sv11

Approximate date of commencement of proposed sale of the securities to the public: As soon as practicable after the effective date of this registration statement.

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. o


(1)	Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(o), Rule 457(a) (with respect to Common Stock other than Common Stock subject to warrants) and Rule 457(g)(2) (with respect to Common Stock subject to warrants).

(2)	Calculated under Section 6(b) of the Securities Act based upon a registration fee rate of $126.70 per $1.0 million of the proposed maximum aggregate offering price.

(3)	Pursuant to Rule 457(g), no separate registration fee is required for such warrants.

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

The information in this prospectus is not complete and may be changed or supplemented. We cannot sell any of the securities described in this prospectus until the registration statement that we have filed to cover the securities has become effective under the rules of the Securities and Exchange Commission. This prospectus is not an offer to sell the securities, nor is it a solicitation of an offer to buy the securities, in any state where an offer or sale of the securities is not permitted.

This is our initial public offering of common stock, $0.01 par value per share. We are offering shares of our common stock and the selling stockholders named in this prospectus are offering an additional shares. We will not receive any of the proceeds from the sale of these shares by the selling stockholders. The shares of our common stock are subject to ownership and transfer restrictions designed to preserve our status as a real estate investment trust. See “Description of Securities — Transfer Restrictions” for a description of the ownership and transfer restrictions applicable to us.

We currently anticipate the initial public offering price of our common stock to be between $ and $ per share.

Our common stock is not currently listed on any national exchange or market system and no public market currently exists for our shares of common stock. We intend to apply to have our common stock listed on the Nasdaq National Market System under the symbol “OAKS.”

See “Risk Factors” beginning on page 13 of this prospectus for certain risk factors you should consider before investing in shares of our common stock.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

We have granted the underwriters a 30-day option to purchase up to an additional shares of common stock solely to cover over-allotments, if any. We have also provided Friedman Billings Ramsey warrants to acquire additional shares of our common stock during the five-year period from the date of this prospectus at an exercise price equal to the public offering price. The above table does not include the shares that we will issue upon the exercise of the over-allotment option or the warrants.

You should rely only on the information contained in this document. We have not authorized anyone to provide you with information that is different. This document may be used only where it is legal to sell these securities. The information in this document may be accurate only on the date of this document.

Market data and forecasts used in this prospectus have been obtained from independent industry sources, including Inside B&C Lending and the Mortgage Bankers Association of America, as well as from research reports prepared for other purposes. We have not independently verified the data obtained from these sources and we cannot assure you of the accuracy or completeness of the data. Forecasts and other forward-looking information obtained from these sources are subject to the same qualifications and the additional uncertainties regarding the other forward-looking statements in this prospectus.

PROSPECTUS SUMMARY

You should read the following summary together with the more detailed information in this prospectus, including the section entitled “Risk Factors,” regarding our company and the common stock being sold in this offering. References in this prospectus to “we,” our,” “us” and “our company” refer to Oak Street Financial Services, Inc., together with our consolidated subsidiaries, including Oak Street Mortgage LLC, which we sometimes refer to as our “mortgage subsidiary.” Unless otherwise indicated, the information in this prospectus has been adjusted to reflect the one-for- reverse split of our shares of common stock that will occur immediately prior to the closing of this offering and assumes that the underwriters will not exercise their over-allotment option to purchase additional shares of our common stock.

Our Company

We are a mortgage banking company that originates non-conforming, jumbo and conforming mortgage loans secured primarily by first liens on single-family residences. Since we began operations in 1999, we have strived to become an efficient originator of competitively priced, prudently underwritten mortgage loans while providing our customers and brokers with responsive service. During 2003 we originated $1.7 billion of mortgage loans in 26 states, of which approximately 73% were originated through our 24 direct-to-borrower retail lending offices and approximately 27% were originated through our wholesale lending network of mortgage brokers.

We historically have sold substantially all of the loans that we have originated in whole loan sales to institutional purchasers. In connection with this offering, we intend to develop a mortgage portfolio consisting of a significant portion of the non-conforming mortgage loans we originate to borrowers with credit scores, as assigned by one of the three credit reporting companies, of between 560 and 700, with an average credit score of approximately 635. We also intend, in some cases, to acquire non-conforming mortgage loans originated by other lenders that meet our disciplined underwriting standards. We intend to finance the non-conforming loans that we will hold in our portfolio by issuing mortgage-backed securities and other debt securities and using the proceeds from these transactions to further expand our mortgage portfolio. We expect to use portfolio-based (as opposed to gain-on-sale) accounting treatment for these transactions. We also intend to continue selling in whole loan sales the non-conforming loans that we originate but decide not to hold in our portfolio, along with all of the conforming loans and most jumbo loans that we originate. Upon the closing of this offering, we intend to elect to be taxed as a real estate investment trust, or REIT, for federal income tax purposes. We intend to distribute the earnings of our portfolio and to retain the earnings, including earnings from loan sales, of our taxable REIT mortgage subsidiary, in order to build our capital base.

We originate conforming loans that meet the underwriting criteria required for a mortgage loan to be purchased by a government sponsored entity such as Fannie Mae or the Federal Home Loan Mortgage Corporation (Freddie Mac). Borrowers under conforming loans typically have good credit payment histories and relatively low levels of consumer debt. A majority of the loans that we originate are non-conforming loans, which are mortgage loans that do not qualify as conforming loans under these criteria. The non-conforming loans that we originate are generally made to borrowers who have equity in the property securing their loans and good credit payment histories. In many cases, non-conforming loans tend to have higher loan-to-value ratios than conforming loans and are made to borrowers with higher debt-to-income ratios than conforming mortgage lenders allow. These borrowers may include individuals who have good credit histories, but who, due to self-employment or other circumstances, have difficulty verifying their income. Non-conforming borrowers are generally willing to pay higher loan origination fees and interest rates than those charged by conventional lending sources and generally are more willing to accept a prepayment penalty since they have fewer options for obtaining financing than the typical conforming mortgage loan borrower. We also originate jumbo loans, which are mortgage loans with an original principal balance that, during 2002 exceeded $300,700, during 2003 exceeded $322,700 and, effective January 1, 2004, that exceed $333,700. These loans do not qualify as conforming loans due to their high balance, which makes them ineligible for sale to Fannie Mae or Freddie Mac. Borrowers under jumbo

loans typically have a high net worth and an excellent credit rating, are highly sensitive to changes in interest rates and have a high propensity to refinance.

We originate mortgage loans through our extensive retail and wholesale networks. We commenced operations in 1999 from a single retail lending office in the Indianapolis area. Since then, we have focused on expanding our retail lending operations while also developing a wholesale lending network. Following this diversified growth strategy, we have expanded our loan originations to where, as of December 31, 2003, we originated mortgage loans in 26 states through our 24 retail offices and five wholesale offices. As of that date, we employed approximately 310 loan officers in our retail division. We also maintained a wholesale network of approximately 1,000 independent mortgage brokers. The following table shows the total originations of non-conforming, jumbo and conforming loans by our retail and wholesale divisions during the years ended December 31, 2003 and 2002.



			Year Ended December 31,


			2003					2002

			Loan		Percentage of			Loan		Percentage of
			Originations		Total			Originations		Total


			(Dollars in millions)
Retail Division:
	Non-conforming		$	770.3		63.3	%	$	503.6		59.1	%
	Jumbo			335.5		27.6			235.2		27.6
	Conforming			111.0		9.1			113.6		13.3

		Total	$	1,216.8		100.0	%	$	852.4		100.0	%

Wholesale Division:
	Non-conforming		$	413.6		90.9	%	$	198.8		89.1	%
	Jumbo			41.6		9.1			24.3		10.9
	Conforming			—		—			—		—

		Total	$	455.2		100.0	%	$	223.1		100.0	%

Company:
	Non-conforming		$	1,183.9		70.8	%	$	702.4		65.3	%
	Jumbo			377.1		22.6			259.5		24.1
	Conforming			111.0		6.6			113.6		10.6

		Total	$	1,672.0		100.0	%	$	1,075.6		100.0	%

We attribute the rapid growth of our mortgage loan originations largely to the extensive experience of our senior management in the mortgage lending industry. Our senior executives have overseen the national expansion of diversified financial services companies, including national residential mortgage lending operations such as the Bank One Consumer Financial Services Division and a division of Household Finance. In addition, several of our key senior executives have worked together for more than 12 years in the consumer lending industry. During this time, they have developed a deep understanding of the mortgage lending business and have made key contacts throughout the industry. They formed Oak Street Mortgage because they perceived an opportunity for a retail-oriented originator of non-conforming, jumbo and conforming mortgage loans to quickly establish itself in a highly-competitive industry by offering borrowers a wide range of loan products, competitive prices and responsive service.

We maintain disciplined underwriting standards on the loans we originate. During 2002 and 2003, the average loan-to-value ratio on the loans we originated was 78.2% and 77.9%, the average loan size was $108,600 and $125,200 and the percentage of loans secured by first mortgages was 91.2% and 94.2%, respectively. We hold a second mortgage on the loans that we originate that are not secured by a first mortgage. We underwrite all of the loans we originate through our retail division at our centralized operations center in the Indianapolis area and underwrite all of the loans we originate through our

wholesale division either at our Indianapolis office or at our centralized operations center in the Phoenix area. Our experienced loan underwriting personnel allow us to exercise flexibility within our underwriting process based on the specific characteristics of each loan application. We also maintain strong quality control procedures that assist us in verifying our compliance with our underwriting policies and procedures, as well as state and federal law.

We historically have sold substantially all of the loans we originate to institutional purchasers in whole loan sales and have underwritten our loans to the underwriting standards of these purchasers. We currently finance our mortgage originations on a short-term basis through warehouse lines of credit and repurchase facilities. We aggregate our loans into mortgage pools and, generally within 45 days of funding the loans, sell these pools of mortgages on a servicing-released basis. We provide interim servicing on all of the loans that we originate for a period of approximately 30 to 90 days following the completion of a loan sale, at which time we transfer the servicing to the purchasers of the loans.

Following the completion of this offering of common stock, we intend to continue to sell in whole loan sales substantially all of the conforming and jumbo loans we originate, as well as a portion of the non-conforming loans we originate. Beginning in the third quarter of 2004, we expect to begin building a mortgage portfolio consisting of a substantial portion of the non-conforming loans that we source through our retail and wholesale networks along with other non-conforming loans that we may selectively purchase from other mortgage originators. We expect, based on current market conditions, that any such purchased loans will not exceed approximately 20% of our total mortgage portfolio and that we will apply the same disciplined underwriting standards to these loans that we apply in underwriting the loans we originate. We currently expect, based on current market conditions, that substantially all of the loans in our mortgage portfolio will be to borrowers with credit scores ranging between 560 and 700, with an average credit score of approximately 635. These estimates may change in response to actual or anticipated changes in market conditions. We also intend to issue mortgage-backed securities and other debt secured by the loans that we will hold in our portfolio and to use the proceeds from these transactions to further expand our mortgage portfolio. We currently intend for the debt we incur in connection with these leveraging transactions, over time, to be approximately 10 to 14 times our equity. We expect to use portfolio-based (as opposed to gain-on-sale) accounting with regard to these transactions, as we believe that this accounting treatment will most closely match our recognition of income with our actual receipt of cash payments from these transactions. As a result, the loans that we securitize will remain on our balance sheet.

We expect to earn net interest income on the loans we hold in our portfolio and from these securitization transactions based upon the difference between the interest income we receive on the loans and the interest we pay to the holders of the mortgage-backed or other debt securities we issue. Our income will also be affected by losses we incur as a result of defaults and delinquencies on the loans we hold in our portfolio, the servicing fees and other expenses we incur in connection with those loans and the amount and timing of borrower prepayments of the underlying mortgages. We are negotiating with three companies that service loans for financial institutions located throughout the country to service our portfolio loans following the completion of this offering. We anticipate entering into a loan servicing agreement with one of these companies during the second quarter of 2004. We currently expect to begin servicing our portfolio loans ourselves within 24 to 36 months following this offering.

Our Industry

The residential mortgage loan market is the largest consumer finance market in the United States. According to statistics compiled by the Mortgage Bankers Association of America (MBAA), lenders in the United States originated approximately $2.5 trillion in residential mortgage loans in 2002. According to the March 15, 2004 statistics of the MBAA, lenders originated approximately $3.8 trillion in 2003. The MBAA projects that modest increases in interest rates will cause mortgage volumes to fall to $2.5 trillion in 2004. We believe that this decline will be primarily attributable to a drop-off in refinancing of conforming loans and jumbo loans as interest rates rise.

Generally, the residential mortgage industry is segmented by the size of the mortgage loans and credit characteristics of the borrowers. We consider mortgage loans that conform to Fannie Mae and Freddie Mac guidelines for both size and credit characteristics to be conforming mortgages. All other mortgage loans are considered non-conforming loans because of the size of the loans (jumbo mortgages) or the credit profiles of the borrowers (non-conforming mortgages). According to Inside B&C Lending, the non-conforming mortgage industry generated an aggregate of $213.0 billion in residential mortgage loans in 2002, which represented a 22.9% increase over 2001 originations of $173.3 billion, and generated an aggregate of $280.0 billion in residential mortgage loans in 2003, which represented a 31.5% increase over 2002 originations.

Our Competitive Advantages

We believe that our competitive advantages include:

• Extensive retail origination network. We generate a majority of our loan originations through our extensive retail channel, which at December 31, 2003 operated from 24 retail offices. This extensive retail presence lessens our need to rely on a broker network to originate loans. We expect generally to earn a higher return on the mortgage loans in our portfolio that we originate through our retail division compared to those originated or acquired through our wholesale division, because we will retain the front-end fees and points we earn on retail loans. We expect that this income will lessen our reliance on the income we receive through whole loan sales, which can be subject to market fluctuations.

• Disciplined underwriting. Our centralized, disciplined and efficient underwriting processes have allowed us to originate prudently underwritten loans and to realize significant growth. We underwrite all of the mortgage loans we originate at centralized facilities in Indianapolis and Phoenix, which allows us to make changes quickly as well as to maintain discipline in our underwriting practices. We expect that our underwriting efficiency and effectiveness will continue to improve as we implement new technology during 2004.

• Extensive product offerings done through the same distribution channels. Each of our loan officers in our retail distribution network is able to sell non-conforming, jumbo and conforming loan products to potential borrowers. This structure allows us to increase our marketing efficiency by allowing us to spread marketing dollars more effectively across a larger population of potential customers.

• Extensive experience of our senior executive team and underwriting personnel in the mortgage industry. Several of our senior executives have overseen the national expansion of diversified financial services companies, including national mortgage lending operations such as the Bank One Consumer Financial Services Division and a division of Household Finance. In addition, several of our key senior executives and underwriting personnel have worked together for more than a decade in the consumer lending industry. During this time, they have developed a deep understanding of all facets of the mortgage lending business and have made key contacts throughout the industry. They have strived to transfer their shared experience in the mortgage industry to our company by instilling a culture of teamwork and integrity and by promoting open and constantly improving work processes.

• Our proprietary marketing database. We have spent significant resources on developing a proprietary marketing database which allows us to market our loan programs directly to potential customers through direct mail and telemarketing campaigns. Our database, which we refine and update each month, allows us to track experiences that we and others have had with present and potential customers and to predict future successes with our marketing programs. We believe that this database increases the efficiency of our marketing expenditures by narrowing the field of potential customers to those most likely to respond to our marketing solicitations.

• Incentive-based compensation. We have implemented a performance-based compensation structure that, we believe, allows us to attract, retain and motivate qualified personnel at all levels.

Our Strategy

Our goal is to maximize stockholder value by focusing on the origination of non-conforming, jumbo and conforming mortgage loans that meet our disciplined underwriting guidelines and building and managing a portfolio of certain of the non-conforming loans that we originate and, to a lesser extent, that we acquire from other mortgage originators that meet our mortgage portfolio investment guidelines. We intend to implement this strategy by:

• expanding our direct-to-customer retail business (which allows us to generate revenue by collecting fees and discount points and reduces our reliance on back-end fees) by filling existing excess capacity with qualified loan officers and by realizing critical mass in each of our retail branches;

• expanding the geographic presence of our retail lending network to become a nationwide lender;

• expanding our wholesale division’s brokerage relationships and geographic presence, and by beginning to purchase loans from correspondent lenders;

• expanding and improving our database marketing approach and our brand recognition;

• improving our per-person sales and operations efficiency and underwriting disciplines by incorporating new technologies in our lending processes;

• using the proceeds of this offering, along with prudent leverage, to hold loans in our mortgage portfolio, which we expect will generate favorable risk-adjusted returns for our stockholders and create a new earnings stream for us that is less volatile than selling whole loans into the secondary market;

• continuing to utilize the ability of each of our loan officers to generate non-conforming, jumbo and conforming loans, which permits us to reduce the inefficiencies associated with creating separate divisions and processes for each of these loan products;

• developing the capacity, within 24 to 36 months of this offering, to service the loans that we hold in our mortgage portfolio; and

• continuing to provide responsive service to our retail customers and wholesale loan brokers.

Risks and Uncertainties

Our business is subject to a number of risks and uncertainties. You should consider carefully the risks discussed in this prospectus under the caption “Risk Factors” before you make your investment decision.

Our Tax Status

We intend to qualify and will elect to be taxed as a REIT under the Internal Revenue Code of 1986, as amended, commencing during the fourth quarter of 2004. See “United States Federal Income Tax Considerations — Requirements for Qualification.” Provided we qualify as a REIT, we generally will not be subject to U.S. federal corporate income tax on taxable income that we earn and distribute to our stockholders. The income earned by our mortgage subsidiary, which will be a taxable REIT subsidiary under the REIT tax rules, and its share of the income of entities in which it owns a direct or indirect interest, will be subject to federal and state income tax at regular corporate rates. REITs are subject to a number of organizational and operational requirements, including a requirement that they currently distribute at least 90% of their annual REIT taxable income. We face the risk that we might not be able to comply with all of the REIT requirements in the future. Failure to qualify as a REIT would render us subject to U.S. federal income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate rates, and distributions to our stockholders would not be deductible. Even if we qualify for taxation as a REIT, we may be subject to certain U.S. federal, state, local and foreign taxes

on our income and property. See “United States Federal Income Tax Considerations — Taxation of Our Company — General.”

Restrictions on Ownership of Our Stock

In order to facilitate our REIT election, our charter prohibits any stockholder from directly or indirectly owning more than 9.8% of the outstanding shares of any class or series of our stock. We adopted this restriction to promote compliance with the provisions of the Internal Revenue Code that limit the degree to which ownership of a REIT may be concentrated. In addition, ownership by certain “disqualified organizations” consisting primarily of governmental and certain tax exempt entities is prohibited to avoid a tax on a portion of our income. See “Description of Securities — Transfer Restrictions” and “United States Federal Income Tax Considerations.”

Dividend Policy and Distributions

To avoid corporate income and excise tax and to maintain our qualification as a REIT, we intend to make annual distributions to our stockholders of at least 90% of our REIT taxable income, as, if and when authorized by our board of directors out of assets legally available therefor, determined without regard to the deduction for dividends paid and by excluding any net capital gains. REIT taxable income is calculated pursuant to standards in the Internal Revenue Code and will not necessarily be the same as our net income as calculated in accordance with generally accepted accounting principles, or GAAP. Our board of directors may, in its discretion, cause us to make additional distributions of cash legally available for that purpose. Our dividend rate from quarter to quarter will depend on our taxable earnings, financial condition and such other factors as our board of directors deems relevant.

In the future we may adopt a dividend reinvestment plan that would permit you to reinvest in our shares of common stock the cash dividends that you would otherwise receive. If we adopt the dividend reinvestment plan and you choose to participate, you will be taxed on an amount equal to the fair market value, on the relevant distribution date, of the shares of our common stock purchased with reinvested distributions even though you will not receive the cash from those distributions. As a result, you may have a tax liability without receiving cash to pay such liability.

General Information

Our principal executive offices are located at 11595 North Meridian Street, Suite 400, Carmel, Indiana 46032, and our telephone number at that address is (317) 805-3200. We maintain a web site at www.oakstreetmortgage.com. Information contained on our web site is not part of this prospectus.

Our Ownership Structure

Oak Street Financial Services, Inc. was incorporated as a Maryland corporation in September 2003. Upon completion of the offering, Oak Street Mortgage LLC will be a wholly-owned taxable REIT subsidiary of Oak Street Financial Services, Inc. In turn, Oak Street Mortgage LLC will own interests in other existing entities engaged in various businesses related to our operations.

Prior to the reorganization of our ownership structure in September 2003, Oak Street Financial Services, Inc. had not engaged in any business activities or had any assets or liabilities. Accordingly, the consolidated financial statements included in this prospectus include the consolidated financial statements of Oak Street Financial Services, Inc. for the three-month period ended December 31, 2003, and consolidated financial statements of our mortgage subsidiary, Oak Street Mortgage LLC, for the years ended December 31, 2003, 2002 and 2001.

This Offering


Common stock offered by us		shares

Common stock offered by the selling stockholders		shares

Shares of common stock outstanding after this offering		shares

The number of shares of common stock to be outstanding after this offering is based on the shares of our common stock outstanding as of the date of this prospectus, as adjusted to give effect to the one-for- reverse stock split that will be effected immediately prior to the closing of this offering. Unless otherwise indicated, the information in this prospectus has been adjusted to reflect the reverse stock split described in the preceding sentence and assumes that the underwriters will not exercise their over-allotment option to purchase additional shares of our common stock. It also excludes shares issuable upon the exercise of outstanding options and warrants and restricted stock awards to be made at the closing of the offering.


Use of proceeds		We estimate that we will receive net proceeds from this offering of approximately $ million. We will not receive any of the proceeds that the selling stockholders named in this prospectus receive from their sale of shares of our common stock. We intend to use substantially all of the net proceeds that we receive to fund our origination and acquisition of certain non-conforming mortgage loans during the third quarter of 2004 and in subsequent periods that we will hold in our mortgage portfolio. We may also use some of the proceeds of this offering to temporarily pay down our warehouse borrowing facilities or for general corporate purposes. See “Use of Proceeds.”

Trading		This is our initial public offering. No public market currently exists for our shares of common stock. Our common stock is not listed on any national securities exchange or market system. We intend to apply to have our common stock listed on the Nasdaq National Market System under the symbol “OAKS.” However, an active trading market for our shares might never develop.

Summary Consolidated Financial And Operating Data

Oak Street Financial Services, Inc. became the holding company for Oak Street Mortgage LLC on September 23, 2003. For accounting purposes, this reorganization was effective September 30, 2003. Previously, Oak Street Financial Services, Inc. had not engaged in any business activities and did not have any assets or liabilities. Financial information for Oak Street Financial Services, Inc. for periods subsequent to the effective date of the reorganization consists of the financial information of Oak Street Mortgage LLC, except for adjustments necessary to account for the minority interest held by Sotseks Corp., which is one of the selling stockholders in this offering. Upon completion of this offering and the sale by Sotseks Corp. of its ownership interest in Oak Street Financial Services, Inc., the minority interest of approximately $5.8 million held by Sotseks Corp. will convert into stockholders’ equity. If Sotseks Corp. had converted its ownership interest into shares of Oak Street Financial Services, Inc. common stock prior to December 31, 2003, the net income and stockholders’ equity of Oak Street Financial Services, Inc. as of that date would have been $4.1 million and $16.1 million, respectively.

The following table sets forth:

• Oak Street Financial Services, Inc.’s historical summary consolidated financial and operating data as of December 31, 2003 and for the three-month period then ended; and

• Oak Street Mortgage LLC’s historical summary consolidated financial and operating data as of and for each of the years in the four-year period ended December 31, 2003 and as of and for the period from October 17, 1999 (inception) through December 31, 1999.

The financial information in the following tables is derived from our consolidated financial statements and other financial records. Since this information is only a summary and does not provide all of the information contained in our consolidated financial statements, including related notes, you should read “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our consolidated financial statements, including related notes, contained elsewhere in this prospectus.


	Oak Street
	Financial			Oak Street Mortgage LLC
	Services, Inc.
	For the Three
	Months Ended			For the Year Ended December 31,
	December 31,
	2003			2003			2002			2001			2000			1999(1)


	(Dollars in thousands)
Consolidated Statement of Income (Loss) Data:
Revenues:
Gain on sale of loans — net	$	17,807		$	62,578		$	43,604		$	24,419		$	1,254		$	—
Interest income on loans		3,185			11,356			8,408			4,303			332			3
Other		1,703			6,370			2,050			1,488			829			—

Total revenues		22,695			80,304			54,062			30,210			2,415			3

Expenses:
Salaries and employee benefits-net		8,518			30,995			26,351			15,607			3,863			129
Marketing and advertising		3,098			11,069			6,872			3,868			893			—
Occupancy and equipment		1,207			3,899			3,303			2,019			407			3
Interest expense		1,474			4,552			4,029			3,087			263			—
Other operating expenses		3,947			11,270			6,685			4,396			1,360			56

Total expenses		18,244			61,785			47,240			28,977			6,786			188

Net income (loss) before minority interest		4,451			18,519			6,822			1,233			(4,371	)		(185	)
Minority interest		(1,831	)		(1,404	)		(699	)		(69	)		—			—

Net income (loss)	$	2,620		$	17,115		$	6,123		$	1,164		$	(4,371	)	$	(185	)


	Oak Street
	Financial
	Services, Inc.		Oak Street Mortgage LLC
	As of		As of December 31,
	December 31,
	2003		2003		2002		2001		2000		1999

Consolidated Balance Sheet Data:
Assets
Cash and cash equivalents	$	7,383	$	7,383	$	6,613	$	1,825	$	102	$	43
Restricted cash		3,031		3,031		3,901		64		557		512
Accounts receivable from the sale of loans		258		258		80		15,449		1,103		—
Loans held for sale — net		152,338		152,338		200,000		59,212		19,536		—
Premises and equipment — net		6,203		6,203		4,926		3,639		2,104		—
Prepaid expenses and other assets		4,978		4,978		3,207		3,002		1,928		59

Total assets	$	174,191	$	174,191	$	218,727	$	83,191	$	25,330	$	614


Liabilities and Stockholders’ Equity
Warehouse lines of credit	$	124,571	$	124,571	$	121,720	$	73,133	$	19,829	$	—
Collateralized financing		25,177		25,177		81,211		—		—		—
Other borrowings		1,274		1,274		1,276		1,743		418		—
Distributions payable		—		—		2,721		—		—		—
Accrued expenses and other liabilities		6,537		6,537		5,544		2,508		1,039		99

Total liabilities		157,559		157,559		212,472		77,384		21,286		99
Minority interest		6,379		574		—		288		—		—
Stockholders’ equity		10,253		16,058		6,255		5,519		4,044		515

Total liabilities and stockholders’ equity	$	174,191	$	174,191	$	218,727	$	83,191	$	25,330	$	614


			Oak Street
			Financial
			Services, Inc.			Oak Street Mortgage LLC
			As of or for the
			Three Months
			Ended			As of or for the Year Ended December 31,
			December 31,
			2003			2003			2002			2001			2000			1999(1)


			(Dollars in thousands, except per share data)
Consolidated Per Share Data:
Income (loss) per share:
	Basic		$	0.01		$	56.41		$	20.59		$	3.94		$	(24.46	)	$	(1.88	)
	Diluted		$	0.01		$	54.96		$	20.00		$	3.90		$	(24.46	)	$	(1.88	)
Weighted average shares outstanding:
	Basic			201,378,743			303,408			297,339			295,507			178,689			98,513
		Diluted		201,378,743			311,408			306,228			298,707			178,689			98,513
Other Data:
Cash distributions declared(2)			$	—		$	7,310		$	5,467		$	13		$	—		$	—
Origination Volumes:
Retail
	Non-conforming		$	214,659		$	770,332		$	503,589		$	314,083		$	28,641		$	—
	Jumbo			47,761			335,498			235,189			66,029			—			—
	Conforming			14,392			110,986			113,637			52,319			—			—

Total			$	276,812		$	1,216,816		$	852,415		$	432,432		$	28,641		$	—

Wholesale
	Non-conforming		$	123,425		$	413,577		$	198,834		$	73,508		$	3,408		$	—
	Jumbo			15,327			41,585			24,308			13,921			776			—
	Conforming			—			—			—			—			—			—

Total			$	138,752		$	455,162		$	223,142		$	87,429		$	4,184		$	—

Company Total
	Non-conforming		$	338,084		$	1,183,909		$	702,424		$	387,591		$	32,049		$	—
	Jumbo			63,088			377,083			259,498			79,950			776			—
	Conforming			14,392			110,986			113,637			52,319			—			—

Total(3)			$	415,564		$	1,671,978		$	1,075,559		$	519,860		$	32,825		$	—

Weighted average coupon on loans originated				7.44	%		7.11	%		7.77	%		8.46	%		11.14	%		—
Weighted average whole loan sales price over par:
	Non-conforming			2.90	%		2.71	%		3.26	%		2.59	%		2.84	%		—
	Jumbo			2.39	%		1.94	%		2.40	%		2.55	%		3.14	%		—
	Conforming			0.25	%		(0.31	)%		(0.19	)%		(0.28	)%		—			—
	Total			2.73	%		2.27	%		2.68	%		2.38	%		2.85	%		—
Weighted average credit score:
	Non-conforming			642			637			632			643			628			—
	Jumbo			679			714			730			690			650			—
	Conforming			704			704			701			711			—			—
	Total			650			659			663			658			628			—
Total mortgage loan sales			$	370,373		$	1,550,971		$	901,096		$	308,645		$	18,742			—
Number of branches at period end:
	Retail			24			24			19			20			2			—
	Wholesale			5			5			3			2			1			—


	Oak Street
	Financial
	Services, Inc.			Oak Street Mortgage LLC
	As of or for the
	Three Months
	Ended			As of or for the Year Ended December 31,
	December 31,
	2003			2003			2002			2001			2000			1999(1)


	(Dollars in thousands, except per share data)
Number of employees at period end		662			662			489			366			113			2
Number of retail loan officers at period end		311			311			219			169			41			—
Number of wholesale account executives at period end		36			36			23			7			5			—
Ratios:
Debt to capital(4)		16.0			9.8			34.0			14.1			5.3			—
Return on average equity(5)(6)		118.0	%		153.4	%		104.0	%		24.3	%		(191.8	)%		N/M	(7)
Return on average assets(6)		5.9	%		8.7	%		4.1	%		2.1	%		(33.7	)%		N/M	(7)
Operating expenses as a percentage of total loans funded		4.4	%		3.70	%		4.39	%		5.57	%		20.67	%		—
Average Balance Sheet Data(5):
Average equity	$	8,884		$	11,156		$	5,887		$	4,781		$	2,279			N/M	(7)
Average assets	$	176,604		$	196,459		$	150,959		$	54,261		$	12,972			N/M	(7)

(1) Data presented is for the period from October 17, 1999 (inception) to December 31, 1999.

(2) Per share data is not considered meaningful since the majority of cash distributions declared were for the purpose of providing the members with cash to pay their share of federal and state income taxes.

(3) Includes certain brokered loans originated by Oak Street Mortgage LLC on behalf of other lenders. See “Business — Loan Originations.”

(4) Debt to capital is computed by dividing the sum of total liabilities and minority interest by stockholders’ equity.

(5) Average balance sheet data, return on average equity and return on assets are calculated based on the average of the beginning and end of period amounts.

(6) Return on average equity is computed by dividing net income (loss) by average equity. Our mortgage subsidiary’s net income does not include a provision for corporate income taxes since it is a limited liability company.

(7) Data deemed not meaningful is designated by N/ M.

An investment in our common stock involves a high degree of risk. You should carefully consider the following information, together with the other information contained in this prospectus, before buying shares of our common stock. In connection with the forward-looking statements that appear in this prospectus, you should also carefully review the cautionary statement referred to under “A Warning About Forward-Looking Statements.”

The following are some of the risks we face related to an increase in interest rates.


	•	Higher interest rates will lead to higher borrowing costs both for us and our borrowers.

	•	A substantial and sustained increase in interest rates could harm our ability to originate loans by causing the refinancing of existing mortgage loans to become less attractive and the financing of new purchase loans to become more expensive.

	•	Borrowers with adjustable-rate mortgages generally will incur higher monthly payments as interest rates increase, which may lead to higher delinquency and default rates.

	•	The cost of financing our mortgage loans prior to sale or securitization is based primarily upon the London Inter-Bank Offered Rate, or LIBOR. 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 most of our mortgage loans are fixed for at least six months. If LIBOR 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 or securitization and our LIBOR-based cost of financing such loans) will be reduced.

	•	Higher short-term interest rates could flatten the yield curve, in which case our borrowing costs would increase more than the yields we earn on our long-term assets, which would adversely affect our net interest income and profitability.

	•	When we securitize the mortgage loans we expect to hold in our mortgage portfolio in the future, the value of and the income we receive from the securitized loans we will hold and the mortgage-related securities we retain may be based on fixed interest rates. Because the income we receive from the mortgage loans that underlie these fixed-rate mortgage-related securities may be based on an adjustable LIBOR-based yield payable to the senior security holders or loan purchasers, we may be subject to interest rate risk with regard to such securities to the extent that we have not successfully hedged our investment position. Even if we have perfectly hedged our interest rate risk, we would still be vulnerable to prepayments which cannot be accurately hedged against. As a result of this interest rate risk, an increase in LIBOR may reduce the income we receive from, and the value of, our mortgage loans and mortgage-related securities.

Accordingly, our business, financial condition, liquidity and results of operations may be significantly harmed as a result of increased interest rates.

The mortgage origination business has historically been a cyclical industry, enjoying periods of strong growth and profitability followed by periods of shrinking volumes and industry-wide losses. The residential mortgage industry has experienced rapid growth over the past three years due to declining interest rates. The Mortgage Bankers Association of America has predicted that residential mortgage originations will decrease sharply in 2004 due to rising interest rates. During periods of rising interest rates, refinancing

Our business strategy following completion of this offering significantly relies upon our ability to leverage the loans that we will hold in our mortgage portfolio by entering into securitizations and similar transactions. We historically have sold all of the loans we have originated in whole loan sales to institutional purchasers and have never previously engaged in any securitization transactions. Our inability to leverage successfully our portfolio of mortgage loans following the completion of this offering would adversely affect our ability to conduct our business as a REIT and would adversely affect our earnings and financial condition in the future.

We expect that these securitization transactions will be one of our primary sources of cash in the future. Our ability to securitize our loans will depend on a number of factors, including conditions in the securities markets generally, conditions in the asset-backed securities market specifically, the performance of our portfolio of securitized loans and our ability to obtain credit enhancement in connection with these transactions. If we are unable to securitize profitably a sufficient number of our portfolio loans, our revenues and earnings will be adversely affected. In addition, because we expect to use the proceeds generated by these securitization transactions to fund our origination of additional mortgage loans, any delay in closing a securitization could reduce the number of mortgage loans we are able to originate in the future, which would also adversely affect our earnings and financial condition in the future as well as our REIT status. Given our lack of historical loan performance data and prior securitization experience, we expect that our level of over-collateralization will be higher than may be experienced by companies with substantial securitization experience. Our ability to efficiently leverage our pool of mortgages may also be impacted by REIT tax issues. See “United States Federal Income Tax Considerations — Taxation of Our Company — Prohibited Transactions Tax.”

We expect that we will rely on credit enhancements provided by certain insurance companies that will guarantee the senior certificates in the securitization trusts that we will issue in our securitization transactions. We expect that these credit enhancements will allow us to obtain an “AAA/ Aaa” rating for these senior certificates. If we are unable to obtain insurance company guarantees for these senior certificates, we may be unable to sell our loans through securitizations, which could materially adversely affect our results of operations, financial condition and business prospects. Although alternative structures for securitizing or otherwise leveraging our mortgage portfolio may be available, we cannot assure you that these alternative structures will be available to us. The willingness of insurance companies to issue credit enhancements for our securitizations may also be adversely affected by any future poor performance of our securitization trusts or the poor performance by other securitization trusts. Our inability to complete future securitizations for any reason would have a material adverse effect on our results of operations, financial condition and business prospects.

We require substantial amounts of cash to fund our loan origination activities and, following completion of this offering, to develop a portfolio of mortgage loans and mortgage-related assets. We use warehouse lines of credit to provide interim financing for our loan originations. In addition to our


	•	issuing mortgage-backed securities and other debt instruments from our REIT;

	•	generating cash from sales of substantially all of the mortgage loans we originate that we decide not to hold in our portfolio and through the operations of our non-mortgage subsidiaries; and

	•	issuing additional equity.

We cannot assure you that any of these alternatives will be available to us, or if available, that we will be able to negotiate favorable terms. Further, we currently intend to leverage our mortgage portfolio to where the resulting debt, over time, will be approximately 10 to 14 times our equity. Once we achieve this amount of leverage we will likely be unable to expand the size of our mortgage portfolio unless we raise additional equity or are able to generate substantial dividends from our taxable REIT subsidiaries. If we cannot generate sufficient liquidity, we will be unable to continue our operations, grow our mortgage portfolio, or maintain our hedging policy. A prolonged, substantial reduction in the size of the secondary market for loans of the types that we originate and purchase may adversely affect our ability to sell loans with a consequent adverse impact on our profitability and ability to fund future originations and purchases, which could have a significant effect on our financial position, results of operations and cash flows. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.”

A relatively few institutions have accounted for most purchases of our loan sales. For the year ended December 31, 2003, we sold $1.3 billion in loans to six investors, which represented 81.3% of $1.6 billion in total loans sold.

Although we have employed only limited hedging strategies in the past, we intend to enter into more involved hedging strategies in an effort to lessen the risk to our portfolio of mortgage loans and mortgage-related assets that we will hold in the future, and with regard to the debt we will incur in connection with this portfolio, from interest rate fluctuations. In particular, we intend to hedge against the fixed-rate mortgage loans that we hold in our portfolio for an extended period of time prior to when we engage in a securitization transaction involving those loans. These hedging strategies may include interest rate swaps, the purchase or sale of interest rate collars, caps or floors, options and interest-only mortgage-backed securities. We cannot assure you that our hedging strategies will have the desired beneficial impact on our results of operations or financial condition. Moreover, no hedging strategy can completely insulate us from the risks associated with changes in interest rates and prepayment rates.

Hedging involves risk and typically involves cost, including transaction costs. These costs generally increase dramatically as the period covered by the hedging increases and during periods of rising and volatile interest rates. We may increase our hedging activity and, thus, increase our hedging costs, during periods when interest rates are volatile or rising and hedging costs have increased. See “Business — Asset/ Liability Management Policy — Interest Rate Risk Management.” Federal tax laws that apply to REITs may prevent us from effectively implementing hedging strategies that we determine, absent such restrictions, would best insulate us from the risks associated with changing interest rates and prepayments. See “United States Federal Income Tax Considerations — Requirements for Qualification — Income Tests.”

Following the completion of this offering of common stock, we intend to securitize the loans that we will hold in our portfolio. As part of the credit enhancement for these securitizations, the net cash flow


	•	the extent to which the interest rates of the mortgage loans exceed the interest rates payable to the senior security holders or loan purchasers;

	•	the level of losses and delinquencies experienced on the underlying loans; and

	•	the extent to which the underlying loans are prepaid by borrowers in advance of scheduled maturities.

Any combination of these factors may reduce the income we receive from and the value of our securitized loans and mortgage-related securities.

