December 31, 2003 compared to the same period in 2002

Loan income
Total revenue. Total revenue increased 97.9% to $27.0 million for the year ended December 31, 2003 from $13.7 million for year ended December 31, 2002. This increase was due to increases in income from sales of loans of $22.5 million and mortgage interest income of $4.2 million.

Income from sales of mortgage loans. Income from sales of loans increased 99.1% to $22.5 million for the year ended December 31, 2003 from $11.3 million for the same period in 2002 due to higher volume of whole loan sales. Total whole loan sales increased 141.2% to $663.6 million for the year ended December 31, 2003 from $275.1 million for the same period in 2002. This increase was due to increased loan originations during the year ended December 31, 2003 compared to the same period in 2002. The weighted average premium for whole loan sales was 2.3% for loans sold in the year ended December 31, 2003 compared to 2.4% for comparable period in 2002.

The lower weighted average premium we received from sales of loans in the year ended December 31, 2003 reflect a decline in value of loans with lower mortgage rates which were originated and held for sale prior to the sharp increase of rates in June and July 2003.

Interest income on loans held for sale. Mortgage interest income increased 85.4% to $4.2 million for the year ended December 31, 2003 from $2.3 million for the comparable period in 2002. The increase in interest income was due to increase in the volume of loans originated in 2003 compared to 2002.

Commission fee income. To lesser extent, we earn commission fees on loans that we broker out to other lenders. The mortgage origination fees earned by us for retail loans are recognized at the time of sale of those mortgage loans and are included in the income from sale of loans. Commission fee income increased to $77,000 in the year ended December 31, 2003 from $66,000 in 2002.

Escrow fee income. Income from our escrow division was $268,000 for the year ended December 31, 2003. Our escrow division was established late in 2002 and recognized negligible income in that year.

Cost of loan origination and sale of mortgage

Commission Expense. Commission expenses for mortgage loans sold during year ended December 31, 2003 increased 84.58% to $9.5 million from $5.1 million in the year ended December 31, 2002. This increase was due to an increased volume of origination. Commission expense, which is primarily pricing rebate paid by the company and origination fee deducted from borrower’s fund at origination, are recognized at the time of sale to correspond with the recognition of income for the same loan. The commissions paid for loans which are held for sale are included in the value of loans held for sale on our balance sheet. As of December 31, 2003, we had paid $870,000 in commissions for loans held for sale.

Warehouse interest expense. Warehouse interest expense represents the interest incurred on all financing associated with use of our warehouse credit facilities during the time our loans are on the line prior to their sale. Interest expense increased 83.3% to $3.2 million for the year ended December 31, 2003 from $1.7 million for the same period in 2002.

Other closing expenses. Other closing expenses related to closing of loans, including credit check expenses, appraisal and appraisal review fees and closing expenses, increased 123.27% to $1.6 million for the year ended December 31, 2003 from $709,000 for the comparable period in 2002. This increase reflects the additional cost related to increased volume loan origination as well as the added cost of acquiring leads for our retail mortgage origination.

- 33 -

Table of Contents

Operating expenses

Total operating expenses. Total operating expenses increased 84.2% to $9.3 million for the year ended December 31, 2003 from $5.1 million for the year ended December 31, 2002. The increase was the result of higher salaries, wages, and benefits expense, and increases in other variable operating expenses associated with growth in mortgage loan volume and in the number of employees.

Salaries and wages. Salaries and wages increased 118.6% to $6.3 million for the year ended December 31, 2003 from $2.9 million for the year ended December 31, 2002. The increase was due to growth in the number of our employees, as well as higher commission and bonus expenses related to loan production. The total number of our employees decreased to 206 at December 31, 2003 including 136 commission based employees from 302 at December 31, 2002. This decrease was primarily in the number of commission only sales employees.

Occupancy. Occupancy expense increased 194.7% to $607,000 for the year ended December 31, 2003 from $206,000 for the year ended December 31, 2002. The occupancy expense in 2003 includes cost of leasehold improvements for office space which we occupied on a month-to-month basis and discontinued to use when we reduced our retail sale operation after the rise in mortgage rates and lower refinancing activity.

General and administrative. General and administrative expenses increased 37.6% to $2.4 million for the year ended December 31, 2003 from $1.8 million for the year ended December 31, 2002. This increase was due to an increase in mortgage loan origination volume, increased marketing expenses, and an increase in the number of employees.

Loss from real estate owned. While we sell all of our loans for a cash price with servicing rights released, under terms of our agreements with various purchasers, we make certain representations and warranties to the purchaser, which we are obligated to satisfy or correct even after completion of sale transaction. For example we agree to repurchase loans where borrowers default on their payments within 90 days from date of transfer of servicing.

As of December 31, 2003, we had not made any provision for losses from Real Estate Owned or loans in default. While, at December 31, 2003 we had outstanding requests from purchasers of our closed loans to repurchase 3 loans with total note amount of $584,250 due to early payment default, the management believes that our interest in each mortgage loan is sufficiently covered by owner’s equity or private mortgage insurance.

Provision for income tax. Provision for income tax increased to $1,312,000 for year ended December 31, 2003 from $424,000 for the year ended December 31, 2002. This increase was a result of the increase in our income before taxes to $3.5 million for the year ended December 31, 2003 from $1 million for the year ended December 31, 2002.

- 34 -

Table of Contents

Liquidity and capital resources
As a mortgage banking company, our primary cash requirements include the funding of (1) mortgage loan originations, including principal, as well as origination costs such as commissions and broker premiums, (2) interest expense on and repayment of principal on warehouse credit facilities, (3) operational expenses, and (4) tax payments. We fund these cash requirements with cash received from (1) borrowings under warehouse credit facilities, (2) loan sales, (3) mortgage interest collections on loans held for sale, (4) points and fees collected from the origination of loans, and (5) private sales of equity and debt securities.

We use warehouse credit facilities to finance a significant portion of our loan originations. It is our intention to utilize the maximum allowable leverage ratio, defined as our total liabilities divided by our stockholders’ equity, for our warehouse financing.

Our liquidity strategy is to maintain sufficient and diversified warehouse credit facilities to finance our mortgage loan originations, to maintain strong relationships with a diverse group of whole loan purchasers, and to establish the ability to execute our own securitizations. This provides us with the ability to finance our growing origination operations and to maximize our realization of the value of loans we originate.

In the past, we have financed our operations through increased warehouse borrowing, additional capitalization, and cash income generated from our operations. In the future, realization of our expansion plans will depend on our ability to secure sufficient credit facilities to fund larger volumes of loans. The extent of this borrowing in turn depends on our net worth and requires certain restricted cash deposits to be maintained with the lender. In addition to cash earnings generated from our operations, we intend to increase our cash and net worth through offerings of our equity or debt securities.