Prior to conducting this offering of common stock, we sold substantially all of the loans we originated in whole loan sales to institutional purchasers on a servicing-released basis. As a result, we are unable to provide meaningful historical information about the delinquency, loss and prepayment experience for those loans. This lack of historical information makes it difficult for us to predict the delinquencies and losses that may occur in the future on the loans that we will hold in our mortgage portfolio. Any difference between our assumptions and the actual performance of our portfolio loans could have a material adverse effect on our future revenues and cash flows. Further, this lack of historical information and the resulting uncertainty with regard to our expected earnings could adversely affect our ability to engage in securitization transactions with regard to the loans we will hold in our mortgage portfolio.

Mortgage loan prepayment rates vary from time to time and may cause changes in our net interest income and the valuation of the mortgage loans and other mortgage-related assets we will hold in our portfolio following this offering. Prepayments of mortgage loans and mortgage-related assets that are backed by mortgage loans ordinarily increase when mortgage interest rates decrease. Prepayment experience also may be affected by the geographic location of the properties securing the mortgage loans, the credit standing of borrowers, general conditions in the housing and financial markets, competition, and general economic conditions. In addition, prepayments on adjustable-rate mortgage loans, or ARMs, are affected by the ability of a borrower to convert an ARM loan to a fixed-rate loan and by conditions in the fixed-rate mortgage market. If the interest rates on ARMs increase at a rate greater than the interest rates on fixed-rate mortgage loans, prepayments on ARMs may tend to increase. We intend to seek to reduce prepayment risk through a variety of means, which may include structuring a diversified portfolio with a variety of prepayment characteristics, holding in our portfolio mortgage loans with prepayment restrictions and penalties, and investing in certain mortgage-backed securities with prepayment protections. See “Business — Asset/ Liability Management Policy — Prepayment Risk Management.” No strategy, however, can completely insulate us from prepayment risks arising from the effects of interest rate changes or otherwise.

Changes in anticipated prepayment rates associated with the mortgage loans and other mortgage-related assets we will hold in our portfolio could affect us in several adverse ways. Faster than anticipated prepayments generally will cause us to write off sooner than we expected any costs we have capitalized in originating mortgage loans or any premium we have paid to purchase mortgage-related assets. These write-offs with respect to certain of our loans will cause our net interest income to decrease. In addition, to the extent prepayments occur during a period of decreasing interest rates, we may not be able to reinvest the amounts we receive in connection with a prepayment in similarly-yielding assets. Conversely, if prepayment rates are slower than we anticipated in times of generally increasing interest rates, the average life of our

By making timely payments on the debts they owe, reducing their debt levels or increasing their incomes, or through other means, borrowers under non-conforming loans are sometimes able to reduce their borrowing costs from refinancing because of their improving credit ratings. As a result, a non-conforming borrower may be able to lower the rate on his or her mortgage loan even during periods when overall interest rates are not decreasing. As a result, the prepayment experience of non-conforming loans may be less predictable than that of conforming loans.

In an effort to generate appropriate net interest income, we intend to incur substantial debt by leveraging the mortgage portfolio we intend to develop following this offering. Although the amount of debt we incur may vary, we currently expect our borrowings, over time, to range between 10 and 14 times our equity. Initially, we intend to acquire the mortgage loans and mortgage-related assets that we will hold in our portfolio with the proceeds of this offering. See “Use of Proceeds.” Thereafter, we intend to originate and acquire mortgage loans and mortgage-related assets to hold in our portfolio with the proceeds we receive from borrowing against, or “leveraging,” our mortgage portfolio pursuant to investment guidelines that we have established or will establish based on changes in industry conditions. If the return on our portfolio assets that we purchase with borrowed funds fails to cover our cost of these borrowings, we will experience net interest losses. In addition, we may not be able to achieve what we believe to be our optimal degree of leverage as a result of, among other factors:


	•	increases in haircuts (i.e., the discount from face value applied by a lender or purchaser with respect to our mortgage assets);

	•	increases in interest rate volatility;

	•	unavailability of financing in the market;

	•	adverse circumstances that may arise from time to time in the lending market; or

	•	tax considerations relating to our REIT structure. See “United States Federal Income Tax Considerations — Taxation of Our Company — Prohibited Transactions Tax.”

The presence of any of these factors could adversely affect our ability to leverage our portfolio, which could adversely affect our profitability. See “Business — Mortgage Portfolio” and “— Asset/ Liability Management Policy.”

A decline in the market value of the assets we will hold in our mortgage portfolio may limit our ability to borrow. In addition, such a decline could cause our lenders to initiate margin calls, which would require us either to pledge additional assets or reduce the amount of our outstanding borrowings. In either case, we could be required to sell assets under adverse market conditions in order to maintain liquidity, which could adversely affect our profitability. Any default by us under our collateralized borrowings could also result in a liquidation of the collateral, including any cross-collateralized assets, and a resulting loss of the difference between the value of the collateral and the amount borrowed. To the extent we are compelled to liquidate mortgage loans or mortgage-related assets that are “qualified REIT assets” to repay borrowings, we may be subject to a penalty tax on the gains from such sales, which may cause us to fail to comply with the income and asset tests applicable to REITs, which would jeopardize our status as a REIT. See “United States Federal Income Tax Considerations — Requirements for Qualification,” “— Income Tests,” and “— Asset Tests” and “United States Federal Income Tax Considerations —

We originate mortgage loans across a geographically diverse area through our retail and wholesale offices in 26 states. See “Business — Loan Production by Borrower Risk Classification — Geographic Diversification.” We currently originate loans in certain states in higher concentrations than in other states. For instance, during the year ended December 31, 2003, approximately 45.7% of the mortgage loans that we originated in the aggregate were to borrowers in California and Florida. If the economies in these states are affected by regional political or business developments, or if natural disasters strike those states, our ability to continue to originate mortgage loans in those states may be adversely affected. Moreover, if these circumstances arise, borrowers in the affected areas could have difficulty repaying their loans. As a result, to the extent that our mortgage portfolio is geographically concentrated in a few states, our financial condition and results of operations could be adversely affected by regional circumstances that affect the states where our borrowers are located.

The risks associated with our business are more acute during periods of economic slowdown or recession because these periods may be accompanied by decreased demand for mortgage loans and declining real estate values. Declining real estate values reduce the ability of borrowers to use home equity to support borrowings because they negatively affect loan-to-value ratios of the home equity collateral. In addition, because we make loans to credit-impaired borrowers, the actual rates of delinquencies, foreclosures and losses on these loans may increase during economic slowdowns. Any sustained period of increased delinquencies, foreclosures or losses could adversely affect our ability to originate or sell loans, the prices we receive for our loans, or the value of our portfolio loans in securitizations. Each of these factors could have a material adverse effect on our results of operations, financial condition and business prospects.

We have grown significantly since our mortgage subsidiary was formed in October 1999. At December 31, 2003, we operated from 24 retail and five wholesale offices originating loans in 26 states, and we had approximately 660 employees. We may be unable to continue to recruit and retain the personnel we will need to successfully operate our business. We intend to continue to expand our retail and wholesale operations during the foreseeable future, which may require additional capital. In addition, we will need to effectively manage our planned expansion by, among other things, identifying and hiring adequate numbers of qualified employees and expanding our information and operating systems. Our expansion plans could be jeopardized if we are unable to obtain and successfully deploy the necessary capital, hire the additional personnel we will require, or successfully expand our information and operating systems. Our inability to successfully expand our geographic operations could materially adversely affect our business prospects and results of operations. Moreover, even if we are able to obtain the resources we will need to expand our operations, we may be unable to operate the expanded business in a profitable manner.

We make loans to borrowers who have impaired or limited credit histories, limited documentation of income and higher debt-to-income ratios than traditional mortgage lenders allow. These loans generally

Our net income will depend, in large part, on our ability to originate and acquire mortgage loans and mortgage-related assets to hold in our portfolio at favorable spreads over our borrowing costs, while utilizing prudent leverage. Despite our management’s experience in originating mortgage loans and managing portfolios of mortgage assets, there can be no assurance that we will be able to originate sufficient mortgage loans or acquire other mortgage-related assets at spreads above our cost of funds. You must rely upon the ability of our management to identify appropriate investment opportunities, and you will not have an opportunity to evaluate relevant economic, financial and other information regarding our future investments at the time they are made.

There can be no assurance that we will originate mortgage loans or otherwise identify mortgage-related assets that meet our investment criteria in a timely manner, or that any such assets, once acquired, will produce a return on our investment. A delay will occur between the closing of this offering and the time we are able to fully deploy the proceeds that we received in accordance with our mortgage portfolio investment policy. During the interim period, we intend to utilize the proceeds to acquire marketable short-term securities consistent with our tax status as a REIT. See “Use of Proceeds.” Although these investments have low credit risk, we anticipate that they will not produce substantial investment returns and that, until we fully deploy the proceeds from this offering and achieve our leverage objectives, our net income will be adversely affected.

We face intense competition from mortgage banking companies, mortgage brokers, consumer finance companies, other mortgage REITs, commercial banks, credit unions, thrift institutions and internet-based lending companies. 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. We also expect that additional mortgage REITs will be organized in the future, which will further increase competition for the available supply of the types of assets we will hold in our portfolio. 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 than are available to us.

The intense competition in the mortgage industry has also led to rapid technological developments and evolving industry lending standards. 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 loan, convenience in obtaining a loan, customer service, amount and term of a 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 mortgage industry. Price competition could cause us to lower the interest rates that we charge borrowers, which could lower the value of our loans. If our competitors adopt less disciplined underwriting standards, we may lose market share. Any increase in these

We also face competition for financing sources, and the growth of our competitors as well as the presence of additional mortgage REITs may affect our ability to obtain financing or cause our costs of borrowing to increase in the future, which could affect our ability to obtain sufficient funds to carry out our business strategy.

During the third quarter of 2004, we will begin to establish a portfolio of mortgage loans consisting of loans that we originate and loans that we purchase from other lenders. We have historically originated mortgage loans through our mortgage subsidiary, Oak Street Mortgage LLC, which held licenses to originate mortgage loans in 26 states as of December 31, 2003. Following the completion of this offering, we intend to originate loans both through our mortgage subsidiary, which will be a taxable REIT subsidiary, and through the REIT. To the extent that we are paid fees by the borrowers in our retail operation, we will earn such fees in the REIT whether the loans are intended to be sold or retained. We intend to fund the loans we intend to sell from our mortgage subsidiary, as we have done in the past, and to fund the loans we intend to hold for investment in our mortgage portfolio from the REIT. There may be circumstances, however, where our mortgage subsidiary will fund loans that the REIT purchases for portfolio. Conducting our retail operation through the REIT rather than a taxable REIT subsidiary will increase the amount of fee income we generate through our tax-advantaged REIT structure, which will decrease our income tax expense. However, some of our fees to borrowers may not qualify for either of the REIT gross income tests. See “United States Federal Income Tax Considerations — Requirements for Qualification — Income Tests.” Before we may originate loans, we must obtain licenses from the applicable state regulatory authorities. Prior to the consummation of this offering, we expect that we will obtain licenses or exemptions to originate mortgage loans through Oak Street Financial Services, Inc. in approximately 20 states by July 2004. If we experience any delay in this process or are unable to obtain licenses to originate mortgage loans in certain states, our ability to develop a mortgage portfolio may be adversely affected, which could have an adverse effect on our results of operations in the future. In addition, our geographic expansion strategy will depend in part on our ability to procure licenses in additional states on a timely basis.

We currently sell substantially all of the loans that we originate in whole loan sales to institutional purchasers on a servicing-released basis, and therefore do not have experience servicing loans. Following the completion of this offering of common stock, we intend to continue conducting whole loan sales on a regular basis but will hold a substantial portion of the non-conforming loans that we originate in the mortgage portfolio we intend to develop. We are currently negotiating with three companies that service the loans of financial institutions located throughout the country and expect to enter into a servicing agreement with one of these companies during the second quarter of 2004 that provides for the servicing of our portfolio loans.

Within 24 to 36 months of the completion of this offering, we intend to develop the capacity to service the loans that we will hold in our mortgage portfolio on our own behalf. Our servicing activities are likely to be conducted through our mortgage subsidiary or another taxable REIT subsidiary since servicing income does not qualify for either of the REIT gross income tests. See “United States Federal Income Tax Considerations — Requirements for Qualification — Income Tests.” In order to service these loans ourselves, we will first need to establish a loan servicing platform with the necessary infrastructure and employees. The costs of developing this platform could adversely affect our results of operations. In addition, poor servicing and collections could adversely affect the level of our loan losses and our

Several states and cities are considering or have passed laws aimed at curbing predatory lending practices. The federal government is also considering legislative and regulatory proposals in this regard. These proposals typically lower the existing federal Home Ownership and Equity Protection Act of 1994 (“HOEPA”) thresholds for defining a “high-cost” loan, and enhance the protections and remedies afforded borrowers with respect to such loans. Further, the Federal Trade Commission enacted regulations that became effective October 1, 2003 that prohibit telemarketers from calling individuals who place their names on a national “do-not-call” list. See “Business — Marketing Strategy.” In general, we do not expect that these regulatory changes will materially affect our business. See “Regulation — Predatory Lending Legislation,” “— Efforts to Avoid Abusive Lending Practices” and “— National Do-Not-Call Registry.” In addition, some states have adopted restrictions on the points a lender may charge on the mortgage loans it originates in that state. These restrictions have not affected our lending operations to date, although they could in the future depending upon the terms from any new legislation.

Many of these laws and rules, however, extend beyond curbing predatory lending practices and may restrict commonly accepted lending activities, including some of our activities. For example, some of these laws and rules prohibit any form of prepayment charge or severely restrict the points that may be charged to borrowers or a borrower’s ability to finance the points and fees charged in connection with his or her loan. Passage of these laws and rules could reduce our loan origination volume. Enactment of such laws may place us at a competitive disadvantage to federally-chartered lenders, which generally are not subject to state or local high cost mortgage laws because of federal preemption. In addition, for reputation reasons and because of the enhanced risk, many whole loan buyers elect not to purchase any loan labeled as a “high cost” loan under any local, state or federal law or regulation. Accordingly, the enactment of these laws and rules could severely constrict the secondary market for a portion of our loan production, which could effectively preclude us from continuing to originate loans that fit within the newly-defined thresholds. As a result, the adoption of these laws and rules could have a material adverse effect on our results of operations, financial condition and business prospects.

Following this offering, we will continue to sell loans to third parties. When we sell the mortgage loans that we originate, we typically make customary representations and warranties to the purchaser about the loans being sold. Our whole loan sale agreements generally require us to repurchase or substitute loans in the event we breach a representation or warranty that we make to the loan purchaser or make a misrepresentation during the mortgage loan origination process. In addition, we may be required to repurchase loans as a result of borrower fraud or upon an early payment default on a mortgage loan. If we are able to resell any loans that we are required to repurchase, we likely will be able to do so only at a steep discount. Significant repurchases of mortgage loans that we have sold could negatively affect our cash flow and results of operations.

In the course of our operations, we must comply with the laws, rules and regulations, as well as judicial and administrative decisions, of all relevant state and local jurisdictions in which we operate, as well as an extensive body of federal laws, rules and regulations. The laws, rules and regulations of each of these jurisdictions are difficult, complex, often highly technical and, in some cases, impose conflicting requirements from one jurisdiction to the next. These laws, rules and regulations cover such diverse fields as consumer credit, fair housing, privacy, real estate and general trade practices, among others. While we


	•	civil and criminal liability, including potential monetary penalties;

	•	loss of state licenses or other approved status required for continued lending and servicing operations;

	•	legal defenses causing delay or otherwise adversely affecting the servicer’s ability to enforce loans, or giving the borrower the right to rescind or cancel the loan transaction;

	•	demands for indemnification or loan repurchases from purchasers of our loans;

	•	class action lawsuits; and

	•	administrative enforcement actions.

The volume of new or modified laws, rules and regulations has increased in recent years, and, in addition, individual municipalities have begun to enact laws, rules and regulations that purport to restrict loan origination activities, and in some cases loan servicing activities. Currently we originate loans in 26 states, and we expect eventually to originate loans nationwide. As our operations continue to grow, it may be more difficult to identify comprehensively, to interpret accurately and to program properly our technology systems and effectively train our personnel with respect to all of these laws, rules and regulations, thereby potentially increasing our exposure to the risks of non-compliance with these laws, rules and regulations.

We rely heavily upon communications and information systems to conduct our business. 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 loan applications being received and processed. During the fourth quarter of 2003, we began testing a new software package that is intended to automate a substantial portion of the processes we employ in originating, underwriting and delivering mortgage loans. In the second quarter of 2004, we obtained an indefinite license for this software that authorizes us to develop our own proprietary automated loan underwriting and processing system derived from the licensed software. We expect to continue testing this new software during 2004. We cannot assure you that this new software will operate as we expect, that we will be able to hire staff with the expertise to customize the software to our operations or develop our own proprietary system, or that we will not experience failures or interruptions in deploying this software and any other new technology that we may deploy. If such failures or interruptions occur, we cannot assure you that we or the third parties on which we rely will adequately address them. The occurrence of any failures or interruptions could significantly harm our business.

When we originate mortgage loans or buy mortgage loans from correspondents, we rely heavily upon information supplied by third parties including the information contained in the loan application, property appraisal, title information and employment and income documentation. If any of this information is intentionally or negligently misrepresented and we do not detect any such misrepresentation before we fund a loan, the value of the loan may be significantly lower than expected. Whether a misrepresentation is made by the loan applicant, the mortgage broker, mortgage banker, another third party or one of our own employees, we generally bear the risk of loss associated with the misrepresentation. A 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

Our future success depends, to a significant extent, upon the continued services of Steven Alonso, our Chairman, President and Chief Executive Officer, and of our management team. In particular, the extensive relationships that members of our management team have developed in the mortgage banking industry are critically important to the success of our business. Although we have employment agreements with our key executive officers, there is no guarantee they will remain employed with us. Mr. Alonso has designated our mortgage subsidiary as the beneficiary with respect to $1.0 million of death benefits payable under a $2.5 million insurance policy on his life. This insurance policy is owned by Mr. Alonso. We do not maintain life insurance on any of our other officers. The loss of services of one or more members of our corporate management team could harm our business and our prospects.

We intend to elect to be taxed as a REIT under the Internal Revenue Code following the completion of this offering. As a result, we will be required to distribute at least 90% of our REIT taxable income to our stockholders. This does not include the undistributed retained earnings of our taxable REIT subsidiaries. We intend to conduct the mortgage sale activities we have historically performed through a taxable REIT subsidiary and also to conduct servicing activities through such subsidiary. As a result, the income that we earn through this subsidiary will be subject to taxation, and we will include in our income any after-tax dividends that the subsidiary pays to us. We will earn most of our REIT-qualifying income from the interest income we earn on the mortgage portfolio we will hold following the completion of this offering (the amount of which will be dependent on our leveraging transactions) and from origination fees paid by borrowers relating to these portfolio loans and the loans we source for sale. See “Business — Mortgage Portfolio.” Accordingly, our dividend rate will depend upon our results of operations and may fluctuate from period to period in response to changes in those results. We cannot assure you that we will be able to generate sufficient income to maintain a stable dividend rate or to maintain our contemplated tax status as a REIT. Further, because we will be required to satisfy complex distribution requirements under the Internal Revenue Code to avoid federal income taxation and maintain our status as a REIT, there will likely be a higher degree of variability in our dividends from period to period as compared to other companies.

Our charter authorizes our board of directors, without stockholder approval, to:


	•	authorize the issuance of additional shares of common or preferred stock in connection with future equity offerings or with acquisitions of other companies;

	•	classify or reclassify any unissued shares of common or preferred stock and to set the preferences, rights and other terms of such classified or reclassified shares, including the issuance of shares of preferred stock that have preferential rights over the shares of common stock with respect to dividends, liquidation, voting and other matters; and

	•	increase or decrease the number of our authorized shares of common or preferred stock.

The issuance of additional shares could be substantially dilutive to our existing stockholders. It could also have the effect of delaying, deferring or preventing a transaction or a change in control that might involve a premium price for holders of our common stock or otherwise be in their best interest.

Maryland law provides that a director has no liability in that capacity if he or she performs his or her duties in good faith, in a manner he or she reasonably believes to be in the corporation’s best interests and with the care that an ordinarily prudent person in a like position would use under similar circumstances. Our charter authorizes us to indemnify our directors and officers for actions taken by them in those capacities to the extent permitted by Maryland law. We have also entered into agreements with our directors that require us to indemnify them to the full extent permitted under current Maryland law or under any revision to Maryland law that would entitle them to greater indemnification than is permitted under current law. In addition, our charter limits the liability of our directors and officers for money damages, except for liability resulting from:


	•	actual receipt of an improper benefit or profit in money, property or services; or

	•	a final judgment based upon a finding of bad faith or active and deliberate dishonesty by the director or officer that was material to the cause of action adjudicated.

As a result, we and our stockholders may have more limited rights against our directors and officers than might otherwise exist. Our bylaws require us to indemnify each director or officer who has been successful, on the merits or otherwise, in the defense of any proceeding to which he or she is made a party by reason of his or her service to us. In addition, we may be obligated to fund the defense costs incurred by our directors and officers. See “Liability and Indemnification of Officers and Directors.”

To qualify as a REIT under the Internal Revenue Code, no more than 50% of our outstanding shares of common stock may be owned, directly or indirectly, by five or fewer persons during the last half of each taxable year (other than our first REIT taxable year). Our charter generally provides that no person may beneficially own, or be deemed to own by virtue of the applicable constructive ownership provisions of the Internal Revenue Code, more than 9.8% (by value or by number of shares, whichever is more restrictive) of the outstanding shares of our common stock or 9.8% of the value of our outstanding capital stock. Our board of directors may, in its discretion, waive these ownership restrictions, although it is not obligated to do so. Generally, shares of our common stock owned by affiliated owners will be aggregated for purposes of the ownership limitation. Any transfer of shares of our common stock that would violate the ownership limitation will be null and void, and the intended transferee will acquire no rights in such shares. Instead, those shares will be designated as “shares-in-trust” and transferred automatically to a trust effective on the day before their purported transfer. The beneficiary of the trust will be one or more charitable organizations named by us. The ownership limitation could have the effect of delaying, deterring or preventing a change in control or other transaction in which stockholders might receive a premium for their shares of common stock over the then-current market price or which such stockholders might believe to be otherwise in their best interests. The ownership limitation provisions also may make our shares of common stock an unsuitable investment vehicle for any person seeking to obtain, either alone or with others as a group, ownership of more than 9.8% of our shares.

Our charter provides that a director may only be removed for cause (as defined in our charter) upon the affirmative vote of holders of two-thirds of the votes entitled to be cast generally in the election of directors. Vacancies may only be filled by the board of directors. This requirement makes it more difficult

Provisions contained in our charter and bylaws, as well as Maryland corporate law, may have anti-takeover effects that delay or prevent a takeover attempt, which may prevent stockholders from receiving a “control premium” for their shares. For example, these provisions may defer or prevent tender offers for our common stock or purchases of large blocks of our common stock, thereby limiting the opportunities for our stockholders to receive a premium for their common stock over then-prevailing market prices. These provisions include the following:


	•	Ownership limit. The ownership limit in our charter limits related investors, including, among other things, any voting group, from acquiring over 9.8% of our common stock without our permission.

	•	Preferred stock. Our charter authorizes our board of directors to issue preferred stock in one or more classes and to establish the preferences and rights of any class of preferred stock issued. These actions can be taken without soliciting stockholder approval.

	•	Maryland business combination statute. The Maryland business combination statute, subject to limitations, prohibits certain business combinations between us and an “interested stockholder” (defined generally as any person who beneficially owns 10% or more of the voting power of our shares or an affiliate or associate of ours who, at any time within the two-year period prior to the date in question, was the beneficial owner of 10% or more of our then-outstanding voting shares or an affiliate thereof) for five years after the most recent date on which the stockholder becomes an interested stockholder, and thereafter imposes special appraisal rights and special stockholder voting requirements on these combinations.

	•	Maryland control share acquisition statute. Maryland law limits the voting rights of “control shares” of a corporation in the event of a “control share acquisition.” Our bylaws contain a provision exempting from the control share acquisition statute any and all acquisitions by any person of shares of our stock. This provision may be amended or eliminated by our board of directors at any time in the future.

Of the shares of common stock to be outstanding after this offering, shares are restricted in nature and are not saleable pursuant to Rule 144 or otherwise until September 2004, at the earliest. We and our directors and executive officers and certain stockholders have agreed with the underwriters that, for a period of 180 days following the closing of this offering, we and they will not sell, contract to sell or otherwise dispose of any of our or their shares or rights to acquire any shares of our common stock without the prior written consent of Friedman Billings Ramsey. See “Description of Securities — Shares Eligible for Future Sale” and “Underwriting.” Additionally, there are outstanding stock options for shares of our common stock, which have been granted to our directors, our executive officers, and certain of our employees at a per share price equal to the public offering price and

which will become exercisable at a rate of 25% at the end of each 12 months of service with us after the date of grant. None of these options is currently exercisable, except in the event of our change in control, until one year after the offering. In addition, we have awarded shares of restricted stock to certain of our executive officers and employees, which vest over a four-year period and have reserved for future issuance pursuant to our omnibus incentive plan an additional shares of common stock. We intend to register under the Securities Act of 1933, as amended, shares reserved for issuance pursuant to the omnibus incentive plan. In addition, Friedman Billings Ramsey has received warrants for shares which have been registered in connection with this offering. The warrants are exercisable beginning one year following the closing of this offering for a period of five years. The issuance of these additional shares of our common stock or the sale of substantial amounts of our common stock in the public market, or the prospect of such sales, could materially and adversely affect the market price of our common stock.

The provisions of the Internal Revenue Code relevant to your investment in our shares of common stock are generally described in “United States Federal Income Tax Considerations.” We strongly urge you to consult your own tax advisor concerning the effects of federal, state and local tax law on an investment in our shares.

To maintain our status as a REIT for federal income tax purposes, we generally are required to distribute to our stockholders at least 90% of our REIT taxable income each year. REIT taxable income is determined without regard to the deduction for dividends paid and by excluding net capital gains. We are also required to pay tax at regular corporate rates to the extent that we distribute less than 100% of our taxable income (including net capital gains) each year. In addition, we are required to pay a 4% nondeductible excise tax on the amount, if any, by which certain distributions we pay with respect to any calendar year are less than the sum of 85% of our ordinary income for that calendar year, 95% of our capital gain net income for the calendar year and any amount of our income that was not distributed in prior years. See “United States Federal Income Tax Considerations — Taxation of Our Company — General.”

We intend to distribute to our stockholders all or substantially all of our taxable REIT income each year in order to comply with the distribution requirements of the Internal Revenue Code and to avoid federal income tax and the nondeductible excise tax. Differences in timing between the receipt of income and the payment of expenses in arriving at REIT taxable income and the effect of required debt amortization payments could require us to borrow funds on a short-term basis to meet the distribution requirements that are necessary to achieve the tax benefits associated with qualifying as a REIT. Such borrowings could adversely affect our operating results or financial condition.

We believe that we will qualify and will be able to remain qualified as a REIT under the Internal Revenue Code, which affords us significant tax advantages. The requirements for this qualification, however, are complex and our management does not have any experience in operating a REIT. See “United States Federal Income Tax Considerations — Requirements for Qualification.” We will need to comply with some of these requirements as soon as the end of the first quarter following this offering. If we fail to meet these requirements, our dividends will not be deductible by us and we will be subject to a corporate level tax on our taxable income. This would substantially reduce our cash available to pay dividends and the yield on your investment. In addition, incurring corporate income tax liability might

Even if we qualify and maintain our status as a REIT, we may become subject to federal income taxes and related state taxes. For example, we may not be able to pay sufficient distributions to avoid corporate income tax and the 4% excise tax on undistributed income. We may also be subject to state and local taxes on our income or property, either directly or at the level of our mortgage subsidiary, or at the level of the other entities through which we indirectly own our properties and conduct our business that would adversely affect our operating results. We cannot assure you that we will be able to continue to satisfy the REIT requirements, or that it will be in our best interests to continue to do so.

If we sell mortgages to customers in the ordinary course of business other than in a taxable REIT subsidiary, we will incur a 100% tax on such sales. See “United States Federal Income Tax Considerations — Taxation of Our Company — Prohibited Transactions Tax.” Thus, we plan to conduct our whole loan sale activities through a taxable REIT subsidiary. However, to retain our status as a REIT, no more than 20% of the value of our total assets may be represented by the shares of taxable REIT subsidiaries, such as the shares of our mortgage subsidiary. Therefore, depending on the growth of our mortgage subsidiary relative to the growth of our total assets, we may at some point be compelled to either decrease our interest in the mortgage subsidiary or increase the amount of our other assets. This could mean having to issue additional shares of our stock, having to sell shares of our mortgage subsidiary, or both, at a time when prevailing conditions prevent us from realizing their full value. If we were unable to accomplish any of these strategies, we might have to decrease our whole loan sale activities.

The federal income tax laws governing REITs or the administrative interpretations of those laws may be amended at any time. Any of those new laws or interpretations may take effect retroactively and could adversely affect us or you as a stockholder. For instance, effective May 28, 2003, the tax rate on both dividends and long-term capital gains for most non-corporate taxpayers was reduced through 2008 to 15%. This reduced tax rate generally does not apply to ordinary REIT dividends, which will continue to be taxed at the higher tax rates applicable to ordinary income. This legislation, or other legislation, could cause shares in non-REIT corporations to be a more attractive investment to individual investors than they had been, and could have an adverse effect on the market price of our shares of common stock. See “United States Federal Income Tax Considerations — New Legislation and Possible Legislative or Other Actions Affecting Tax Consequences.”

We have entered into agreements with our Chief Executive Officer and President, Steven Alonso, and our other executives that provide each of them with severance benefits if we terminate employment without cause, or if the executive terminates employment for good reason or within 12 months of a change in control. In the case of such termination each executive will be entitled to an acceleration of future benefits due him under the agreement, and Mr. Alonso will be entitled to a lump sum cash payment. See “Management of the Company — Omnibus Incentive Plan.” These benefits could increase the cost to a

The market price of our common stock may experience fluctuations that are unrelated to our operating performance. In particular, the price of our common stock may be affected by general market price movements as well as developments specifically related to the consumer finance industry and the financial services sector. These could include, among other things, interest rate movements, quarterly variations or changes in financial estimates by securities analysts, or a significant reduction in the price of the stock of another participant in the consumer finance industry. This volatility may make it difficult for us to access the capital markets through public offerings of our common stock, regardless of our financial performance.

We determined the offering price for the shares of our common stock through negotiations with the underwriters. As a result, this offering price may not relate directly to our assets, book value or financial condition, and may not reflect the fair market value of our common stock following this offering. Moreover, there has never been a public market for our common stock, and we cannot assure you that such a public market will ever develop, or if it does, that it will be sustained. We therefore cannot assure you that the price of our common stock will not decrease following this offering.

The initial public offering price of our common stock is higher than what the book value per share of our outstanding common stock will be immediately following this offering. If you purchase our common stock in this offering, you will incur immediate dilution of approximately $ in the book value per share of our common stock from the price you pay in this offering.

We intend to conduct our operations so as not to become regulated as an investment company under the Investment Company Act of 1940, as amended. We believe that we will qualify for an exemption from the registration requirements under the Investment Company Act due to the nature of the assets we will hold in our mortgage portfolio. To continue to qualify for these exemptions, we will need to closely monitor the composition of our mortgage portfolio. We may nevertheless become subject to registration as an investment company if amendments are made to the Investment Company Act or to the rules and regulations that implement that statute. In addition, we could, among other things, be required either (a) to change the manner in which we conduct our operations to avoid being required to register as an investment company or (b) to register as an investment company, either of which could have an adverse effect on us and the market price for our common stock.

We make forward-looking statements in this prospectus that are subject to risks and uncertainties. These forward-looking statements include information about possible or assumed future results of our business, financial condition, liquidity, results of operations, plans and objectives. Statements regarding the following subjects are forward-looking by their nature:


	•	our business strategy;

	•	our projected operating results;

	•	our ability to obtain future financing arrangements;

	•	estimates relating to our ability to make distributions to our stockholders in the future;

	•	our expansion strategy results;

	•	our competition;

	•	market trends;

	•	projected capital expenditures; and

	•	use of the proceeds of this offering.

The forward-looking statements are based on our beliefs, assumptions and expectations of our future performance, taking into account all information currently available to us. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to us. If a change occurs, our business, financial condition, liquidity and results of operations may vary materially from those expressed in our forward-looking statements. You should carefully consider these risks before you make an investment decision with respect to our shares of common stock, along with the following factors that could cause actual results to vary from our forward-looking statements:


	•	the factors referenced in this prospectus, including those set forth under the sections captioned “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business;”

	•	changes in our industry, interest rates or general economic conditions;

	•	general volatility of the capital markets and the market price of our shares of common stock;

	•	changes in our business strategy;

	•	availability, terms and deployment of capital;

	•	availability of qualified personnel; and

	•	the degree and nature of our competition.

When we use the words “believe,” “expect,” “anticipate,” “estimate,” “intend,” “plan,” “target” or similar expressions, we intend to identify forward-looking statements. You should not place undue reliance on these forward-looking statements.

We expect to receive $ in proceeds, based upon an assumed public offering price of $ per share (the midpoint of the offering price range set forth on the cover page of this prospectus), or $ if the underwriters exercise in full their over-allotment option, from our sale of common stock in this offering. We will not receive any of the estimated proceeds of $ that the selling stockholders named in this prospectus will receive from their sale of our shares of common stock. We expect to use these proceeds to pay estimated underwriting and other expenses relating to this offering of approximately $ . After paying these expenses, we will retain approximately $ in net offering proceeds.

We intend to use substantially all of the net proceeds that we receive to fund certain of the mortgage loans we originate and acquire during the third quarter of 2004 and in succeeding periods that we intend to hold in our mortgage portfolio. We alternatively may use a portion of the net proceeds to temporarily invest in marketable short-term debt securities or pay down our warehouse borrowing facilities, which had an average interest cost of 2.28% at December 31, 2003. One of the facilities expires on October 29, 2004, and the other facility expires on March 27, 2005. We may also use a portion of the net proceeds for general business purposes.


	•	our actual capitalization as of December 31, 2003, and

	•	our pro forma capitalization, as adjusted to give effect to the sale by us of our common stock in this offering at an assumed initial offering price of $ per share, net of the underwriting discount and estimated expenses payable by us in connection with this offering.


	•	the one-for- reverse stock split of our common stock,

	•	the conversion of our outstanding non-voting common stock into voting common stock,

	•	the conversion of outstanding non-voting units of Oak Street Operations LLC held by Sotseks Corp. into shares of our voting common stock, and

	•	our acquisition of the 50% limited partnership interest in Great Western Loans & Investments, LP currently held by a third party,

You should read this table in conjunction with our audited financial statements and the notes thereto that are included elsewhere in this prospectus, and with the section of this prospectus captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

(1)

Excludes (i) the issuance of shares subject to the underwriters’ over-allotment option, (ii) shares reserved for issuance under our omnibus incentive plan, of which are subject to stock option grants and restricted stock awards effective as of the close of this offering, and (iii) shares reserved for issuance pursuant to the warrants granted to Friedman Billings Ramsey in connection with this offering.


(2)	Does not include minority interest of approximately $6.4 million, of which approximately $5.8 million is held by Sotseks Corp. and will be converted into shares of our common stock in connection with this offering. If this minority interest held by Sotseks Corp. had been converted into shares of our common stock prior to December 31, 2003, our total stockholders’ equity as of that date would have been $ million.

(3)	Reflects issuance of shares of our common stock in exchange for non-voting units of Oak Street Operations LLC held by Sotseks Corp.

As of December 31, 2003, Oak Street Financial Services, Inc. had a net tangible book value of approximately $10.3 million, or approximately $ per share. These amounts do not reflect the minority interest of approximately $6.4 million in Oak Street Financial Services, Inc., of which $5.8 million is held by Sotseks Corp., one of the selling stockholders in this offering Net tangible book value per share represents the amount of our total tangible assets less our total liabilities, divided by the number of our outstanding shares of common stock.

Dilution in net tangible book value per share represents the difference between the amount per share paid by purchasers of our common stock in this offering and the net tangible book value per share of common stock immediately after this offering, after giving effect to:


	•	the sale of the shares of our common stock offered by this prospectus, excluding the shares offered by the selling stockholders, at an assumed initial public offering price of $ per share, and our receipt of approximately $ million in net proceeds from this offering, after deducting the underwriting discount and estimated offering expenses;

	•	the one-for- reverse stock split of our common stock and exchange of our non-voting for voting shares of common stock that will occur immediately prior to the closing of this offering;

	•	the conversion of outstanding non-voting units of Oak Street Operations LLC held by Sotseks Corp. into shares of our common stock;

	•	the issuance of shares of our common stock upon the exercise of options issued pursuant to our omnibus incentive plan; and

	•	the grant of shares of restricted stock under our omnibus incentive plan.


	•	the issuance of shares of our common stock upon the exercise of the warrants issued to Friedman Billings Ramsey.

Our pro forma net tangible book value as of December 31, 2003 would have been approximately $ million, or $ per share of common stock. This amount represents an immediate increase in net tangible book value of $ per share to existing stockholders prior to this offering and an immediate dilution in pro forma net tangible book value of $ per share of common stock to new investors. The following table illustrates this per share dilution:


(1)	Historical net tangible book value per share of common stock is determined by dividing net tangible book value as of December 31, 2003 (net book value of the tangible assets consisting of total assets less intangible assets and deferred costs) by the number of shares of common stock outstanding prior to the offering, adjusted for the one-for- reverse stock split.

(2)	After deducting underwriting discounts, commissions and other expenses of this offering.


(3)	Based on pro forma net tangible book value attributable to common stockholders of approximately $ million divided by the sum of shares of common stock to be outstanding upon completion of this offering.

(4)	Dilution is determined by subtracting pro forma net tangible book value per share of our common stock after giving effect to this offering from the assumed initial public offering price paid by a new investor for a share of common stock.

Differences Between New and Existing Stockholders in Number of Shares and Amount Paid

The table below summarizes, as of December 31, 2003, on the pro forma basis discussed above (but excluding (i) the options to acquire shares of our common stock issued pursuant to our omnibus incentive plan, (ii) restricted stock grants of shares under our omnibus incentive plan, and (iii) the warrants held by Friedman Billings Ramsey to acquire shares of our common stock which will be outstanding upon completion of this offering), the differences between the number of shares of common stock purchased from us, the total consideration paid and the average price per share paid by existing stockholders and new investors purchasing shares in this offering. The options and warrants described in the preceding sentence will be exercisable at the initial public offering price of our common stock in this offering. The options have terms of ten years, and the warrants have a term of five years and are exercisable one year following the completion of this offering. The restricted shares vest over a four-year period and result in immediate dilution. To the extent the outstanding options and warrants are exercised in the future, there will be further dilution to new investors. We used the assumed initial public offering price of $ per share, and we have not deducted estimated underwriting discounts and commissions and estimated offering expenses in our calculations.


(1)	Based on the December 31, 2003 net tangible book value of the assets (consisting of total assets less intangible assets and deferred costs, net of liabilities).

(2)	Represents the proceeds from this offering before deducting underwriting discounts, commissions and other expenses of this offering.