As of December 31, 2004, we had three warehouse credit facilities to finance our loan originations. After funding the loans, we sell our mortgage loans within one to three months of origination and pay off the warehouse credit facilities with the proceeds. Both of these warehouse facilities were structured as repurchase agreements, where the warehouse will provide the funds for origination of loans and will hold the collateral until we repurchase the loans to sell them to the investors. Under terms of such agreements, the investor would send the purchase proceeds directly to the warehouse lender, where the principal borrowing plus accrued interest and fees are deducted before the balance is forwarded to us.

One warehouse credit facility with a financial institution in the amount of $80 million is structured as a repurchase agreement and accrues interest at a rate based upon 1 month LIBOR (2.40% as of December 31, 2004) plus 2.25%. This facility extends 100% credit for loans that are committed for sale to an affiliate of the financial institution up to an additional $50 million. As of December 31, 2004 we had an outstanding balance of $81.6 million on this facility, which included loans we had committed to sell to the lender’s affiliated entity.

Our second warehouse facility is structured as a repurchase agreement and allows funding up to $30 million. This facility contains a sub-limit for various categories of loans such as “wet” funding (loans for which the collateral custodian has not yet received the related loan documents) or Alt-A loans and it has a one year term.. This facility has a cost of borrowing equal to the 1 month LIBOR rate plus a spread equal to 2.25% for all loans except 2^nd TD and sub-prime loans which have a spread of 2.75%. As of December 31, 2004 we had an outstanding balance of $27.7 million on this line.

Our third warehouse credit facility is structured as a secured credit agreement and will expire on May 1, 2005. This facility is in the amount $10 million. The cost of borrowing under this agreement is equal to 1 month LIBOR plus a spread between 2.25% and 3.75% based on type of loan and period of time for which the loan is held on the line. This facility has sub-limits for various type of loans and contains certain financial covenants. As of December 31, 2004 we had an outstanding balance of $6.3 on this facility.

- 35 -

Table of Contents

In July 2004 The Company entered into an Early Purchase Agreement with the same financial institution where certain qualifying loans are acquired by the institution immediately upon origination. Under terms of this purchase agreement the Company retains the right to service the notes. As a condition of acquisition of loans by the financial institution, the Company shall assign to the financial institution any commitment by a Takeout investor who would purchase the notes with servicing rights released at later dates. The price that loans under this agreement are acquired by the financial institution will be 98% of Takeout Investor’s price, but not to exceed the original note amount. Loans origination under provisions of this facility are recognized as sales of loan and are not reflected on the Company’s balance sheet. Upon receipt of funds from Takeout investors the financial institution shall release its interest I the loan and transfer excess funds pertaining to the servicing right to the Company. Loans for which a commitment from Takeout investor is not obtained within 90 days by the Company are placed in the regular warehouse credit facility. This Early Purchase facility has a maximum purchase concentration of $100 million at any time. Upon purchase of loans by a Takeout investor the unused facility up to maximum concentration may be re-used by the Company to originate new loans. This Early Purchase agreement meets all criteria listed under FAS140 for the purpose of defining "transfer of financial assets". As of December 31, 2004 we had utilized $93.7 million of the concentration limit. The management believes that the value of the servicing right for loans originated through this facility prior to their sale to Takeout investors were not material to the financial statements as of December 31, 2004 and no provision has been recognized. The maximum concentration allowed under this facility has subsequently been increased to $150 million in March 2005.

Our warehouse and other credit facilities contain customary covenants including minimum liquidity, profitability and net worth requirements, and limitations on other indebtedness. If we fail to comply with any of these covenants or otherwise default under a facility, the lender has the right to terminate the facility and require immediate repayment that may require sale of the collateral at less than optimal terms. As of December 31, 2004 we have been in compliance with covenants of our warehouse agreements.

Subject to the various uncertainties described above, and assuming that we will be able to successfully execute our liquidity strategy, we anticipate that our liquidity, credit facilities and capital resources will be sufficient to fund our operations for the next six months.

Off-Balance Sheet Arrangements We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources.

Inflation
Inflation affects us most significantly in the area of loan originations by affecting interest rates. Interest rates normally increase during periods of high inflation (or in periods when the Federal Reserve Bank attempts to prevent inflation) and decrease during periods of low inflation.

Newly Issued Accounting Pronouncements
In April 2003, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS No. 149 amends and clarifies accounting and reporting for derivative instruments and hedging activities under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” SFAS No. 149 is effective for derivative instruments and hedging activities entered into or modified after September 30, 2003, except for certain forward purchase and sale securities. For these forward purchase and sale securities, SFAS No. 149 is effective for both new and existing securities after September 30, 2003. Management does not expect adoption of SFAS No. 149 to have a material impact on the Company’s statements of earnings, financial position, or cash flows.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS No. 150 establishes standards for how an issuer classifies and measures in its statement of financial position certain financial instruments with characteristics of both liabilities and equity. In accordance with the standard, financial instruments that embody obligations for the issuer are required to be classified as liabilities. SFAS No. 150 will be effective for financial instruments entered into or modified after May 31, 2003 and otherwise will be effective at the beginning of the first interim period beginning after June 15, 2003. Management does not expect adoption of SFAS No. 150 to have a material impact on the Company’s statements of earnings, financial position, or cash flows.

- 36 -

Table of Contents

In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123R, Share-Based Payment (“SFAS 123R”). SFAS 123R requires companies to expense the value of employee stock options and similar awards. SFAS 123R is effective for interim and annual financial statements beginning after June 15, 2005 and will apply to all outstanding and unvested share-based payments at the time of adoption. The Company is currently evaluating the impact SFAS 123R will have on its consolidated financial statements and will adopt such standard as required.

In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets,” an amendment to Opinion No. 29, “Accounting for Nonmonetary Transactions”. SFAS No. 153 eliminates certain differences in the guidance in Opinion No. 29 as compared to the guidance contained in standards issued by the International Accounting Standards Board. The amendment to Opinion No. 29 eliminates the fair value exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. Such an exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS No. 153 is effective for nonmonetary asset exchanges occurring in periods beginning after June 15, 2005. Earlier application is permitted for nonmonetary asset exchanges occurring in periods beginning after December 16, 2004. Management does not expect adoption of SFAS No. 153 to have a material impact, if any, on the Company’s financial position or results of operations.

In December 2004, the FASB issued SFAS No. 152, “Accounting for Real Estate Time-Sharing Transactions”. The FASB issued this statement as a result of the guidance provided in AICPA Statement of Position (SOP) 04-2, “Accounting for Real Estate Time-Sharing Transactions”. SOP 04-2 applies to all real estate time-sharing transactions. Among other items, the SOP provides guidance on the recording of credit losses and the treatment of selling costs, but does not change the revenue recognition guidance in SFAS No. 66, “Accounting for Sales of Real Estate”, for real estate time-sharing transactions. SFAS No. 152 amends Statement No. 66 to reference the guidance provided in SOP 04-2. SFAS No. 152 also amends SFAS No. 67, “Accounting for Costs and Initial Rental Operations of Real Estate Projects”, to state that SOP 04-2 provides the relevant guidance on accounting for incidental operations and costs related to the sale of real estate time-sharing transactions. SFAS No. 152 is effective for years beginning after June 15, 2005, with restatements of previously issued financial statements prohibited. Management does not expect adoption of SFAS No. 152 to have a material impact, if any, on the Company’s financial position or results of operations.

In November 2004, the FASB issued SFAS No. 151,“Inventory Costs”. SFAS No. 151 amends the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage) under the guidance in ARB No. 43, Chapter 4, “Inventory Pricing”. Paragraph 5 of ARB No. 43, Chapter 4, previously stated that “. . . under some circumstances, items such as idle facility expense, excessive spoilage, double freight, and rehandling costs may be so abnormal as to require treatment as current period charges. . . .” This statement requires that those items be recognized as current-period charges regardless of whether they meet the criterion of “so abnormal.” In addition, this statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. This statement is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Management does not expect adoption of SFAS No. 151 to have a material impact, if any, on the Company’s financial position or results of operations.

- 37 -

Table of Contents

ITEM 7A. Quantitative and Qualitative Market Risk Disclosure
Market risks generally represent the risk of loss that may result from the potential change in the value of a financial instrument due to fluctuations in interest and foreign exchange rates and in equity and commodity prices. Our market risk relates primarily to interest rate fluctuations. We may be directly affected by the level of and fluctuations in interest rates, which affects the spread between the rates of interest received on our mortgage loans and the related financing rate. Our profitability could be adversely affected during any period of unexpected or rapid changes in interest rates, by impacting the value of loans held for sale and loans sold with retained interests.

The objective of interest rate risk management is to control the effects that interest rate fluctuations have on the value of our assets and liabilities. Our management of interest rate risk is intended to mitigate the volatility of earnings associated with fluctuations in the unrealized gain (loss) on the mortgage-related securities and the market value of loans held for sale due to changes in the current market rate of interest.

We use several tools and risk management strategies to monitor and address interest rate risk. Such tools allow us to monitor and evaluate our exposure to these risks and to manage the risk profile to our loan portfolio in response to changes in the market. We cannot assure you, however, that we will adequately offset all risks associated with our loans held for sale or committed.

As part of our interest rate management process, we may in the future use derivative financial instruments such as financial futures and options, interest rate swaps and financial forwards. We will designate certain derivative financial instruments used to hedge our mortgage loans held for sale as hedge instruments under SFAS No. 133. At trade date these instruments and their hedge relationship will be identified, designated and documented. For derivative financial instruments designated as hedge instruments, we will evaluate the effectiveness of these hedges against the mortgage loans being hedged to ensure that there remains a highly effective correlation in the hedge relationship. Since our concern with interest rates is the potential change in fair market value of the loans, we will treat these as fair value hedges under SFAS No. 133. Once the hedge relationship is established, the realized and unrealized changes in fair value of both the hedge instruments and mortgage loans will be recognized in the consolidated statements of operations in the period in which the changes occur. Any net amount recorded in the consolidated statements of operations will be referred to as hedge ineffectiveness.

For derivative financial instruments not designated as hedge instruments, realized and unrealized changes in fair value are recognized in the consolidated statements of operations in the period in which the changes occur or when such instruments are settled.

Interest Rate Simulation Sensitivity Analysis
Changes in market interest rates affect our gain (loss) from sales of mortgage loans held for sale and the fair value of our mortgage-related securities and related derivatives when we engage in such securitization strategy.

As of December 31, 2004 we held $27.2 million in loans which had not been committed for sale. Increases in interest rate would adversely affect revenue we will realize from uncommitted loans. Likewise, any decrease in interest rates would have a positive impact on our gain from sales of the same amount of uncommitted loans.

The following table summarizes impact of — 100 basis points (bps), -50 bps, 50 bps and 100 bps change in the prevailing market rates on the pricing premiums we would collect from sales of these loans, compared to no change in prevailing rates. Since we do not recognize the revenue until loans are sold, the impact of interest rate change will be on our future income from uncommitted loans.

- 38 -

Table of Contents

ITEM 8. FINANCIAL STATEMENTS
     The information required by this Item 8 is incorporated by reference to TMSF Holdings, Inc.‘s Consolidated Financial Statements and Independent Auditors’ Report beginning at page F-1 of this Form 10-K.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

     None

ITEM 9A. CONTROLS AND PROCEDURES

     (a)   Evaluation of disclosure controls and procedures

     The term “disclosures controls and procedures” refers to the controls and procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files under Rules 13a – 14 of the Securities and Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within the required time periods. As of the end of the period covered by this report(the “Evaluation Date”), we carried out an evaluation under the supervision and with participation of our Chief Executive Officer and Chief Financial Officer of the effectiveness of our disclosure controls and procedures. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the Evaluation Date, such controls and procedures were effective in ensuring that required information will be disclosed on a timely basis in our periodic reports filed under the Exchange Act.

     (b)  Changes in internal control

      There were no significant changes to our internal control over financial reporting (as defined in Exchange Act Rules Bu-15(f) and 15d-15(f) that occurred during the company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially effect, the company’s internal control over financial reporting.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Code of Ethics

     We have adopted a code of business conduct and ethics within the meaning of Item 406(b) of Regulation S-B. This code of ethics applies to our directors, executive officers and employees, including our CEO, CFO and Controller. This code of ethics is publicly available in the corporate governance section of the investor relations page of our website located at www.TMSFHOLDINGS.COM and in print upon request to the Secretary at TMSF Holdings, Inc., 727 W 7th St. Suite 850, Los Angeles, California 90017. If we make amendments to the code of ethics or grant any waiver that the SEC requires us to disclose, we will disclose the nature of such amendment or waiver on our website.

- 39 -

Table of Contents

     The following table provides certain information with respect to the executive officers and directors of the Company.

____________________
(1)   Member of the Audit and Compensation Committees

     Raymond Eshaghian has served as the Company's Chief Executive Officer, President and Chairman of the Board since October 2002. From July 1995 to October 2002, Mr. Eshaghian served as President of The Mortgage Store Financial, Inc., and from September 1992 to October 2002, he served as a member of its Board of Directors. Mr. Eshaghian also served as Vice President of The Mortgage Store Financial, Inc. from May 1994 to July 1995.

     Masoud Najand has served as the Company's Chief Financial Officer since October 2002. Mr. Najand has served as the Controller of The Mortgage Store Financial, Inc. since January 2001, and from March 1997 to January 2001, he was a consultant of The Mortgage Store Financial, Inc.