We intend to distribute each year at least 90% of our REIT taxable income (which does not ordinarily equal net income calculated in accordance with generally accepted accounting principles) to our stockholders in order to maintain our status as a REIT. Any such required distributions that remain after we make our final quarterly distribution will be made as a special dividend or as part of a regular quarterly dividend payment in the following taxable year. See “United States Federal Income Tax Considerations — Requirements for Qualification — Annual Distribution Requirements.” We currently do not intend to pay dividends to the REIT on the earnings of our taxable REIT subsidiary. We currently intend that we will retain any such earnings as capital. Our board of directors may revise this dividend policy at its discretion. Moreover, our distributions will be made at the discretion of our board of directors and will depend on our taxable income and financial condition, as well as considerations regarding the maintenance of our REIT status and any other factor that our board of directors deems relevant.

Distributions to stockholders will generally be subject to tax as ordinary income, although we may designate a portion of such distributions as capital gain. In some cases, distributions may constitute a tax-free return of capital, although we generally do not intend to declare dividends that would result in a return of capital. We will annually furnish to each of our stockholders a statement setting forth

Cash distributions of $10.0 million, $2.7 million and $13,000 were paid by our mortgage subsidiary to its members during the years ended December 31, 2003, 2002 and 2001, respectively, primarily to provide the members with cash to pay their share of federal and state income taxes.

The consolidated financial statements in this prospectus include the consolidated financial statements of Oak Street Financial Services, Inc. and consolidated financial statements of our mortgage subsidiary, Oak Street Mortgage LLC. Oak Street Financial Services, Inc. was organized in September 2003 and, prior to then, had not engaged in any business activities and did not have any assets or liabilities.

The following table sets forth Oak Street Financial Services, Inc.’s historical summary consolidated financial and operating data as of December 31, 2003 and for the three-month period ended December 31, 2003, and Oak Street Mortgage LLC’s historical selected consolidated financial and operating data as of and for each of the years in the four-year period ended December 31, 2003, and as of and for the period from October 17, 1999 (inception) through December 31, 1999. The selected consolidated balance sheet data as of December 31, 2003 and 2002 and the statement of income data for each of the years in the three-year period ended December 31, 2003 are derived from our mortgage subsidiary’s audited consolidated financial statements that are included in this prospectus. The selected consolidated balance sheet data as of December 31, 2001 are derived from our mortgage subsidiary’s audited consolidated financial statements that are not included in this prospectus. The selected consolidated financial data presented as of and for the year ended December 31, 2000 and for the period from October 17, 1999 to December 31, 1999, and the selected consolidated balance sheet data as of December 31, 2000 and 1999 are derived from our mortgage subsidiary’s unaudited consolidated financial statements as of or for those respective periods, which are not included in this prospectus. Those unaudited consolidated financial statements were prepared on the same basis as the audited consolidated financial statements and, in the opinion of our management, include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of our financial position and results of operations as of and for those respective periods.

The information set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and all of the consolidated financial statements and the notes thereto and other financial information included elsewhere in this prospectus. References to “shares” in the following table refer to shares of our common stock.


(1)	Data presented is for the period from October 17, 1999 (inception) to December 31, 1999.


(2)	Per share data is not considered meaningful since the majority of cash distributions declared were for the purpose of providing the members with cash to pay their share of federal and state income taxes.

(3)	Includes certain brokered loans originated by Oak Street Mortgage LLC on behalf of other lenders. See “Business — Loan Originations.”

(4)	Debt to capital is computed by dividing the sum of total liabilities and minority interest by stockholders’ equity.

(5)	Average balance sheet data, return on average equity and return on assets are calculated based on the average of the beginning and end of period amounts.

(6)	Return on average equity is computed by dividing net income (loss) by average equity. Our mortgage subsidiary’s net income does not include a provision for corporate income taxes since it is a limited liability company.

(7)	Data deemed not meaningful is designated by N/ M.

Oak Street Financial Services, Inc. was organized as a Maryland corporation on September 23, 2003 to be the holding company of our ownership interest in Oak Street Mortgage LLC (our mortgage subsidiary). We originate non-conforming, jumbo and conforming residential mortgage loans secured primarily by first liens on single-family residences. These loans are originated through our direct to customer retail offices (approximately 73% of originations in 2003) or through independent mortgage brokers (approximately 27% of originations in 2003). We typically finance these residential mortgage loans through a secured warehouse or repurchase facility.

Historically, we have sold 100% of our mortgages on a whole loan, servicing-released basis. We recognize a gain or loss upon the sale of the loan. We recognize interest income on the loans held in inventory and interest expense on any associated warehouse borrowing throughout the period preceding sale of the loans. The proceeds of loan sales are used to repay any warehouse borrowing associated with those loans. Although we do not currently act as a permanent servicer of loans, we service all of our loans for a short period, typically not more than 90 days, to input and validate the borrowers’ loan information, collect the first payment or two and accommodate servicing transfer schedules of the acquiring investors.

We have 24 retail offices that originate mortgage loans directly to our customers. The loan officers in these offices have the skill to originate non-conforming, jumbo and conforming loans to our customers depending on the customer’s loan requirements and credit profile. By not creating separate distribution channels for each product set, we believe we can more effectively utilize our marketing, personnel and facilities, thereby achieving economies of scale in our retail offices. We also believe this distribution and product strategy allows us to penetrate a greater number of our potential customers.

This extensive retail presence reduces our need to rely on a broker network to originate loans. By using our sophisticated database marketing techniques, we are able to identify potential customers, market our extensive array of mortgage products and develop and maintain profitable customer relationships. By originating loans through our retail channel, we are able to charge front-end fees and discount points, which eventually may reduce the volatility in earnings that can result from fluctuations in the whole loan purchase market. Retail loans require that we perform more origination services than are required for wholesale loans, and we generally are able to charge and collect fees with respect to the originations of those loans commensurate with these additional services.

Our wholesale division originates non-conforming and jumbo residential mortgage loans through independent mortgage brokers. This distribution channel requires (1) a commitment to delivering high service levels to the broker and, therefore, the mortgage customer; (2) an extensive product offering at a competitive price; (3) technology that simplifies the mortgage application and approval process; and (4) a dedicated sales individual responsible for maintaining our relationship with the broker.

In April 2004, we created a correspondent loan acquisition channel and began purchasing non-conforming mortgage loans originated by community banks and smaller mortgage banks on a servicing-released basis. We added this niche market to our loan acquisition channel to diversify our product distribution and increase the volume of loans available to be held in our portfolio. We intend to sell in the secondary market any loans we acquire through this channel that do not fit our portfolio guidelines. We have hired managers to oversee this new loan acquisition channel who previously held senior management positions with Bank One in the correspondent and wholesale lending businesses. We expect that this new correspondent loan channel will originate less than 15% of our loan origination volume in 2004.

We generate higher revenues and incur higher expenses on our non-conforming loans. Non-conforming loan borrowers have a combination of risk characteristics for which we can charge a higher interest rate. By properly managing this risk, our yields and sale proceeds on these loans are generally higher than on conforming loans.

The mortgage industry generally is highly competitive with interest rates and other terms determined by market factors. Our revenues are determined primarily by our level of loan originations and the interest rates and fees we can charge on the loans. Our goal is to maximize the value of our loan origination infrastructure by increasing our loan originations and revenues while controlling our expenses.

Upon completion of this offering, we expect to retain a significant portion of our non-conforming loans in order to build an investment portfolio. We expect to continue selling all of the conforming and most of the jumbo loans that we originate. We expect to qualify, and will elect to be taxed, as a real estate investment trust, or REIT, under the Internal Revenue Code commencing during the fourth quarter of 2004. We intend to distribute the earnings of our portfolio and to retain the earnings, including earnings from loan sales, of our taxable REIT mortgage subsidiary, in order to build our capital base.

As a result of the proposed changes in the way we will conduct our business after this offering, we believe it is important to describe the differences that an investor would expect to see in our financial statements.

When we have a portfolio of loans that we hold for investment, in addition to our portfolio of loans held for sale, the presentation of interest income and interest expense on those two portfolios will be modified from what we currently show in our historical consolidated financial statements. When we have a loan portfolio, we will separate our interest income and expense into two components each. Interest income will be shown separately as “Interest income — loans held for sale” and “Interest income — loans held for investment.” Interest expense will be shown separately as “Interest expense — loans held for sale” and “Interest expense — loans held for investment.” We will also record a provision for loan losses based on our estimate of probable losses inherent in our loan portfolio held for investment.

When we have an investment portfolio of loans, we will also make certain changes to our balance sheet. We currently show “Loans held for sale, net” consisting of “Non-conforming loans” and “Conforming loans.” Since we intend to continue to sell all of our conforming loans, we will show them as “Mortgage loans held for sale, net,” which will also include any non-conforming loans which we intend to sell. We will show our non-conforming loans that we retain in our portfolio as “Mortgage loans held for investment.” What we currently show as “Warehouse lines of credit” and “Collateralized financing” consist of borrowings used to fund mortgages held for sale. We will now show those as “Warehouse lines of credit — mortgage loans held for sale.” We will show as “Mortgage securities and other borrowings — mortgage loans held for investment” the mortgage-backed securities we issue to finance our portfolio loans and the warehouse financing of our portfolio loans prior to securitization.

Upon implementing our new business plan, three new critical accounting policies will be employed, two related to our proposed financing strategy utilizing on-balance sheet securitizations:


	•	Allowance for loan losses

	•	Accounting for transfers and servicing of financial assets

and one related to our new corporate structure and planned issuance of stock-based compensation:

We will continue to comply with the provisions of Statement of Financial Accounting Standards (“SFAS”) 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, once we begin to generate a portfolio of loans for securitization. Depending on the structure, securitizations may either be treated as sales or as secured financings for financial statement purposes. It is our intent that our securitizations be treated as secured financings and, accordingly, one of the critical accounting policies will be compliance with SFAS 140. We will not utilize gain on sale accounting but rather will treat the securitizations as on balance sheet financings. Because we intend to maintain these loans on the balance sheet for the life of the loans, we also will need to maintain an allowance for loan losses, which will be based on our estimates of the losses which we believe are inherent in our loan

Our strategy of retaining on our balance sheet the mortgage loans in our securitization pools will reduce the number of loans we sell and, therefore, our total gain on sale of loans will be lower than we have historically recognized. Because we will be building and retaining a mortgage portfolio, we expect to realize substantially higher net interest income than we have historically recognized.

When we issue stock-based compensation in conjunction with our new corporate structure, we will be required to account for the stock-based compensation under SFAS 123, Accounting for Stock-based Compensation, as amended. Due to the subjective nature and estimates required under SFAS 123, this will be considered a critical accounting policy.

We intend to qualify and will elect to be taxed as a real estate investment trust, or REIT, for federal income tax purposes. Our retail operation will be conducted by the REIT. This will allow us to benefit from the discount points and loan commitment fees we collect from our retail business by earning them in the REIT rather than in our taxable REIT subsidiary. We expect to fund non-conforming and certain jumbo loans through the REIT that we intend to hold in our portfolio. Our mortgage subsidiary, which will be a taxable REIT subsidiary, will continue to fund conforming and some non-conforming and certain jumbo loans that we intend to sell. There may be circumstances, however, where our mortgage subsidiary will fund loans that the REIT purchases for our REIT portfolio. To the extent that the REIT purchases loans from our mortgage subsidiary, the REIT will be required to purchase those loans at fair market value and our mortgage subsidiary will be subject to federal income tax at the regular corporate rates on any taxable gain recognized for federal income tax purposes by our mortgage subsidiary. We expect that any net interest income generated from our retained portfolio will be recognized by the REIT.

Federal income tax law requires that a REIT distribute to its stockholders annually at least 90% of its taxable income, excluding the retained earnings of any taxable REIT subsidiary it owns. So long as the REIT complies with these requirements and distributes all of its taxable income to its stockholders, it will not be subject to federal income tax and will not record income tax expense. We expect that the REIT will make regular quarterly distributions of at least 90% of all of its REIT taxable income to holders of our common stock. Any taxable income generated by our mortgage subsidiary and entities in which it owns an interest, however, will be subject to federal corporate income tax. See “Business — Other Activities” for a description of the entities owned by our mortgage subsidiary. Our mortgage subsidiary will continue to record income tax expense. Our mortgage subsidiary may retain any income it generates net of any tax liability it incurs on that income without affecting the REIT distribution requirements. Any distributions we make in the future will be at the discretion of our board of directors and will depend upon, among other things, our actual results of operations.

As described in more detail under the heading “United States Federal Income Tax Considerations,” in order to qualify as a REIT, at least 75% of our assets must be qualified real estate assets, government securities and cash and cash items. The need to comply with these asset ownership requirements may cause us to acquire other assets that are qualified real estate assets for purposes of these requirements but are not part of our overall business strategy and might not otherwise be the best investment alternative for us. The likelihood that we would have to acquire other real estate assets for this purpose will increase if our production of new non-conforming mortgage loans following the closing of this offering is less than we currently expect.

We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America and, therefore, are required to make estimates regarding the values of our assets and liabilities and in recording income and expenses. These estimates are based, in part, on our judgment and assumptions regarding various economic conditions that we believe are

We originate loans for sale to investors. Loans held for sale are valued at the lower of cost or fair value determined on an aggregate basis.

We sell loans on a servicing-released basis. Gain or loss is recognized upon delivery of the loans to the purchasers in an amount equal to the difference between the sales price and the carrying amount of the loans sold. Nonrefundable loan origination fees, net of certain direct loan origination costs, are deferred and recognized as a yield adjustment over the life of the underlying loan. Origination costs represent third-party costs incurred in the lending process and origination activities performed by our employees which are allocated based on time incurred. The allocations of time incurred by employees and the determination of third-party costs is judgmental, but such judgments are based on our recent historical experience, industry knowledge and time studies performed. Any unamortized net fees on loans are included in determining the gain or loss on sale of loans at the time of sale.

We account for our derivative financial instruments in accordance with SFAS 133, Accounting for Derivative Instruments and Hedging Activities, as amended. SFAS 133 requires that an entity recognize its derivative financial instruments as assets or liabilities on the balance sheet and measure them at fair value. If certain conditions are met, an entity may elect to designate a derivative instrument either as a cash flow hedge, a fair value hedge or a hedge of foreign currency exposure.

We use derivative instruments with the objective of hedging interest rate risk. Interest rates on our liabilities adjust frequently, while interest rates on our assets adjust annually, or not at all. The fair value of our derivative instruments is included in accrued expenses and other liabilities on our balance sheet. Any changes in fair value of derivative instruments related to hedge effectiveness are reported in accumulated other comprehensive income. Changes in fair value of derivative instruments related to hedge ineffectiveness are recorded as adjustments to earnings.

Oak Street Financial Services, Inc. became the holding company for Oak Street Mortgage LLC on September 23, 2003. For accounting purposes, this reorganization was effective September 30, 2003. We undertook this reorganization to provide greater flexibility for our operations, to avoid adverse tax consequences to the members of Oak Street Mortgage LLC and to enhance our ability to raise capital. Prior to this reorganization, Oak Street Financial Services, Inc. had not engaged in any business activities and did not have any assets or liabilities. The consolidated financial statements included in this prospectus include the consolidated financial statements of Oak Street Financial Services, Inc. as of and for the three-month period ended December 31, 2003. We have included in this prospectus the historical financial statements as of and for each of the years in the three-year period ended December 31, 2003 of Oak Street Mortgage LLC rather than Oak Street Financial Services, Inc., as this information is more meaningful.

The terms and definitions used in the following discussion have the same meanings with regard to Oak Street Financial Services, Inc. and Oak Street Mortgage LLC.

Gain on Sale of Loans, Net. Gain on sale of loans, net consists of the premium received over the loan balance plus fees, net of certain direct costs to originate. We realize a gain on sale on loans sold to investors for a premium over the loan balances. We occasionally realize a loss on those loans sold that have a value less than the loan balance. This normally occurs if there are underwriting or documentation issues. We realize a premium on most of our loans sold. Our loans are sold on a servicing-released basis.

Retail loan fees are collected at the time the loan is funded. These fees include discount points (which buy down the interest rate), origination fees, underwriting fees, processing fees and document preparation fees. Wholesale loan fees include an underwriting, document preparation and administrative fee. All fees are recognized as revenue at the time the loan is sold and are included as a component in our gain on sale of loans, net in our consolidated income statement.

Interest Income. Interest income represents the interest earned on our mortgage loans during the period from the funding date to the date of sale. Interest is not accrued on mortgages that are 90 or more days past due.

Other Income. Other income primarily consists of broker fees we receive on a limited number of loans that do not meet our underwriting standards that we broker to other lenders. These are loans that meet our customers’ needs that we do not want to originate and record on our balance sheet primarily because of their credit risk.

Salaries and Employee Benefits. Salaries and employee benefits include salaries, commissions, benefits and payroll taxes for all employees. Commissions paid to loan officers (retail) and business development managers (wholesale) as well as incentive bonuses paid to managers are variable. Other salaries and benefits are relatively fixed, based on our staffing levels, which generally correspond to our current and estimated future loan origination levels.

Marketing and Advertising. Marketing and advertising expenses are expenditures for customer lead generation and brand awareness. We provide potential customer leads to our retail loan officers of which a certain percentage is converted into mortgage loan customers (see “Business — Marketing Strategy”).

Interest Expense. Interest expense consists almost entirely of the borrowing costs to finance our mortgage loans during the period from the funding date to the date of sale.

Occupancy and Equipment. Our occupancy and equipment expenses consist primarily of leasing costs for retail branches and corporate headquarters and depreciation on office equipment and furnishings.

Other Operating Expenses. Other operating expenses include credit verification, professional travel, communication costs, software depreciation, express mail, insurance, meals and entertainment and training.

Income Tax Expense. Oak Street Financial Services, Inc. has elected to be treated as an S corporation under the Internal Revenue Code, while Oak Street Mortgage LLC is a limited liability company. Therefore, these companies are flow-through entities for federal and most state income tax purposes. In lieu of corporate income taxes, the stockholders or members are taxed on their distributive share of the companies’ net income. As a result, our historical financial statements do not include a provision for corporate income taxes.

The following discussion and analysis of financial condition and results of operations is for Oak Street Financial Services, Inc.

Originations for the three-month period ended December 31, 2003 were $415.6 million which consisted of $276.8 million of originations from our retail channel and $138.8 million from our wholesale channel. The composition of these loan originations was $338.1 million non-conforming, $63.1 million jumbo and $14.4 million conforming.

Net income for the three-month period ended December 31, 2003 was $2.6 million. Revenues totaled $22.7 million, expenses totaled $18.2 million and net income attributable to minority interests was $1.8 million during the three month period.

We had $363.2 million in whole loan sales, resulting in a gain on sale of loans of $17.8 million. In addition, we had interest income on loans of $3.2 million and other income, consisting primarily of broker fees, of $1.7 million during the three month period.

Total expenses for the period were $18.2 million. The composition of our expenses was $8.5 million in salaries and employee benefits, $3.1 million in marketing and advertising, $1.2 million in occupancy and equipment, $1.5 million in interest expense and $3.9 million in other operating expenses.

At December 31, 2003, we had $174.2 million in total assets, $157.6 million in total liabilities, $6.4 million in minority interests and $10.3 million in stockholders’ equity.

The following discussion and analysis of financial condition and results of operations is for our mortgage subsidiary, Oak Street Mortgage LLC.

Originations increased 54.5% from $1.1 billion for the year ended December 31, 2002 to $1.7 billion for the year ended December 31, 2003. This was primarily due to the origination capacity increases built in the previous years (infrastructure and personnel) and the low interest rate environment.

Net income increased 180.3% to $17.1 million for the year ended December 31, 2003 from $6.1 million for the year ended December 31, 2002. The increase in net income was due to higher loan originations and loan sales in 2003 versus 2002 together with lower expenses as a percentage of revenue. Additional loan origination offices (retail) and business development managers (wholesale) as well as additional infrastructure support drove expense increases. Revenue increased 48.4% to $80.3 million for the year ended December 31, 2003 from $54.1 million for the year ended December 31, 2002. Expenses as a percent of revenue decreased from 87.4% for the year ended December 31, 2002 to 76.9% for the year ended December 31, 2003. This expense efficiency was caused primarily by our company achieving improved leverage on our investments in infrastructure and personnel, resulting in higher economies of scale as discussed above.

Gain on Sale of Loans, Net. Gain on sale of loans, net increased 43.6% from $43.6 million for the year ended December 31, 2002 to $62.6 million for the year ended December 31, 2003. The increase was due to an increase in loan sales of 77.7% from $901.1 million in 2002 to $1.6 billion in 2003. The gain on sale percentage increase is not proportional to the loan sale increase because of a planned reduction in interest rates in 2003 on our loans implemented in 2003 to compete in the non-conforming market for larger balance loans and an increase in our jumbo loans sold of 45.3%, which decreased our front-end fees realized (compared to fees realized on the non-conforming business).

The following table shows the investors that purchased the most loans from us during 2003 and 2002.

Once the offering is closed, we will be originating a substantial portion of our non-conforming mortgages to hold in our portfolio. Therefore, we will experience an increase in net interest income and a decrease in gain on sale income.

Interest Income. Interest income increased 35.7% from $8.4 million for the year ended December 31, 2002 to $11.4 million for the year ended December 31, 2003. This increase was the direct result of our increased origination volumes in 2003 as compared to 2002, partially offset by lower interest rates on the loans originated due to lower interest rates generally.

Other Income. Other income increased 210.7% from $2.1 million for the year ended December 31, 2002 to $6.4 million for the year ended December 31, 2003 primarily due to an increase in broker fee income related to higher loan volumes.

Total expenses increased 30.8% from $47.2 million for the year ended December 31, 2002 to $61.8 million for the year ended December 31, 2003. This increase was caused by increases in loan originations, salaries, commissions, benefits, infrastructure, marketing and other operating expenses associated with the increased business volume. Total expenses as a percent of revenue decreased as shown

Salaries and Employee Benefits. Salaries and employee benefits increased 17.4% from $26.4 million in 2002 to $31.0 million in 2003. This was primarily due to the fact that we opened four new offices and expanded our existing retail and wholesale businesses. Our number of full-time equivalent employees increased from 489 on December 31, 2002 to 662 on December 31, 2003.

Marketing and Advertising. Marketing and advertising costs increased 60.9% from $6.9 million in 2002 to $11.1 million in 2003. This resulted in growth in originations as well as an investment in brand awareness advertising in the form of radio and television media in selected markets during 2003.

Interest Expense. Interest expense increased 15.0% from $4.0 million for the year ended December 31, 2002 to $4.6 million for the year ended December 31, 2003. The increase in our interest expense is not proportionate to our increase in interest income or increased volume. This was due to a reduction in our cost of funds from the 2002 period as compared to the 2003 period, caused by a declining interest rate environment.

Occupancy and Equipment. Occupancy and equipment costs increased 18.2% from $3.3 million for the year ended December 31, 2002 to $3.9 million for the year ended December 31, 2003. Occupancy and equipment costs increased because of the additional infrastructure that was built to support the increased originations.

Other Operating Expenses. Other operating expenses increased 68.7% from $6.7 million for the year ended December 31, 2002 to $11.3 million for the year ended December 31, 2003. This increase was primarily due to increased costs associated with higher levels of personnel, infrastructure and professional fees associated with our higher mortgage production.

At December 31, 2003, total assets decreased 20.4%, primarily due to a $47.7 million decrease in our loans held for sale from $200.0 million at December 31, 2002 to $152.3 million at December 31, 2003. This decrease was primarily due to the fact that we accelerated loan sales in December 2003 as compared to December 2002 through more efficient back office processes. Our warehouse lines of credit and collateralized financing decreased $53.2 million from $202.9 million at December 31, 2002 to $149.7 million at December 31, 2003 due to the corresponding reduction in loans held for sale.

Originations increased 111.6% from $519.9 million for the year ended December 31, 2001 to $1.1 billion for the year ended December 31, 2002. This increase was primarily the result of origination capacity increases realized from the addition of personnel and infrastructure.

Net income increased 425.9% from $1.2 million in 2001 to $6.1 million in 2002. The increase in net income in 2002 was primarily the result of increased loan originations and loan sales together with lower expenses as a percentage of revenue. Gain on sale of loans, interest income and other income all increased while expenses as a percent of revenue decreased from 95.9% to 87.4%.

Gain on Sale of Loans, Net. Gain on sale of loans, net increased 78.6% to $43.6 million for the year ended December 31, 2002 from $24.4 million for the comparable period in 2001. This increase was primarily the result of higher mortgage originations and loan sales during 2002.

The following table shows the investors that purchased the most loans from us during 2001 and 2002.

Interest Income. Interest income increased 95.4% in 2001 to 2002 from $4.3 million to $8.4 million. The increase was due to the increased amount of mortgage loans held for sale during the year, resulting from the increase in loan originations. This increase was partially offset by a decrease in average yield due to declining interest rates in 2002 and the higher percentage of jumbo and conforming mortgage loans held for sale which carried a lower interest rate.

Other Income. Other income increased 37.8% from $1.5 million in 2001 to $2.1 million in 2002, primarily due to an increase in broker fee income related to higher loan volumes.

Total Expenses. Total expenses increased 63.0% from $29.0 million in 2001 to $47.2 million in 2002. The increase was primarily due to increases in loan originations, salaries, commissions, benefits, infrastructure, marketing and other operating expenses associated with the growth of the business.

Expenses as a percent of revenue decreased between 2001 and 2002 as shown in the following chart. This reflects the economies of scale we realized as we grew and implemented better technology and processes.

Salaries and Employee Benefits. Salaries and employee benefits increased 68.8% to $26.4 million for the year ended December 31, 2002 from $15.6 million for the year ended December 31, 2001. This increase was primarily due to the increase of the employee base to produce more originations as well as the commission and marketing expenses associated with such growth. Our number of full-time equivalent employees increased from 366 on December 31, 2001 to 489 on December 31, 2002.

Marketing and Advertising. Marketing and advertising costs increased 76.9% from $3.9 million for the year ended December 31, 2001 to $6.9 million for the year ended December 31, 2002, primarily due to increases in costs associated with the development of new customer lead sources, which resulted in corresponding increases in loan originations.

Interest Expense. Interest expense increased 30.5% to $4.0 million for the year ended December 31, 2002 from $3.1 million for the comparable period in 2001. The increase was primarily due to the increase in loans held for sale and the corresponding increases in the warehouse lines of credit and the collateralized financing facilities. This was partially offset by a decrease in the cost of funds due to interest rate declines during 2002.

Occupancy and Equipment. Occupancy and equipment costs increased 65.0% from $2.0 million for the year ended December 31, 2001 to $3.3 million for the year ended December 31, 2002. This was primarily due to the increased office space and equipment that was acquired to support the increased originations.

Other Operating Expenses. Other operating expenses increased 52.1% to $6.7 million in 2002 from $4.4 million in 2001. This increase was primarily due to increased costs associated with higher levels of personnel, infrastructure and professional fees associated with our higher mortgage originations.

Our total assets increased 162.9% from $83.2 million at December 31, 2001 to $218.7 million at December 31, 2002. The increase was primarily due to the increase in loans held for sale from $59.2 million at December 31, 2001 to $200.0 million at December 31, 2002. This was a result of our increases in mortgage loan originations. Correspondingly, our warehouse borrowing facilities increased 177.6% from $73.1 million at December 31, 2001 to $202.9 million at December 31, 2002.

As a mortgage lending company, we borrow substantial sums of money to originate mortgage loans, which we hold in inventory (“warehouse”) prior to selling the loans to investors. Our primary cash requirements currently include:


	•	personnel and marketing expenses;

	•	premiums paid in connection with loans originated in the wholesale channel;

	•	interest expenses on our warehouse and collateralized financing facilities; and

	•	ongoing general and administrative expenses.


	•	borrowings from our warehouse and collateralized financing facilities secured by mortgage loans held in inventory;

	•	points and fees collected from the originations of retail and wholesale loans;

	•	proceeds of whole loan sales;

	•	principal and interest collections relative to the mortgage loans held for sale; and

	•	availability on revolving lines of credit.

In addition, under our new strategy, our liquidity will be dependent in part upon our ability to securitize pools of our non-conforming mortgages. Upon completion of our securitizations we will use the proceeds of the sale of the mortgage-backed securities to repay warehouse and repurchase lines of credit. Factors that could affect our future ability to complete securitizations include the experience and ability of our management team, conditions in the securities markets generally, conditions in the mortgage-backed securities market specifically, the performance of our portfolio of securitized non-conforming loans and our ability to obtain credit enhancement.

The primary component of our liquidity strategy is to finance our mortgage loans held for sale through our warehouse lenders and to schedule frequent sales of loans so that the average holding period of our inventory of loans generally does not exceed 60 days. We generally have funded our working capital requirements through operating profits and we also have a revolving line of credit with total availability of $10.0 million at March 31, 2004.

We use our excess cash from operations to reduce the advances on our warehouse or repurchase lines. This process reduces our debt outstanding and the corresponding interest expense incurred and results in a pool of highly liquid mortgage collateral available to secure borrowings to meet our working capital needs.

For the year ended December 31, 2003 we had net cash flows of $770,000. See “Consolidated Statements of Cash Flows.” For the years ended December 31, 2002 and December 31, 2001 we had net cash flows of $4.8 million and $1.7 million, respectively. Operating cash flows, as presented in our consolidated statements of cash flows, exclude the net proceeds from our mortgage warehouse financing facilities which are used to support the increase in loans held for sale. Net proceeds from, or repayments of, our mortgage financing facilities are presented in our consolidated statements of cash flows as cash flows from financing activities and not as operating cash flows.

We typically have not had to use our revolving line of credit to finance our cash flow needs. Operating profits have been sufficient to meet our cash requirements. As of December 31, 2003, we had $10.4 million of cash and equivalents, $3.0 million of which was restricted, under our warehouse lending agreements. Our mortgage financing facilities totaled $300.0 million at December 31, 2003, of which $150.3 million was unutilized.

Contractual Obligations. The following table summarizes our contractual obligations at December 31, 2003, and the effect such obligations are expected to have on our liquidity and cash flows in future periods:

In the normal course of business, we are party to various activities that contain credit and market risk that are not reflected in the financial statements. Such activities include commitments to originate loans and sell loans. At December 31, 2003, commitments to originate and sell loans totaled $60.4 and $57.0 million, respectively.

Off-Balance Sheet Arrangements. The Company does not have any off-balance sheet arrangements.

In December 2002, the Financial Accounting Standards Board (FASB) issued SFAS 148, Accounting for Stock-Based Compensation — Transition and Disclosure, which amends SFAS 123. SFAS 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based compensation. Under the fair value based method, compensation cost for stock options is measured when options are issued. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require more prominent and more frequent disclosures in financial statements of the effects of stock-based compensation. The transition guidance and annual disclosure provisions of SFAS 148 are effective for fiscal years ending after December 15, 2002. The interim disclosure provisions are effective for financial reports containing financial statements for interim periods beginning after December 15, 2002. The annual disclosure requirements have been implemented herein. We have not adopted the fair value method of accounting for such options.

In May 2003, the FASB issued SFAS 149, Amendments of Statement 133 on Derivative Instruments and Hedging Activities. This statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS 133. This statement was effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. SFAS 133 implementation issues that are effective for the fiscal quarters beginning prior to June 15, 2003 will continue to be effective based on their respective effective dates, and paragraphs relating to forward purchases or sales of “when issued” or other securities that do not yet exist would be applicable to both existing transactions as well as new transactions entered into after June 30, 2003. The adoption of this statement did not have a significant impact on our consolidated financial statements.

In May 2003, the FASB issued SFAS 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. SFAS 150 establishes standards on the classification and measurement of certain financial instruments with characteristics of both liabilities and equity. The provisions of SFAS 150 are effective for financial instruments entered into or modified after May 31, 2003 and to all instruments that exist as of the beginning of the first interim financial reporting period beginning after June 15, 2003. Subsequent to its issuance certain provisions of SFAS 150 were indefinitely deferred for private companies. We believe that this statement will not have a material impact on our consolidated financial statements.

In November 2002, the FASB issued Financial Interpretation (FIN) 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, which

In January 2003, the FASB issued FIN 46, Consolidation of Variable Interest Entities, which was replaced by FIN 46 (Revised December 2003), Consolidation of Variable Interest Entities (FIN 46[R]). FIN 46 requires consolidation by business enterprise of variable interest entities that meet certain requirements. FIN 46[R] changes the effective date of FIN 46 for certain entities. Public companies shall apply either FIN 46 or FIN 46[R] to their interest in special purpose entities (SPEs) as of the first interim or annual period ending after December 15, 2003. The decision to apply FIN 46 or FIN 46[R] may be made on an SPE by SPE basis. The adoption of FIN 46 and FIN 46[R] did not have a significant impact on our consolidated financial statements.

Inflation affects us most significantly in the effect it has on interest rates and real estate values. Our level of loan originations is affected by the level and trends of 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. In addition, inflation of real estate values increases the equity homeowners have in their homes and increases the volume of refinancing loans we originate as borrowers draw down on the increased equity in their homes.

Market risk generally represents the risk of loss that may result from the potential change in the value of a financial instrument due to fluctuations in interest rates. Market risk is inherent in both derivative and non-derivative financial instruments, and accordingly, the scope of our market risk management extends beyond derivatives to include all market sensitive financial instruments.

We monitor the aggregate cash flow, projected net yield, and market value of our market sensitive financial instruments under various interest rate and loss assumptions. While certain financial instruments may perform poorly in an increasing or decreasing interest rate environment, other financial instruments may perform well, and others may not be impacted at all.

To mitigate the risk of changes in interest rates and degradation in the value of our loans we actively use three hedging tools. First, we lock the sale price on our conforming loans at the point of application by agreement with the eventual purchaser of the loan. Second, we use forward commitments to deliver loans for sale. Third, we use an interest rate swap to protect and lock our cost of funds on our warehouse lines. The use of forward commitments allows us to lock the pricing for the loans we will originate over a specific period of time. Typically these forward commitments are for 30, 60 and 90 days. At December 31, 2003 we had forward commitments to sell $50.0 million a month of loans. On July 31, 2004 this commitment will decrease to $25.0 million. As of December 31, 2003 we utilized an interest rate swap (swaps variable to fixed) to lock in our cost of funds at 2.97% for $100.0 million of our $200.0 million warehouse capacity through February 2005.

With the development of our portfolio through securitizations we plan to use a hedging strategy to protect the value of our loans while they are being aggregated for securitization. For example, we plan to use various swap techniques to lock in our cost of funds in order to match fund as closely as possible to attempt to protect the net return on our portfolio.

In accordance with SFAS 133 we have a hedging policy and mark to market the value of our swap on a monthly basis. Adjustments to the market value are recognized through “accumulated other comprehensive loss” on our balance sheet. At December 31, 2003 this resulted in a $556,000 negative adjustment.

We measure the sensitivity of the current fair value of our interest rate lock commitments, forward security trades, and mortgage loans held for sale to changes in interest rates. Changes in interest rates are defined as instantaneous and sustained equal changes to market interest rates of various maturities in 50 basis point increments. We estimate the fair value of these instruments assuming there would be no changes in interest rates from those at period end. Once we establish the base case, we project cash flows for each of the defined interest rate scenarios. These projections are then compared with the base case to determine the estimated change to the fair value of our derivatives and mortgage loans held for sale.

Changes in interest rates affect the relative fair market value of the mortgages held for sale and the fair value of the financial instruments used to hedge against changes in interest rates. The following table summarizes the relative sensitivity of the value of our loans as caused by changes in interest rates assuming no use of locks or forward commitments.

We are a mortgage banking company that originates non-conforming, jumbo and conforming mortgage loans secured primarily by first liens on single-family residences. Since we began operations in 1999, we have strived to become an efficient originator of competitively priced, prudently underwritten mortgage loans while providing our customers and brokers with responsive service. During the year ended December 31, 2003, we originated $1.7 billion of mortgage loans in 26 states, of which approximately 73% were originated through our 24 direct-to-borrower retail lending offices and approximately 27% were originated through our wholesale lending network of mortgage brokers. During 2002 and 2003, approximately 65.3% and 70.8% of the loans we originated were non-conforming mortgage loans, approximately 24.1% and 22.6% were jumbo loans and approximately 10.6% and 6.6% were conforming mortgage loans, respectively.

Our senior executives formed Oak Street Mortgage in 1999 because they saw an opportunity to apply their combined experience and create a mortgage lender focused primarily on delivering a full range of mortgage products to its customers, including the origination of non-conforming, jumbo and conforming mortgage loans to borrowers through a single retail distribution channel with risk profiles that we believe provide us with attractive yields. We believe that our management’s experience in the mortgage lending industry and the infrastructure we have established to support our retail and wholesale divisions provide us with an advantage over many of our competitors. Moreover, we believe that conducting our business through a REIT will provide us with a more efficient structure for competing in this segment of the market.

Due to our senior management’s extensive mortgage lending experience, our highly-trained loan officers, our extensive retail and wholesale lending networks and our disciplined underwriting processes, we have successfully developed a profitable mortgage banking business. Since we began operating from a single office in 1999, we have grown to where, as of December 31, 2003, we are licensed to originate mortgage loans in 26 states from our 24 retail offices and our five wholesale offices. During the years ended December 31, 2002 and 2003, we originated $1.1 billion and $1.7 billion of mortgage loans, respectively.

We originate non-conforming, jumbo and conforming loans through our retail division and non-conforming and jumbo loans through our wholesale division. A conforming loan is a mortgage loan that meets the underwriting criteria required for a mortgage loan to be purchased by Fannie Mae or Freddie Mac. A majority of the loans we originate are non-conforming loans, which are mortgage loans that do not qualify as conforming loans under these criteria. The non-conforming loans that we originate are generally made to borrowers who have equity in the property securing their loans and good credit payment histories. These borrowers may include individuals who, due to self-employment or other circumstances, have difficulty verifying their income. In many cases, non-conforming loans tend to have higher loan-to-value ratios than conforming loans and are made to borrowers with higher debt-to-income ratios than conforming

Because our non-conforming borrowers typically use their loan proceeds to consolidate and refinance debt and to finance home improvements, education and other consumer needs, we believe that general levels of interest rates or home sales affect our non-conforming loan origination volume somewhat less than they affect the loan volume of conforming lenders. As a result, we believe that our loan production has been and may be less cyclical in the future as compared to lenders that originate only conforming mortgage loans. For example, during the three-month period ended December 31, 2003, a period during which overall interest rates generally increased, the MBAA Mortgage Finance Forecast dated March 15, 2004 reported a 47.2% reduction in originations from the third quarter 2003 to the fourth quarter 2003. During this same period our origination volume declined 18.2%, from $508.6 million in the third quarter to $415.8 million in the fourth quarter. Production expressed in units declined 10.5% from 3,902 loans originated during the third quarter to 3,491 loans originated in the fourth quarter. By product channel our non-conforming loan originations decreased by 8.3% from the prior three-month period. During this period, our originations of jumbo loans decreased 47.6%, while our originations of conforming mortgage loans decreased by 25.2% from the prior period. We expect non-conforming loan originations to continue to comprise a greater percentage of our originations as long as interest rates remain above their recent historic lows.

We also originate “jumbo loans,” or loans with an original principal balance that exceeds the maximum threshold for loans eligible to be sold to Fannie Mae and Freddie Mac, which was $300,700 during 2002, $322,700 during 2003 and is $333,700 effective January 1, 2004. Although we generally make these loans only to borrowers with excellent credit ratings, they are nevertheless considered non-conforming loans because, due to their high balance, they are not eligible to be sold to Fannie Mae or Freddie Mac. A typical borrower under a jumbo loan has a high net worth and an excellent credit rating, is highly sensitive to changes in interest rates and has a high propensity to refinance.

An important factor we consider in underwriting mortgage loans is the nature and value of the collateral securing the loans. We believe that the amount of equity present in the real estate securing the loans we originate, together with the fact that approximately 96.3% and 95.9% of the loans that we originated during 2002 and 2003, respectively, were secured by the borrowers’ primary residences, helps to mitigate the risks inherent in mortgage lending. The initial weighted average loan-to-value ratio on the loans that we originated in 2002 and 2003 was approximately 78.2% and 77.9%, respectively. During those respective periods, the combined weighted average loan-to-value ratio on the non-conforming loans that we originated was approximately 86.0% and 87.3%, the combined weighted average loan-to-value ratio on the jumbo loans that we originated was approximately 67.2% and 72.4%, and the combined weighted average loan-to-value ratio on the conforming loans that we originated was approximately 77.0% and 76.5%. Approximately 91.2% and 94.2% of the loans that we originated during 2002 and 2003, respectively, were secured by first mortgages, while the remainder were secured by second mortgages.

In evaluating the credit history of a prospective borrower, we rely to a large extent on the credit rating, or FICO® scores, assigned to the borrower by one of the three major credit reporting companies that use the credit rating software developed by Fair Isaac & Company. This software assigns a credit score to each borrower by applying a mathematical equation that evaluates many types of information that are on the borrower’s credit report and that compares this information to the information in the credit reports of other borrowers.

We focus on maintaining disciplined underwriting standards on the loans we originate by underwriting all of the loans originated by our retail division at our centralized operations center in Indianapolis and all of the loans originated by our wholesale division at our centralized operation centers located either in Indianapolis or Phoenix. Our experienced loan underwriting personnel allow us to exercise flexibility within

The residential mortgage loan market is the largest consumer finance market in the United States. According to MBAA statistics, lenders in the United States originated approximately $2.5 trillion in residential mortgage loans in 2002. According to the March 15, 2004 forecast of the MBAA, lenders originated approximately $3.8 trillion in 2003. The MBAA projects that modest increases in interest rates will cause mortgage volumes to fall to $2.5 trillion in 2004. We believe that this decline will be primarily attributable to a drop-off in refinancing of conforming loans and jumbo loans as interest rates rise.

Generally, the residential mortgage industry is segmented by the size of the mortgage loans and credit characteristics of the borrowers. Mortgage loans that conform to Fannie Mae and Freddie Mac guidelines for both size and credit characteristics are called conforming mortgages. All other mortgage loans are considered non-conforming loans because of the size of the loans (referred to as jumbo mortgages) or the credit profiles of the borrowers (generally referred to as non-conforming mortgages). We believe that non-conforming loan originations have been a less cyclical segment of the mortgage industry because they are less interest rate sensitive than conforming mortgages and refinancings. Non-conforming borrowers tend to focus more on their payments, taking debt consolidation into account, and less on the interest rate they are paying. According to Inside B&C Lending, the non-conforming mortgage industry generated an aggregate of $213.0 billion in residential mortgage loans in 2002, which was a 22.9% increase over 2001 originations of $173.3 billion, and $280.0 billion in 2003, which was a 31.5% increase over the $213.0 billion originated in 2002.


	•	Extensive retail origination network. We generate a majority of our loan originations through our extensive retail channel, which at December 31, 2003 operated from 24 retail offices. This extensive retail presence lessens our need to rely on a broker network to originate loans. We expect generally to earn a higher return on the mortgage loans in our portfolio that we originate through our retail division compared to those originated or acquired through our wholesale division, because we will retain the front-end fees and points we earn on retail loans. We expect that this income will lessen our reliance on the income we receive through whole loan sales, which can be subject to market fluctuations.

	•	Disciplined underwriting. Our centralized, disciplined and efficient underwriting processes have allowed us to originate prudently underwritten loans and to realize significant growth. We underwrite all of the mortgage loans we originate at centralized facilities in Indianapolis and Phoenix, which allows us to make changes quickly as well as to maintain discipline in our underwriting practices. We expect that our underwriting efficiency and effectiveness will continue to improve as we implement new technology during 2004.

	•	Extensive product offerings done through the same distribution channels. Each of our loan officers in our retail distribution network is able to sell non-conforming, jumbo and conforming loan products to potential borrowers. This structure allows us to increase our marketing efficiency by allowing us to spread marketing dollars more effectively across a larger population of potential customers.


	•	Extensive experience of our senior executive team and underwriting personnel in the mortgage industry. Several of our senior executives have overseen the national expansion of diversified financial services companies, including national mortgage lending operations such as the Bank One Consumer Financial Services Division and a division of Household Finance. In addition, several of our key senior executives and underwriting personnel have worked together for more than a decade in the consumer lending industry. During this time, they have developed a deep understanding of all facets of the mortgage lending business and have made key contacts throughout the industry. They have strived to transfer their shared experience in the mortgage industry to our company by instilling a culture of teamwork and integrity and by promoting open and constantly improving work processes.

	•	Our proprietary marketing database. We have spent significant resources on developing a proprietary marketing database which allows us to market our loan programs directly to potential customers through direct mail and telemarketing campaigns. Our database, which we refine and update each month, allows us to track experiences that we and others have had with present and potential customers and to predict future successes with our marketing programs. We believe that this database increases the efficiency of our marketing expenditures by narrowing the field of potential customers to those most likely to respond to our marketing solicitations.

	•	Incentive-based compensation. We have implemented a performance-based compensation structure that, we believe, allows us to attract, retain and motivate qualified personnel at all levels.

Our goal is to maximize stockholder value by focusing on the origination of non-conforming, jumbo and conforming mortgage loans that meet our disciplined underwriting guidelines and building and managing a portfolio of certain of the non-conforming loans that we originate and, to a lesser extent, acquire on a flow basis from other mortgage originators that meet our mortgage portfolio investment guidelines. We intend to implement this strategy by:


	•	Expanding our direct-to-customer retail business, which allows us to generate revenue by collecting fees and discount points and reduces our reliance on back-end fees. We expect to earn a higher return on the mortgage loans in our portfolio that we originate through our retail division compared to those originated through our wholesale division or that we acquire from other lenders because we will be able to amortize the front-end fees and points we earn on a retail loan over the life of the loan.

	•	Improving our sales productivity in our retail space by filling existing excess capacity with qualified loan officers and by realizing critical mass in each of our retail branches.

	•	Expanding our wholesale division’s brokerage relationships and geographic presence.

	•	Expanding and improving our database marketing approach and our brand recognition.

	•	Improving our per-person sales and operations efficiency and underwriting disciplines by incorporating new technologies in our lending processes.

	•	Using the proceeds of this offering, along with prudent leverage, to hold loans in our mortgage portfolio, which we expect will generate favorable risk-adjusted returns for our stockholders and create a new earnings stream for us that is less volatile than selling whole loans into the secondary market.

	•	Continuing to utilize the ability of each of our loan officers to generate non-conforming, jumbo and conforming loans, which permits us to reduce the inefficiencies associated with creating separate divisions and processes for each of these loan products. We expect that this flexibility will allow us to adapt quickly to a changing marketplace, spread our marketing dollars over more product sets and, we anticipate, improve our marketing performance.


	•	Developing the capacity, within 24 to 36 months of this offering, to service the loans that we hold in our mortgage portfolio. Until we develop this loan servicing capacity ourselves, we intend to enter into an agreement with a company that services loans for financial institutions located throughout the country to service our portfolio loans.

	•	Continuing to provide responsive service to our retail customers and wholesale loan brokers.

We offer a wide range of mortgage loan products secured by first and second mortgages. The distinguishing features of our loan origination process include the documentation we require, the loan-to-value ratio on a loan, the borrower’s mortgage and consumer credit payment history, the property type and the credit score we require for a borrower to qualify under a particular program. Each program relies upon our analysis of a borrower’s ability to repay, the risk that the borrower will not repay us, the fees and rates we charge, the value of the collateral, the benefit we believe we are providing to the borrower, and the loan amounts relative to the risk we believe we are taking.

Our loans have payment schedules (1) based upon an interest rate that is constant over the life of the loan, commonly referred to as “fixed-rate mortgages” or (2) based upon an interest rate that is fixed for a stated period of time, ranging from six months to seven years, and then adjusts every six or 12 months thereafter, sometimes referred to as “adjustable-rate mortgages” or “ARMs.” Generally, the payments on our fixed-rate loans are calculated to fully repay the loans from anywhere between 10 and 30 years. The payments on our adjustable-rate mortgages are calculated to fully repay the loans in 30 years, and the payment amounts are adjusted whenever the interest rates are adjusted. Our ARMs with a two-year initial fixed-rate period are commonly referred to as “2/28’s” and our ARMs with a three-year initial fixed-rate period are commonly referred to as “3/27’s.” After the applicable fixed-rate periods expire on these two loan products, the interest rates adjust every six months. We also offer ARMs with an initial fixed-rate period ranging from six months to seven years. After the applicable fixed-rate periods expire on these loans, the interest rates adjust every 12 months. These loans are commonly referred to as “1/1’s” where the interest rate remains fixed for one year and then adjusts annually, and “5/1’s” where the interest rate remains fixed for five years and then adjusts annually. The vast majority of our loans are fully amortizing and we offer no negative amortization products.

The interest rate adjustments on our adjustable-rate mortgages are determined by adding a “margin” to an “index” rate, subject to certain adjustment limitations. The “margin” is a percentage established at origination of a loan, and the “index” for some of our ARMs is the six-month LIBOR, which is determined as of a specified time prior to the interest adjustment date. Our 1/1 and 5/1 ARM products utilize the one-year U.S. Treasury rate as their index. It is common during the initial fixed-rate period of an ARM to allow the borrower to pay a rate lower than the margin plus the index at loan origination. Over time, the rate may adjust upward so that, eventually, the interest rate will equal the index plus the entire margin. These adjustments are generally limited to no more than 2% at each adjustment date, and the interest rates may not be adjusted above a maximum and in some cases may not fall below a minimum amount specified in the loan documents. Our goal is to acclimate the borrower to the repayment obligation, yet be able to achieve the fully indexed interest rate over time.

On February 1, 2004 we began offering a new line of interest-only loan products in response to similar loan products offered by our competitors. These products generally provide for mortgage payments consisting only of accrued interest on the loan for a fixed term, after which the loan begins to amortize with payments calculated based upon the remaining term.

We originate mortgage loans that allow our borrowers to refinance existing mortgage loans, consolidate debt, purchase homes, improve their existing homes or obtain cash for other purposes. Our loans are secured by one-to four-unit primary residences, one-unit second homes, or one- to four-unit investment properties. Eligible property types include primarily single-family detached homes, but may also include semi-detached homes, row or townhomes, individual condominiums, and individual units in planned-unit developments. These collateral types are consistent with the Freddie Mac Seller-Servicer Guide for

A substantial portion of our loans includes prepayment penalties. During 2002 and 2003, 71.3% and 76.4%, respectively, of the loans that we originated contained such penalties. Borrowers who agree to prepayment penalties generally receive lower interest rates and/or lower loan fees on their mortgage loans. Borrowers always retain the right to refinance their loans, but may have to pay a penalty as allowed by state law. If state law does not restrict prepayment charges, our loan documents generally provide for prepayment penalties during the first three years of the term of the loan in an amount equal to six months interest on the original principal balance on the loan. Certain state laws restrict or prohibit prepayment penalties on mortgage loans, and many lenders have relied on the federal Alternative Mortgage Transactions Parity Act and related rules issued by the Office of Thrift Supervision to preempt limitations on prepayment penalties in certain states. The Alternative Mortgage Transactions Parity Act was enacted to extend to financial institutions, other than federally-chartered depository institutions, the federal preemption which federally-chartered depository institutions enjoy. We elected not to use the federal preemption afforded under the Parity Act. As a result, when the preemption provided under the Parity Act was subsequently reduced by regulatory action, our lending operations were not significantly affected.

Loan Production by Product Type. The following table sets forth information about adjustable-rate and fixed-rate mortgage loan production by our mortgage subsidiary for the periods indicated.


(1)	Includes brokered loans originated on behalf of other lenders in the amount of $167.5 million, $42.6 million and $16.5 million during 2003, 2002 and 2001, respectively.

As of December 31, 2003, we originated mortgage loans in 26 states through our 24 retail offices and five wholesale offices. During 2002 and 2003, our retail division funded approximately $852.4 million and $1.2 billion in loans, or 79.3% and 72.8% of our total loan production during those respective periods. Our wholesale division funded $223.1 million and $455.2 million in loans, or 20.7% and 27.2% of our total loan production during those respective periods. In certain cases we elect to originate loans as a broker for other lenders. Most of the loans in this category are to borrowers with lower credit scores that we elect not to hold on our balance sheet.

The following table summarizes originations by our mortgage subsidiary for the periods shown.


(1)	Includes brokered loans originated on behalf of other lenders in the amount of $167.5 million and $42.6 million during 2003 and 2002, respectively.

The following tables summarize certain information regarding loan originations by our mortgage subsidiary for the years ended December 31, 2003, 2002 and 2001.


(1)	Includes brokered loans originated on behalf of other lenders in the amount of $106.2 million, $32.0 million and $15.5 million during 2003, 2002 and 2001, respectively.

(2)	Includes brokered loans originated on behalf of other lenders in the amount of $61.3 million, $10.6 million and $941,000 during 2003, 2002 and 2001, respectively.

(3)	Includes brokered loans originated on behalf of other lenders in the amount of $102,000 during 2001.


(4)	Includes brokered loans originated on behalf of other lenders in the amount of $167.5 million, $42.6 million and $16.5 million during 2003, 2002 and 2001, respectively.


(1)	Includes brokered loans originated on behalf of other lenders in the amount of $106.2 million, $32.0 million and $15.5 million during 2003, 2002 and 2001, respectively.

(2)	Includes brokered loans originated on behalf of other lenders in the amount of $61.3 million, $10.6 million and $941,000 during 2003, 2002 and 2001, respectively.

(3)	Includes brokered loans originated on behalf of other lenders in the amount of $102,000 during 2001.

(4)	Includes brokered loans originated on behalf of other lenders in the amount of $167.5 million, $42.6 million and $16.5 million during 2003, 2002 and 2001, respectively.

Our retail division originates loans through direct sales solicitations by our loan officers. During 2002 and 2003, we originated through our retail division $852.4 million and $1.2 billion or 79.3% and 72.8% of the loans we originated during those respective periods. As of December 31, 2003, we had approximately 426 employees in our retail division, including approximately 310 loan officers, who originated loans from our 24 sales offices. Through our retail division, we primarily originate conforming and non-conforming first mortgage loans as well as jumbo loans and second-mortgage loans.

We require all of our newly-hired loan officers, regardless of their prior experience, to attend a concentrated one-week training program where they learn about our loan products, sales techniques and loan processing systems. We believe that this centralized training process distinguishes us from our competitors and provides our loan officers with a solid understanding of our products, systems and company culture and is a key factor in why our loan officer turnover rate is lower than the industry average. We pay our loan officers an hourly wage and, if they meet certain loan production levels, incentive commissions. Our retail branch managers receive a salary and are also eligible to receive incentive commissions. We believe that we experience significantly less turnover among our branch managers than the industry norm.

We typically design our retail lending offices to accommodate 20 to 35 loan officers. When we open a new retail office, we typically hire fewer loan officers than this so that, as our business expands in the new market, we can increase the number of loan officers at a low marginal cost. We believe that this structure provides for a sales office that is sufficiently large to permit us to hire talented managers and loan officers. We strive to maximize the efficiency of our retail offices by training our loan officers to handle both

Retail lending contributes to our profitability and cash flow by generating loan origination fees and premiums upon sale, although these fees and premiums are partially offset by the higher costs associated with retail lending. We believe that our extensive retail presence provides us with important advantages over our competitors that do not have a similar retail presence. First, we believe that a retail network like ours requires substantial expense and expertise that cannot be easily replicated without significant cost and effort. Second, we believe that because we have already incurred this expense and have established systems to hire and motivate talented loan officers, we can expand our retail presence at a relatively low marginal cost compared to the expense that a competitor would incur to newly enter this market segment. Further, because we have already established a retail network, we have been able to develop relationships with our borrowers who, in connection with their future need for mortgage financing, we expect will be a source of potential repeat customers. Finally, because we have developed sophisticated data mining and marketing techniques, we expect that we will be able to successfully match our financial products with these repeat customers as well as with new borrowers. See “— Marketing Strategy.” We believe that these factors provide our retail division with a cost and experience advantage over our competitors that have not already developed a significant retail lending presence.

Retail lending generally enhances our ability to establish lending relationships with our customers and permits us to exercise greater control over the lending process. We believe that our extensive retail lending network provides us with a sustainable source of loan originations and allows us to establish brand identity in the market, solicit referrals and better utilize our marketing dollars. Because of these advantages that we perceive in establishing a retail network, we intend to continue to expand the number of states in which we are licensed to originate mortgage loans and, eventually, to become a nationwide lender.

Our retail loan officers communicate directly with borrowers throughout the loan application and approval process. During the initial conversation with a customer, the loan officer gathers basic information about the customer and obtains authorization to request the customer’s credit report. After reviewing the information provided by the customer and contained in the credit report, the loan officer generally will propose at least one of our financial products that the loan officer believes will fulfill the customer’s credit needs. The loan officer then requests that the customer submit any additional documentation that we need to complete the loan application process and arranges for an appraisal to be performed by an appraiser from an approved appraiser network on the property that will secure the loan. Our loan processors compile the information submitted by a borrower and, when all supporting documentation has been delivered, submit the completed loan application to our underwriting department. Once all of the appropriate documentation and the appraisal are received, the loan processor sends the application to our centralized underwriting department where the decision on whether we will approve the loan is made.

The following table sets forth selected information relating to retail loan originations by our mortgage subsidiary during the periods shown.


(1)	Includes brokered loans originated on behalf of other lenders in the amount of $35.9 million, $25.4 million, $28.2 million and $16.7 million during the quarters ended December 31, September 30, June 30 and March 31, 2003, respectively, and $11.4 million, $10.2 million, and $4.6 million during the quarters ended December 31, September 30, and June 30, 2002, respectively.

(2)	Includes brokered loans originated on behalf of other lenders in the amount of $10.8 million, $21.4 million, $14.4 million and $14.8 million during the quarters ended December 31, September 30, June 30 and March 31, 2003, respectively, and $6.7 million and $3.9 million during the quarters ended December 31 and September 30, 2002, respectively.

(3)	Includes brokered loans originated on behalf of other lenders in the amount of $46.7 million, $46.7 million, $42.6 million and $31.5 million during the quarters ended December 31, September 30, June 30 and March 31, 2003, respectively, and $18.1 million, $14.0 million, and $4.6 million during the quarters ended December 31, September 30, and June 30, 2002 respectively.

(4)	The weighted average initial loan-to-value ratio of a loan secured by a first mortgage is determined by dividing the amount of the loan by the appraised value of the mortgaged property at origination. The weighted average initial loan-to-value ratio of a loan secured by a second mortgage is determined by taking the sum of the first and second mortgages and dividing by the appraised value of the mortgaged property at origination.

As of December 31, 2003, our wholesale division originated non-conforming loans in 26 states through its five offices. During 2002 and 2003, our wholesale division originated $223.1 million and $455.2 million,

We pay our business development managers a salary and, depending upon their production levels, a commission. Each business development manager maintains a network, on average, of approximately 20 loan brokers. Because each loan broker offers loan products carried by our competitors, the success of our wholesale division depends to a large extent upon the ability of our business development managers to educate the brokers within their network about our loan products. We believe that the high level of customer service that we provide, coupled with the rapid turn-around times we provide on loan applications and the accessibility of our decision makers to our loan brokers, distinguishes us from our competitors.

In wholesale originations, the broker’s role is to identify the applicant, assist in completing the loan application form, gather necessary information and documents and serve as our liaison with the borrower through the lending process. We review and underwrite the applications submitted by the broker, approve or deny the application, set the interest rate and other terms of the loan and, upon acceptance by the borrower and satisfaction of all conditions that we impose, fund the loan. Because brokers conduct their own marketing and employ their own personnel to complete loan applications and maintain contact with borrowers, and because our business development managers in many cases work out of their homes, originating loans through our wholesale division allows us to increase our loan volume without incurring the higher marketing, facilities and other overhead costs associated with increased retail originations.

Loan brokers typically submit loan applications either to our business development manager located in the broker’s geographic region or directly to our centralized processing centers either in Indianapolis or Phoenix. If an application is submitted to a business development manager, he or she reviews the file and then forwards the application to either our Indianapolis or Phoenix office. The staff in the centralized processing center that receives the application then enters the loan into our underwriting processing system, delivers required disclosures to the borrower and submits the loan for underwriting. When we approve a loan application, we typically will include several conditions that the borrower must meet (for example, credit verifications and independent third-party appraisals) and request additional documentation that the borrower must provide before we will fund the loan. One of our account managers and the originating business development manager will work directly with the submitting mortgage broker to collect the requested information and meet the underwriting conditions and other requirements. In most cases, we fund loans within 15 to 20 days after approving a loan application. Upon the closing of the loan, the broker receives any yield spread premium on the loan in addition to certain fees obtained from the borrower during the application process.

We conduct due diligence on independent mortgage brokers with whom we consider doing business. Our due diligence process includes reviewing the broker’s financial condition, checking business references and obtaining copies of the broker’s licenses and verifying that the broker is in good standing with applicable regulators, and confirming that the broker is authorized to sell our mortgage products. Once we approve a mortgage broker, we require the broker to sign an agreement that governs the mechanics of doing business with us and that sets forth the representations and warranties the broker makes to us regarding each loan. We also audit the first few loan applications submitted by each newly-approved independent mortgage broker to confirm that the broker is adhering to our standards.

We believe that we have successfully penetrated the wholesale lending market by providing prompt, consistent service to the brokers in the geographic areas where we originate loans through our wholesale division. In particular, we believe that we offer a wide-ranging package of loan products to our borrowers and that we utilize underwriting personnel with experience in reviewing non-conforming loan files and who are qualified to evaluate the specific characteristics of each loan application. We also believe that we have

The following table sets forth selected information relating to wholesale loan originations by our mortgage subsidiary during the periods shown.

(1)

The weighted average initial loan-to-value ratio of a loan secured by a first mortgage is determined by dividing the amount of the loan by the appraised value of the mortgaged property at origination. The weighted average initial loan-to-value ratio of a loan secured by a second mortgage is determined by taking the sum of the first and second mortgages and dividing by the appraised value of the mortgaged property at origination.

We historically have not purchased mortgage loans originated by other lenders, which are referred to as “correspondent loans.” We began purchasing non-conforming correspondent loans during April 2004 as part of our strategy to diversify our origination channel. See “— Mortgage Portfolio.” We expect, based on current market conditions, that any such correspondent loans will not exceed approximately 15% of our mortgage loan production during 2004 or 20% of our total mortgage portfolio in future periods. We expect to purchase correspondent loans from small banks and from small mortgage bankers. We intend to acquire correspondent loans on a flow basis, meaning that we will underwrite each loan to our own underwriting standards and will agree to purchase the loan before the loan is closed by the correspondent lender. See “— Loan Underwriting — Underwriting Standards.” We also intend to acquire correspondent loans on a bulk basis in individual purchases that do not exceed $5.0 million. We intend to apply to these purchased

Before we purchase correspondent loans from a lender, we analyze the lender’s underwriting guidelines, lending licenses and financial condition, including its financial statements. We then enter into purchase and sale agreements with qualified lenders that include customary representations and warranties regarding the loans we purchase that are similar to those that we give in our whole loan sale agreements with the institutional purchasers that purchase our loans. We expect that our correspondent loan purchase agreements will permit us to recapture any premium we pay for a loan that is repaid within one year of the date of our purchase of the loan and will require the correspondent to repurchase or substitute loans if it breaches a representation or warranty or if a payment default occurs within a specified period after the settlement date of the loan sale.

Underwriting Procedures. Each applicant for a mortgage loan completes a loan application that requests information about the applicant’s income, assets, liabilities and employment history. This information is submitted to the loan officer or broker, who compiles the additional information we will require to underwrite the loan and delivers the completed loan application, supporting documentation and a credit report detailing the applicant’s credit history to a loan processor in one of our two centralized operations centers. Our processing department then performs certain verification procedures with regard to the information in the applicant’s loan file. We require an appraisal on all loans and, in many cases, we may also require a review appraisal or second appraisal depending on the value of the property and the underwriter’s comfort with the original valuation. All appraisals are required to conform to the Uniform Standards of Professional Appraisal Practice adopted by the Appraisal Standards Board of the Appraisal Foundation and are generally on forms acceptable to Fannie Mae and Freddie Mac. Once an applicant completes the loan application and provides us with all required supporting documentation, our underwriters make the final determination on whether we will approve the loan.

Our underwriting guidelines include four levels of applicant documentation requirements: full documentation, limited documentation, stated income for self-employed borrowers and stated income for wage-earning borrowers. Our full documentation guidelines generally require applicants to submit two written forms of verification of stable income for at least the prior 12 months. Under the limited documentation program, verification of income is not required, although we do require personal or business bank statements for the most recent six months as evidence of cash flows. Under the stated income documentation programs, an applicant with a qualifying credit score may be approved based on the applicant’s monthly income stated in the loan application and, in the case of a wage-earning borrower, a written verification of employment conducted by the processor, provided that the loan-to-value ratio on the proposed loan complies with our standards, which may vary depending upon the borrower’s FICO score.

We underwrite all of the loans that we originate through our retail division at our Indianapolis office, and we underwrite all of the loans originated through our wholesale division at either our Indianapolis or Phoenix office. We underwrite the correspondent loans we purchase in our new Kansas City office, which opened in February 2004. We have hired underwriters who have, on average, ten years experience underwriting mortgage loans and who work under the supervision of our Executive Director — Operations/ Risk.

Underwriting Standards. In general, our underwriting standards are intended to evaluate the credit history of the potential borrower, the capacity and willingness of the borrower to repay the loan and the adequacy of the collateral securing the loan. We historically have conformed our underwriting standards to those published by the institutional purchasers that have purchased substantially all of the mortgage loans that we have originated. We intend to continue to originate the loans we sell in whole loan sales to the underwriting standards of the purchasers of those loans, and also to originate the loans that we intend to

The following tables show the categories and criteria we consider in grading the credit history of potential borrowers. We currently anticipate that loans we originate to borrowers with credit grades of A, A- or B on our credit grading scale will be eligible for us to hold in our mortgage portfolio, and that we will sell all of the loans that we originate to borrowers with a credit grade on our scale of A+, C or D.


(1)	Maximum permitted number of delinquencies exceeding the specified number of days during prior 12 months

(2)	Stated income of self-employed borrower

(3)	Stated income of wage-earning borrower

(4)	Minimum time required to have elapsed since borrower was discharged from bankruptcy

(5)	Minimum time required to have elapsed since completion of foreclosure action against borrower

(6)	No prior foreclosure action against borrower permitted

(7)	Collections initiated and judgments entered against borrower within the period specified

(8)	Minimum amount of time required to have elapsed since borrower obtained services from consumer credit counselor

(9)	No prior experience with consumer credit counselor permitted


(1)	Maximum permitted number of delinquencies exceeding the specified number of days during prior 12 or 24 month period, as indicated

(2)	Stated income of self-employed borrower

(3)	Stated income of wage-earning borrower

(4)	Minimum time required to have elapsed since borrower was discharged from bankruptcy

(5)	Minimum time required to have elapsed since completion of foreclosure action against borrower

(6)	No prior foreclosure action against borrower permitted

(7)	Collections initiated and judgments entered against borrower within the period specified

(8)	Minimum amount of time required to have elapsed since borrower obtained services from consumer credit counselor

(9)	No prior experience with consumer credit counselor permitted

Collateral Valuation. Underwriting standards rely heavily on the value of the collateral securing a loan and ensure that the lender is appropriately protected in the event of default. We have established an appraisal policy as part of our underwriting guidelines that requires a second and/or review appraisal on certain properties in order to verify the value of the property. We provide loans up to a maximum loan-to-value ratio of up to 100%, and in limited instances up to 125%, based on the credit risk classification and the loan amount. The weighted average loan-to-value ratio on the loans that we originated during 2002 and 2003 was 78.2% and 77.9%, and the average loan amount was approximately $108,600 and $125,200, respectively.

Quality Control. We subject the loans that we originate to an internal quality control check prior to funding. We have also established second-look guidelines for loans in excess of $400,000 that require a second underwriter to approve the loan. Additionally, our quality control manager reviews on a quarterly basis a statistical sampling of our funded loans for compliance with the control and compliance procedures that apply to lenders approved by the U.S. Department of Housing and Urban Development (“HUD”). The quality control manager reports the results of this review directly to our general counsel. Moreover, the institutional purchasers that have entered into whole loan sale agreements with us typically conduct extensive due diligence with regard to the loans that they purchase under those agreements. See “— Financing for Mortgage Lending Operations — Whole Loan Sales.” As a result, most of the loans that we originate are subjected either to an internal review or to a review by an independent third party for compliance with our underwriting standards.

The following tables set forth information about our mortgage subsidiary’s loan production by borrower risk classification.


(1)	Includes brokered loans originated on behalf of other lenders in the amount of $167.5 million, $42.6 million and $16.5 million during 2003, 2002 and 2001, respectively.


(1)	Includes brokered loans originated on behalf of other lenders in the amount of $167.5 million, $42.6 million and $16.5 million during 2003, 2002 and 2001, respectively.


(1)	Includes brokered loans originated on behalf of other lenders in the amount of $106.2 million, $32.0 million and $15.5 million during 2003, 2002 and 2001, respectively.


(1)	Includes brokered loans originated on behalf of other lenders in the amount of $61.3 million, $10.6 million and $941,000 during 2003, 2002 and 2001, respectively.


(1)	Includes brokered loans originated on behalf of other lenders in the amount of $102,000 during 2001.

The following tables set forth information about our mortgage subsidiary’s loan production based upon borrowers’ credit scores obtained from one or more of the three principal credit bureaus. Before a system conversion in 2001, FICO data was not consistently retained on all loans. During 2002 and 2003, we inadvertently did not retain borrower FICO scores on loans originated during each period as indicated in the footnotes to the following tables.


(1)	Excludes loans in which the borrower FICO scores were not retained in the amount of $63.4 million and $28.2 million during 2003 and 2002, respectively.


(1)	Excludes loans in which the borrower FICO scores were not retained in the amount of $60.1 million and $27.3 million during 2003 and 2002, respectively.


(1)	Excludes loans in which the borrower FICO scores were not retained in the amount of $41.2 million and $17.1 million in 2003 and 2002, respectively.


(1)	Excludes loans in which the borrower FICO scores were not retained in the amount of $13.4 million and $6.9 million in 2003 and 2002, respectively.


(1)	Excludes loans in which the borrower FICO scores were not retained in the amount of $5.5 million and $3.2 million in 2003 and 2002, respectively.


(1)	Excludes loans in which the borrower FICO scores were not retained in the amount of $3.3 million and $937,000 in 2003 and 2002, respectively.


(1)	Excludes loans in which the borrower FICO scores were not retained in the amount of $2.9 million and $937,000 in 2003 and 2002, respectively.


(1)	Excludes loans in which the borrower FICO scores were not retained in the amount of $354,000 in 2003.

Loan Production by Lien Position. The following tables set forth information about our mortgage subsidiary’s loan production based on lien positions in dollar volume during the periods shown.


(1)	Includes brokered loans originated on behalf of other lenders in the amount of $167.5 million and $42.6 million during 2003 and 2002, respectively.

The following table summarizes certain information regarding our mortgage subsidiary’s total loan originations.

Loan Production by Collateral Type. The following table sets forth information about our mortgage subsidiary’s loan production during the periods shown based upon units originated and collateral type.

The following table sets forth information about our mortgage subsidiary’s loan production based on borrower purpose.

Geographic Diversification. As of December 31, 2003, we originated mortgage loans in 26 states from our 24 retail offices and five wholesale offices. In the past, the geographic diversification of our lending did not affect our credit risk since we sold substantially all of the loans we originated to third parties. As we develop a mortgage portfolio following the completion of this offering of our common stock, we intend to carefully monitor the geographic diversification of the loans that we hold in our portfolio.

The following tables show the aggregate dollar amounts and percentages of the loans originated by our mortgage subsidiary in the states where it originated loans during the periods indicated.


(1)	Includes brokered loans originated on behalf of other lenders in the amount of $167.5 million, $42.6 million, and $16.5 million during 2003, 2002 and 2001, respectively.


(1)	Includes brokered loans originated on behalf of other lenders in the amount of $106.2 million, $32.0 million and $15.5 million during 2003, 2002 and 2001, respectively.


(1)	Includes brokered loans originated on behalf of other lenders in the amount of $61.3 million, $10.6 million and $941,000 during 2003, 2002 and 2001, respectively.


(1)	Includes brokered loans originated on behalf of other lenders in the amount of $102,000 during 2001.

These tables indicate that 58.7% of the mortgage loans we originated during 2002 and 45.7% of the mortgage loans we originated during 2003 were to borrowers in Florida and California. We believe that the dollar volume of loans indicated for California is largely attributable to the high number of jumbo loans we originated there during these respective periods, and that the decrease in the dollar volume of loans we originated in California during 2003 is largely attributable to increasing interest rates during that period. Because borrowers under jumbo loans are highly interest-rate sensitive, we expect that our loan originations in California will decrease as a result of any future increase in interest rates.

An important component of our strategy to operate our business as a REIT following the completion of this offering is to develop a mortgage portfolio of mortgage assets consisting primarily of certain of the mortgage loans that we originate. We also intend to acquire mortgage loans for our portfolio that are originated by other lenders and that meet our underwriting and credit risk guidelines. See “— Correspondent Loans.” We intend to begin creating our mortgage portfolio during the third quarter of 2004 by

We currently intend to build our mortgage portfolio primarily with mortgage loans that we originate through our retail and wholesale lending networks or, to a lesser extent, that we acquire from correspondents that are underwritten to our portfolio loan standards to borrowers generally with FICO scores from 560 to 700. We currently intend to hold in our portfolio only first-and second-mortgage loans to borrowers with a credit grade of A, A- or B under our credit grading standards. We believe that the risk characteristics associated with this category of loans will allow us to earn an appropriate risk-adjusted rate of return. We currently anticipate, based upon current market conditions, that our mortgage portfolio will consist entirely of non-conforming mortgage loans, although we may decide in the future, based upon actual or anticipated changes in market conditions, to hold a limited amount of jumbo loans in our portfolio as well. We also expect to hold a substantial percentage of both ARM and fixed-rate loans in our portfolio, although the exact mix will change depending upon prevailing market conditions. We also currently expect, based on current market conditions, that we will acquire not more than approximately 20% of the loans in our mortgage portfolio from correspondent lenders. See “— Correspondent Loans.” Prior to the closing of this offering and the effective date of our REIT election, we intend to acquire and hold in our mortgage portfolio certain of the mortgage loans originated by our mortgage subsidiary during the third quarter of 2004 that have not been sold pursuant to whole loan sales to institutional purchasers and that meet our portfolio loan underwriting guidelines.

Although we have not previously originated loans to hold in our own mortgage portfolio, we believe that we have significant experience originating portfolio loans through our historical practice of originating mortgage loans to be sold in whole loan sales to institutional purchasers. As noted, we have historically written the loans we originate to the underwriting standards of those purchasers. In many cases, the institutional purchasers that purchase our loans hold the loans they purchase from us in their own portfolios and engage in leveraging transactions similar to those we intend to conduct in the future. See “— Financing for Mortgage Lending Operations — Use of Leverage.” Consequently, we believe that we have historically operated our business in the manner of a portfolio mortgage lender, even though we have never before held our own mortgage portfolio. We expect that our loan origination activities in the future will not materially deviate from our past lending practices.

We historically have originated mortgage loans through our mortgage subsidiary, Oak Street Mortgage LLC. Following the completion of this offering, we intend to source loans both through our mortgage subsidiary, which will be a taxable REIT subsidiary, and through the REIT. We intend to conduct our entire retail operation, over time, through the REIT and, to the extent we are paid fees by the borrowers, we will earn such fees in the REIT whether the loans are intended to be sold or retained. Our wholesale operation will remain in the mortgage subsidiary.

We intend to fund the loans that we intend to hold for investment in our mortgage portfolio through the REIT, rather than through our mortgage subsidiary. We also intend to hold our mortgage portfolio in the REIT. We expect that this arrangement will allow us to increase our REIT-qualifying income and the amount of funds available for distribution to our stockholders and will reduce the amount of taxable income we earn through our mortgage subsidiary, which is a taxable REIT subsidiary. Oak Street Mortgage LLC will fund those loans that we intend to sell to institutional purchasers in whole loan sale transactions.

Because the REIT will source all loans in our retail operation and will fund most of the loans we intend to hold in our portfolio, it will need to obtain the necessary licenses in those states where it intends

Interest Rate Risk Management. To the extent consistent with our election to qualify as a REIT, we intend to follow an interest rate risk management program intended to help protect our portfolio of mortgage-related assets and related debt against the effects of major interest rate changes. Specifically, we intend to formulate our interest rate management program in a manner that offsets to some extent the potential adverse effects resulting from rate adjustment limitations on our mortgage-related assets and the differences between interest rate adjustment indices and interest rate adjustment periods of our adjustable-rate mortgage-related assets and related borrowings.

We expect that our interest rate risk management program will encompass a number of procedures, including the following:


	•	monitoring and adjusting, if necessary, the interest rate sensitivity of our mortgage-related assets compared with the interest rate sensitivities of our borrowings;

	•	attempting to structure our borrowing agreements relating to ARM-related assets to have a range of different maturities and interest rate adjustment periods (although substantially all will be less than one year); and

	•	actively managing, on an aggregate basis, the interest rate indices and interest rate adjustment periods of our mortgage-related assets compared to the interest rate indices and adjustment periods of our borrowings.

As a result, we expect that we will be able to adjust the average maturity/adjustment period of our borrowings on an ongoing basis by changing the mix of maturities and interest rate adjustment periods as borrowings come due or are renewed. Through the use of these procedures, we intend to reduce the risk of differences between interest rate adjustment periods of our ARM-related assets and our related borrowings.

Depending on market conditions and the cost of the transactions, we may conduct certain hedging activities in connection with the management of our portfolio, including periodically entering into derivative transactions with the objective of reducing interest rate risk. To the extent consistent with our election to qualify as a REIT, we may adopt a hedging strategy intended to lessen the effects of interest rate changes and to enable us to earn net interest income in periods of generally rising, as well as declining or static, interest rates. Specifically, hedging programs will be formulated with the intent to offset some of the potential adverse effects of changes in interest rate levels relative to the interest rates on the mortgage-related assets held in our mortgage portfolio, and differences between the interest rate adjustment indices and periods of our mortgage-related assets and our borrowings. We plan to monitor carefully, and may have to limit, our asset/liability management program to assure that we do not realize excessive hedging income, or hold hedges having excess value in relation to our mortgage-related assets. See “United States Federal Income Tax Considerations — Requirements for Qualification — Income Tests” and “— Asset Tests.” This would result in our disqualification as a REIT or, in the case of excess hedging income where the excess is due to reasonable cause and not willful neglect, the payment of a penalty tax for failure to satisfy certain REIT income tests under the Internal Revenue Code. In addition, asset/liability management involves transaction costs that increase dramatically as the period covered by hedging protection increases and that may increase during periods of fluctuating interest rates.