     H. Wayne Snavely has served as a member of the Company's Board of Directors since October 2002. Mr. Snavely served as the Chairman of the Board and Chief Executive Officer of Imperial Credit Industries, Inc. from December 1991 to August 2001. Mr. Snavely also served as President of Imperial Credit Industries, Inc. from February 1996 to August 2001. Mr. Snavely served as a member of the Board of Directors of Imperial Bank from 1975 to 1983 and from 1993 to 1998. Mr. Snavely currently serves on the Board of Visitors of the Graduate School of Business Management at Pepperdine University.

     M. Aaron Yashouafar has served as a member of the Company's Board of Directors since October 2002. Mr. Yashouafar is an owner of Milbank Real Estate Services, Inc., a commercial real estate investment and management company in Los Angeles, California, and he has served as its Chief Executive Officer since 2000. Prior to becoming its Chief Executive Officer, Mr. Yashouafar served as Executive Vice President of Milbank Real Estate Services from 1993 to 2000. Additionally, Mr. Yashouafar served as Vice President of Supreme Property Management Company from 1983 to 1993. Massoud Yashouafar graduated from California State University at Northridge in 1982 with a degree in Business Administration.

     There are no family relationships between any of the directors or executive officers of the Company.

- 40 -

Table of Contents

Audit Committee Financial Expert

The Company's board of directors has determined that at least one person serving on the Audit Committee is an "audit committee financial expert" as defined under Item 401(e) of Regulation S-B. H. Wayne Snavely is an "audit committee financial expert" and is independent as defined under Item 7(d)(3)(iv) of Schedule 14A of the Exchange Act.

Compliance with Section 16(a) of the Securities Exchange Act of 1934

     Section 16(a) of the Securities Act of 1934, as amended (the "Exchange Act"), requires the Company's directors, executive officers and persons who own more than 10% of a registered class of the Company's equity securities to file with the Securities and Exchange Commission (the "SEC") initial reports of ownership and reports of changes in ownership of the common stock of the Company. Such persons are required by the SEC's regulations to furnish the Company with copies of all Section 16(a) forms they file.

     To the Company's knowledge, based solely on review of the copies of such reports furnished to the Company and written representations that no other reports were required, during the fiscal year which ended December 31, 2003, all Section 16(a) filing requirements applicable to the Company's executive officers, directors and greater than ten percent stockholders were satisfied by such persons, except that M. Aaron Yashouafar, and Solyman Yashouafar and H. Wayne Snavely, each filed one report late with respect to one transaction.

ITEM 11. EXECUTIVE COMPENSATION

     The following table sets forth information concerning the annual and long-term compensation earned by the Company's Chief Executive Officer and each of the other executive officers whose annual salary and bonus during 2002, 2003 and 2004 exceeded $100,000 (the "Named Executive Officers").

Summary Compensation Table

- 41 -

Table of Contents

Compensation of Directors

     The Company does not pay its non-employee directors any annual compensation for their services or for attendance at Board or committee meetings. However, the Company paid H. Wayne Snavely consulting fees of $40,000, $40,000, and $35,000 in the years 2004, 2003, and 2002 respectively. Officers of the Company who are members of the Board of Directors are not paid any directors’ fees.

Stock Option Plan

     During the year ended December 31, 2003 Mr. H. Wayne Snavely was awarded 750,000 options to purchase Company stock at a certain price and exercisable at a certain period. These options are issued outside the Equity Compensation Plan of the Company.

     On June 25, 2004, under the Company’s employee stock option plan and with approval of the Board of Directors, Raymond Eshaghian, the President and CEO of the Company was granted 500,000 Incentive Stock Options (“ISO”) to purchase company’s stock at an exercise price of $0.95. These options vest immediately.

     On August 23, 2004 under the Company’s employee stock option plan and in consideration for services rendered in the past and as future incentive M. Aaron Yashouafar was granted 210,000 options to purchase the Company’s stock at an exercise price of $0.95. These options vest immediately.

- 42 -

Table of Contents

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The following table sets forth certain information known to the Company with respect to beneficial ownership of the Company’s common stock as of March 21, 2005 by (i) each person known to the Company to beneficially own more than five percent of the Company’s common stock, (ii) each director, (iii) the Company’s executive officers, and (iv) all directors and executive officers as a group.

     The percentage ownership is calculated using 15,000,000 shares of the Company’s common stock that were outstanding as of March 30, 2005. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to the securities, or the right to acquire voting or investment power within 60 days through the exercise of an option, warrant or right, through the conversion of a security, or through the power to revoke a trust. To our knowledge, except as set forth in the footnotes to this table and subject to applicable community property laws, each person named in the table has sole voting and investment power with respect to the shares of common stock set forth opposite such person’s name. The address of each of such persons listed below is c/o: TMSF Holdings, Inc., 727 Seventh Street, Suite 850, Los Angeles, CA 90017.

     As of March 21, 2005, Raymond Eshaghian beneficially owned approximately 62% of the voting power of the Company’s common stock. By virtue of this stock ownership, Raymond Eshaghian may be deemed to be a “control person” of the Company within the meaning of the rules and regulations promulgated under the Securities Act of 1933, as amended (the “Securities Act”).

Securities Authorized for Issuance Under Equity Compensation Plans

     During the year ended December 31, 2003, the Company adopted an equity compensation plan (including individual compensation arrangements), which was approved by the Company’s stockholders, pursuant to which 2,000,000 shares were reserved for issuance.

     On June 25, 2004, under the Company’s employee stock option plan and with approval of the Board of Directors, Raymond Eshaghian, the President and CEO of the Company was granted 500,000 Incentive Stock Options (“ISO”) to purchase company’s stock at an exercise price of $0.95. These options vest immediately.

     On August 23, 2004 under the Company’s employee stock option plan and in consideration for services rendered in the past and as future incentive M. Aaron Yashouafar was granted 210,000 options to purchase the Company’s stock at an exercise price of $0.95. These options vest immediately.

     On August 23, 2004 in consideration for services rendered, the Company granted Mr. Joseph H. Nourmand options to purchase 52,000 shares of common stock at an exercise price of $0.85 per share. These options vested immediately. The company has recognized the fair market value of these options as consulting expense. In addition, options to purchase 30,000 shares of common stock, which was granted to CCG Investor Relations on May 4, 2004, and which were scheduled to be issued by September 30, 2004 were recognized as consulting expense at their fair market value.

- 43 -

Table of Contents

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The Mortgage Store

     The Mortgage Store Financial, Inc. (“The Mortgage Store”) is a wholly-owned subsidiary of the Company, which is a holding company. The Company and The Mortgage Store have interlocking executive positions and share common ownership. Raymond Eshaghian, the Company’s Chairman of the Board, Chief Executive Officer, President and Secretary, and The Mortgage Store’s President, is an owner of 62% of the outstanding shares of the common stock of the Company.