Prepayment Risk Management. Prepayment rates on mortgage loans vary from time to time and tend to increase during periods of declining interest rates. We seek to mitigate our prepayment risk through a variety of means, including originating a significant portion of loans with prepayment penalties with terms of two to five years, depending in many cases upon applicable state laws that restrict our ability

Loan Servicing. We currently sell substantially all of the loans that we originate in whole loan sales on a servicing-released basis. See “— Financing for Mortgage Lending Operations — Whole Loan Sales.” Because we do not retain servicing rights on the loans we sell, we have not developed significant loan servicing capability to date. We have developed limited loan servicing capability with regard to the loans that we sell in whole loan sales to institutional purchasers. Under our loan sale agreements with these purchasers, we generally service the loans that we sell for a period typically lasting from 30 to 90 days from the date the loans were originated. We currently employ five people who service these loans during this interim period.

As we develop a mortgage portfolio following the completion of this offering of our common stock, we intend initially to have a third party service those loans on our behalf. We are currently negotiating with three companies that perform loan servicing for financial institutions throughout the country. We expect to enter into a loan servicing agreement with one of these providers during the second quarter of 2004 on terms and conditions that are typical for such arrangements. We currently intend, within 24 to 36 months from the completion of this offering, to develop loan servicing capabilities that will permit us to service the loans that we will hold in our portfolio. We believe that servicing these loans will help us control our overall customer relationships and our communications with our borrowers, and will provide us with the opportunity to cross-sell our other financial products to our customers. Before we begin servicing our portfolio loans, we intend to develop comprehensive loan servicing guidelines that address, among other things, the collection and remittance of loan payments, making required advances, accounting for principal and interest, holding escrow for payment of taxes and insurance, making required inspections of the property, contacting delinquent borrowers and supervising foreclosures and property disposition. We also expect to hire staff with experience in servicing and collecting accounts that are in default, which we believe to be a key factor in the success of a loan servicing department. We currently intend to service only the loans that we hold in our portfolio and to continue our past practice of selling the servicing rights on those loans that we originate and sell through whole loan sales. Our servicing activities are likely to be conducted through our mortgage subsidiary or another taxable REIT subsidiary since servicing income does not qualify for either of the REIT gross income tests. See “United States Federal Income Tax Considerations — Requirements for Qualification — Income Tests.”

Delinquencies and Foreclosures. The mortgage loans that we originate are secured by mortgages, deeds of trust, security deeds or deeds to secure debt, depending upon the prevailing practice in the state in which the property securing the loan is located. Depending on local law, foreclosure is effected by judicial action or nonjudicial sale, and is subject to various notice and filing requirements. In general, the borrower, or any person having a junior encumbrance on the real estate, may cure a monetary default by paying the entire amount in arrears plus other designated costs and expenses incurred in enforcing the obligation during a statutorily prescribed reinstatement period. Generally, state law controls the amount of foreclosure expenses and costs, including attorneys fees, which may be recovered by a lender. After the reinstatement period has expired without the default having been cured, the borrower or junior lienholder no longer has the right to reinstate the loan and may be required to pay the loan in full to prevent the scheduled foreclosure sale. Where a loan has not yet been sold or securitized, we will generally allow a borrower to reinstate the loan up to the date of the foreclosure sale.

Although foreclosure sales are typically public sales, third-party purchasers rarely bid in excess of the lender’s lien because of the difficulty of determining the exact status of title to the property, the possible deterioration of the property during the foreclosure proceedings and a requirement that the purchaser pay for the property in cash or by cashier’s check. Thus, the foreclosing lender often purchases the property from the trustee or referee for an amount equal to the sum of the principal amount outstanding under the loan, accrued and unpaid interest and the expenses of foreclosure. Depending on market conditions, the ultimate proceeds of the sale may not equal the lender’s investment in the property.

We have sold substantially all of the mortgage loans that we have originated on a servicing-released basis through whole loan sales with institutional purchasers. Accordingly, we do not have representative historical delinquency, bankruptcy, foreclosure or default experience to which we may refer for purposes of estimating the future delinquency and loss experience of our mortgage loans.

We intend to implement a financing strategy under which we will continue to sell certain of the mortgage loans we originate to institutional purchasers in whole loan sale transactions and also to leverage the loans we will hold in our mortgage portfolio following the completion of this offering. See “— Mortgage Portfolio.” We also intend to continue borrowing under the credit facilities, which we refer to as “warehouse lending facilities,” that we currently use to fund our lending activities. We believe that this combination of financing transactions will assist us to enhance our operating profits and improve our cash flow.

We have followed a strategy of selling substantially all of the loans that we have originated pursuant to whole loan sales agreements with third-party institutional purchasers. In connection with these transactions, we generally transfer all our interests, including servicing rights, in the loans we sell. In a typical loan sale transaction, we receive a cash price that represents a premium over the principal balance of the loans being sold. During 2002 and 2003, we sold $901.1 million and $1.6 billion, respectively, of loans through whole loan sale transactions at a weighted average sales price equal to 2.68% and 2.27% of the original principal balance of the loans sold during those respective periods. Some of these loans were subsequently securitized by the investors who purchased them from us, while others were retained in the respective portfolios of the investors who purchased them. We have not previously securitized the mortgage loans that we have originated, although we intend to securitize the loans we will hold in our mortgage portfolio after the completion of this offering of our common stock. See “— Financing for Mortgage Lending Operations — Use of Leverage.”

We seek to maximize the premium we receive on our whole loan sales by closely monitoring institutional purchasers’ requirements and focusing on originating the types of loans that meet those requirements. Similarly, we also focus on originating the types of loans for which institutional purchasers tend to pay higher premiums. In each of 2002 and 2003 we sold loans to 28 and 23 purchasers, respectively.

The following table shows the investors that purchased the most loans from us for the periods indicated and their purchases in each period.

We typically make whole loan sales on a non-recourse basis pursuant to a purchase agreement in which we make customary representations and warranties regarding our processes and the underwriting criteria that we employed in originating the loans being sold. If we breach one or more of these representations or warranties, the loan sale agreement may require us to repurchase or substitute loans. In addition, we typically commit in these loan sale agreements to repurchase or substitute a loan if a payment default occurs within a specified period, typically from one to three months, after the settlement date of the loan sale, or in other cases, if a loan becomes 90 days delinquent during the 12-month period following the settlement date. The loan sale agreements also require, in some cases, that we repurchase or substitute a loan if the loan documentation is alleged to contain fraudulent misrepresentations made by the borrower. See “Risk Factors — We may be required to repurchase mortgage loans or indemnify investors if we breach representations and warranties in our loan sale agreements, which would adversely impact our earnings.”

Following the completion of this offering of common stock, we intend to develop a mortgage portfolio consisting of certain of the loans that we originate to borrowers with FICO scores in the 560 to 700 range, and with an average FICO score of approximately 635. See “— Mortgage Portfolio.” In developing our mortgage portfolio we intend to use several financial tools as part of our asset/liability management strategy to leverage our overall portfolio. These financial tools may include aggregation lines, repurchase agreements, commercial paper conduits, shared executions and securitizations. In today’s environment, securitizations and shared executions (securitizations in which more than one company transfers assets) are the most common ways of leveraging a mortgage portfolio. We currently intend to leverage our mortgage portfolio to where the resulting debt, over time, will be approximately 10 to 14 times our equity.

Consequently, we intend to use securitizations as a part of our overall asset/liability strategy of leveraging our mortgage portfolio. Our management has significant experience in the securitization of non-conforming and other single family residential mortgage loans. Securitization is the process of pooling mortgage loans and issuing equity securities, such as mortgage pass throughs, or debt securities, such as collateralized mortgage obligations. We intend to securitize by issuing structured debt. For accounting purposes, the mortgage loans that are securitized remain as assets on our balance sheet while the debt obligations appear as liabilities. We do not intend to use gain-on-sale accounting for our securitizations.

By accounting for these transactions as financings, we will not have any “residuals” on our balance sheet, other than cash over collateralization accounts that would occur if we were to use gain-on-sale accounting treatment. Consequently this method of accounting is a more conservative approach and not subject to the risk of write-downs of non-cash residuals. By utilizing the financing treatment, we will recognize the net interest spread of our portfolio, which is the difference between the interest income earned by the portfolio less our interest costs for the securitization. We intend to recognize the resulting stream of expected “spread” income over the life of the loan through the tax-advantaged REIT structure. See “Asset/ Liability Management Policy — Interest Rate Risk Management” and “United States Federal Income Tax Considerations — Taxation of Our Company — Prohibited Transactions Tax.” We may conduct certain of the securitization activities through one or more taxable subsidiaries that would be formed specifically for that purpose.

We expect that our interests in these securitizations, regardless of the form used, will be subordinated to the classes of securities issued to investors in the securitizations with respect to losses of principal and interest on the underlying mortgage loans. Accordingly, any such losses incurred on the underlying mortgage loans would be applied first to reduce the remaining amount of our retained interest, until reduced to zero. Thereafter, any further losses would be borne by the investors or, if used, a third-party insurance carrier rather than by us.

Our securitization strategy may create earnings and cash flow timing differences. These differences are caused by the timing of the receipt of the cash from a transaction, the recognition of the revenue from the

Traditionally, we charge front-end fees. These fees represent origination fees, discount points, underwriting fees and processing fees. Although the cash for these fees is received at the closing of the transaction, the net revenue from the fees is recognized over the life of the loan. As an offset to this revenue, we will defer under generally accepted accounting principles the direct costs of originating the loan providing the revenue. This matching and ultimate accretion of revenue and expense is recognized as an adjustment to the net interest spread for financial statement purposes. For tax purposes such fees will be recognized when earned. See “United States Federal Tax Considerations — Requirements for Qualification — Income Tests.” Receiving the cash flow at the funding of the loan while recognizing the net revenue over time will create an earnings and cash flow timing difference. The excess cash flow received at the time of the funding of the loan will create opportunity for us to fund any over-collateralization required in our securitizations.

Over-collateralization. As we begin to securitize our loans, we anticipate that the rating agencies will require an over-collateralization position in our securitizations. Given our lack of historical loan performance data and prior securitization experience, we expect that our level of over-collateralization will be higher than may be experienced by companies with substantial securitization experience. We intend to fund this over-collateralization position with three sources of funds; the first being the proceeds from the securitization, the second being the excess cash flow created at the time of funding the loans, and the third being the cash flow from the net interest spread created by the securitization.

We require access to short-term warehouse credit and repurchase facilities in order to fund our mortgage loan originations. We currently have a warehouse line of credit and a repurchase agreement to finance loan originations. In some cases, certain of our subsidiaries may also draw on these warehouse credit facilities to fund the mortgage loans that they originate. We also have credit arrangements for our other operations.

Residential Funding Corporation. At December 31, 2003, we had a $200.0 million warehouse line of credit from Residential Funding Corporation, due March 27, 2005. The lender is obligated to fund mortgage loan originations up to the committed amount, subject to our meeting various financial and other covenants. This credit facility contains various sub-limits for, among other things, conforming loans, second mortgages, mortgage loans aged more than 90 days and wet settlement advances (i.e., advances on loans for which Residential Funding Corporation has not yet received the related loan documents). The loans are secured by the mortgage loans we originate or correspondent loans we purchase that are held by Residential Funding Corporation until we resell those loans to institutional purchasers in whole loan sales.

We pay monthly interest on this warehouse facility at a margin ranging from 1.0% to 3.25% above the one-month LIBOR index, which was 1.12% at December 31, 2003. Under this loan arrangement, the lender may charge our operating account, among other reasons, if loans are not closed or sold, if collateral documents are not in compliance, for misrepresentations, and for loan defaults or foreclosures. At December 31, 2003, the balance outstanding under this warehouse credit facility was approximately $108.6 million.

Credit Suisse First Boston Mortgage Capital LLC. At December 31, 2003, we had available a $100.0 million repurchase agreement with Credit Suisse First Boston Mortgage Capital LLC (“Credit Suisse”) that will expire October 13, 2004. We transfer mortgage loans to Credit Suisse under this Agreement for the lesser of (a) the principal balance of the loans and (b) the market value of the loans times a purchase price percentage that varies depending upon whether the loan is a non-conforming, jumbo, conforming or second-lien mortgage loan (the “Cash Purchase Price”). Credit Suisse’s custodian, LaSalle Bank, N.A., holds these loans until we sell them to an institutional purchaser or repurchase them from Credit Suisse. Credit Suisse has the option to require us to repurchase the loans at a date certain or on demand if the loans are not sold by Credit Suisse. In this case, the repurchase price would be the Cash

We are currently negotiating with various financial institutions including Friedman Billings Ramsey Group, Inc., which is an affiliate of one of our underwriters, to arrange alternative sources of funding our mortgage loan originations.

The following chart shows our warehouse lending facilities and the amounts available to us under those facilities at December 31, 2003, and the expiration dates of the respective facilities.

We generally have funded our working capital requirements through operating profits and we also have a revolving line of credit with total availability of $10.0 million at March 31, 2004.

Bank One, N.A. has extended a secured line of credit to our subsidiary, Oak Street Funding LLC, in an amount that is the lesser of (a) $5.0 million prior to February 1, 2004 and $15.0 million after February 1, 2004 and (b) 80% of eligible Oak Street Funding LLC’s notes receivable from commission loans made to insurance agents. See “— Other Activities.” This loan is secured by substantially all of the assets of Oak Street Funding LLC and its outstanding ownership interests. The loan will bear interest at prime plus .25% or LIBOR plus 2.75%. We have guaranteed $2.5 million of this loan.

Bank One, N.A. has also extended a secured revolving line of credit to our subsidiary, Hudson & Keyse LLC (“Hudson & Keyse”) a joint venture in which we hold a 50% interest. See “— Other Activities.” The amount of the line of credit is the lesser of (a) $2.5 million, or (b) a borrowing base based on a specified percentage of eligible debt to receivables owned by Hudson & Keyse. This line of credit is secured by all of the assets of Hudson & Keyse, including an assignment of its acquired debt accounts and other supporting collateral, and expires in November 2005. The line of credit is cross-collateralized and cross-defaulted with all other debt of Hudson & Keyse owing to Bank One, N.A., and bears an interest rate, at the borrower’s option, of the floating prime rate or LIBOR plus 250 basis points. We have subordinated repayment of a $1.0 million loan made to Hudson & Keyse to the prior repayment of Bank One, N.A.

Our warehouse facilities and other credit facilities contain various affirmative and negative covenants customary for credit arrangements of their type. Included among these provisions are financial covenants that require us to maintain certain levels of consolidated tangible equity or certain debt-to-equity or debt-to-net worth ratios, that prohibit us from incurring net losses in any three consecutive months or that restrict our ability to incur unsecured indebtedness. We believe that these financial covenants will not have a material effect on our operations, growth and financial flexibility, and that they will not restrict our operations or growth in the immediate future.

We primarily generate mortgage loans through direct mail and telemarketing, through the internet and through mass media advertising. To increase the effectiveness of these direct marketing efforts, we have developed various proprietary modeling techniques that are intended to match a pool of potential customers to our various loan products. These proprietary techniques allow us to integrate information we obtain about prospective borrowers from a broad range of sources and are intended to optimize our marketing efforts. Using these techniques, we create a targeted mailing list which a third-party mailing

Under regulations that became effective October 1, 2003, businesses may no longer make telephone solicitations to individuals who have placed their names on the national “do-not-call” registry established by the Federal Trade Commission. Suits have been filed to prevent the Federal Trade Commission from enforcing these new regulations. Due to these suits and to other factors, we cannot predict the future status of the do-not-call registry or its effect on our business. We believe, however, that the other sources of high-quality lead referrals we have developed will allow us to continue generating sufficient sales leads in the future to conduct our business regardless of whether the legal challenges to the do-not-call registry succeed.

An important source that we utilize to generate lead referrals is our arrangement with loan aggregators such as Lending Tree®, Get Smart® and America’s Lending Partners. Each of these companies generates potential sales leads for us by advertising extensively in the mass media and by aggregating responses they receive from potential customers who either call a toll-free phone number or go to the aggregator’s website. We provide these companies with profiles of our target customers for different loan products and they provide us, for a fee, with the names and contact information of potential customers matching these profiles who respond to their advertisements. Because a lead aggregator typically provides customer information to up to three potential lenders, we compete directly with these other lenders in trying to obtain a customer’s business after we receive a sales lead. In our communications with potential customers, we emphasize our excellent service, competitive terms and pricing and extensive package of loan products, which we believe differentiates us from our competitors. We also intend for these factors to help us develop a relationship with our customers that will assist us in identifying and meeting their mortgage needs.

In addition to these direct marketing initiatives, we have also recently begun testing a mass media advertising campaign to generate sales leads. In June 2003 we began advertising on the radio in Jacksonville, Florida, on cable television in Grand Rapids, Michigan and on radio and network and cable television in Indianapolis. We expect these advertisements will not only generate sales leads, but also develop our brand name and identity, especially among our target customers. We intend to monitor the effectiveness of these advertising campaigns and to evaluate whether to expand them in the future.

We strive to incorporate the latest technology into our operations, which we believe allows our loan officers to make consistent and quick credit decisions, improves the quality of our underwriting processes and enhances our customers’ satisfaction. We are in the process of implementing a new software package that is intended to automate a substantial amount of the processes involved in originating, underwriting and delivering mortgage loans. We hold an indefinite license for this software package that will permit us to develop our own proprietary automated loan underwriting and approval system derived from the licensed software.

During the loan application and approval process, we intend for this new system to integrate the line item detail of the credit reports we receive from the credit reporting agencies with a comprehensive review of a borrower’s total credit profile and of any exceptions made to our credit policies. This new system will contain automated underwriting capabilities and a point of sale module that we expect will enhance the ability of our loan officers to select the financial product that fits our customers’ needs. We also intend to configure this system to automate our pre-approval, underwriting and risk-based pricing processes, and to

We began testing this new system during the fourth quarter of 2003 and expect to continue our testing during 2004. To continue developing this automated system, we intend to hire additional information technology staff during 2004. Even after the automated underwriting system is in place, we plan to continue to use our staff to audit credit, income and appraisal documentation to ensure that loans approved in the automated system are consistent with our underwriting guidelines. Further, we anticipate that certain loans may be incompatible with an automated underwriting system and, in those cases, we will utilize our manual loan underwriting processes. See “— Loan Underwriting — Underwriting Procedures.” We intend for this new technology to increase our level of loan originations without causing a corresponding increase in the number of our loan processors, underwriters or loan officers. There can be no assurance, however, that we will be able to successfully implement this new software or hire the additional staff, or that the software will be able to complete all of the tasks that we intend for it to perform. If we are unable to implement this new software, it would be necessary for us to obtain replacement software, which could affect our profitability. See “Risk Factors — An interruption in or breach of our information systems could impair our ability to originate loans on a timely basis and may result in lost business.”

Following this offering, we expect that our mortgage subsidiary will elect to be treated as a taxable REIT subsidiary. A taxable REIT subsidiary is subject to federal income tax, and state and local income tax where applicable, as a regular C corporation. See “United States Federal Income Tax Considerations — Taxation of our Company — Taxable REIT Subsidiaries.” We expect to receive dividends from this subsidiary that will be based on the net income of this subsidiary and the entities it owns, after accounting for expenses and income taxes. We intend for these operations to provide us with a diversified income stream and, to a limited extent, protect us from the cyclicality associated with our mortgage lending operations. Any dividend income that we receive from these operations, combined with all other income that does not qualify for purposes of the 75% gross income test, may not exceed 25% of our gross income in any taxable year. See “United States Federal Income Tax Considerations — Requirements for Qualification — Income Tests.” In addition, the value of our interests in taxable REIT subsidiaries may not constitute more than 20% of the value of our total assets. See “United States Federal Income Tax Considerations — Requirements for Qualification — Asset Tests.” For this purpose, the value of our mortgage subsidiary will include the value of its interests in the entities described below.

The following summarizes our mortgage subsidiary’s current interests in other material entities.

Oak Street Funding, LLC. Oak Street Funding LLC (“Oak Street Funding”) commenced business in September 2003 to provide loans and related services for insurance companies and insurance agents. These loans typically are secured by the revenue streams payable to the borrowers under insurance policies held by their customers. Our mortgage subsidiary owns 90% of the ownership units in Oak Street Funding, and one of our key employees owns the remaining 10% of the ownership units. Oak Street Funding’s operating agreement provides this employee with the option to purchase up to an additional five percent interest in Oak Street Funding for approximately $140,000 if Oak Street Funding exceeds certain income thresholds over a five-year period from the date it commenced business. If Oak Street Funding exceeds these net income targets, the employee’s option to purchase additional membership units will vest in stages over this five-year period and will be exercisable for a period of 10 years from the date of vesting. The operating agreement also grants the employee an option to require Oak Street Funding to purchase his interest at its “fair value,” as defined below, upon his termination as an officer, manager, or employee without good cause, or if Oak Street Funding is dissolved or terminated. For these purposes, “fair value” means the fair market value of a member’s ownership units, without any discounts for lack of marketability or minority ownership, as determined by mutual agreement or by appraisers selected by the employee and by us.

The operating agreement also provides that, in the event of a public offering of stock by a company that controls Oak Street Mortgage LLC (such as this offering of our common stock), the employee shall have the right to receive, in exchange for his membership units in Oak Street Funding, a number of shares of the public company based upon a formula. For purposes of any future offering of our common stock, this formula would entitle the employee to exchange his ownership interest in Oak Street Funding based upon the number of our outstanding shares of stock, the proportion of our value attributable to Oak Street Funding (based upon the relative net income of the two entities) and the employee’s ownership interest in Oak Street Funding. The operating agreement provides that the employee may exercise this right to redeem his Oak Street Funding units for shares of our common stock once each year for a period of five years upon each anniversary date of this offering. In lieu of accepting shares of common stock for his ownership interest in Oak Street Funding, the employee may elect to receive a cash payment equal to the fair market value of those shares instead.

The 10% owner of Oak Street Funding and our mortgage subsidiary have been sued for breach of various non-compete and confidentiality agreements entered into with the employee’s former employer. See “— Legal Proceedings.”

Hudson & Keyse, LLC. Hudson & Keyse is a collection agency joint venture with an outside investor who also serves as the Chief Executive Officer and President of Hudson & Keyse. Our mortgage subsidiary owns 50% of the membership units and has an option to purchase up to 90.1% of Hudson & Keyse from the outside investor, at the original purchase price he paid for those units, by January 2007. We also have an obligation to redeem up to 90.1% of the units owned by the outside investor upon achievement of certain financial performance measures or if the outside investor’s employment with Hudson & Keyse is terminated without good cause. The outside investor has an option to purchase our membership units in Hudson & Keyse upon the joint venture’s failure to achieve certain financial performance measures and upon receipt of written notice from us of our intent to exit the debt-collection business. In the event of a public offering by Oak Street Mortgage LLC, the operating agreement for Hudson & Keyse provides the outside investor with a right to exchange his membership units, other than those that we may purchase from him prior to January 2007, for a number of shares of the public company’s common stock based upon the relative value of Hudson & Keyse to the value of the public company, the number of shares of the public company that are outstanding and the number of Hudson & Keyse’s ownership units to be converted. The outside investor may exercise this option at any time within five years from the date of the initial public offering of Oak Street Mortgage LLC.

Creations Title, LLC. Creations Title, LLC (“Creations Title”) is a title insurance company joint venture we have entered into with Nation’s Title. Our mortgage subsidiary owns 24% of the outstanding membership units of Creations Title.

Great Western Loans & Investments, LP. Great Western Loans & Investments, LP (“Great Western”), is an originator of non-conforming mortgage loans in which we hold a 50% interest. Great Western will be merged into our mortgage subsidiary upon the completion of this offering of common stock and payment to the third-party owner of approximately $2.5 million.

Other Subsidiaries. We have also established wholly-owned subsidiaries to assist us in complying with various mortgage lending licensing requirements of certain states and to hold our investments in our other subsidiaries. Our earnings from these subsidiaries are not material to our operations.

We face intense competition in the business of originating, purchasing and selling mortgage loans. Our competitors in the industry include mortgage banking companies, mortgage brokers, consumer finance companies, other mortgage REITs, commercial banks, credit unions, thrift institutions and internet-based lending companies. Many of these competitors are substantially larger and have considerably greater financial, technical and marketing resources than are available to us. In addition, many financial services organizations that are much larger than we are 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 that we and our competitors have realized on the sale of non-conforming loans may attract additional competitors into this market. Additional competition may lower the rates we can charge borrowers. To the extent any of these competitors significantly expand their activities in our market, our operations could be materially 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 borrowing costs may have a competitive advantage. During periods of declining rates, competitors may solicit our customers to refinance their loans.

We believe our competitive strengths include: (i) our extensive retail and wholesale distribution channels; (ii) the experience of our senior executive team and underwriting personnel; (iii) providing a high level of service to brokers and their customers; (iv) offering competitive loan programs for borrowers whose needs are not met by conventional mortgage lenders; (v) our targeted direct mail marketing program and database screening methodology; and (vi) our performance-based compensation structure which allows us to attract, retain and motivate qualified personnel.

We also face competition for financing sources, and the presence of additional mortgage REITs may restrict our ability to obtain financing or cause our costs of borrowing to increase in the future, which could affect our ability to obtain sufficient funds to carry out our business strategy.

Our executive and administrative offices and one of our two centralized operations centers are located at our facilities in the Indianapolis office. These premises consist of approximately 45,000 square feet under a lease that expires in May 2011. We lease approximately 9,200 square feet of office space at our other centralized operations center in Phoenix under a lease that terminates in September 2009. We also lease a total of approximately 115,000 square feet of office space in our 24 retail offices.

At December 31, 2003, we employed approximately 660 full-time employees, including approximately 310 loan officers. None of our employees is subject to a collective bargaining agreement. Each of our employees has executed a confidentiality and non-solicitation agreement that protects our confidential information and restricts our former employees from soliciting our customers for a period of 12 months following the termination of their employment with us.

We occasionally become involved in litigation arising in the normal course of our business. We believe that any liability with respect to such legal actions, individually or in the aggregate, will not have a material adverse effect on our financial position or results of operations.

During the first quarter of 2004, a lawsuit was filed in the Federal District Court for the Middle District of Florida alleging that our mortgage subsidiary failed to pay certain loan officers overtime wages in violation of the Fair Labor Standards Act. The plaintiffs seek certification as a class and claim actual and punitive damages. We believe that the complaint is without merit and intend to vigorously defend the action.

Our business is regulated by federal, state, and local government authorities and is subject to extensive federal, state and local laws, rules and regulations. We are also subject to judicial and


	•	the Equal Credit Opportunity Act;

	•	the Federal Truth in Lending Act and Regulation Z;

	•	the Home Ownership and Equity Protection Act (“HOEPA”);

	•	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;

	•	the Telephone Consumer Protection Act; and

	•	the Gramm-Leach-Bliley Act.


	•	state lender licensing laws, and laws requiring licenses for loan servicing;

	•	state usury laws and other state laws limiting fees and charges that may be imposed in mortgage loan transactions;

	•	state fair lending laws;

	•	state debt collection laws;

	•	state deceptive trade practices laws; and

	•	other state consumer protection laws.


	•	impose licensing obligations and financial requirements on us;

	•	limit the interest rates, finance charges, and other fees that we may charge;

	•	prohibit discrimination;

	•	mandate disclosures and notices to consumers;

	•	mandate the collection and reporting of statistical data regarding our customers;

	•	regulate our marketing techniques and practices; and

	•	require us to safeguard non-public information about our customers.

These laws are complex, often highly technical and, in some cases, impose conflicting requirements from one jurisdiction to the next. While we strive to comply with applicable laws, we cannot give assurances that all of our loans comply with all applicable laws. It is not uncommon for lenders to experience some incidence of noncompliance with consumer credit laws. Failure to comply with these laws can lead to:


	•	civil and criminal liability, including potential monetary penalties;

	•	loss of approved or licensed status;

	•	demands for indemnification or loan repurchases from purchasers of our loans;

	•	legal defenses causing delay or otherwise adversely affecting the servicer’s ability to enforce loans, or giving the borrower the right to rescind or cancel the loan transaction;


	•	certain borrowers claiming damages or exercising rescission rights under the Truth in Lending Act and Regulation Z;

	•	class action lawsuits; and

	•	administrative enforcement actions.

We regularly monitor the laws, rules and regulations that apply to our business and analyze any changes to them. We integrate many legal and regulatory requirements into our computerized loan origination system so as to reduce the prospect of inadvertent non-compliance due to human error. We also maintain policies and procedures, summaries and checklists to help our origination personnel comply with these laws.

Our training programs are designed to teach our personnel about significant laws, rules and regulations that affect their job responsibilities. We also maintain a variety of pre-funding quality control procedures designed to detect compliance errors prior to funding.

In addition, we also subject a statistically valid sampling of our loans to post-funding quality assurance reviews and analysis. We track the results of the quality assurance reviews and report such results back to the responsible origination units.

As of December 31, 2003, we were licensed or exempt from licensing requirements by the relevant state banking or consumer credit agencies to originate first and second mortgages in 26 states.

During recent years, federal and state legislators and regulators adopted a variety of new or expanded regulations, particularly in the areas of privacy and consumer protection, including predatory lending protections.

The federal Gramm-Leach-Bliley financial reform legislation imposes obligations on us with respect to the privacy and confidentiality of the personal financial information of our applicants and borrowers. Regulations adopted in 2002 that became effective during 2003 impose additional obligations on us to safeguard such information we maintain on our borrowers. In addition, several states are considering even more stringent privacy legislation. If passed, a variety of inconsistent state privacy legislation could substantially increase our compliance costs.

In 2002, the Board of Governors of the Federal Reserve System adopted changes to Regulation C promulgated under the Home Mortgage Disclosure Act. Among other things, the new regulations require lenders to report pricing data on loans with annual percentage rates that exceed the yield on treasury bills with comparable maturities by 3%. The expanded reporting takes effect in 2004. We anticipate that a majority of our loans would be subject to the expanded reporting requirements.

However, the expanded reporting requirements do not include certain salient loan information, such as credit risk, debt-to-income ratio, loan-to-value ratio, documentation level or other relevant loan features. As a result, some lenders are concerned that the new reporting obligations may lead to increased litigation because the new information, and the context in which it is presented, could be misinterpreted by third parties.

HOEPA identifies a category of mortgage loans and subjects such loans to more stringent restrictions and disclosure requirements. In addition, liability for violations of applicable law for loans covered by HOEPA extends not only to the originator, but also to the purchaser of the loans. HOEPA covers certain mortgage loans (excluding, for example, purchase money mortgage loans secured by the borrower’s primary residence or non-owner occupied mortgage loans) for which (i) total points and fees payable by the consumer at origination exceed the greater of $499 (adjusted annually to reflect the annual percentage change in the Consumer Price Index) or eight percent of the loan amount, or (ii) the annual percentage rate at origination is, for first-lien loans, more than eight percentage points higher than the yield on United States Treasury securities of comparable maturity as of the 15th day of the month immediately preceding the month in which the lender received the borrower’s loan application or, for subordinate-lien loans, ten percentage points higher than the yield on such securities.

We have implemented procedures and systems designed to prevent origination of loans covered by HOEPA because of the higher legal risks as well as the potential negative perception of originating loans that are considered to be “high cost” under federal law.

Several federal, state and local laws and regulations have been adopted or are under consideration that are intended to eliminate so-called “predatory” lending practices. Many of these laws and regulations go beyond targeting abusive practices and impose broad restrictions on certain commonly accepted lending practices. In addition, some of these laws impose liability on assignees of mortgage loans such as secondary market investors, lenders and securitization trusts. Such provisions deter loan buyers from purchasing loans covered by the applicable law. For example, the Georgia Fair Lending Act that took effect in October 2002 resulted in our withdrawal from the Georgia market because our lenders and secondary market investors refused to finance or purchase loans covered by that law. The Georgia legislature subsequently repealed this statute, enacted a modified statute, and we were able to reenter the market.

There can be no assurance that these 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. Adoption of these laws could also have a material adverse effect on our loan origination volume, especially if our lenders and secondary market investors elect not to finance or purchase loans covered by the new laws.

We have adopted policies for our loan products and programs designed to prevent the origination of loans containing terms that might be considered unfair or involving practices that might be considered predatory. For example, it is our policy not to: make or purchase “high cost loans,” as defined by HOEPA or state high cost loan laws; offer single premium credit life, disability or accident insurance; or make or purchase loans containing negative amortization, mandatory arbitration clauses or interest rate increases triggered by borrower default. We offer loans with and without prepayment penalties to all approved borrowers, and prepayment penalties that are included in our loans typically do not extend beyond three years from the origination date, unless specifically provided for by state law.

Our loan processing policies and procedures are also intended to adhere to responsible lending standards. Accordingly, it is our policy not to solicit our loan portfolio within twelve months of loan origination or ask appraisers to report a predetermined value. We use an electronic credit grading system intended to ensure consistency in our underwriting, and we employ manual systems to protect against certain disfavored practices, such as “flipping” — i.e., frequent refinancings that result in little or no economic benefit to the borrower.

We have also developed policies and procedures designed to ensure that our customer interaction and customer education practices are consistent with responsible lending standards, including: providing a

We also regularly review our loans and lending practices to evaluate our compliance with lending laws and regulations. It is our policy to use origination standards that enable us to sell our mortgage loans in the secondary market. We subject a statistical sampling of our loans to a quality assurance review of borrower qualification, validity of information, and verified property value determination. In addition, our compliance officer monitors production fair lending performance, including loan file analysis and reporting.

We plan to continue to review, revise and improve our policies, procedures and practices to enhance our fair lending efforts and support the goal of eliminating predatory lending practices.

The Federal Trade Commission adopted regulations that became effective on October 1, 2003 that prohibit telemarketers from calling individuals who have placed their name on a national do-not-call registry maintained by that agency. We do not expect, however, that these regulations will materially adversely affect our business since we believe that we have sufficient other sources to generate sales leads to conduct our business.

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. If this occurs, we could be held responsible under applicable law for the cost of cleaning up or removing the hazardous waste. This cost could exceed the value of the underlying properties.

On July 30, 2002, President Bush signed the Sarbanes-Oxley Act of 2002, corporate governance and accounting reform law. While some of the provisions of the Sarbanes-Oxley Act were effective immediately upon enactment, other provisions required the Securities and Exchange Commission to adopt relevant rules. The Securities and Exchange Commission issued these implementing rules during 2002 and 2003. Our management has spent and will continue to spend significant time monitoring these rules, reviewing existing procedures and putting new procedures in place as necessary or appropriate to comply with the new requirements of the Sarbanes-Oxley Act once we are subject to these rules.

The following table sets forth certain information regarding our executive officers and directors upon the closing of this offering.

(1)

Messrs. Havens and Skestos have served with Mr. Alonso on the board of directors of our mortgage subsidiary since its formation in 1999 and as directors of Oak Street Financial Services, Inc. since its organization in September 2003. Upon the closing of this offering, both Messrs. Havens and Skestos will resign from the board of directors of our mortgage subsidiary and from our board of directors and will no longer serve in any management capacity with us.

Steven Alonso is our Chairman, President and Chief Executive Officer and serves on the board of directors of our mortgage subsidiary. He has served in these capacities since the organization of our mortgage subsidiary in 1999 and of Oak Street Financial Services, Inc. in September 2003. From 1993 to 1999, Mr. Alonso served as President and Chief Executive Officer of the Consumer Financial Services Division at Bank One Corporation, which included Bank One Mortgage Corporation (conforming mortgage operation), Bank One Financial Services (non-conforming mortgage operation) and Bank One Education Finance (student loan operation). Prior to Bank One, Mr. Alonso served as Division General Manager of Operations for Household Finance’s east coast business, and Senior Vice President of Operations for Household Mortgage Services (the company’s conforming mortgage operation). Mr. Alonso started his career at Procter & Gamble in 1982 holding different management positions in manufacturing. Mr. Alonso earned a Bachelor of Science degree from Lehigh University and a Master of Science degree from Stevens Institute of Technology.

Lawrence N. Bangs will serve on our board of directors following the completion of this offering. Mr. Bangs has held various positions with Household International since 1959, including serving as Vice Chairman from 1999 to 2001 and as a consultant from 2001 through 2003. During his tenure with Household, Mr. Bangs was responsible for many of Household’s business units, including assignments as Chairman and Chief Executive Officer of Alexander Hamilton Life Insurance Company, and Managing Director and Chief Executive Officer of HFC Bank in the United Kingdom. He was also involved in several start-up businesses and acquisitions during his tenure. Mr. Bangs attended Roosevelt University and spent four years in the United States Marine Corps.

Joseph D. Barnette, Jr., will serve on our board of directors following the completion of this offering. Since 2002, Mr. Barnette has served as President of the Sexton Group, which develops, owns and manages multi-family apartment properties. Mr. Barnette has also held various positions with Bank One Corporation and served as the Chairman and Chief Executive Officer of Bank One Indiana N.A. from 1994 through 2001. He previously held various management positions with American Fletcher National Bank (the predecessor to Bank One Indiana), The First National Bank of Evanston and Lake View Trust and Savings Bank. Mr. Barnette received a Bachelor of Arts degree from Wabash College and a Master of Business Administration degree from Indiana University.

Glenn R. Brunker has served as the Executive Director-Retail Business since March 2000 and, following the completion of this offering, will serve on our board of directors. During 1999 and 2000, Mr. Brunker served as Senior Vice President of the Direct Loan Center of Bank One that originated mortgages in non-branch Bank One states. Mr. Brunker’s prior experience included serving as Senior Vice President of Operations and Centralized Sales at Bank One Home Loan Services, the national wholesale mortgage business of Bank One. Mr. Brunker also held several management positions at Boatmen’s National Bank and Household Mortgage Services, a subsidiary of Household Bank FSB. Mr. Brunker earned a Bachelor of Science degree from Northern Illinois University and a Master of Business Administration degree from DePaul University.

Carl LoBue will serve on our board of directors following the completion of this offering. Mr. LoBue founded The LoBue Group in 1981 and has served as that company’s Chairman of the Board of Directors since its inception. For the past 20 years, Mr. LoBue has consulted with senior executives at financial services firms in more than 40 countries. His experience spans a wide range of project and client types including management strategy, reorganizations, product distribution, risk strategy and operations efficiency. Mr. LoBue is a cum laude graduate of Seton Hall University with a Bachelor of Science degree. He also has a Master of Business Administration degree from Seton Hall University.

John F. Havens is a co-founder and has served as a non-employee member of the board of directors of our mortgage subsidiary since it was organized in 1999. Mr. Havens has also served on the board of directors of Oak Street Financial Services, Inc. since its inception in September 2003. He intends to resign from these positions upon the completion of this offering. Mr. Havens has been retired for the past five years. Mr. Havens previously served as Chairman of the Board for Bank One Corporation. Mr. Havens currently serves on the board of directors for W.W. Williams Co., an equipment distribution company, and Cardinal Health, Inc., a large pharmaceutical distributor. He has also served on the board of directors for Worthington Industries and Midland Life Insurance Company. In addition, Mr. Havens has served as Chairman of the Board of Trustees of the Ohio State University. He is currently on the Ohio State University Hospital Board. Mr. Havens earned a Bachelor of Arts and Sciences degree from the Ohio State University.

George A. Skestos has served as a non-employee member of the board of directors of our mortgage subsidiary since 2001. Mr. Skestos has also served on the board of directors of Oak Street Financial Services, Inc. since its inception in September 2003. He intends to resign from these positions upon the completion of this offering. Mr. Skestos is the founder of the Homewood Corporation, a multifaceted home building firm. Mr. Skestos founded Homewood in 1964 and spent 25 years as its Chief Executive Officer and President. Mr. Skestos has retired from Homewood in 1989 and has spent the last 14 years as a consultant of Homewood. Mr. Skestos served on the board of directors for Huntington Bancshares Inc. and has served on the Board of Trustees for the Ohio State University including one year as the Chairman. Mr. Skestos earned a Bachelor of Arts and Sciences degree, a Master of Business Administration degree and a law degree from the University of Michigan.

Craig L. Royal has served as our Chief Financial Officer and Secretary since our inception in 1999. He received the added title of Treasurer in 2003. Mr. Royal has over 20 years of experience in the real estate and financial services industries. Prior to joining our company, Mr. Royal served as the President of Keystone Investments from January 1998 to October 1999, specializing in corporate finance, financial management and mergers and acquisitions. Mr. Royal also served as the President of NEWCO Investment

Dennis L. Trent has served as our Chief Operations Officer since our inception in 1999. Mr. Trent has over 22 years of experience in the mortgage banking and consumer finance industries. Prior to joining our company, Mr. Trent served as Executive Vice President of Operations at Bank One Financial Services, Inc., a consumer finance subsidiary of Bank One, from 1994 to 1999. Prior to joining Bank One, Mr. Trent was with Household International from 1981 to 1994. During his tenure with Household, he played a key role in the company’s re-engineering effort, which centralized all back office operations from a distributed branch network. Mr. Trent was Assistant Vice President for Household Finance’s residential mortgage originations. Mr. Trent obtained a Bachelor of Arts degree from Loyola College in Baltimore, Maryland.

Michael R. Ford has served as the Executive Director — Wholesale Business since April 2000. Mr. Ford has 30 years of experience in the financial services industry. Prior to joining our company, Mr. Ford served as a manager for DMR Financial Services, a mortgage banking firm, where he ran the western states wholesale operation from 1998 to 2000. Mr. Ford was also a part of Bank One where he managed its national correspondent mortgage originations business. Mr. Ford moved on to lead Bank One Home Loan Services, the national wholesale mortgage business of Bank One. Prior to Bank One, Mr. Ford was Chief Operating Officer of Security Pacific International Finance in San Diego and held various positions with General Electric Capital Corporation. Mr. Ford earned a Bachelor of Science degree from Clarion University.

D. Scott Clarke has served as our Executive Director — Corporate Development and Secondary Marketing since March 2000. Mr. Clarke has 17 years of consumer lending experience. Prior to joining our company, Mr. Clarke served as Senior Vice President of Bank One Consumer Lending from 1999 to 2000 and as Senior Vice President of Operations of Bank One Financial Services, Inc. from 1996 to 1999. Mr. Clarke also served as a manager with Household International in both the conforming and non-conforming mortgage lending businesses. Mr. Clarke received a Bachelor of Arts degree from the State University of New York, College of Oswego.

Following this offering, our directors will be elected for a staggered term of three years and hold office until their successors are elected and qualify. All officers serve at the discretion of our board of directors.

Our charter provides that the number of directors shall be set by our board of directors. Our bylaws currently provide that our board of directors shall have no more than eleven directors and the minimum number will not be less than the minimum number required by the Maryland General Corporation Law, which is currently one. Our board of directors will initially have five directors. Any vacancy may be filled only by the majority vote of the remaining directors and shall be filled until the remainder of the full term of the directorship in which the vacancy occurs.

Our charter also provides for three classes of directors with staggered terms, such that one class shall be elected each year. After the initial staggered period (i.e., the first three years), all directors will serve for a term of three years and until their successors are duly elected and qualify. Messrs. Alonso and Brunker are Class I directors and will hold office initially for a term expiring at the annual meeting of stockholders in 2005, Messrs. Bangs and LoBue will be Class II directors, and will hold office initially for a term expiring at the annual meeting of stockholders in 2006, and Mr. Barnette will be a Class III director, and will hold office initially for a term expiring at the annual meeting of stockholders in 2007, all until their successors are duly elected and qualify.

We have established an audit committee, governance and nominating committee, and a stock compensation committee of our board of directors. We may establish other committees from time to time.

Our audit committee will consist of Carl LoBue, Joseph Barnette and Lawrence Bangs at the closing of the public offering. We currently believe that each of these individuals satisfies the independence requirements included in the Nasdaq listing standards applicable to directors who serve on audit committees of listed companies and the independence and other standards of the National Association of Securities Dealers. We also believe that at least one member of the audit committee will be an “audit committee financial expert” within the meaning of the rules adopted by the Securities and Exchange Commission relating to the disclosure of financial experts on audit committees in periodic filings pursuant to the Securities Exchange Act of 1934 (the “Exchange Act”). The audit committee has a written charter that requires, among other things, the audit committee to: (i) oversee the integrity of our financial reporting process on behalf of our board of directors and report the results of its activities to the board; (ii) retain our auditors and review the quality of the engagement and independence of our auditors; (iii) review the adequacy of our internal accounting controls and financial reporting process; (iv) review related party transactions; (v) review our compliance with legal regulatory requirements; (vi) monitor the compliance of our employees with our standards of business conduct; and (vii) meet at least quarterly with our senior executive officers, internal audit staff, and our independent auditors in separate executive sessions.

Our governance and nominating committee has been formed to establish and implement our corporate governance practices and to nominate individuals for election to the board of directors. This committee also periodically prepares and submits to the board for adoption the committee’s selection criteria for director nominees. It reviews and makes recommendations on matters involving general operations of the board and our corporate governance, and it annually recommends to the board nominees for each committee of the board. The members of our governance and nominating committee are Carl LoBue, Joseph Barnette and Lawrence Bangs. Our governance and nominating committee will be comprised entirely of independent directors.

Our compensation committee has been delegated full authority by our board of directors to administer our omnibus stock incentive plan and our Oak Street bonus plan and to make salary and bonus recommendations to our board for our employees. The members of our compensation committee will be Carl LoBue, Joseph Barnette and Lawrence Bangs.

Our directors will be paid $800 per board meeting and $500 per committee meeting attended. In addition, they will receive a $10,000 annual retainer fee. At the closing of the offering, each non-employee director will receive options for 5,000 shares of our common stock with an option price equal to the public offering price.

The following table sets forth information as to annual, long-term and other compensation we paid to our Chairman, President and Chief Executive Officer and the other named executive officers for the fiscal years ended December 31, 2003 and 2002.


(1)	Includes amounts deferred by our executive officers pursuant to §401(k) of the Internal Revenue Code, under our 401(k) Plan.

(2)	Each named executive officer receives certain perquisites, but the incremental cost of providing such perquisites does not exceed the lesser of $50,000 or 10% of the officer’s salary and bonus.

(3)	Amounts shown indicate the amount of self-employment tax reimbursed to the named executive officers with respect to income taxable to them as members of Oak Street Mortgage LLC.

(4)	Includes the matching contributions we have made on behalf of the named executive officers pursuant to our 401(k) Plan.

(5)	Includes insurance premiums of $1,622 we paid on a $2.5 million insurance policy on the life of Steven Alonso with 40% of the proceeds to be distributed to Oak Street Mortgage LLC and 60% of the proceeds to be distributed to Mr. Alonso’s wife. Mr. Alonso is the owner of this insurance policy and has the sole right to change beneficiaries. This policy does not have a cash surrender value.

(6)	Includes gains recognized on exercising options.

On , 2004 our board of directors adopted and our stockholders approved our Oak Street annual bonus plan. The purposes of this plan are to encourage employees to maintain focus on specific goals important to us and to reward employees when those goals are met.

Our compensation committee will administer this plan. It will have complete discretion to determine the eligibility criteria to participate in the plan, to determine the employees eligible to participate in the plan and to determine the individual goals and awards for the employees.

Prior to the beginning of each performance period, which will most likely be a calendar year, the compensation committee will establish specific award levels and performance goals for employees. An award will be a multiple of salary based on whether the employee met, equaled or exceeded the performance goal. Whether or not an employee earned a final award will be determined by our

Unless otherwise contained in an agreement with an employee or determined by the compensation committee or board, our change in control will have no effect on any award granted to an employee.

We have determined that the $1.0 million deduction limit of Section 162(m) of the Internal Revenue Code will not apply to compensation paid pursuant to this bonus plan through December 31, 2007 unless, prior to the end of such period, the plan expires, the plan is materially modified or all compensation has been allocated under the plan. After the expiration or early termination of this grace period, unless the plan is modified to take advantage of other exemptions, Section 162(m) of the Internal Revenue Code will apply to compensation paid pursuant to the plan.

Immediately prior to the closing of the offering, and after approval by our board of directors and stockholders, we will enter into three-year employment agreements with the following executive officers:


	•	Steven Alonso, our Chairman, President, and Chief Executive Officer;

	•	Craig L. Royal, our Chief Financial Officer, Treasurer and Secretary;

	•	Dennis L. Trent, our Chief Operations Officer;

	•	Glenn R. Brunker, our Executive Director — Retail Business;

	•	Michael R. Ford, our Executive Director — Wholesale Business; and

	•	D. Scott Clarke, our Executive Director — Corporate Development and Secondary Marketing.

Each agreement provides for annual salary and benefits as well as the opportunity to participate in our annual bonus plan and our omnibus incentive plan. Each agreement also includes nondisclosure and non-competition covenants from the executive officer.

Each agreement will automatically extend annually for an additional year (unless either we or the executive gives the other notice of non-renewal). Each agreement will automatically terminate upon the death of the executive. Each agreement may be terminated by either us or the executive upon the executive’s disability. Each agreement may be terminated by us for cause or without cause. Each agreement may be terminated by the executive for any reason. Each executive may also terminate his respective agreement for good reason, which in the case of Mr. Alonso includes a reduction in his duties, responsibilities or benefits and, in the case of each other executive, includes a reduction in his pay or bonus in the absence of a similar reduction affecting our other executives.

For the executives, a severance benefit equal to salary and benefits for the remainder of the term of the agreement, an average of one year’s bonus, unpaid bonus ending on the date of termination and the acceleration and vesting of awards under the omnibus incentive plan are payable by us upon termination of the agreement by us without cause, upon termination of the agreement by the executive within 12 months after a change in control or upon termination of the agreement by the executive for good reason. Upon a termination of the agreement by us without cause or upon a termination of the agreement by Mr. Alonso for good reason or within 12 months after a change in control, Mr. Alonso is entitled to an additional severance benefit of $ in cash. Upon a termination of the agreement by Mr. Alonso for any reason (other than good reason or within 12 months after a change in control), Mr. Alonso is entitled to an additional severance benefit of $500,000 in cash.

We have determined that the $1.0 million deduction limit of Section 162(m) of the Internal Revenue Code will not apply to compensation paid pursuant to any of the employment agreements through

We also pay the premiums on a $2.5 million insurance policy on the life of Mr. Alonso. Mr. Alonso is the owner of the policy and retains the right to change beneficiaries under the policy. In the event of Mr. Alonso’s death during the term of the policy, based on current beneficiary designations made by Mr. Alonso, 40% of the death benefits under the policy are to be paid to our mortgage subsidiary and 60% are to be paid to Mr. Alonso’s wife.

On , 2004 our board adopted and our stockholders approved our omnibus incentive plan. This plan is intended to give us a competitive advantage in attracting, retaining and motivating employees, non-employee directors, independent contractors and consultants and to provide us with the ability to provide incentives more directly linked to our profitability and increases in stockholder value. This plan is an omnibus plan, which allows for the grant of stock options, stock appreciation rights, restricted stock, performance units and phantom stock to employees, independent contractors and consultants and stock options and restricted stock to non-employee directors.

Our compensation committee, which is comprised of two or more non-employee directors, will administer this plan for employees, independent contractors and consultants. It will have complete discretion to select employees, independent contractors and consultants to whom awards may be granted, to determine the type of award as well as the number of shares of common stock to be covered by each award, and to determine the terms and conditions of any awards. Our board will administer this plan for non-employee directors. It will have the complete discretion to select non-employee directors to whom awards may be granted, to determine the type of award as well as the number of shares of common stock to be covered by each award, and to determine the terms and conditions of any awards.

Our board has authorized the issuance of, and has reserved for issuance, shares of our common stock for awards in accordance with this plan. In the event of any change in our corporate capitalization (e.g., a stock split), a corporate transaction involving us (e.g., a merger, consolidation, or separation), our reorganization or partial or complete liquidation, the compensation committee or the board may, at their discretion, make such substitution or adjustment in the number, kind and price of shares subject to this plan. In addition, no person may receive an award if, as a result of payment of the award, the person would own more than 9.8% of our issued and outstanding common stock.

We have determined that the $1.0 million deduction limit of Section 162(m) of the Internal Revenue Code will not apply to compensation paid pursuant to this plan through December 31, 2007 unless, prior to the end of such period, the plan expires, the plan is materially modified or all stock or other compensation has been allocated under the plan. After the expiration or early termination of this grace period, unless the plan is modified to take advantage of other exemptions, Section 162(m) of the Internal Revenue Code will apply to compensation paid pursuant to the plan.

Effective as of the date of this prospectus, we are awarding options to purchase shares of our common stock to our executive officers, directors and employees at an exercise price equal to the initial public offering price and shares of restricted stock to our executive officers and employees.

The following table shows the number of options and shares of restricted stock that have been approved by our board of directors and stockholders for issuance to our executive officers and directors immediately upon consummation of this offering. The options that we award under our omnibus incentive

Stock options granted under this plan to employees may be either incentive stock options, as described in Section 422 of the Internal Revenue Code, or nonqualified stock options. Stock options granted under this plan to non-employee directors, independent contractors and consultants may be only nonqualified stock options. No award may be granted under this plan to any person who, assuming exercise of all options and payment of all awards held by such person, would own or be deemed to own more than 9.8% of the outstanding shares of our common stock.

Stock options are exercisable at the time specified in each option award agreement. No stock option, however, is exercisable more than ten years after the date of grant and, except in the case of death or disability, no stock option is exercisable earlier than six months after the date of grant. The exercise price of nonqualified stock options will not be less than 85% of the fair market value on the date of grant. The exercise price of incentive stock options will not be less than 100% of the fair market value on the date of grant or, in the case of an incentive stock option granted to a 10% stockholder, 110% of the fair market value on the date of grant. The exercise price is payable in cash or, if otherwise determined by the compensation committee, in common stock.

A stock appreciation right gives the participant the right to any increase in value of our common stock. A stock appreciation right may be awarded either with or without a related stock option. A stock appreciation right entitles the participant to receive, upon exercise, the excess of the fair market value of the common stock underlying the award on the date of exercise over the exercise price of common stock covered by the award. Such amount will be paid to the participant in common stock, cash or a combination thereof.

Restricted stock gives the participant the right to ownership of a share of our common stock once certain restrictions imposed by the compensation committee lapse. Except for such restrictions, during the restriction period the participant will have all the rights of a stockholder with respect to the common stock underlying the restricted stock award.

A performance unit entitles the participant to a payment based on our performance or the participant’s performance. At the conclusion of an award cycle, the compensation committee will determine and deliver to such participant cash and/or a number of shares of common stock equal to the fair market value of earned performance units.

An award of phantom stock entitles the participant to a payment based on the appreciation in our common stock once restrictions lapse. Upon the lapsing of restrictions, the compensation committee will determine the excess of the fair market value of the common stock covered by the phantom stock on the date the restrictions lapse over the fair market value of the common stock covered by the phantom stock

In the event of our change in control, any options granted to non-employee directors will become exercisable in full and all restrictions on any restricted stock granted to non-employee directors will lapse. Unless otherwise contained in an award agreement or determined by the compensation committee or board, our change in control will have no effect on any award granted to an employee, independent contractor or consultant.

This plan may be amended, altered or discontinued by the board at its discretion; provided that certain amendments require stockholder approval. If required by law or agreement, a participant’s consent may be required for any amendment, alteration or discontinuance that may impair the rights of the participant.

We have determined that the $1.0 million deduction limit of Section 162(m) of the Internal Revenue Code will not apply to compensation paid pursuant to this plan during the first three years after our initial public offering unless, prior to the end of such three-year period, this plan expires, this plan is materially modified or all stock or other compensation has been allocated under this plan. After the expiration or early termination of this grace period, unless this plan is modified to take advantage of other exemptions, Section 162(m) will apply to compensation paid pursuant to this plan.

We have established and maintain a retirement savings plan under section 401(k) of the Internal Revenue Code to cover our eligible employees. This 401(k) plan provides participants with savings and retirement benefits based on employee deferrals of compensation. All active employees may begin participating in our 401(k) plan after one year of service (1,000 hours per year) with us and upon reaching the age of eighteen. Participants may make annual salary reduction contributions to the 401(k) plan in amounts up to 100% of their compensation, within the legally permissible limit ($12,000 for 2003). A participant is immediately vested in his or her own elective deferrals of compensation under the 401(k) plan and becomes vested in our matching contributions based on the employee’s years of service with us. An employee will become 100% vested in our matching contributions after four years of service or upon the retirement, death, or disability of the employee while he or she is our employee. We currently make matching contributions based on a percentage of the contributions to the 401(k) plan and the employee’s performance for the prior year. We may also make a discretionary profit sharing contribution based on a percentage of the employee’s eligible compensation. Our expense for the 401(k) plan for the years ended December 31, 2002 and 2003 was approximately $304,000 and $282,000, respectively.

Currently, participants may invest their accounts under our 401(k) plan in and among several funds with varying investment characteristics including stable value funds, fixed income funds, balanced funds, large, medium and small cap funds, and global/international funds.

Generally, distributions from the 401(k) plan may commence upon a participant’s separation from service for any reason. However, participants may request to receive funds from the 401(k) plan in the form of hardship withdrawals and loans. Distributions from the 401(k) plan are generally subject to federal and state income taxes, and distributions made before a participant attains age 59 1/2 may also be subject to an early distribution penalty tax.

The following table sets forth certain information with respect to the beneficial holders of our common stock as of , 2004, and as adjusted to reflect the sale of our common stock being offered by this prospectus, for each of our directors and named executive officers, for each holder of 5% or more of our common stock and for all of our directors and executive officers as a group. The beneficial owners


(1)	Beneficial ownership is determined in accordance with Securities and Exchange Commission rules and generally includes voting or investment power with respect to securities. Shares of common stock subject to options or warrants currently exercisable or exercisable within 60 days of the date hereof are deemed outstanding for computing the percentage of any other person.

(2)	The address of each person listed is Oak Street Financial Services, Inc., 11595 N. Meridian Street, Suite 400, Carmel, Indiana 46032.

(3)	Applicable percentages are after giving effect to a one-for- reverse stock split, the conversion of voting shares into non-voting shares effective upon the consummation of this offering, and the issuance of shares of common stock in this offering. Percentage assumes the exercise by such persons of all options to acquire shares of common stock and no exercise by any other person.

(4)	Messrs. Havens and Skestos will resign as directors upon the closing of this offering.

(5)	John F. Havens is the father of Ellen H. Hardymon, John C. Havens and Thomas F. Havens.

(6)	Ellen H. Hardymon is the daughter of John F. Havens.

(7)	John C. Havens is the son of John F. Havens.

(8)	of these shares are owned beneficially through a trust. Thomas F. Havens is John F. Havens’ son.

(9)	These shares are owned beneficially through a trust. Ms. Nick is John F. Havens’ daughter.

During the period of May 2000 through June 2002, The Crown Group, Inc., an owner of approximately 36.1% of the membership units of Oak Street Mortgage LLC, our mortgage subsidiary, provided a $5.0 million first loss guarantee on a warehouse lending facility provided by GMAC-RFC. The

In April 2001, we entered into a loan with Steven Alonso, our Chairman, President and Chief Executive Officer. The loan was in the amount of $230,000. The purpose of the loan was to refinance his primary residence in Carmel, Indiana. The loan was secured by a first mortgage lien on that residence. We believe that this loan was made on substantially the same terms, including interest rate and collateral, as those prevailing at the time for comparable transactions. We sold this loan in the normal course of business pursuant to a whole loan sale agreement with an unaffiliated third party.

In August 2002, we entered into a loan with Dennis L. Trent, our Chief Operations Officer. The loan was in the amount of $180,400. The purpose of the loan was to refinance his primary residence in Carmel, Indiana. The loan was secured by a first mortgage lien on that residence. We believe that this loan was made on substantially the same terms, including interest rate and collateral, as those prevailing at the time for comparable transactions. We sold this loan in the normal course of business pursuant to a whole loan sale agreement with an unaffiliated third party.

In September 2002, we entered into a loan with Steven Alonso, our Chairman, President and Chief Executive Officer. The loan was in the amount of $210,000. The purpose of the loan was to refinance his primary residence in Carmel, Indiana. The loan was secured by a first mortgage lien on that residence. We believe that this loan was made on substantially the same terms, including interest rate and collateral, as those prevailing at the time for comparable transactions. We sold this loan in the normal course of business pursuant to a whole loan sale agreement with an unaffiliated third party.

In November 2002, we entered into a loan with D. Scott Clarke, our Executive Director-Corporate Development and Secondary Marketing. The loan was in the amount of $544,000. The purpose of the loan was to refinance his primary residence in Fishers, Indiana. The loan was secured by a first mortgage lien on that residence. We believe that this loan was made on substantially the same terms, including interest rate and collateral, as those prevailing at the time for comparable transactions. We sold this loan in the normal course of business pursuant to a whole loan sale agreement with an unaffiliated third party. The loan was on our balance sheet on December 31, 2002.

In November 2002, we entered into a loan with Craig L. Royal, our Chief Financial Officer, Treasurer and Secretary. The loan was in the amount of $220,000. The purpose of the loan was to refinance his primary residence in Carmel, Indiana. The loan was secured by a first mortgage lien on that residence. We believe that this loan was made on substantially the same terms, including interest rate and collateral, as those prevailing at the time for comparable transactions. We sold this loan in the normal course of business pursuant to a whole loan sale agreement with an unaffiliated third party. The loan was on our balance sheet on December 31, 2002.

In September 2003, Oak Street Mortgage LLC issued 10,000 of its non-voting units for a price of $30 per unit to Dennis L. Trent, our Chief Operations Officer, and advanced on Mr. Trent’s behalf $200,000 estimated to be the income taxes payable by Mr. Trent as a result of this transaction. Mr. Trent, in exchange, executed an interest-bearing promissory note to our mortgage subsidiary in the amount of $500,000 due and payable on October 31, 2003. Interest was payable on the note at the variable annual prime rate (as set forth from time to time in The Wall Street Journal). Mr. Trent subsequently exchanged the units he acquired in this transaction for an equal number of shares of our non-voting common stock. Mr. Trent has refinanced this loan with a third party lender and is no longer liable to us under any indebtedness.

In September 2003, Oak Street Mortgage LLC issued 6,000 of its non-voting units for a price of $30 per unit to D. Scott Clarke, our Executive Director-Corporate Development and Secondary Marketing, and advanced on Mr. Clarke’s behalf $120,000 estimated to be the income taxes to be payable by Mr. Clarke as a result of this transaction. Mr. Clarke, in exchange, executed an interest-bearing

In September 2003, we entered into a loan with Steven Alonso, our Chairman, President and Chief Executive Officer, the proceeds of which were used to acquire a second home. The original principal amount of the loan was $1.1 million and was secured by a first lien mortgage in the acquired real estate. We believe that this loan was made on substantially the same terms, including interest rate and collateral, as those prevailing at the time for comparable transactions. We sold this loan in the normal course of business pursuant to a whole loan sale agreement with an unaffiliated third party during October 2003 and, as of the date of this prospectus, we have not made any other loan or extension of credit to Mr. Alonso.

We do not intend to make mortgage or other loans to our executive officers or directors in the future.

Our board of directors has adopted a conflict of interest policy which includes, among other provisions, a requirement that all transactions, including permissible loans between our officers, directors, principal stockholders and their respective affiliates and us, be approved by a majority of the board of directors, including a majority of the independent and disinterested non-employee directors on the board of directors, and be on terms no less favorable to us than could be obtained from unaffiliated third parties.


	•	If a director or officer has an interest that may conflict with any interest of ours, he or she must immediately disclose the matter and discuss it fully and frankly with our board of directors. An interested director or officer may participate in the discussion of the transaction, and his or her presence may be counted for purposes of determining a quorum. However, he or she may not vote on any resolution or motion that authorizes, approves or ratifies a contract or transaction in which that director or officer may have a conflict of interest.


	•	Accept or seek on behalf of himself or herself, or any immediate family member, any financial advantage or gain of other than nominal value offered as a result of the individual’s affiliation with us;

	•	Disclose any confidential information that is available solely as a result of the director or officer’s affiliation with us to any person not authorized to receive such information, or use to our disadvantage any such confidential information, without our express authorization; or

	•	Knowingly take any action or make any statement intended to influence the conduct of our business in such a way to confer any financial benefit on such person or on any corporation or entity in which the individual has a significant interest or affiliation.

The following table sets forth the beneficial ownership of shares of our common stock by the selling stockholders as of , 2004, the maximum number of shares being offered by the selling stockholders under this prospectus and the beneficial ownership of shares by the selling stockholders on , 2004, as adjusted to give effect to the sale of the shares of our common stock offered by this prospectus. The Securities and Exchange Commission has defined “beneficial” ownership of a security to mean the possession, directly or indirectly, of voting power and/or investment power. A stockholder is also


(1)	Assumes outstanding shares of our common stock as of , 2004.

(2)	Assumes outstanding shares of our common stock as of , 2004, including shares issued in this offering.

(3)	Messrs. Havens and Skestos have served as members of the board of directors of our mortgage subsidiary since its formation in 1999 and on the board of directors of Oak Street Financial Services, Inc. since its formation in September 2003. Upon the consummation of this offering, they will resign from each of these positions and will no longer serve in any management capacity with us.

The Maryland General Corporation Law permits a Maryland corporation to include in its charter a provision limiting the liability of the directors and officers to a corporation and its stockholders for money damages except for liability resulting from (a) actual receipt of an improper benefit or profit in money, property or services or (b) active and deliberate dishonesty established by a final judgment as being material to the cause of action. Our charter contains a provision which limits the liability of our directors and officers to the maximum extent permitted by Maryland law.

Our charter permits us, to the maximum extent permitted by Maryland law, to obligate us to indemnify and to pay or reimburse reasonable expenses in advance of the final disposition of a proceeding to (a) any present or former director or officer or (b) any individual who, while a director and at our request, serves or has served another real estate investment trust, corporation, partnership, joint venture, trust, employee benefit plan or any other enterprise as a trustee, director, officer or partner of such real estate investment trust, corporation, partnership, joint venture, trust, employee benefit plan or other enterprise from and against any claim or liability to which such person may become subject or which such person may incur by reason of his or her status as a present or former director or officer of our company. Our bylaws obligate us, to the maximum extent permitted by Maryland law, to indemnify and to pay or reimburse reasonable expenses in advance of the final disposition of a proceeding to (a) any present or former director or officer who is made, or threatened to be made, a party to the proceeding by reason of his or her service in that capacity or (b) any individual who, while a director of our company and at our request, serves or has served another real estate investment trust, corporation, partnership, joint venture, trust, employee benefit plan or other enterprise as a trustee, director, officer or partner of such real estate investment trust, corporation, partnership, joint venture, trust, employee benefit plan or other enterprise and who is made, or threatened to be made, a party to the proceeding by reason of his or her service in that capacity. Our charter and bylaws also permit us to indemnify and advance expenses to any person who served a predecessor of our company in any of the capacities described above and to any employee or agent of our company or a predecessor of our company.

The Maryland General Corporation Law requires a corporation (unless its charter provides otherwise, which our charter does not) to indemnify a director or officer who has been successful, on the merits or otherwise, in the defense of any proceeding to which he or she is made a party by reason of his or her service in that capacity. The Maryland General Corporation Law permits a corporation to indemnify its present and former directors and officers, among others, against judgments, penalties, fines, settlements and reasonable expenses actually incurred by them in connection with any proceeding to which they may be made, or threatened to be made, a party by reason of their service in those or other capacities unless it is established that (a) the act or omission of the director or officer was material to the matter giving rise to the proceeding and (i) was committed in bad faith or (ii) was a result of active and deliberate dishonesty, (b) the director or officer actually received an improper personal benefit in money, property or services or (c) in the case of any criminal proceeding, the director or officer had reasonable cause to believe that the act or omission was unlawful. However, a Maryland corporation may not indemnify for an adverse judgment in a suit by or in the right of the corporation or for a judgment of liability on the basis that personal benefit was improperly received unless, in either case, a court orders indemnification, and then only for expenses. The Maryland General Corporation Law permits a corporation to advance reasonable expenses to a director or officer upon the corporation’s receipt of (a) a written affirmation by the director or officer of his or her good faith belief that he or she has met the standard of conduct necessary for indemnification by the corporation and (b) a written undertaking by him or her or on his or her behalf to repay the amount paid or advanced by the corporation if it shall ultimately be determined that the standard of conduct was not met.

We have also entered into indemnification agreements with our directors, effective April 21, 2004, which provide indemnification and advance of expenses to the fullest extent permitted by Maryland law, as amended from time to time. However, no change in Maryland law will have the effect of reducing any benefits available to the directors under the indemnification agreements based on Maryland law as in effect on the effective date of the indemnification agreements. Furthermore, our officers and directors will also be indemnified against specified liabilities by the underwriters, and the underwriters will be indemnified against certain liabilities by us, under the underwriting agreement relating to this offering. See “Underwriting.”

We also intend to purchase and maintain insurance on behalf of all of our directors and executive officers against liability asserted against or incurred by them in their official capacities with us, whether or not we are required or have the power to indemnify them against the same liability.

Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling us pursuant to the foregoing provisions, we have been informed that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.

The following description of the terms of our stock is only a summary. For a complete description, we refer you to the Maryland General Corporation Law, our charter and our bylaws. We have filed our charter and bylaws as exhibits to the registration statement of which this prospectus is a part.

Our charter provides that we may issue up to shares of common stock, $.01 par value per share, and up to shares of preferred stock, $.01 par value per share. As of the date hereof, we have shares of common stock and no shares of preferred stock outstanding. Upon completion of this offering, we will have shares of common stock and no shares of preferred stock outstanding. Under Maryland law, our stockholders generally are not liable for our debts or obligations.

All shares of our common stock offered by this prospectus are, or will be upon issuance, duly authorized, fully paid and nonassessable. Holders of our common stock are entitled to receive dividends when authorized by our board of directors out of assets legally available for the payment of dividends. They are also entitled to share ratably in our assets legally available for distribution to our stockholders in the event of our liquidation, dissolution or winding up, after payment of or adequate provision for all of our known debts and liabilities. These rights are subject to the preferential rights of any other class or series of our stock and to the provisions of our charter regarding restrictions on transfer of our stock.

Subject to our charter restrictions on transfer of our stock, each outstanding share of common stock entitles the holder to one vote on all matters submitted to a vote of stockholders, including the election of directors. Except as provided with respect to any other class or series of stock, the holders of our common stock will possess the exclusive voting power. There is no cumulative voting in the election of directors, which means that the holders of a majority of the outstanding shares of common stock can elect all of the directors then standing for election, and the holders of the remaining shares will not be able to elect any directors.

Holders of our common stock have no preference, conversion, exchange, sinking fund, redemption or appraisal rights and have no preemptive rights to subscribe for any of our securities. Subject to our charter restrictions on transfer of stock, all shares of common stock will have equal dividend, liquidation and other rights.

Under Maryland law, a Maryland corporation generally cannot dissolve, amend its charter, merge, sell all or substantially all of its assets, engage in a share exchange or engage in similar transactions outside the ordinary course of business, unless approved by the affirmative vote of stockholders holding at least two thirds of the shares entitled to vote on the matter. However, a Maryland corporation may provide in its charter for approval of these matters by a lesser percentage, but not less than a majority of all of the votes entitled to be cast on the matter. Our charter provides that these matters may be approved by a majority of all of the votes entitled to be cast on the matter.

Our charter authorizes our board of directors to classify and reclassify any unissued shares of our common stock or preferred stock into other classes or series of stock. Prior to issuance of shares of each class or series, our board is required by Maryland law and by our charter to set, subject to our charter restrictions on transfer of stock, the terms, preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms or conditions of redemption for each class or series. Therefore, our board could authorize the issuance of shares of common stock or preferred stock of a class or series of preferred stock with terms and conditions which also could have the effect of delaying, deferring or preventing a transaction or a change in control that might involve a premium price for holders of our common stock or otherwise be in their best interest. No shares of preferred stock are outstanding and we have no present plans to issue any preferred stock.

We believe that the power to issue additional shares of common stock or preferred stock and to classify or reclassify unissued shares of common stock or preferred stock and thereafter to issue the classified or reclassified shares provides us with increased flexibility in structuring possible future financings and acquisitions and in meeting other needs which might arise. These actions can be taken without stockholder approval, unless stockholder approval is required by applicable law or the rules of any stock exchange or automated quotation system on which our securities may be listed or traded. Although we have no present intention of doing so, we could issue a class or series of stock that could delay, defer or prevent a transaction or a change in control of our company that might involve a premium price for holders of common stock or otherwise be in their best interest.

Under Maryland law, our board of directors may increase or decrease the number of our authorized shares without a vote of stockholders. However, under certain circumstances, stockholder approval may be required by the rules of any stock exchange or automated quotation system on which our securities may be listed or traded for increases in authorized shares if they are to be issued in material transactions.

For us to qualify as a REIT under the Internal Revenue Code, our stock must be beneficially owned by 100 or more persons during at least 335 days of a taxable year of twelve months or during a proportionate part of a shorter taxable year. Also, not more than 50% of the value of our outstanding stock may be owned, directly or indirectly, by five or fewer individuals (as defined in the Internal Revenue Code to include certain entities such as qualified pension plans) during the last half of a taxable year. These requirements of the Internal Revenue Code do not apply to the first year for which an election to be a REIT is made. Our charter contains, subject to certain exceptions, restrictions on the amount of shares of our stock that a person may own. No person may beneficially own, or be deemed to own by virtue of the applicable constructive ownership provisions of the Internal Revenue Code, more than 9.8% (by value or by number of shares, whichever is more restrictive) of the outstanding shares of our common stock or 9.8% of the value of our outstanding capital stock.

Our charter generally prohibits (a) any person from owning shares of our stock that would result in our being “closely held” under Section 856(h) of the Internal Revenue Code or otherwise cause us to fail to qualify as a REIT, (b) any person from transferring shares of our stock if the transfer would result in our stock being owned by fewer than 100 persons and (c) certain “disqualified organizations,” consisting primarily of governmental and certain tax exempt entities, from owning shares of our stock. See “United States Federal Income Tax Considerations — Taxation of Our Company — General.”

Any person who acquires or intends to acquire shares of our stock that may violate any of these restrictions, or who is the intended transferee of shares of our stock which are transferred to the Trust, as defined below, is required to give us immediate written notice and provide us with such information as we may request in order to determine the effect of the transfer on our status as a REIT. The above restrictions will not apply if our board of directors determines that it is no longer in our best interests to continue to qualify as a REIT.

Our board of directors, in its sole discretion, may exempt a person from these limits, subject to such terms, conditions, representations and undertakings our board may determine in its sole discretion. Our board also may increase or decrease these limits under certain circumstances.

Any attempted transfer of our stock which, if effective, would result in our stock being owned by fewer than 100 persons will be null and void. Any attempted transfer of our stock which, if effective, would result in violation of the ownership limits discussed above or in our being “closely held” under Section 856(h) of the Internal Revenue Code or otherwise failing to qualify as a REIT, will cause the number of shares causing the violation (rounded to the nearest whole share) to be automatically transferred to a trust (“Trust”) for the exclusive benefit of one or more charitable beneficiaries (“Charitable Beneficiaries”), and the proposed transferee will not acquire any rights in the shares. The automatic transfer will be deemed to be effective as of the close of business on the Business Day (as defined in our charter) prior to the date of such violation. The shares transferred to the Trust will generally be selected so as to minimize the aggregate value of shares transferred to the Trust. Shares of our stock held in the Trust will be issued and outstanding shares. The proposed transferee will not benefit economically from ownership of any shares of stock held in the Trust, will have no rights to dividends and no rights to vote or other rights attributable to the shares of stock held in the Trust. The trustee of the

Trust (“ Trustee”) will have all voting rights and rights to dividends or other distributions with respect to shares held in the Trust. These rights will be exercised for the exclusive benefit of the Charitable Beneficiary. Any dividend or other distribution paid prior to our discovery that shares of stock have been transferred to the Trust will be paid by the recipient to the Trustee upon demand. Any dividend or other distribution authorized but unpaid will be paid when due to the Trustee. Any dividend or distribution paid to the Trustee will be held in trust for the Charitable Beneficiary. Subject to Maryland law, the Trustee will have the authority (i) to rescind as void any vote cast by the proposed holder prior to our discovery that the shares have been transferred to the Trust and (ii) to recast the vote in accordance with the desires of the Trustee acting for the benefit of the Charitable Beneficiary. However, if we have already taken irreversible corporate action, then the Trustee will not have the authority to rescind and recast the vote. If necessary to protect our status as a REIT, we may establish additional Trusts with distinct Trustees and Charitable Beneficiaries to which shares may be transferred.

Within 20 days of receiving notice from us that shares of our stock have been transferred to the Trust, the Trustee will sell the shares to a person designated by the Trustee whose ownership of the shares will not violate the above ownership limitations. Upon the sale, the interest of the Charitable Beneficiary in the shares sold will terminate and the Trustee will distribute the net proceeds of the sale to the proposed holder and to the Charitable Beneficiary as follows. The proposed holder will receive the lesser of (i) the price paid by the proposed holder for the shares or, if the proposed holder did not give value for the shares in connection with the event causing the shares to be held in the Trust (e.g., a gift, devise or other similar transaction), the Market Price (as defined in our charter) of the shares on the day of the event causing the shares to be held in the Trust and (ii) the price received by the Trustee (net of any commissions or other expenses of sale) from the sale or other disposition of the shares. The Trustee may reduce the amount payable to the proposed transferee by the amount of dividends or distributions that have been paid to the proposed holder that are owed by the proposed transferee to the Trustee. Any net sale proceeds in excess of the amount payable to the proposed transferee will be paid immediately to the Charitable Beneficiary. If, prior to our discovery that shares of our stock have been transferred to the Trust, the shares are sold by the proposed transferee, then (i) the shares shall be deemed to have been sold on behalf of the Trust and (ii) to the extent that the proposed transferee received an amount for the shares that exceeds the amount the proposed transferee was entitled to receive, the excess shall be paid to the Trustee upon demand.

In addition, shares of our stock held in the Trust will be deemed to have been offered for sale to us, or our designee, at a price per share equal to the lesser of (i) the price per share in the transaction that resulted in the transfer to the Trust (or, in the case of a devise or gift, the Market Price at the time of the devise or gift) and (ii) the Market Price on the date we, or our designee, accept the offer. We may reduce the amount payable by the amount of dividends or distributions paid to the proposed holder. We will have the right to accept the offer until the Trustee has sold the shares. Upon a sale to us, the interest of the Charitable Beneficiary in the shares sold will terminate and the Trustee will distribute the net proceeds of the sale to the proposed transferee.