     In addition, as owner of a majority of the outstanding shares of voting stock of the Company, Mr. Eshaghian has the right to elect the majority of the members of the Company’s Board of Directors and has the ability to significantly control the outcome of matters for which the consent of the holders of the majority of the outstanding shares of the common stock of the Company is required.

Related Party Transactions

     During the years ended December 31, 2004, 2003 and 2002, the Company paid $403,600 , $0, $66,250 and $ 397,500, $ 0, $30,000 , respectively, for consulting expenses to companies owned by shareholders and relative of a shareholder. Furthermore, during the years ended December 31, 2004, 2003 and 2002, the Company paid consulting expenses of $40,000, $40,000 and $35,000 , respectively, to a director.

Lease Agreement

     In October 2002, the Company began leasing its corporate offices from Milbank Real Estate Services, Inc., a commercial real estate investment and management company that is owned in part by Massoud Yashouafar, who is a member of the Company’s Board of Director and 10% stockholder. The Company paid approximately $310,775 to Milbank Real Estate Services for the lease of its corporate offices during the year ending December 31, 2004. The lease, which expires in 2005, provides for future lease payments of approximately $483,450 during the term of the lease.

Private Placement

     On November 29, 2002, an aggregate of 5,000,000 shares of the Company’s common stock, par value $0.001, was sold and issued at a price of $0.60 per share in a private offering to four accredited investors pursuant to Regulation D of the Securities Act in exchange for $2,000,000 principal amount of notes that was previously issued by The Mortgage Store to affiliates of the investors and a cash payment of $1,000,000.

     Massoud Yashouafar, a member of the Company’s Board of Directors, participated in this private offering and, as a result, he beneficially owns 2,000,000 shares of the Company’s common stock.

Registration of Shares

     The Company has agreed to register 14,500,000 shares of its outstanding common stock, which includes 9,500,000 shares issued to Raymond Eshaghian, as well as the 5,000,000 shares issued pursuant to the private placement in November 2002, of which 2,000,000 are beneficially owned by Massoud Yashouafar.

- 44 -

Table of Contents

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

     During the fiscal years ended December 31, 2004, 2003, and 2002 the Company retained Singer Lewak Greenbaum & Goldstein, LLP as independent auditors and paid the following fees for services rendered:

(1)  Review of Registration Statement for SB-2 filing.
(2)  Preparation of tax return

Pre-Approval Policies and Procedures for Audit and Non-Audit Services

The audit committee pre-approves all auditing services and permitted non-audit services, including the fees and terms thereof, to be performed by our independent auditor, subject to the de minimis exceptions for non-audit services described in Section 10A(i)(I)(B) of the Exchange Act which are approved by the audit committee prior to the completion of the audit. The audit committee may form and delegate authority to subcommittees consisting of one or more members of the audit committee when appropriate, including the authority to grant pre-approvals of audit and permitted non-audit services, provided that decisions of such subcommittee to grant pre-approvals shall be presented to the full audit committee at its next scheduled meeting. In pre-approving the services in 2003 under audit related fees, tax fees or all other fees, the audit committee did not rely on the de minimis exception to the SEC pre-approval requirements.

- 45 -

Table of Contents

PART IV

ITEM 15. EXHIBITS, LIST AND REPORTS ON FORM 8-K
(a) Exhibits

(b) Reports on Form 8-K
    None.

- 46 -

Table of Contents

SIGNATURES
     Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Los Angeles, State of California, on the 31st day of March, 2005.

- 47 -

Table of Contents

POWER OF ATTORNEY

     We, the undersigned directors and officers of TMSF Holdings, Inc., do hereby constitute and appoint Raymond Eshaghian and Masoud Najand, or either of them, our true and lawful attorneys and agents, to do any and all acts and things in our name and behalf in our capacities as directors and officers and to execute any and all instruments for us and in our names in the capacities indicated below, which said attorneys and agents, or either of them, may deem necessary or advisable to enable said corporation to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations, and requirements of the Securities and Exchange Commission, in connections with this report, including specifically, but without limitation, power and authority to sign for us or any of us in our names and in the capacities indicated below, any and all amendments to this report, and we do hereby ratify and confirm all that the said attorneys and agents, or either of them, shall do or cause to be done by virtue hereof.

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

- 48 -

Table of Contents

TMSF HOLDINGS, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

F-1

Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors
TMSF Holdings, Inc. and subsidiaries
Los Angeles, CA

We have audited the accompanying consolidated balance sheets of TMSF Holdings, Inc. and subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of income, retained earnings and cash flows. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of TMSF Holdings, Inc. and subsidiaries as of December 31, 2004 and 2003, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

SINGER LEWAK GREENBAUM & GOLDSTEIN LLP

Los Angeles, California
March 29, 2005

F-2

Table of Contents

TMSF HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31

F-3

Table of Contents

TMSF HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
For the years ended December 31,

F-4

Table of Contents

TMSF HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
December 31, 2004

F-5

Table of Contents

TMSF HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31,

F-6

Table of Contents

TMSF HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004

NOTE 1 — ORGANIZATION AND LINE OF BUSINESS

General
The Mortgage Store Financial, Inc. was incorporated on August 25, 1992. The Company (as defined in Note 2) is licensed by the California Department of Corporations and respective agencies in 30 other states. It is principally engaged in the origination and purchase of residential mortgage loans. Generally, such loans are subsequently sold to financial institutions or to other entities that sell such loans to investors as a part of secured investment packages. The Company has obtained approval from the Department of Housing and Urban Development to act as a non-supervised mortgagee.

In August 2003, the Company formed a new subsidiary, CPV Limited, Inc. The sole purpose of this subsidiary is to hold real estate properties repossessed by the Company.

Share Exchange, Redemption of Stock, and Consulting Agreement
On November 4, 2002, the Company and its sole shareholder entered into a share exchange agreement with Little Creek, Inc. (“Little Creek”), a publicly traded company listed on the NASDAQ Bulletin Board, in which the sole shareholder received 9,500,000 shares, or approximately 97% of the stock of Little Creek, in exchange for 100% of the stock of the Company. Under the terms of the exchange agreement, 1,295,118 shares of Little Creek were canceled prior to the transaction, and 336,365 shares remained issued and outstanding. Subsequently, Little Creek’s name was changed to TMSF Holdings, Inc., and its incorporated domicile was changed from the state of Utah to the state of Delaware.

The transaction was accounted as a reverse acquisition. The accompanying financial statements reflect the consolidated statements of TMSF Holdings, Inc. and its wholly owned subsidiary, The Mortgage Store Financial, Inc. Pro forma information of the combined businesses is not furnished as Little Creek had insignificant assets, liabilities, and operations.

In addition, on the closing, TMSF Holdings, Inc. entered into a one-year consulting agreement under which it was required to pay the consultant $265,000 and issued a five-year warrant to purchase 163,635 shares of common stock of TMSF Holdings, Inc. at a per share exercise price of $0.05. The fair value of the warrants was insignificant. All warrants were exercised in February 2003. The consulting fee was amortized over one year.

F-7

Table of Contents

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation
The consolidated financial statements include the accounts of TMSF Holdings, Inc. and its wholly owned subsidiaries, The Mortgage Store Financial, Inc. and CPV Limited, Inc. (collectively, the “Company”). All significant inter-company accounts and transactions are eliminated in consolidation.

Revenue Recognition
Loan origination fees and other lender fees earned on loans that are funded by the Company are recorded as income when the related loan is sold. Origination fees for loans which are brokered to other lenders are recognized at the time such fees are received. The Company recognizes mortgage interest income on all loans from the date they are funded to the date they are sold or to the end of reporting period for loans which are held for sale.

Comprehensive Income
The Company utilizes Statement of Financial Accounting Standards (“SFAS”) No. 130, “Reporting Comprehensive Income.” This statement establishes standards for reporting comprehensive income and its components in a financial statement. Comprehensive income as defined includes all changes in equity (net assets) during a period from non-owner sources. Examples of items to be included in comprehensive income, which are excluded from net income, include foreign currency translation adjustments and unrealized gains and losses on available-for-sale securities. Comprehensive income is not presented in the Company’s financial statements since the Company did not have any of the items of comprehensive income in the periods presented.

Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.

Mortgage Loans Held for Sale
Mortgage loans held for sale are recorded at the aggregate lower of cost or market, less an estimated allowance for losses on repurchased loans. All mortgage loans are collateralized by residential property.

Revenues associated with closing fees received by the Company and costs associated with obtaining mortgage loans are deferred and recognized upon sale of the related mortgage loans. Mortgage loans held for sale are reported net of such deferred revenues and costs in the accompanying balance sheet.

Real Estate Owned
Real estate owned by the Company is recorded at the repurchase price less fees and commissions paid to the broker on the purchase. Real estate owned is recorded at the aggregate lower of cost or market.

Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization are provided using the straight-line method over estimated useful lives of three to seven years.

Fair Value of Financial Instruments
The Company’s financial instruments include cash and cash equivalents, mortgage loans held for sale, and warehouse lines of credit. The book value of these financial instruments are representative of their fair values.

Table of Contents

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Advertising Costs
The Company expenses advertising costs as incurred. Advertising costs for the years ended December 31, 2004, 2003 and 2002 were $36,381, $17,018 and $70,964 , respectively.

Income Taxes
Deferred income taxes are recognized for the tax consequences in future years of differences between the tax basis of assets and liabilities and their financial report amounts at each period end, based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. At December 31, 2004 and December 31, 2003, the net deferred tax liability is a result of the use of differing depreciation methods between financial and tax reporting purposes, and the use of the accrual method of accounting for financial reporting purposes and the cash basis for tax reporting purposes prior to fiscal year 2003. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. The provision for income taxes represents the tax payable for the period, if any, and the change during the period in deferred tax assets and liabilities.

Earnings Per Share
The Company follows Statement of Financial Accounting Standards No. 128, “Earnings per Share” (“SFAS 128”), and related interpretations for reporting Earnings per Share. SFAS 128 requires dual presentation of Basic Earnings per Share (“Basic EPS”) and Diluted Earnings per Share (“Diluted EPS”). Basic EPS excludes dilution and is computed by dividing net income by the weighted average number of common shares outstanding during the reported period. Diluted EPS reflects the potential dilution that could occur if stock options were exercised using the treasury stock method.

In accordance with SFAS 128, basic earnings per share is calculated based on the weighted average number of shares of common stock outstanding during the reporting period. Diluted earnings per share is calculated giving effect to all potentially dilutive common shares, assuming such shares were outstanding during the reporting period.

As of December 31, 2004 the company had potential common stock as follows:

Table of Contents

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Stock-Based Compensation
SFAS No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure,” defines a fair value based method of accounting for stock-based compensation. However, SFAS No. 123 allows an entity to continue to measure compensation cost related to stock and stock options issued to employees using the intrinsic method of accounting prescribed by Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees.” Entities electing to remain with the accounting method of APB Opinion No. 25 must make pro forma disclosures of net income and earnings per share as if the fair value method of accounting defined in SFAS No. 123 had been applied. The Company has elected to account for its stock-based compensation to employees under APB Opinion No. 25 using the intrinsic value method.

If the Company had elected to recognize compensation expense based upon the fair value at the grant date for awards under its plan consistent with the methodology prescribed by SFAS No. 123, the Company’s net income and earning per share would be reduced to the pro forma amounts indicated below for the years ended December 31 2004, 2003 and 2002:

For purposes of computing the pro forma disclosures required by SFAS No. 123, the fair value of each option granted to employees and directors is estimated using the Black-Scholes option-pricing model with the following weighted-average assumptions for the year ended December 31, 2004: dividend yield of 0%; expected volatility of 50.38%; risk-free interest rate of 3.63% based on 5 years T-bill; and expected life of five years.

Table of Contents

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Reclassifications
Certain amounts included in the prior period financial statements have been reclassified to conform to the current period presentation. Such reclassifications did not have any effect on reported net income.

Estimates
The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

Concentration of Credit Risk
For the years ended December 31, 2004 and 2003, the Company maintained cash balances with banks totaling $11,141,680 and $4,884,964 respectively, in excess of federally insured amounts of $100,000 per bank.

Major Customers
During the years ended December 31, 2004, and 2003 the Company sold 59% , 11%, , 11% and 44%, 23% and 13% of its mortgage loans to three institutional investors . During the year ended December 31, 2002, the Company sold 33%, 27%, 22% and 12% of its mortgage loans to four institutional investors.

Market Risk
The Company is involved in the real estate loans market. Changes in interest rates or other market conditions within the real estate loans market may have a significant effect on the volume and profitability of the business of the Company.

Impact of Recently Issued Accounting Statements
In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123R, Share-Based Payment (“SFAS 123R”). SFAS 123R requires companies to expense the value of employee stock options and similar awards. SFAS 123R is effective for interim and annual financial statements beginning after June 15, 2005 and will apply to all outstanding and unvested share-based payments at the time of adoption. The Company is currently evaluating the impact SFAS 123R will have on its consolidated financial statements and will adopt such standard as required.

In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets,” an amendment to Opinion No. 29, “Accounting for Nonmonetary Transactions”. SFAS No. 153 eliminates certain differences in the guidance in Opinion No. 29 as compared to the guidance contained in standards issued by the International Accounting Standards Board. The amendment to Opinion No. 29 eliminates the fair value exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. Such an exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS No. 153 is effective for nonmonetary asset exchanges occurring in periods beginning after June 15, 2005. Earlier application is permitted for nonmonetary asset exchanges occurring in periods beginning after December 16, 2004. Management does not expect adoption of SFAS No. 153 to have a material impact, if any, on the Company’s financial position or results of operations.