All certificates representing shares of our stock will bear a legend referring to the restrictions described above.

Every record owner of more than a specified percentage of our stock as required by the Internal Revenue Code or the regulations promulgated thereunder (which may be as low as 0.5% depending upon the number of stockholders of record of our stock), within 30 days after the end of each taxable year, is required to give us written notice, stating the owner’s name and address, the number of shares of each class and series of our stock beneficially owned and a description of the manner in which the shares are held. Each such owner shall provide us with such additional information as we may request in order to determine the effect, if any, of the owner’s beneficial ownership on our status as a REIT and to ensure compliance with the ownership limits. In addition, each stockholder shall upon demand be required to provide us with such information as we may request in good faith in order to determine our status as a REIT and to comply with the requirements of any taxing authority or governmental authority or to determine such compliance.

These ownership limits could delay, defer or prevent a transaction or a change in control that might involve a premium price for the common stock or otherwise be in the best interest of our stockholders.

Prior to this offering, there has been no market for our common stock. Future sales in the public markets of substantial amounts of common stock could adversely affect the market prices prevailing from time to time for the common stock. It could also impair our ability to raise capital through future sales of equity securities.

After completion of this offering, we will have shares of common stock outstanding. All of the shares of common stock sold in this offering will be freely transferable without restriction or further registration under the Securities Act, except for any of the shares that are acquired by affiliates as that term is defined in Rule 144 under the Securities Act.

The shares of common stock held by our existing stockholders, including certain of our directors and executive officers, are restricted securities as that term is defined in Rule 144 under the Securities Act. Restricted securities may be sold in the public market only if registered or if they qualify for an exemption from registration under Rule 144, which is summarized below.

We may implement a dividend reinvestment plan whereby stockholders may automatically reinvest their dividends in our common stock. Details about any such plan would be sent to our stockholders following adoption thereof by our board of directors.

In connection with this offering, we have granted to Friedman Billings Ramsey warrants to purchase shares of our common stock, representing 1% of our fully diluted shares of common stock pro forma for the offering, and subject to adjustment if the underwriters’ over-allotment option is exercised, at the offering price of our shares in this offering. These warrants and the shares subject thereto have been registered in this offering. Accordingly, the shares acquired pursuant to the warrants may be sold in the public market.

In general, Rule 144 provides that a person who is not an affiliate and has not been an affiliate in the prior 90 days who has beneficially owned shares of our common stock for at least one year would be entitled to sell within any three-month period a number of shares that does not exceed the greater of:


	•	1% of the total number of shares of common stock then outstanding; or

	•	the average weekly trading volume of the common stock on the Nasdaq National Market System during the four calendar weeks preceding the filing of notice on Form 144 with respect to the sale.

Sales under Rule 144 are also subject to manner of sale provisions and notice requirements and to the availability of current public information about us.

Under Rule 144(k), a person who is not deemed to have been one of our affiliates at any time during the 90 days preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years, including the holding period of any prior owner which was not an affiliate, is entitled to sell the shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144.

We have agreed to grant registration rights to family members and affiliates of John F. Havens owning restricted shares of our common stock and any permitted transferees of such persons. These rights, which can be exercised no earlier than 180 days following the completion of this offering, include demand and piggy back registration rights that may be exercised after six months following the close of this public offering. We will bear all expenses incident to these registration requirements, except for any underwriting

We have agreed that, subject to specified exceptions (including issuances of shares of common stock in connection with acquisitions), without the consent of the underwriters, we will not, directly or indirectly, offer, sell or otherwise dispose of any shares of our common stock or any securities that may be converted into or exchanged for any shares of our common stock for a period of 180 days from the date of this prospectus. Our executive officers and directors and certain stockholders have each agreed under lock-up agreements with the underwriters that, without the prior written consent of Friedman Billings Ramsey, they will not, directly or indirectly, offer for sale, sell, pledge, enter into any swap or other derivatives transaction that transfers to another any of the economic benefits or risks of ownership of our common stock, or otherwise dispose of any shares of our common stock or any securities that may be converted into or exchanged for any shares of common stock for a period ending 180 days after the date of this prospectus or pursuant to an earlier release as provided in the lock-up agreements.

Following the completion of this offering, we intend to file a registration statement on Form S-8 under the Securities Act covering shares of common stock issued or reserved for issuance under our omnibus incentive plan. Accordingly, shares registered under the Form S-8 registration statement will, subject to vesting provisions, be available for sale in the open market. The registration statement will become effective automatically upon filing. The registration statement on Form S-8 will cover options and shares granted to our officers and directors. Effective the date of closing of this offering, options to purchase in the aggregate shares of our common stock have been granted to our directors. The options awarded under our omnibus incentive plan will vest ratably over a four-year period.

The following description of the terms of our stock and of certain provisions of Maryland law is only a summary. For a complete description, we refer you to the Maryland General Corporation Law, our charter and our bylaws. We have filed our charter and bylaws as exhibits to the registration statement of which this prospectus is a part.

Our charter provides that the number of our directors may be established only by our board of directors but may not be fewer than the minimum required by the Maryland General Corporation Law (which is currently one). Our bylaws currently provide that the number of directors shall not be more than eleven. Any vacancy will be filled, at any regular meeting or at any special meeting called for that purpose, by a majority of the remaining directors and shall be filled until the remainder of the full term of the directorship in which the vacancy occurred. Following the completion of this offering, our board of directors will have five directors.

Pursuant to our charter, the board of directors is divided into three classes of directors. The current terms of the Class I, Class II and Class III directors will expire in 2005, 2006 and 2007, respectively. Directors of each class will be chosen for three-year terms upon the expiration of their current terms and each year one class of directors will be elected by our stockholders. We believe that classification of the board of directors will help to assure the continuity and stability of our business strategies and policies as determined by the board of directors. Holders of shares of our common stock will have no right to cumulative voting in the election of directors. Consequently, at each annual meeting of stockholders, the

The classified board provision could have the effect of making the replacement of incumbent directors more time-consuming and difficult. At least two annual meetings of stockholders, instead of one, will generally be required to effect a change in a majority of our board of directors. Thus, the classified board provision could increase the likelihood that incumbent directors will retain their positions. The staggered terms of directors may delay, defer or prevent a tender offer or an attempt to change the control of our company, even though the tender offer or change in control might be in the best interest of our stockholders.

Our charter provides that a director may be removed only for cause (as defined in the charter) and only by the affirmative vote of at least two-thirds of the votes entitled to be cast in the election of directors. This provision, when coupled with the provision in our bylaws authorizing only our board of directors to fill vacant directorships, precludes stockholders from removing incumbent directors except for cause and by a substantial affirmative vote and filling the vacancies created by the removal with their own nominees.

Under Maryland law, “business combinations” between a Maryland corporation and an interested stockholder or an affiliate of an interested stockholder are prohibited for five years after the most recent date on which the interested stockholder becomes an interested stockholder. These business combinations include a merger, consolidation, share exchange or, in circumstances specified in the statute, an asset transfer, issuance or reclassification of equity securities. An interested stockholder is defined as:


	•	any person who beneficially owns 10% or more of the voting power of the corporation’s shares; or

	•	an affiliate or associate of the corporation who, at any time within the two-year period prior to the date in question, was the beneficial owner of 10% or more of the voting power of the then outstanding voting stock of the corporation.

A person is not an interested stockholder under the statute if the board of directors approved in advance the transaction by which the person otherwise would have become an interested stockholder. However, in approving a transaction, the board of directors may provide that its approval is subject to compliance, at or after the time of approval, with any terms and conditions determined by the board.

After the five-year prohibition, any business combination between the Maryland corporation and an interested stockholder generally must be recommended by the board of directors of the corporation and approved by the affirmative vote of at least:


	•	80% of the votes entitled to be cast by holders of outstanding shares of voting stock of the corporation voting together as a single group; and

	•	two-thirds of the votes entitled to be cast by holders of voting stock of the corporation other than shares held by the interested stockholder with whom or with whose affiliate the business combination is to be effected or held by an affiliate or associate of the interested stockholder.

These super-majority vote requirements do not apply if the corporation’s common stockholders receive a minimum price, as defined under Maryland law, for their shares in the form of cash or other consideration in the same form as previously paid by the interested stockholder for its shares.

The statute permits various exemptions from its provisions, including business combinations that are exempted by the board of directors prior to the time that the interested stockholder becomes an interested stockholder. Our board of directors has not utilized this authority to exempt transactions with any person from the statutory restrictions on business combinations described above.

The business combination statute may discourage others from trying to acquire control of us and increase the difficulty of consummating any offer.

Maryland law provides that control shares of a Maryland corporation acquired in a control share acquisition have no voting rights except to the extent approved by a vote of two-thirds of the votes entitled to be cast on the matter. Shares owned by the acquiror, by officers of the corporation or by directors who are employees of the corporation are excluded from shares entitled to vote on the matter. Control shares are voting shares of stock which, if aggregated with all other shares of stock owned by the acquiror or in respect of which the acquiror is able to exercise or direct the exercise of voting power (except solely by virtue of a revocable proxy), would entitle the acquiror to exercise voting power in electing directors within one of the following ranges of voting power:


	•	one-tenth or more but less than one-third,

	•	one-third or more but less than a majority, or

	•	a majority or more of all voting power.

Control shares do not include shares the acquiring person is then entitled to vote as a result of having previously obtained stockholder approval. A control share acquisition means the acquisition of control shares, subject to certain exceptions.

A person who has made or proposes to make a control share acquisition may compel the board of directors of the corporation to call a special meeting of stockholders to be held within 50 days of demand to consider the voting rights of the shares. The right to compel the calling of a special meeting is subject to the satisfaction of certain conditions, including an undertaking to pay the expenses of the meeting. If no request for a meeting is made, the corporation may itself present the question at any stockholders’ meeting.

If voting rights are not approved at the meeting or if the acquiring person does not deliver an acquiring person statement as required by the statute, then the corporation may redeem for fair value any or all of the control shares, except those for which voting rights have previously been approved. The right of the corporation to redeem control shares is subject to certain conditions and limitations. Fair value is determined, without regard to the absence of voting rights for the control shares, as of the date of the last control share acquisition by the acquiror or of any meeting of stockholders at which the voting rights of the shares are considered and not approved. If voting rights for control shares are approved at a stockholders’ meeting and the acquiror becomes entitled to vote a majority of the shares entitled to vote, all other stockholders may exercise appraisal rights. The fair value of the shares as determined for purposes of appraisal rights may not be less than the highest price per share paid by the acquiror in the control share acquisition.

The control share acquisition statute does not apply (a) to shares acquired in a merger, consolidation or share exchange if the corporation is a party to the transaction, or (b) to acquisitions approved or exempted by the charter or bylaws of the corporation.

Our bylaws contain a provision exempting from the control share acquisition statute any and all acquisitions by any person of shares of our stock. This provision may be amended or eliminated by our board of directors at any time in the future.

Except as set forth below, our charter may be amended only by the affirmative vote of the holders of not less than a majority of all of the votes entitled to be cast on the matter. However, the provisions in the charter relating to the removal of directors, the number and staggered terms of our directors, restrictions on the transfer and ownership of shares required and indemnification and limitation of liability of our directors may only be amended by the affirmative vote of holders of not less than two-thirds of all the

Our bylaws provide that with respect to an annual meeting of stockholders, nominations of persons for election to our board of directors and the proposal of business to be considered by stockholders may be made only (i) pursuant to our notice of the meeting, (ii) by our board of directors or (iii) by a stockholder of record who is entitled to vote at the meeting and who has complied with the advance notice procedures of our bylaws. With respect to special meetings of stockholders, only the business specified in our notice of the meeting may be brought before the meeting. Nominations of persons for election to our board of directors at a special meeting may be made only (i) pursuant to our notice of the meeting, (ii) by the board of directors, or (iii) provided that the board of directors has determined that directors will be elected at the meeting, by a stockholder of record who is entitled to vote at the meeting and who has complied with the advance notice provisions of our bylaws.

Anti-Takeover Effect of Certain Provisions of Maryland Law and of our Charter and Bylaws

The business combination provisions and the control share acquisition provisions of Maryland law, the provisions of our charter on classification of our board of directors and removal of directors and the advance notice provisions of our bylaws could delay, defer or prevent a transaction or a change in the control of our company that might involve a premium price for holders of our common stock or otherwise be in their best interest.

The following discussion summarizes the material U.S. federal income tax considerations regarding our qualification and taxation as a REIT and the material U.S. federal income tax consequences resulting from the acquisition, ownership and disposition of our common stock. This discussion is based on current law and assumes that we will at all relevant times qualify as a REIT for U.S. federal income tax purposes. The tax law upon which this discussion is based could be changed, and any such change could have retroactive effect. The following discussion is not exhaustive of all possible tax considerations. This summary neither gives a detailed discussion of any state, local or foreign tax considerations nor discusses all of the aspects of U.S. federal income taxation that may be relevant to you in light of your particular circumstances or to particular types of stockholders which are subject to special tax rules, such as insurance companies, tax-exempt entities or organizations (except to the limited extent discussed in “—Taxation of Tax-Exempt Stockholders”), financial institutions or broker-dealers, foreign corporations or partnerships, and persons who are not citizens or residents of the United States (except to the limited extent discussed in “— Taxation of Non-U.S. Stockholders”), stockholders that hold our stock as a hedge, part of a straddle, conversion transaction or other arrangement involving more than one position, or stockholders whose functional currency is not the U.S. dollar. This discussion assumes that you will hold our common stock as a “capital asset,” generally property held for investment, under the Internal Revenue Code.

The statements in this discussion are based on current provisions of the Internal Revenue Code, and their legislative history, current administrative rulings and practices of the Internal Revenue Service, or IRS, and judicial decisions, all of which are subject to changes that may be retroactively applied. No assurances can be given that legislative, judicial or administrative changes will not affect the accuracy of this discussion of tax considerations. See “— New Legislation and Possible Legislative or Other Action Affecting Tax Consequences.” We will not seek a ruling from the IRS on any of the matters addressed in this discussion. Instead, we will rely on an opinion of counsel in regard to REIT status as described in this discussion. Unlike a private letter ruling, an opinion of counsel is not binding on the IRS. Thus, no

You are urged to consult with your tax advisor regarding the specific consequences to you of the purchase, ownership and sale of stock in an entity electing to be taxed as a REIT, including the federal, state, local, foreign and other tax considerations of such purchase, ownership, sale and election and the potential changes in applicable tax laws.

We were organized as a Maryland corporation in September 2003. Since that date we have conducted through our mortgage subsidiary the various businesses previously conducted since October 1999, which consist primarily of the origination, holding and sale of loans secured by single family residences. We elected to be treated as an S corporation under the Internal Revenue Code for our initial tax year. Before completion of this offering, we will no longer meet the requirements for an S corporation and our S corporation election will terminate. The termination of our S election will cause our taxable year to terminate and a new tax year (our short taxable year) to commence on the termination.

We intend to make an election to be taxed as a REIT under the Internal Revenue Code commencing with our short taxable year ending December 31, 2004. In connection with this offering, we will receive the opinion of our legal counsel, Barnes & Thornburg, that commencing with our short taxable year ending December 31, 2004, assuming that the elections and other procedural steps described in this discussion are completed by us in a timely fashion, we will be organized in conformity with the requirements for qualification as a REIT under the Internal Revenue Code and our current and proposed methods of operation will enable us to meet the requirements for qualification and taxation as a REIT under the Internal Revenue Code. This opinion is not binding on the IRS or any court. In addition, the opinion of our counsel is based on various assumptions and is conditioned upon certain representations that we have made as to factual matters, including factual representations concerning our business and assets as set forth in this prospectus, and assumes that the actions described in this prospectus are completed in a timely fashion.

Our qualification and taxation as a REIT depend on our ability to meet, through actual annual operating results, distribution levels, diversity of stock ownership, and the various other qualification tests imposed under the Internal Revenue Code discussed below, the results of which will not be reviewed by Barnes & Thornburg. No assurance can be given that our actual results for any particular taxable year will satisfy these requirements. See “— Failure to Qualify as a REIT.” In addition, qualification as a REIT depends on future transactions and events that cannot be known at this time.

General. So long as we qualify for taxation as a REIT, we generally will be permitted a deduction for dividends we pay to our stockholders. As a result, we generally will not be required to pay federal corporate income taxes on our net income that is currently distributed to our stockholders. This treatment substantially eliminates the “double taxation” that ordinarily results from investment in a corporation. Double taxation means taxation once at the corporate level when income is earned and once again at the stockholder level when this income is distributed. Currently, stockholders of regular corporations who are taxed at individual rates generally are taxed on dividends they receive at capital gains rates, which are lower for individuals than ordinary income rates. Nevertheless, income earned by a REIT and distributed currently to its stockholders generally will still be subject to lower aggregate rates of federal income taxation than if such income were earned by a regular corporation, subjected to corporate income tax, and then distributed to stockholders and subjected to tax at capital gain rates.

While we generally are not subject to corporate income taxes on income that we distribute currently to stockholders, we will be subject to federal income tax as follows:


	•	We will be subject to corporate federal income tax on taxable income, including net capital gain, that we do not distribute to stockholders during or within a specified time period after the calendar year in which the income is earned.


	•	We will be subject to the corporate “alternative minimum tax” on any items of tax preference that we do not distribute or allocate to stockholders.

	•	We will be subject to tax, at the highest corporate rate, on:


	•	net income from the sale or other disposition of property acquired through foreclosure (“foreclosure property”) that we hold primarily for sale to customers in the ordinary course of business, and

	•	other non-qualifying income from foreclosure property. See “— Taxation of Our Company — Foreclosure Property.”


	•	We will be subject to a 100% tax on net income from sales or other dispositions of property, other than foreclosure property, but including mortgage loans, that we hold primarily for sale to customers in the ordinary course of business, which are referred to in the Internal Revenue Code as “prohibited transactions.” Whether property is held primarily for sale to customers in the ordinary course of a trade or business depends on all the facts and circumstances surrounding the particular transactions. See “— Taxation of Our Company — Prohibited Transactions Tax.”

	•	If we fail to satisfy the 75% gross income test or the 95% gross income test, as described below under “— Requirements for Qualification — Income Tests,” but nonetheless continue to qualify as a REIT because we meet other requirements, we will be subject to a 100% tax on:


	•	the greater of (1) the amount by which we fail the 75% test, or (2) the excess of 90% of our gross income (except gross income from prohibited transactions) over the amount of gross income attributable to sources that qualify under the 95% test, multiplied by

	•	a fraction the numerator of which is our taxable income determined without any dividends paid deductions and any net operating loss deduction and by excluding any net capital gain (net long term capital gain in excess of net short term loss) and the denominator of which is our gross income excluding gross income from prohibited transactions, long term capital gain and short term capital gain to the extent of any short term capital loss and income from foreclosure property to the extent it does not meet the 75% test.


	•	If we fail to distribute during a calendar year at least the sum of: (1) 85% of our REIT ordinary income for the year, (2) 95% of our REIT capital gain net income for the year, and (3) any undistributed taxable income from earlier periods, then we will be subject to a 4% excise tax on the excess of the required distribution over the amount we actually distributed. This excise tax is computed in a different manner than the distribution requirements described under “— Requirements for Qualification — Annual Distribution Requirements” and applies even though such requirements are met.

	•	We may elect to retain and pay income tax on our net capital gain. In that case, a U.S. stockholder would be taxed on its proportionate share of our undistributed net capital gain (to the extent that we make a timely designation of such gain to the stockholder) and would receive a credit or refund for its proportionate share of the tax we paid.

	•	We will be subject to a 100% excise tax on improperly allocated amounts due to transactions with a taxable REIT subsidiary that are not conducted on an arm’s-length basis.

	•	If we acquire any asset from a “C corporation” (that is, a corporation generally subject to the full corporate-level tax) in a transaction in which the basis of the asset in our hands is determined by reference to the basis of the asset in the hands of the C corporation, and we recognize gain on the disposition of the asset during the 10 year period beginning on the date that we acquired the asset, then the asset’s “built-in” gain will be subject to tax at the highest regular corporate rate unless we make an election under Treasury Regulations Section 1.337(d)-7(c) to cause the C corporation to recognize all of the gain inherent in the property at the time of acquisition of the asset.

	•	With respect to an equity interest in either a taxable mortgage pool or a residual interest in a real estate mortgage investment conduit (“REMIC”), the ownership of which is attributed to us or to a


		REIT in which we own an interest, we will pay tax at the highest corporate rate on the amount of any “excess inclusion income” for the taxable year allocable to the percentage of our shares that are held by “disqualified organizations.” “Excess inclusion income” is an amount, with respect to any calendar quarter, equal to the excess, if any, of (a) income allocable to the holder of the residual interest in a REMIC or an equity interest in a taxable mortgage pool over (b) the sum of an amount for each day in the calendar quarter equal to the product of (i) the adjusted issue price of such interest at the beginning of the quarter (unless such interest has no significant value, in which case the adjusted issue price is deemed to be nothing) multiplied by (ii) 120% of the long-term Federal rate (determined on the basis of compounding at the close of each calendar quarter and properly adjusted for the length of such quarter). A “disqualified organization” includes the United States; any state or political subdivision of the United States; any foreign government; any international organization; any agency or instrumentality of any of the foregoing; any other tax-exempt organization, other than a farmer’s cooperative described in section 521 of the Internal Revenue Code, that is exempt both from income taxation and from taxation under the unrelated business taxable income provisions of the Internal Revenue Code; and any rural electrical or telephone cooperative. For this reason, our charter will prohibit disqualified organizations from owning our common stock. However, this prohibition may not prevent us from incurring this tax.

In addition, notwithstanding our status as a REIT, we may also have to pay certain state and local income taxes, because not all states and localities treat REITs in the same manner that they are treated for federal income tax purposes. Moreover, any taxable REIT subsidiary (as further described below) in which we own an interest will be subject to federal, state and local corporate income tax on its net income.

Qualified REIT Subsidiaries. If a REIT owns a corporate subsidiary that is a “qualified REIT subsidiary,” the separate existence of that subsidiary is disregarded for federal income tax purposes. Generally, a qualified REIT subsidiary is a corporation, other than a taxable REIT subsidiary, all of the capital stock of which is owned by the REIT. All assets, liabilities and items of income, deduction and credit of the qualified REIT subsidiary will be treated as assets, liabilities and items of income, deduction and credit of the REIT itself. A qualified REIT subsidiary of ours is not subject to federal corporate income taxation, although it may be subject to state and local taxation in some states.

Taxable REIT Subsidiaries. A “taxable REIT subsidiary” is an entity that is taxable as a corporation in which we directly or indirectly own stock and that elects with us to be treated as a taxable REIT subsidiary. In addition, if one of our taxable REIT subsidiaries owns, directly or indirectly, securities representing 35% or more of the vote or value of a subsidiary corporation, that subsidiary will also be treated as a taxable REIT subsidiary of ours. However, an entity will not qualify as a taxable REIT subsidiary if it directly or indirectly operates or manages a lodging or health care facility or generally provides to another person, under a franchise, license or otherwise, rights to any brand name under which any lodging facility or health care facility is operated. A taxable REIT subsidiary is subject to federal income tax, and state and local income tax where applicable, as a regular C corporation. To the extent that our taxable REIT subsidiaries are required to pay taxes, we will have less cash available for distribution to stockholders. If dividends are paid by one or more of our taxable REIT subsidiaries to us, then dividends from us to our stockholders who are taxed at individual rates, up to the amount of dividends we received from our taxable REIT subsidiaries, will generally be eligible to be subject to tax at reduced capital gains rates, rather than tax at ordinary income rates. See “— Taxation of Taxable U.S. Stockholders — Regular Distributions.”

Income earned by a taxable REIT subsidiary is not attributable to the REIT. As a result, income that might not be qualifying income for purposes of the income tests applicable to REITs, discussed below under “— Requirements for Qualification — Income Tests,” could be earned by a taxable REIT subsidiary without affecting our ability to meet the income tests. However, overall, no more than 20% of the value of our assets may consist of securities of one or more taxable REIT subsidiaries, and no more than 25% of the value of our assets may consist of the securities of taxable REIT subsidiaries and other taxable subsidiaries and other assets that are not qualifying assets for purposes of the 75% asset test discussed below under “— Requirements for Qualification — Asset Tests.” We expect to have taxable REIT

Several provisions regarding the arrangements between a REIT and its taxable REIT subsidiaries ensure that a taxable REIT subsidiary will be subject to an appropriate level of federal income taxation. For example, a taxable REIT subsidiary is limited in its ability to deduct interest payments made to us. In addition, we will be obligated to pay a 100% penalty tax on some payments that we receive or on certain expenses deducted by a taxable REIT subsidiary if the economic arrangements among us and/or our taxable REIT subsidiaries are not comparable to similar arrangements among unrelated parties. See “— Taxation of Our Company — General.”

Prohibited Transactions Tax. A REIT will incur a 100% tax on the net income derived from any sale or other disposition of property, other than foreclosure property, that the REIT holds primarily for sale to customers in the ordinary course of a trade or business. Whether a REIT holds an asset primarily for sale to customers in the ordinary course of a trade or business depends, however, on the facts and circumstances in effect from time to time, including those related to a particular asset. We currently earn most of our income from the acquisition, holding, and sale of mortgages which our mortgage subsidiary originates and processes for resale. As a REIT we would incur the 100% tax on the net income from the sale of those mortgages held for sale to third parties if not earned through taxable REIT subsidiaries and such income would not qualify for the 75% or 95% gross income tests discussed under “— Requirements for Qualification — Income Tests.” We expect to continue to originate some mortgages which will be held for sale. In order to avoid the 100% tax and qualify the net income after tax from such sales for the 95% gross income test, we expect to hold and sell such mortgages in a taxable REIT subsidiary. Such income will be subject to taxation. This will reduce the amount available for distribution to our stockholders.

The prohibited transactions tax may also impact our ability to efficiently leverage the pool of mortgages we hold for investment. We are likely to leverage our equity in such mortgages by financing a portion of their acquisition. See “Business — Mortgage Portfolio.” There are two basic methods of leveraging a portfolio of loans. First, we could assign as security for a loan a group of mortgages. Such an assignment does not result in a sale unless and until the security for the debt is foreclosed and hence does not give rise to any income on which the 100% tax would be imposed. A second method is securitization, which is the issuance of an interest in an entity or a segregated pool holding the loans rather than merely assigning the loans as security for a debt. Securitization often is a more efficient method of leveraging in that a greater percentage of the value of the collateral can often be obtained at a lower financing cost. For this reason, we are likely to engage in securitization transactions. Securitization often results in a sale of the collateral or a portion thereof to the lender or to the entity which issues the securitized debt or of the debt security itself. Thus, it may result in transactions to which the 100% tax would apply to any net income. It is important to note, however, that the 100% tax is only incurred (and there is only gross income on the transaction for the purpose of the income tests) to the extent of any taxable gain on the transaction. Taxable gain is the excess of the sale price over the seller’s tax basis in the property sold. Many securitizations do not result in any taxable gain because the sales proceeds are not in excess of the basis allocated to the assets sold.

There are a number of basic legal structures to securitize a pool of mortgages. First, we can issue certificates constituting undivided interests in a pool of mortgages held by us or more likely held by a grantor trust in which the purchasers of the certificates are the beneficiaries. For example, we could transfer a 90% interest in a pool of mortgages to a grantor trust, the beneficial interests in which are held by purchasers of certificates, and retain the remaining 10% interest in the pool of mortgages. For tax purposes, the transfer to the grantor trust constitutes a sale of the portion of the pool transferred. However, no income is recognized unless the sales proceeds, net of selling expenses, exceed the basis allocated to the undivided interest sold. The terms of such transactions generally result in the same percentage of the adjusted basis being allocated to the interest sold as the percentage interest sold. As a result, there generally is no gain and no taxable income for purposes of the 100% tax or the income tests from such transactions. However, the use of such certificates is limited to the situation where all attributes of the

If an undivided interest in all the attributes of a mortgage pool are not passed through to a purchaser of an interest in the pool, the pool will be deemed to be a separate entity for tax purposes which will be classified as either a REMIC, a Financial Asset Securitization Investment Trust (“FASIT”) or, if no election is made to be a REMIC or a FASIT, a taxable mortgage pool. An entity, or a portion of an entity, will be classified as a taxable mortgage pool under the Internal Revenue Code if (i) substantially all of its assets consist of debt obligations or interests in debt obligations; (ii) more than 50% of those debt obligations are real estate mortgages or interests in real estate mortgages as of specified testing dates; (iii) the entity has issued debt obligations (liabilities) that have two or more maturities; (iv) the payments required to be made by the entity on its debt obligations “bear a relationship” to the payments to be received by the entity on the debt obligations that it holds as assets; and (v) no election is made by it to be a REMIC or FASIT. If less than 80% of the assets of an entity (or a portion of an entity) consist of debt obligations, these debt obligations are considered not to comprise “substantially all” of its assets, and therefore the entity would not be treated as a taxable mortgage pool. Where an entity, or a portion of an entity, is classified as a taxable mortgage pool, it is generally treated as a taxable corporation for federal income tax purposes. The interests issued by the taxable mortgage pool are viewed as either debt or equity interests in a corporation based on normal tax rules as to whether a corporate security will be treated for tax purposes as debt or equity. Thus, a taxable mortgage pool would be taxed on its net interest income after deducting its interest expense thereby defeating the single tax advantage of a REIT. In addition, the transfer of mortgages to it would be a taxable transfer for purposes of the 100% tax to the extent we were deemed to have received the debt and equity interests in exchange for our contribution of mortgages and sold the debt securities or the transfer is required to be marked to market as discussed below.

Special rules apply, however, in the case of a REIT, or a portion of a REIT, or a disregarded subsidiary of a REIT, that is a taxable mortgage pool. Thus, in a situation where we retain all of the interests deemed to be equity in a taxable mortgage pool, the taxable mortgage pool would be a qualified REIT subsidiary the assets of which would be treated as still held directly by us, rather than a subsidiary corporation subject to corporate income taxes. Thus, absent application of the mark to market rules described below, the transfer of the mortgage pool to it would be ignored and would not generate income for purposes of either the 100% tax or the income tests. Moreover, in most cases the securities deemed debt would merely be viewed as debt issued directly by the REIT collateralized by the pooled mortgages. Thus, for purposes of the income tests, the gross mortgage interest we receive on the pool would qualify for purposes of both the 75% and 95% gross income tests and the entire mortgage pool would be included in computing the assets test described below. Except for the possibility that the REIT will be responsible for paying the tax on any excess inclusion income allocated to non-taxable stockholders, such as government-related entities, the consequences of taxable mortgage pool classification will generally be confined to the REIT’s stockholders. The Treasury Department has yet to issue regulations to govern the tax treatment of stockholders of a REIT that owns an interest in a taxable mortgage pool making the tax consequences to stockholders, particularly as to excess inclusion income which is computed in the same manner as for a REMIC, somewhat unclear.

A taxable mortgage pool will probably be the preferable method of securitization so long as 100% of its equity interests are deemed owned by the REIT since it allows multi-maturity or class debt to be directly issued by the REIT without generating any taxable income from the issuance of the debt either for purposes of the 100% tax or the income tests. However, a taxable mortgage pool may present undue risk in highly leveraged situations. Unlike with a REMIC as described below, normal rules apply to determine which interests in a taxable mortgage pool are debt and which are equity. If an interest not held by us is determined to be equity rather than debt, the taxable mortgage pool would no longer qualify as a qualified REIT subsidiary. Instead, the taxable mortgage pool would be subject to corporate income tax, the transfer of mortgages to it might be a taxable sale subject to the 100% tax and it would be treated differently in our income and asset test calculations, which could adversely affect our ability to meet such tests.

An alternative structure for securitizations is a REMIC. A REMIC is essentially a taxable mortgage pool as to which REMIC status is elected. It issues regular interests which are conclusively presumed to be debt instruments and which can have different interest rates and maturities and a single residual interest which is conclusively presumed to be equity. No tax is imposed on the REMIC but the holder of the residual interest is taxed on the difference between its taxable income from the mortgage pool and its deductions, including interest on the regular interests. Because the REMIC regular interests are not required to pass through the tax character of the mortgage pool payments as principal or interest, there can be for tax purposes a significant mismatch of principal and interest between the mortgage pool and the regular interests resulting in phantom income or loss to the holder of the residual interest based on timing differences. This phantom income could create problems for a REIT holding a residual REMIC interest in meeting the REIT distribution requirements discussed under “— Requirements for Qualification — Annual Distribution Requirements” below. In addition, to the extent the mismatch results in excess inclusion income, the REIT stockholders may be taxed on phantom income. Income from both regular and residual interests in a REMIC qualify for purposes of both the 75% and 95% gross income tests, however.

No matter how a REMIC is structured, for tax purposes the transfer of the mortgages to the REMIC is treated as a contribution to the REMIC in exchange for the regular and residual interests in the REMIC which does not generate taxable income for purposes of either the 100% tax or the income tests unless the mark to market rules described below are applicable. However, the deemed disposition of the regular interests is a taxable sale. The aggregate basis of the transferor (here the REIT) in the regular and residual interests is the transferor’s cost basis in the mortgages increased by REMIC transaction costs. This basis is allocated between the regular and the residual interests received on the basis of the relative fair market value (but in no case, less than zero) of each on the date the regular interests are priced for sale. If the basis allocated to a regular interest is equal to or greater than its fair market value, no gain will be realized on the sale of the regular interest for purposes of either the 100% tax or the income tests. If the basis of the regular interest is less than its fair market value, then the difference will be taken into income over time as interest income if the regular interest is retained, or taken into income immediately if the regular interest is sold.

A third legal structure for securitization is a FASIT, which is similar to a REMIC except that the transfer of assets to it is fully taxable. For this and other reasons, a FASIT is not likely to be used by a REIT.

Another method of securitization would be for us to conduct all securitizations through a taxable REIT subsidiary with the REIT purchasing from it REMIC interests or all equity interests issued by a taxable mortgage pool. The income from such interests would qualify for purposes of both the 75% and 95% income tests. However, the profit on the securitization would be subject to regular corporate income tax. We do not currently expect to utilize this structure and only would be likely to if, due to the mark to market rules discussed below or for other reasons, it would be the only method of securitization which would avoid the 100% tax on gain from prohibited transactions.

Under the mark to market rules a dealer in securities is required to recognize gain or loss taxable at ordinary income rates on the disposition of securities held for sale rather than investment and to treat such securities held at the end of the taxable year as sold at their fair market value on the last day of the tax year. These rules to the extent applicable could, in addition to the form of the securitization, result in a taxable gain either on an otherwise nontaxable disposition of a pool mortgage or at year end.

Mortgages are securities for purposes of the mark to market rules. Residual interests in a REMIC and similar interests (which may include an equity interest in a taxable mortgage pool), however, are not securities. For purposes of these rules, a dealer in securities means a taxpayer who regularly purchases securities from or sells securities to a customer in the ordinary course of business. We intend to conduct all of our activities which would normally make us a dealer in securities in our taxable REIT subsidiaries, not in the REIT itself. For example, our wholesale operation, in which we purchase mortgages originated by one concern for sale to another, and our sale of whole loans we originate will be conducted through a taxable REIT subsidiary. The mortgages held in the REIT will be held for investment.

Nevertheless, it is possible that the securitization activities we conduct to leverage the mortgages we intend to hold in the REIT for investment might be deemed to make the REIT a dealer in securities for this purpose. In such event, we still should be exempt from the mark to market rules on our mortgage pools held for investment since a dealer may identify securities held for investment rather than for sale. In this regard, however, a Treasury Regulation proposed in 1995 but not finalized to date states that, “If a taxpayer expects to contribute securities (for example, mortgages) to a trust or entity, including a REMIC, in exchange for interests therein (including ownership interests or debt issued by the trust or other entity), the contributed securities qualify as held for investment... or not held for sale [for purposes of the mark to market rules] only if the taxpayer expects each of the interests received (whether or not a security within the meaning of [the mark to market rules]), to be either held for investment or not held for sale to customers in the ordinary course of the taxpayer’s trade or business.” If finalized in its current form, and if valid, this proposed regulation might be interpreted to make the mark to market rules applicable to the deemed transfer of a mortgage pool in any securitization by us using either a REMIC or a taxable mortgage pool. On the other hand, one can argue that this proposed regulation even if finalized would not apply to a securitization through a taxable mortgage pool which is a qualified REIT subsidiary in any event because either (i) there is no transfer of mortgages in this situation since the taxable mortgage pool assets are treated as remaining directly owned by the REIT or (ii) only the equity interests in a taxable mortgage pool which will be retained are received in exchange for the transfer of mortgages since the debt is deemed issued directly by the taxable mortgage pool. We expect to take the position that our securitization activities in the REIT will not be subject to the mark to market rules. There can be no assurance that the IRS would not take a contrary position and that a court would not sustain such a position if taken. If so, we might incur the 100% tax on gain on our securitization transactions or be forced to use less desirable forms of securitization to avoid such tax.

In any event, we will conduct our future securitizations to attempt to ensure that we do not incur the 100% tax or adversely affect our status as a REIT. As a result, we may be precluded from maximizing the efficiency or leverage of securitization transactions.

Foreclosure Property. We will be subject to tax at the maximum corporate rate on any income from foreclosure property, other than income that otherwise would be qualifying income for purposes of the 75% gross income test, less expenses directly connected with the production of that income. However, gross income from foreclosure property will qualify under the 75% and 95% gross income tests. Foreclosure property is any real property, including interests in real property, and any personal property incident to such real property, acquired by a REIT as the result of the REIT’s having bid on the property at foreclosure, or having otherwise reduced such property to ownership or possession by agreement or process of law after actual or imminent default on indebtedness secured by the property (any such proceeding or agreement referred to as a “Repossession Action”). Property acquired by a Repossession Action will not be considered “foreclosure property” if (a) the REIT held or acquired the property securing indebtedness for sale to customers in the ordinary course of business or (b) the lease or loan was acquired or entered into with intent to take Repossession Action or in circumstances where the REIT had reason to know a default would occur. The determination of such intent or reason to know must be based on all relevant facts and circumstances. In no case will property be considered foreclosure property unless the REIT makes a proper election to treat the property as foreclosure property.

A REIT will not be considered to have foreclosed on a property where the REIT takes control of the property as a mortgagee-in-possession and cannot receive any profit or sustain any loss except as a creditor of the mortgagor. Property generally ceases to be foreclosure property at the end of the third taxable year following the taxable year in which the REIT acquired the property (or longer if an extension is granted by the IRS). This period (as extended, if applicable) terminates, and foreclosure property ceases to be foreclosure property on the first day:


	•	on which a lease is entered into for the property that, by its terms, will give rise to income that does not qualify for purposes of the 75% gross income test, or any amount is received or accrued, directly or indirectly, pursuant to a lease entered into on or after such day that will give rise to income that does not qualify for purposes of the 75% gross income test;


	•	on which any construction takes place on the property, other than completion of a building or any other improvement, where more than 10% of the construction was completed before default became imminent;

	•	which is more than 90 days after the day on which the REIT acquired the property and the property is used in a trade or business which is conducted by the REIT, other than through an independent contractor from whom the REIT itself does not derive or receive any income.

We may have the option to foreclose on mortgage loans when a borrower is in default. The foregoing rules would affect the implications of a decision by us to foreclose on a particular mortgage loan and may affect whether we will choose to foreclose with regard to a particular mortgage loan.