In December 2004, the FASB issued SFAS No. 152, “Accounting for Real Estate Time-Sharing Transactions”. The FASB issued this statement as a result of the guidance provided in AICPA Statement of Position (SOP) 04-2, “Accounting for Real Estate Time-Sharing Transactions”. SOP 04-2 applies to all real estate time-sharing transactions. Among other items, the SOP provides guidance on the recording of credit losses and the treatment of selling costs, but does not change the revenue recognition guidance in SFAS No. 66, “Accounting for Sales of Real Estate”, for real estate time-sharing transactions. SFAS No. 152 amends Statement No. 66 to reference the guidance provided in SOP 04-2. SFAS No. 152 also amends SFAS No. 67, “Accounting for Costs and Initial Rental Operations of Real Estate Projects”, to state that SOP 04-2 provides the relevant guidance on accounting for incidental operations and costs related to the sale of real estate time-sharing transactions. SFAS No. 152 is effective for years beginning after June 15, 2005, with restatements of previously issued financial statements prohibited. Management does not expect adoption of SFAS No. 152 to have a material impact, if any, on the Company’s financial position or results of operations.

Table of Contents

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

In November 2004, the FASB issued SFAS No. 151,“Inventory Costs”. SFAS No. 151 amends the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage) under the guidance in ARB No. 43, Chapter 4, “Inventory Pricing”. Paragraph 5 of ARB No. 43, Chapter 4, previously stated that “. . . under some circumstances, items such as idle facility expense, excessive spoilage, double freight, and rehandling costs may be so abnormal as to require treatment as current period charges. . . .” This statement requires that those items be recognized as current-period charges regardless of whether they meet the criterion of “so abnormal.” In addition, this statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. This statement is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Management does not expect adoption of SFAS No. 151 to have a material impact, if any, on the Company’s financial position or results of operations.

NOTE 3 — RESTRICTED CASH

The Company maintains restricted cash deposits in financial institutions. These restrictions relate to the warehouse lines of credit, whereby the Company must maintain a reserve for funding in excess of warehouse’s advance limit. The Company does not have direct access to these funds. Such cash balances for the years ended December 31, 2004 and 2003 aggregated to $ 1,356,170 and $ 489,214 , respectively.

The Company also maintains an escrow trust account in a financial institution for funds that are to be reimbursed to borrowers when the escrow closes. Cash balances in the escrow account at December 31, 2004 and 2003 were $0 and $ 54,308 , respectively.

NOTE 4 — PROPERTY AND EQUIPMENT

Property and equipment for the years ended December 31, 2004 and 2003 consisted of the following:

Depreciation and amortization expense was $176,132, $105,191 and $44,002 for the years ended December 31, 2004, 2003 and 2002, respectively.

Table of Contents

NOTE 5 — WAREHOUSE LINES OF CREDIT

The Company maintains a warehouse line of credit with a financial institution, which is subject to renewal on an annual basis. Advances are received by the Company up to a maximum of $80,000,000 based upon a specified percentage of mortgage loans, which are pledged as collateral, and interest accrues at 1 month LIBOR (2.40% at December 31, 2004), plus 2.25% per annum. This facility expires on December 31, 2004 and is renewed automatically

Advances are due upon the earlier of the sale of the mortgage loans that are pledged as collateral or a specified period of time from the date on which the advance was received. The warehouse line of credit is guaranteed by the shareholder and contains a financial covenant concerning a minimum net worth of $8,744,904. At December 31, 2004, management believes the Company was in compliance with such covenant.

In addition, the Company must maintain a balance in a separate restricted cash account as a pledge for amounts funded by the warehouse lender in excess of a specified percentage of the loan amount agreed upon by the warehouse lenders. At December 31, 2004 and December 31, 2003, the pledged amounts aggregated to $877,388 and $434,906 , respectively.

In February 2004, the Company secured a second warehouse line of credit with a financial institution. The credit facility is structured as a repurchase agreement where the financial institution may, at its sole discretion, purchase mortgage loans from the Company. The maximum purchase amount on this credit line is $30,000,000 and interest accrues at LIBOR plus a pricing spread between 2.25% and 2.75% per annum, which is dependent on the specific investor type and the mortgage loan category. This facility has a one year term and is renewable with the consent of both parties.

In addition, the Company must maintain a balance in a separate restricted cash account as a pledge for amounts funded by the warehouse lender. The Company shall ensure that at all times the balance in the cash account is no less than greater of (a) $175,000 and (b) the aggregate of all cash account allocated amounts for all purchased mortgage loans. At December 31, 2004, the pledged amounts aggregated to $ 478,782 .

In March 2004, the Company secured a third warehouse line of credit with a financial institution. The maximum purchase amount on this credit line is $10,000,000. The unpaid amount of each advance outstanding bears interest from the date of such advance until paid in full at a rate of interest equal to the lesser of the maximum rate allowed by law and a floating rate of interest equal to 1 month LIBOR plus a margin between 2.25% and 3.75% per annum, dependent on the type of loan funded. The warehouse line of credit contains financial and non-financial covenants of which management believes the Company was in compliance with as of December 31, 2004.

In July 2004 The Company entered into an Early Purchase Agreement with the same financial institution where certain qualifying loans are acquired by the institution immediately upon origination. Under terms of this purchase agreement the Company retains the right to service the notes. As a condition of acquisition of loans by the financial institution, the Company assigns to the financial institution any commitment by a Takeout investor who would purchase the notes with servicing rights released at later dates. The price that loans under this agreement are acquired by the financial institution will be 98% of Takeout Investor’s price, but not to exceed the original note amount. Loans origination under provisions of this facility are recognized as sales of loan and are not reflected on the Company’s balance sheet. Upon receipt of funds from Takeout investors the financial institution shall release its interest in the loan and transfer excess funds pertaining to the servicing right to the Company. Loans for which a commitment from Takeout investor is not obtained within 90 days by the Company are placed in the regular warehouse credit facility.

NOTE 5 — WAREHOUSE LINES OF CREDIT (Continued)

This Early Purchase facility has a maximum purchase concentration of $100 million at any time. Upon purchase of loans by a Takeout investor the unused facility up to maximum concentration may be re-used by the Company to originate new loans. This Early Purchase agreement meets all criteria listed under FAS140 for the purpose of defining "transfer of financial assets". As of December 31, 2004 $93.7 million of the concentration limit was utilized. The management believes that for loans originated through this facility, the value of servicing right for the short period prior to their sale to Takeout investors were not material to the financial statements as of December 31, 2004 and no corresponding asset have been recorded.

The aggregate outstanding balance on the warehouse lines of credit for the years ended December 31, 2004 and 2003 was $115,554,147 and $ 42,357,240 , respectively.

NOTE 6 — COMMITMENTS AND CONTINGENCIES

Mortgage Loan Purchase Agreements
The Company maintains mortgage loan purchase agreements with various mortgage bankers. The Company is obligated to perform certain procedures in accordance with these agreements. The agreements provide for conditions, whereby the Company may be required to repurchase mortgage loans for various reasons, among which are either (a) a mortgage loan is originated in violation of the mortgage banker’s requirements, (b) the Company breaches any term of the agreements, and (c) an early payment default occurs from a mortgage originated by the Company.

During the year ended December 31, 2004, the Company repurchased three loans with an aggregate value of $229,500. During the year ended December 31, 2004 the Company increase the reserve for losses with regard to repurchased loans and loans held for sale by $ 43,690.

As of December 31, 2004, the Company was obligated to repurchase loans with an aggregate balance of 4,318,283 The Company recorded a reserve of $ 475,238 on the loans to be repurchased for the estimated impairment in the market value.

During the year ended December 31, 2004, the Company recorded loss of $78,743 from disposal of mortgage loans held for sale. The Company recognized $78,280 income for recovery of losses from sales of assets that were recognized in previous years.

During the year ended December 31, 2003, the Company repurchased four loans that were collateralized by three properties with an aggregate balance of $558,998. This amount was recorded as real estate owned at December 31, 2003. One of these properties was sold subsequent to December 31, 2003.

During the year ended December 31, 2002, the Company repurchased two loans with an aggregate balance of $848,203. The Company took title to one property in March 2002 and the other in May 2002 and recorded these properties as real estate owned. At December 31, 2002, both of the properties related to the purchased loans were sold, and a loss of $115,913 was recognized on the sale.

Table of Contents

NOTE 6 — COMMITMENTS AND CONTINGENCIES (Continued)

Reverse Merger
The Company became a publicly traded company through a reverse merger with an unrelated entity, which had prior operations in an unrelated business. There may be potential liabilities incurred by the prior business, which are unknown to the Company’s management at this time, which the Company may be held liable. The Company does not have any insurance for liabilities incurred as result of business conducted prior to the reverse merger.

LA Business Tax
The Company was informed in January 2004 that the City of Los Angeles had assessed an additional $136,550 in business tax for the years 2001 through 2003. The Company is contesting this assessment on the grounds that the City of Los Angeles assessment is 1) based on the Company’s entire revenue including fees collected by the Company on behalf of third parties, such as commissions and escrow impounds; and 2) based on the Company’s nationwide revenue and not only revenue generated from transactions that occurred from transactions within the City of Los Angeles.

The Company has retained legal counsel and an administrative hearing was held on May 11, 2004. Subsequently in August 2004 the Company provided additional information to examiners with regards to items in dispute and is expecting a response. At this time management is unable to determine the outcome of the administrative review and no provision has been made in the consolidated balance sheet.

NOTE 7 — INCOME TAXES

The following table presents the current and deferred income tax provision for (benefit from) federal and state income taxes for the year ended December 31, 2004 and 2003:

Table of Contents

NOTE 7 — INCOME TAXES (Continued)

At December 31, 2004 and December 31, 2003, components of net deferred tax assets (liabilities) in the accompanying balance sheets include the following amounts:

Income tax expense differs from the amounts computed by applying the United States federal income tax rate of 34% to income taxes as a result of the following for the years ended December 31, 2004 and 2003:

Table of Contents

NOTE 8 – STOCK OPTIONS

In June 2003, the Company approved the issuance of stock options to a director. The agreement grants the director options to purchase 750,000 shares of common stock at an exercise price of $1 per share. The options vest in 24 equal monthly installments, commencing in December 2003, and expire in five years. The fair value of the options was estimated at $198,700 using the Black-Scholes option-pricing model and the following assumptions: a risk-free interest rate of 4%, expected volatility of 50%, and a dividend yield of 0%. The expense for the year ended December 31, 2003 was immaterial.

On June 25, 2004, under the Company’s employee stock option plan and with approval of the Board of Directors, Raymond Eshaghian, the President and CEO of the Company was granted 500,000 Incentive Stock Options (“ISO”) to purchase company’s stock at an exercise price of $0.95. These options vest immediately.

On August 23, 2004 under the Company’s employee option plan and in consideration for services rendered in the past and as future incentive M. Aaron Yashouafar was granted 210,000 options to purchase company’s stock at an exercise price of $0.95. These options vest immediately.

On August 23, 2004 in consideration for services rendered the Company granted Mr. Joseph H. Nourmand options to purchase 52,000 shares of common stock at an exercise price of $0.85 per share. These options are vested immediately. The company has recognized the fair market value of these options as consulting expense. In addition, options to purchase 30,000 shares of common stock, which was granted to CCG Investor Relations on May 4, 2004, and which were scheduled to be issued by September 30, 2004 were recognized as consulting expense at their fair market value.

Table of Contents

NOTE 9 — RELATED PARTY TRANSACTIONS

Consulting Expenses
During the years ended December 31, 2004, 2003 and 2002, the Company paid $403,600 , $0, $66,250 and $ 397,500, $ 0, $30,000 , respectively, for consulting expenses to companies owned by shareholders and relative of a shareholder. Furthermore, during the years ended December 31, 2004, 2003 and 2002, the Company paid consulting expenses of $40,000, $40,000 and $35,000 , respectively, to a director.

Rent and Lease Expenses
The Company leases its office facilities from a shareholder, which lease expires in November 2005. Future minimum lease payments under this non-cancelable operating lease as of December 31, 2004 was $483,450. Rent paid to the shareholder for the years ended December 31, 2004, 2003 and 2002 amounted to $346,138, $311,076 and $48,529 respectively . In addition, the Company pays for certain vehicles operating expenses on behalf of certain officers. Lease payments made for these officers for the years ended December 31, 2004, 2003 and 2002 were $61,908, $ 33,826 and $21,615 respectively.

NOTE 10 — SHAREHOLDERS’ EQUITY

During the twelve months ended December 31 , 2004, the Company entered into an agreement with an investor relations firm under which it will grant options to purchase 30,000 shares of common stock. The options are exercisable at $1.25 per share, vest five months after the date of the agreement and expire in May 2006. The value of the options was not material.

On August 23, 2004, the Company granted H. Joseph Nourmand options to purchase 52,000 shares of Company’s common stock. The exercise price of these options are $0.85. The options vest immediately and expire on August 23, 2014. The fair value of the option is $28,600.

NOTE 11 – SUBSEQUENT EVENTS

In March 2005 through mutual agreement, the company’s Early Purchase warehousing facility was expanded to a maximum concentration amount of $150,000,000. The term of this and the fixed credit facility of $10,000,000 with the same financial institution was extended to May 1, 2005. The minimum tangible net-worth covenant of the agreement was increased to $12,000,000.