To qualify as a REIT, we must elect to be treated as a REIT, and we must meet various (a) organizational requirements, (b) gross income tests, (c) asset tests, and (d) annual distribution requirements as described below:

Organizational Requirements. A REIT is a corporation, limited liability company, trust or association that meets each of the following requirements:


	1. It is managed by one or more trustees or directors;

	2. Its beneficial ownership is evidenced by transferable shares, or by transferable certificates of beneficial interest;

	3. It would be taxable as a domestic corporation, but for Sections 856 through 860 of the Internal Revenue Code;

	4. It is neither a financial institution nor an insurance company subject to special provisions of the federal income tax laws;

	5. At least 100 persons are beneficial owners of its shares or ownership certificates (determined without reference to any rules of attribution);

	6. Not more than 50% in value of its outstanding shares or ownership certificates is owned, directly or indirectly, by five or fewer individuals, which the federal income tax laws define to also include certain entities described below, during the last half of any taxable year;

	7. At the close of its tax year, it has no earnings and profits accumulated in a non-REIT tax year; and

	8. It elects to be a REIT, or has made such election for a previous taxable year, and satisfies all relevant filing and other administrative requirements established by the IRS that must be met to elect and maintain REIT status.

We must meet requirements 1 through 4 during our entire taxable year and must meet requirement 5 during at least 335 days of a taxable year of 12 months, or during a proportionate part of a taxable year of less than 12 months. If we comply with all the requirements for ascertaining information concerning the ownership of our outstanding shares in a taxable year described below and have no reason to know that we violated requirement 6, we will be deemed to have satisfied requirement 6 for that taxable year.

For purposes of determining share ownership under requirement 6, an “individual” generally includes a supplemental unemployment compensation benefits plan, a private foundation, or a portion of a trust permanently set aside or used exclusively for charitable purposes. An “individual,” however, generally does not include a trust that is a qualified employee pension or profit sharing trust under the federal income tax laws, and beneficiaries of such a trust will be treated as holding our shares in proportion to their actuarial interests in the trust for purposes of requirement 6.

We are required to solicit information from certain of our record stockholders to verify actual stock ownership levels, and our charter provides for restrictions regarding the transfer of our stock in order to aid in meeting the stock ownership requirements. See “Description of Securities — Transfer Restrictions.” We will be treated as satisfying the 50% rule if we comply with the demand letter and record keeping requirements discussed below, and if we do not know, and by exercising reasonable diligence would not have known, whether we failed to satisfy the 50% rule. We anticipate that we will satisfy the stock ownership tests immediately following the offering, and will use reasonable efforts to monitor our stock ownership in order to ensure continued compliance with these tests. If we were to fail either of the stock ownership tests, we would generally be disqualified from REIT status.

To monitor our compliance with the stock ownership tests, we are required to maintain records regarding the actual ownership of our shares of stock. To do so, we are required to demand written statements each year from the record holders of certain percentages of our shares of stock in which the record holders are to disclose the actual owners of the shares (i.e., the persons required to include our dividends in gross income). A REIT with 2,000 or more record stockholders must demand statements from record holders of 5% or more of its shares, one with fewer than 2,000, but more than 200, record holders must demand statements from record holders of 1% or more of its shares, while a REIT with 200 or fewer record stockholders must demand statements from record holders of 0.5% or more of its shares. A list of those persons failing or refusing to comply with this demand must be maintained as part of our records. A stockholder who fails or refuses to comply with the demand must submit a statement with his tax return disclosing the actual ownership of the shares of stock and certain other information.

As to requirement 7, an existing corporation will qualify as a REIT only if, at the close of its taxable year, it has no earnings and profits accumulated in any non-REIT year. If we have been an S corporation for all our prior tax years, we will have no accumulated earnings and profits and thus will meet this requirement. We filed an election to be taxed as an S corporation for our initial tax year and such election has not been revoked or terminated. Nevertheless, the S corporation requirements are highly technical and complex. Thus, there can be no assurance that the IRS might not assert that we failed to qualify as an S corporation for some reason unknown to us. If the IRS were successful in such a contention, we would not be eligible to qualify as a REIT until the tax year in which we paid out any accumulated earnings and profits. In addition, if we were not an S corporation immediately prior to the completion of the offering, our tax year would not end on the date the S election is purportedly terminated, requiring us to meet the income and assets tests described below for all of calendar 2004 rather than only our short tax year in order to qualify as a REIT for our tax year ending December 31, 2004.

Normally each item of our income for the year we terminate our S election (i.e., 2004) is allocated on a pro-rata basis between each day of the short S corporation taxable year and our short C corporation taxable year (i.e., our short REIT taxable year). This pro-rata rule does not apply if either (i) we and our stockholders on the first day of the REIT short taxable year consent; or (ii) there is a 50% or more change in ownership of our stock due to a sale or exchange during the calendar year the S election terminates. If either of these is true, we allocate our S termination year income under our normal accounting method as if we had closed our books on the S termination date. Since new stock sold in this offering will not count as a sale or exchange for this purpose, the S election will be terminated prior to the consummation of the offering by transfer of stock to a non-qualified S corporation stockholder enabling us to make an election not to have the pro-rata rule apply by filing the consent of our stockholders immediately prior to the consummation of the offering.

Income Tests. We must satisfy two gross income tests annually to maintain our qualification as a REIT. First, at least 75% of our gross income for each taxable year must consist of defined types of income that we derive, directly or indirectly, from investments relating to real property or mortgages on real property or qualified temporary investment income. Qualifying income for purposes of this 75% gross income test generally includes:


	•	rents from real property;

	•	interest on debt secured by mortgages on real property, or on interests in real property;


	•	dividends or other distributions on, and gain from the sale of, shares in other REITs;

	•	gain from the sale of real property or mortgage loans not held primarily for sale in the ordinary course of business;

	•	income derived from the temporary investment of new capital that is attributable to the issuance of our shares of common stock or a public offering of our debt with a maturity date of at least five years and that we receive during the one-year period beginning on the date on which we received such new capital;

	•	amounts, such as commitment fees, received in consideration for entering into an agreement to make a loan secured by real property, unless such amounts are determined by income and profits;

	•	income derived from a REMIC in proportion to the real estate assets held by the REMIC, unless at least 95% of the REMIC’s assets are real estate assets in which case all of the income derived from the REMIC; and

	•	gross income from foreclosure property. See “— Taxation of Our Company — Foreclosure Property.”

Second, in general, at least 95% of our gross income for each taxable year must consist of (i) income that is qualifying income for purposes of the 75% gross income test, (ii) other types of interest and dividends, (iii) gain from the sale or disposition of stock or securities, (iv) income from certain hedging instruments including some interest rate swap and cap agreements, options, futures and forward contracts entered into to hedge interest rate risk on debt incurred or to be incurred to acquire or carry qualified real estate assets, or (v) any combination of these. Gross income from our sale of property that we hold primarily for sale to customers in the ordinary course of business is excluded from both the numerator and the denominator in both income tests.

The 75% and 95% tests are based on gross income. Consequently, offsetting expenses, such as interest expense incurred to provide assets generating interest income, are not deducted. However, as to income from a sale of assets only the gain counts, not the gross amount received. The income that is analyzed for purposes of the REIT income tests generally will differ materially in amount and type from the income described or reported for financial accounting purposes.

For purposes of the 75% and 95% gross income tests, a REIT is deemed to have earned a proportionate share of the income earned by any partnership, or any limited liability company treated as a partnership for U.S. federal income tax purposes, in which it owns an interest, which share is determined by reference to its capital interest in such entity, and is deemed to have earned the income earned by any qualified REIT subsidiary. A sole member limited liability company (i.e., one that is 100% owned by another entity) is not treated as a separate entity for tax purposes unless it elects to be treated as a corporation for tax purposes. Thus, sole member limited liability companies owned directly or indirectly by the REIT and not making an election to be taxed as a taxable REIT subsidiary will be treated in a manner similar to a qualified REIT subsidiary.

The following paragraphs discuss the specific application of the gross income tests to us.

Our share of dividends qualify for purposes of the 95% gross income test but not for purposes of the 75% gross income test. The rules for treating a REIT as earning the income earned and holding the assets held by 100% owned entities or the percentage interest owned in unincorporated entities does not apply to taxable REIT subsidiaries. A taxable REIT subsidiary will pay income tax at regular corporate rates on any income that it earns. The balance of a taxable REIT subsidiary’s income after taxes will be available for distribution as a dividend to the operating company. Our (i.e., the REIT’s) share of distributions from a taxable REIT subsidiary will thus qualify for purposes of the 95% gross income test but not the 75% gross income test. Consequently, we may earn up to 25% of our income from taxable REIT subsidiaries (if no other non-qualifying income is earned directly or indirectly). We may engage in activities indirectly through a taxable REIT subsidiary as necessary or convenient to avoid earning income or rendering services that would jeopardize our REIT status if we engaged in the activities directly. In particular, we

Interest (including original issue discount and market discount income) on obligations secured by real property or an interest in real property is REIT qualifying income for both gross income tests. We expect to invest the net proceeds of this offering in leveraged mortgage and mortgage backed security portfolios held for investment rather than sale. The income from such portfolios should qualify for both the 95% and the 75% gross income tests with minor exceptions, the most likely of which are discussed below. We are likely to leverage our equity in such mortgages by financing a portion of their acquisition through securitizations as discussed above under “— Taxation of Our Company — Prohibited Transactions Tax.” Whether the gross income from such pools is included in the tests without offset for the related interest expense depends on the form of the lending or securitization transactions. In some cases we may transfer mortgages to such pools in exchange for interests therein or retain only a portion of such pools and transfer the balance. In general, income from the interests we retain, such as regular or residual interests in REMICs, will qualify under both income tests. The amount includable in our gross income with respect to a regular or residual interest in a REMIC generally is treated as interest on an obligation secured by a mortgage on real property. If, however, less than 95% of the assets of a REMIC consists of real estate assets, the interest income from a regular or residual interest will be treated as interest on an obligation secured by real property in the same proportion that the REMIC’s interest would be so treated. Interest income received with respect to non-REMIC pass-through bonds and pass-through debt instruments, such as collateralized mortgage obligations, however, will not be qualifying income for purposes of the 75% gross income test but will qualify for purposes of the 95% gross income test.

If we receive interest income with respect to a mortgage loan that is secured by both real property and other property and the highest principal amount of the loan outstanding during a taxable year exceeds the fair market value of the real property on the date we became committed to make or purchase the mortgage loan, a portion of the interest income will not be qualifying income for purposes of the 75% gross income test, but will be qualifying income for purposes of the 95% gross income test. The portion of the interest income that will not be qualifying income for purposes of the 75% gross income test will be equal to the portion of the principal amount of the loan that is not secured by real property — that is, the amount by which the loan exceeds the value of the real estate that is security for the loan. Accordingly, in order to determine the extent to which the interest earned on our loans constitutes qualifying income for purposes of the REIT income tests, we may need to determine the value of the real estate at the time we acquire each loan. Although we will seek to be prudent in making these determinations, there can be no assurances that the IRS might not disagree with our determinations and assert that a lower value is applicable, which could negatively impact our ability to qualify as a REIT. These considerations also might restrict the types of loans that we can make in the future.

Interest earned by a REIT ordinarily does not qualify as income meeting the 75% or 95% gross income tests if the determination of all or some of the amount of interest depends in any way on the income or profits of any person. Interest will not be disqualified from meeting such tests, however, solely by reason of being based on a fixed percentage or percentages of receipts or sales. In some instances, the interest income from a mortgage loan may be based in part on the borrower’s profits or net income. That scenario generally will cause the income from the loan to be non-qualifying income for purposes of both gross income tests unless the borrower leases substantially all of its interest in the property to tenants and the rental income derived by the borrower would qualify as rents from real property if it had been earned directly by the REIT. We do not plan to hold mortgages as to which the determination of any portion of the interest depends in any way on the income or profits of any person.

Many of the mortgages we will hold are likely to have prepayment penalties. A penalty for prepayment of a mortgage is interest and thus such payments will be qualifying income for both the 75% and 95% gross income tests.

Although contingent interest under a shared appreciation provision in a mortgage (i.e., a provision entitling the lender to receive a share of any gain realized if the property is or were sold) is generally treated as interest for tax purposes, any such income is treated as gain on the sale of the property securing the mortgage for purposes of applying the REIT income tests. The REIT will be deemed to have a holding period for the property for the shorter of the period the shared appreciation provision was part of the mortgage or the owner of the property held such property. However, the REIT will normally be treated as holding the property for at least the four year safe harbor period in the event the property is sold or disposed of in bankruptcy. If the owner of the property held it for sale in the ordinary course of a trade or business, then the deemed gain would be so treated in the hands of the REIT. We currently do not plan to hold shared appreciation mortgages.

From time to time, we may sell mortgage pools we have acquired for investment or individual assets therein. Income from the disposition of mortgages or investment portfolios held for investment will be qualifying income for both gross income tests as opposed to income from the sale of mortgages or mortgage pools held for sale in the ordinary course. Whether a REIT holds an asset “primarily for sale to customers in the ordinary course of a trade or business” depends on the facts and circumstances in effect from time to time, including those related to a particular asset. We will attempt to comply with the terms of safe-harbor provisions in the federal income tax laws prescribing when an asset sale will not be characterized as a prohibited transaction. We cannot assure you, however, that we can comply with the safe-harbor provisions or that we will avoid owning property outside of a taxable REIT subsidiary that may be characterized as property held “primarily for sale to customers in the ordinary course of a trade or business.” We may form or acquire a taxable REIT subsidiary to hold and dispose of those properties we conclude may not fall within the safe-harbor provisions.

From time to time, we may enter into hedging transactions with respect to one or more of our assets or liabilities. Our hedging activities may include entering into interest rate swaps, caps, and floors, options to purchase such items, and futures and forward contracts. Any periodic income or gain from the disposition of any financial instrument for these or similar transactions to hedge indebtedness we incur to acquire or carry “real estate assets” should be qualifying income for purposes of the 95% gross income test, but not the 75% gross income test. Since the financial markets continually introduce new and innovative instruments related to risk-sharing or trading, it is not entirely clear which such instruments will generate income which will be considered qualifying income for purposes of the gross income tests. We intend to structure any hedging or similar transactions so as not to jeopardize our status as a REIT.

We will receive various fees in connection with our activities regarding originating, purchasing and holding mortgage loans. These fees will be qualifying income for purposes of both the 75% and 95% income tests only if they are received in consideration for entering into an agreement to make or acquire a loan secured by real property, and the fees are not determined by income and profits. Therefore, commitment fees incurred in connection with agreements to make mortgage loans or purchase them from others will generally be qualifying income for purposes of both income tests. This is true even if the loans committed to are never made or the loans committed to are sold in whole or in part. On loans we originate through our retail operation, some of our fees for agreeing to make the loan are denominated as documentation and other charges due to state law regulations on fees chargeable even though such fees have no relationship to the cost or value of services performed for borrowers. We expect to take the position that such fees are fees for agreeing to make the loan. The IRS may disagree with this position to the extent such fees are only paid if a loan closes. Even if these fees do not qualify for either of the gross income tests, they are not expected to equal 5% of the REIT’s gross income. Other fees, such as fees received for servicing loans, are not qualifying income for purposes of either income test. If these fees are earned by a taxable REIT subsidiary of ours, then the income from these services will not be included for purposes of our income tests but any dividends received from such subsidiaries will qualify for purposes of the 95% gross income test. As a result, in the future we plan to have a taxable REIT subsidiary perform servicing and other activities that would yield non-qualifying income. See “— Taxation of Our Company — Taxable REIT Subsidiaries.”

As discussed in “Business — Other Activities,” our mortgage subsidiary holds ownership interests in several entities that engage in non-mortgage lending activities such as providing title insurance and other services to borrowers, engaging in collection activities and originating loans to insurance companies and agents. None of these activities will generate income qualifying under either gross income test except, as to the 95% test, from dividends if such activities are conducted through taxable REIT subsidiaries. For this reason, the ownership interests in these subsidiaries will remain the property of our mortgage subsidiary which will be a taxable REIT subsidiary.

If we fail to satisfy one or both of the 75% or 95% gross income tests for any taxable year, we may nevertheless qualify as a REIT for the year if we are entitled to relief under the Internal Revenue Code. Generally, we may avail ourselves of the relief provisions if:


	•	our failure to meet these tests was due to reasonable cause and not due to willful neglect;

	•	we attach a schedule of the sources of our income to our U.S. federal income tax return; and

	•	any incorrect information on the schedule was not due to fraud with intent to evade tax.

If we are entitled to avail ourselves of the relief provisions, we will maintain our qualification as a REIT but will be subject to certain penalty taxes as described above in “— Taxation of Our Company — General.” We may not, however, be entitled to the benefit of these relief provisions in all circumstances. If these relief provisions do not apply to a particular set of circumstances, we will not qualify as a REIT.

Asset Tests. At the close of each quarter of our taxable year, we must satisfy five tests relating to the nature and diversification of our assets:


	•	cash or cash items, including certain receivables;

	•	government securities;

	•	interests in real property, including leaseholds and options to acquire real property and leaseholds;

	•	interests in mortgages on real property;

	•	stock in other REITs; and

	•	investments in stock or debt instruments during the one-year period following our receipt of new capital that we raise through equity offerings or public offerings of debt with at least a five-year term.

Second, of our investments not included in the 75% asset class, the value of our interest in any one issuer’s securities (other than a taxable REIT subsidiary) may not exceed 5% of the value of our total assets.

Third, we may not own more than 10% of the voting power or value of any one issuer’s outstanding securities (other than a taxable REIT subsidiary or securities included in the 75% asset class).

Fourth, no more than 20% of the value of our total assets may consist of the securities of one or more taxable REIT subsidiaries.

Fifth, no more than 25% of the value of our total assets may consist of the securities of taxable REIT subsidiaries and other taxable subsidiaries and other assets that are not qualifying assets for purposes of the 75% asset test.

For purposes of the second and third asset tests, the term “securities” does not include stock in another REIT, equity or debt securities of a qualified REIT subsidiary or taxable REIT subsidiary, mortgage loans that constitute real estate assets, or equity interests in a partnership. The term “securities,” however, generally includes debt securities issued by a partnership or another REIT, except that certain “straight debt” securities are not treated as “securities” for purposes of the 10% value test (for example, qualifying debt securities of a corporation if such securities are the only interests we or any taxable REIT

Qualified real estate assets include interests in mortgages on real property to the extent the principal balance of a mortgage does not exceed the fair market value of the associated real property, regular or residual interests in a REMIC (except that, if less than 95% of the assets of a REMIC consists of “real estate assets” our regular or residual interest in the REMIC will be treated as a real estate asset in the same proportion that the REMIC’s assets would be so treated) and shares of other REITs. Non-REMIC debt instruments, however, are not qualified real estate assets for this purpose. We will monitor the status of our assets for purposes of the various asset tests and will seek to manage our portfolio to comply at all times with such tests. There can be no assurances, however, that we will be successful in this effort. In this regard, to determine our compliance with these requirements, we will need to estimate the value of the real estate securing our mortgage loans at various times. Although we will seek to be prudent in making these estimates, there can be no assurances that the IRS might not disagree with these determinations and assert that a lower value is applicable, in which case we might not satisfy the 75% asset test and would fail to qualify as a REIT.

For purposes of the asset tests, we will be deemed to own a proportionate share of the assets of any grantor trust, any partnership, or any limited liability company treated as a partnership for U.S. federal income tax purposes, in which we own an interest, which share is determined by reference to our capital interest in the entity, and will be deemed to own the assets owned by any qualified REIT subsidiary and any other entity that is disregarded for U.S. federal income tax purposes.

The assets tests described above are based on total assets rather than net assets after being offset by associated liabilities. For this reason, the amount of assets included may be impacted by what methods we use to leverage mortgage pools. See “— Taxation of Our Company — Prohibited Transactions Tax.” Because what is treated as a sale for financial accounting purposes may vary from the treatment for federal income tax purposes, our assets for purposes of the REIT assets tests may differ materially in an amount and type from our assets for financial accounting purposes.

As discussed above, a substantial portion of our historic income will not qualify for either gross income test unless the activities generating such income are conducted through a taxable REIT subsidiary. Thus, existing businesses with substantial value will be in entities which elect, after this offering, to be taxable REIT subsidiaries. The fourth and fifth asset tests described above will only be met if the securities of such taxable REIT subsidiaries do not exceed 20% of the value of our total assets and the value of such securities and other assets not qualifying for purposes of the 75% asset test do not exceed 25% of our total assets. Our projections of future operations indicate that these requirements are likely to be met. We have represented to Barnes & Thornburg in conjunction with its opinion that we will manage our assets so that this will be the case. There can be no assurances, however, that circumstances beyond our control will not prevent this or that the IRS will not successfully contest our valuation methods for this purpose.

We will monitor the status of our assets for purposes of the various asset tests and will manage our portfolio in order to comply at all times with such tests. After initially meeting the asset tests at the close of any quarter, we will not lose our status as a REIT for failure to satisfy the asset tests at the end of a later quarter solely by reason of changes in asset values. If we fail to satisfy the asset tests because we acquire securities or other property during a quarter, we can cure this failure by disposing of sufficient non-qualifying assets within 30 days after the close of that quarter. For this purpose, an increase in our capital interest in any partnership or limited liability company in which we own an interest will be treated as an acquisition of a portion of the securities or other property owned by that partnership or limited liability company. We intend to maintain adequate records of the value of our assets to ensure compliance with the asset tests and to take any available action within 30 days after the close of any quarter as may be required to cure any noncompliance with the asset tests. We cannot ensure that these steps always will be successful. If we fail to cure the noncompliance with the asset tests within this 30-day period, we could fail to qualify as a REIT.

Annual Distribution Requirements. To maintain our qualification as a REIT, we are required to distribute dividends, other than capital gain dividends, to our stockholders in an amount at least equal to the sum of:


	•	90% of our “REIT taxable income,” and

	•	90% of our after tax net income, if any, from foreclosure property, minus

	•	the excess of the sum of specified items of our non-cash income items over 5% of REIT taxable income, as described below.

For purposes of these distribution requirements, our “REIT taxable income” is computed without regard to the dividends paid deduction and net capital gain. In addition, for purposes of this test, the specified items of non-cash income include income attributable to leveled stepped rents, certain original issue discount, certain like-kind exchanges that are later determined to be taxable and income from cancellation of indebtedness. In addition, if we disposed of any asset we acquired from a corporation which is or has been a C corporation in a transaction in which our basis in the asset is determined by reference to the basis of the asset in the hands of that C corporation and we did not elect to recognize gain currently in connection with the acquisition of such asset, we would be required to distribute at least 90% of the after-tax gain, if any, we recognize on a disposition of the asset within the ten-year period following our acquisition of such asset, to the extent that such gain does not exceed the excess of:


	•	the fair market value of the asset on the date we acquired the asset, over

	•	our adjusted basis in the asset on the date we acquired the asset.

Only distributions that qualify for the “dividends paid deduction” available to REITs under the Internal Revenue Code are counted in determining whether the distribution requirements are satisfied. We must make these distributions in the taxable year to which they relate, or in the following taxable year if they are declared before we timely file our tax return for that year and are paid on or before the first regular dividend payment following the declaration and we elect on our tax return to have a specified dollar amount of such distributions treated as if paid in the prior year. For these and other purposes, dividends declared by us in October, November or December of one taxable year and payable to a stockholder of record on a specific date in any such month shall be treated as both paid by us and received by the stockholder during such taxable year, provided that the dividend is actually paid by us by January 31 of the following taxable year.

In addition, dividends distributed by us must not be preferential. If a dividend is preferential, it will not qualify for the dividends paid deduction. To avoid being preferential, every stockholder of the class of stock to which a distribution is made must be treated the same as every other stockholder of that class, and no class of stock may be treated other than according to its dividend rights as a class.

To the extent that we do not distribute all of our net capital gain, or we distribute at least 90%, but less than 100%, of our REIT taxable income, as adjusted, we will be required to pay tax on this undistributed income at regular ordinary and capital gain corporate tax rates. Furthermore, if we fail to distribute during each calendar year (or, in the case of distributions with declaration and record dates falling in the last three months of the calendar year, by the end of the January immediately following such year) at least the sum of (1) 85% of our REIT ordinary income for such year, (2) 95% of our REIT capital gain income for such year, and (3) any undistributed taxable income from prior periods, we will be subject to a 4% nondeductible excise tax on the excess of such required distribution over the amounts actually distributed. We intend to make timely distributions sufficient to satisfy the annual distribution requirements.

It is possible that, from time to time, we may experience timing differences between the actual receipt of income and actual payment of deductible expenses and the inclusion of that income and deduction of such expenses in arriving at our REIT taxable income. For example, we may not deduct recognized net capital losses from our “REIT taxable income.” Further, it is possible that, from time to time, we may be allocated a share of net capital gain attributable to the sale of depreciated property that exceeds our

allocable share of cash attributable to that sale. Other potential sources of non-cash taxable income include loans and securities that are financed through securitization structures, which require some or all of the available interest income from these assets to be used to repay principal on these borrowings; loans or mortgage-backed securities held by us as assets that are issued at a discount and require the accrual of taxable income in advance of the receipt of the related cash flow; loans on which the borrower is permitted to defer payments of interest; and distressed loans on which we may be required to accrue interest or discount income even though the borrower is unable to make current or past due payments. As a result of the foregoing, we may have less cash than is necessary to distribute all of our taxable income and thereby avoid corporate income tax and the excise tax imposed on certain undistributed income. In such a situation, we may need to borrow funds or issue additional shares of common or preferred stock.

Under certain circumstances, we may be able to rectify a failure to meet the distribution requirements for a year by paying “deficiency dividends” to our stockholders in a later year, which may be included in our deduction for dividends paid for the earlier year. If a determination by a court or by the IRS occurs which results for a prior year in (i) an increase in our REIT taxable income computed without regard to the dividends paid deduction and excluding net capital gain, (ii) an increase in net income from foreclosure property, (iii) an increase in the excess of net capital gain over the deduction for capital gain dividends, or (iv) a decrease in the deduction for dividends paid determined without regard to capital gain dividends, we may elect to distribute an additional dividend within 90 days after the date of such determination in an amount not to exceed the amount of such determination and claim an additional deduction for dividends paid for the taxable year effected by such determination. Although we will be able to avoid being taxed on amounts distributed as deficiency dividends, we will be required to pay to the IRS interest based upon the amount of any deduction taken for deficiency dividends.

If we fail to qualify for taxation as a REIT in any taxable year, and the relief provisions of the Internal Revenue Code do not apply, we will be required to pay taxes, including any applicable alternative minimum tax, on our taxable income in that taxable year and all subsequent taxable years (unless and until we qualify again as a REIT) at regular corporate rates. Distributions to our stockholders in any year in which we fail to qualify as a REIT will not be deductible by us and we will not be required to distribute any amounts to our stockholders. As a result, we anticipate that our failure to qualify as a REIT would reduce the cash available for distribution to our stockholders. In addition, if we fail to qualify as a REIT, all distributions to our stockholders will be taxable at ordinary income rates to the extent of our current and accumulated earnings and profits. In this event, corporate distributees may be eligible for the dividends-received deduction. Unless entitled to relief under specific statutory provisions, we will also be disqualified from taxation as a REIT for the four taxable years following the year in which we lose our qualification.

For purposes of the discussion in this prospectus, the term “United States stockholder” means a beneficial holder of our stock that is, for U.S. federal income tax purposes:


	•	a citizen or resident of the United States (as determined for U.S. federal income tax purposes);

	•	a corporation, partnership, or other entity created or organized in or under the laws of the United States or of any state thereof or in the District of Columbia, unless, in the case of a partnership, Treasury regulations provide otherwise;

	•	an estate the income of which is subject to U.S. federal income taxation regardless of its source; or

	•	a trust whose administration is subject to the primary supervision of a U.S. court and which has one or more U.S. persons who have the authority to control all substantial decisions of the trust or a trust that was in existence on August 20, 1996 and has made a valid election to be treated as a U.S. person.

Generally, in the case of a partnership that holds shares of our common stock, any partner that would be a United States stockholder if it held shares of our common stock directly is also a United States stockholder.

Regular Distributions. Distributions out of our current or accumulated earnings and profits, other than capital gain dividends, will be taxable to United States stockholders as ordinary dividends. Such REIT dividends generally are ineligible for the new reduced 15% tax rate for dividends received by individuals, trusts and estates. However, for tax years prior to 2009 such rate will apply to the extent that we make distributions attributable to amounts, if any, we receive as dividends from non-REIT corporations or to the extent that we make distributions attributable to income that was subject to tax at the REIT level. Provided that we qualify as a REIT, dividends paid by us will not be eligible for the dividends received deduction generally available to United States stockholders that are corporations. To the extent that we make distributions in excess of current and accumulated earnings and profits, the distributions will be treated as a tax-free return of capital to each United States stockholder, and will reduce the adjusted tax basis that each United States stockholder has in our stock by the amount of the distribution, but not below zero. Distributions in excess of a United States stockholder’s adjusted tax basis in its stock will be taxable as capital gain, and will be taxable as long-term capital gain if the stock has been held for more than one year. The calculation of the amount of distributions that are applied against or exceed adjusted tax basis are made on a share-by-share basis. To the extent that we make distributions, if any, that are attributable to excess inclusion income from a REMIC or taxable mortgage pool interest, such amounts may not be offset by current deductions or net operating losses of a United States stockholder. If we declare a dividend in October, November, or December of any calendar year which is payable to stockholders of record on a specified date in such a month and actually pay the dividend during January of the following calendar year, the dividend will be deemed to be paid by us and received by the stockholder on December 31st of the year preceding the year of payment. Stockholders may not include in their own income tax returns any of our net operating losses or net capital losses. Instead, these losses are generally carried over by us for potential offset against our future income.

Capital Gain Distributions. Distributions designated by us as capital gain dividends will be taxable to United States stockholders as capital gain income. We can designate distributions as capital gain dividends to the extent of our net capital gain for the taxable year of the distribution. Capital gain dividends are taxed to United States stockholders as gain from the sale or exchange of a capital asset held for more than one year. This tax treatment applies regardless of the period during which the stockholders have held their shares. If we designate any portion of a dividend as a capital gain dividend, the amount that will be taxable to the stockholder as capital gain will be indicated to United States stockholders on IRS Form 1099-DIV. For tax years prior to 2009, this capital gain income will generally be taxable to non-corporate United States stockholders at a 15% or 25% rate based on the characteristics of the asset we sold that produced the gain. We must determine the maximum amounts that we may designate as 15% and 25% capital gain dividends by performing the computation required by the Internal Revenue Code as if the REIT were an individual whose ordinary income were subject to a marginal tax rate of at least 28%. United States stockholders that are corporations may be required to treat up to 20% of certain capital gain dividends as ordinary income.

Retention of Net Capital Gains. We may elect to retain, rather than distribute as a capital gain dividend, our net capital gains. If we were to make this election, we would pay tax on such retained capital gains. In such a case, our stockholders would generally:


	•	include their proportionate share of our undistributed net capital gains in their taxable income;

	•	receive a credit for their proportionate share of the tax paid by us in respect of such net capital gain; and

	•	increase the adjusted basis of their stock by the difference between the amount of their share of our undistributed net capital gain and their share of the tax paid by us.

Qualified Dividend Income. For tax years prior to 2009, distributions that are treated as dividends may be taxed at capital gains rates, rather than ordinary income rates, if they are distributed to a non-corporate taxpayer, are properly designated by us as qualified dividend income and certain other requirements are satisfied. Dividends are eligible to be designated by us as qualified dividend income up to an amount equal to the sum of the qualified dividend income received by us during the year of the distribution from other C corporations (including any taxable REIT subsidiaries in which we own an interest), our “undistributed” REIT taxable income from the immediately preceding year, and any income attributable to the sale of a built-in-gain asset from the immediately preceding year (reduced by any federal income taxes that we paid with respect to such REIT taxable income and built-in gain).

As explained in the preceding paragraph, dividends that we receive that are qualified dividend income to us may increase the amount of dividends that we pay to our stockholders that may be designated as qualified dividend income to our stockholders. Dividends that we receive will be treated as qualified dividend income to us if certain criteria are met. For example, the dividends must be received from a domestic corporation (other than a REIT or a regulated investment company) or a qualifying foreign corporation. A foreign corporation generally will be a qualifying foreign corporation if it is incorporated in a possession of the United States, the corporation is eligible for benefits of an income tax treaty with the United States which the Secretary of Treasury determines is satisfactory, or the stock on which the dividend is paid is readily tradable on an established securities market in the United States. However, if a foreign corporation is either a foreign personal holding company, a foreign investment company or a passive foreign investment company, then it will not be treated as a qualifying foreign corporation and the dividends we receive from such an entity would not constitute qualified dividend income.

Furthermore, certain exceptions and special rules apply in order to determine whether dividends may be treated as qualified dividend income to us. These rules include certain holding requirements that we would have to satisfy with respect to the shares on which the dividend is paid, and special rules with regard to the dividends received from regulated investment companies and other REITs.

In addition, even if we designate certain dividends as qualified dividend income to our stockholders, each stockholder will have to meet certain other requirements in order to treat the dividend as qualified dividend income to the stockholder. For example, the stockholder will only be eligible to treat the dividend as qualifying dividend income if the stockholder is taxed at individual rates and meets certain holding requirements. In general, in order to treat a particular dividend as qualified dividend income, a stockholder will be required to hold our shares for more than 60 days during the 120-day period beginning on the date which is 60 days before the date on which such shares become ex-dividend with respect to such dividend. A longer holding period may apply to preferred dividends which are attributable to a period or periods aggregating in excess of 366 days.

Passive Activity Losses, Investment Interest Limitations and Other Tax Considerations of Holding Our Stock. Distributions we make, undistributed net capital gain includible in income and gains arising from the sale or exchange of our stock by a United States stockholder will not be treated as passive activity income. As a result, United States stockholders will not be able to apply any “passive losses” against income or gains relating to our stock. Distributions by us, to the extent they do not constitute a return of capital, and undistributed net capital gain includible in our stockholders’ income generally will be treated as investment income for purposes of computing the investment interest limitation under the Internal Revenue Code, provided the proper election is made.

If we, or a portion of our assets, were to be treated as a taxable mortgage pool, or if we were to acquire REMIC residual interests, our stockholders may not be permitted to offset certain portions of the dividend income they derive from our shares with their current deductions or net operating loss carryovers or carrybacks. The portion of a stockholder’s dividends that will be subject to this limitation will equal the allocable share of our excess inclusion income.

Dispositions of Stock. A United States stockholder that sells or disposes of our stock will recognize gain or loss for federal income tax purposes in an amount equal to the difference between the amount of cash or the fair market value of any property the stockholder receives on the sale or other disposition and

the stockholder’s adjusted tax basis in the stock. This gain or loss generally will be capital gain or loss and will be long-term capital gain or loss if the stockholder has held the stock for more than one year. However, any loss recognized by a United States stockholder upon the sale or other disposition of our stock that the stockholder has held for six months or less will be treated as long-term capital loss to the extent the stockholder received distributions from us which were required to be treated as long-term capital gains. All or a portion of any loss that a U.S. stockholder realizes upon a taxable disposition of shares of common stock may be disallowed if the U.S. stockholder purchases other shares of our common stock or substantially identical securities within 30 days before or after the disposition. For tax years prior to 2009, capital gain of an individual United States stockholder is generally taxed at a maximum rate of 15% where the property is held for more than one year. The deductibility of capital loss is limited. A non-corporate taxpayer may deduct capital losses not offset by capital gains against its ordinary income only up to a maximum of $3,000 annually. A non-corporate taxpayer may carry unused capital losses forward indefinitely. A corporate taxpayer must pay tax on its net capital gain at corporate ordinary income rates. A corporate taxpayer may deduct capital losses only to the extent of capital gains, with unused losses carried back three years and forward five years.

Information Reporting and Backup Withholding. We will report to our United States stockholders and the IRS the amount of dividends paid during each calendar year, along with the amount of any tax withheld. Under the backup withholding rules, a stockholder may be subject to backup withholding with respect to dividends paid and redemption proceeds unless the holder is a corporation or comes within other exempt categories and, when required, demonstrates this fact, or provides a taxpayer identification number or social security number, certifying as to no loss of exemption from backup withholding, and otherwise complies with applicable requirements of the backup withholding rules. A United States stockholder that does not provide us with its correct taxpayer identification number or social security number may also be subject to penalties imposed by the IRS. A United States stockholder can meet this requirement by providing us with a correct, properly completed and executed copy of IRS Form W-9 or a substantially similar form. Backup withholding is not an additional tax. Any amount paid as backup withholding will be creditable against the stockholder’s income tax liability, if any, and otherwise be refundable, provided the proper forms are filed on a timely basis. In addition, we may be required to withhold a portion of capital gain distributions made to any stockholders who fail to certify their non-foreign status. See “— Taxation of Non-U.S. Stockholders.” The backup withholding tax rate currently is 28%.

The IRS has ruled that amounts distributed as a dividend by a REIT will be treated as a dividend by the recipient and excluded from the calculation of unrelated business taxable income when received by a tax-exempt entity. Based on that ruling, provided that a tax-exempt stockholder has not held our stock as “debt financed property” within the meaning of the Internal Revenue Code (i.e., property the acquisition or holding of which is or is treated as financed through a borrowing by the tax-exempt United States stockholder), the stock is not otherwise used in an unrelated trade or business, and we do not hold a REMIC or taxable mortgage pool interest that gives rise to excess inclusion income, dividend income on our stock and income from the sale of our stock should not be unrelated business taxable income to a tax-exempt stockholder. However, if we were to hold residual interests in a REMIC, or if we or a pool of our assets were to be treated as a taxable mortgage pool, a portion of the dividends paid to a tax-exempt stockholder may be subject to tax as unrelated business taxable income. See — “Taxation of Our Company — Prohibited Transactions Tax” as to the possibility we might engage in transactions giving rise to excess inclusion income.

For tax-exempt stockholders that are social clubs, voluntary employees’ beneficiary associations, supplemental unemployment benefit trusts, and qualified group legal services plans exempt from U.S. federal income taxation under Sections 501(c)(7), (c)(9), (c)(17) and (c)(20) of the Internal Revenue Code, respectively, income from an investment in our stock will constitute unrelated business taxable income unless the organization is able to properly claim a deduction for amounts set aside or placed in reserve for certain purposes so as to offset the income generated by its investment in our stock.

Notwithstanding the above, however, a substantial portion of the dividends received with respect to our stock may constitute unrelated business taxable income, or UBTI, if we are treated as a “pension-held REIT” and you are a pension trust which:


	•	is described in Section 401(a) of the Internal Revenue Code; and

	•	holds more than 10%, by value, of our equity interests.

Tax-exempt pension funds that are described in Section 401(a) of the Internal Revenue Code and are exempt from tax under Section 501(a) of the Internal Revenue Code are referred to below as “qualified trusts.”


	•	it would not have qualified as a REIT but for the fact that Section 856(h)(3) of the Internal Revenue Code provides that stock owned by a qualified trust shall be treated, for purposes of the 50% ownership rule, described above, as owned by the beneficiaries of the trust, rather than by the trust itself; and

	•	either at least one qualified trust holds more than 25%, by value, of the interests in the REIT, or one or more qualified trusts, each of which owns more than 10%, by value, of the interests in the REIT, holds in the aggregate more than 50%, by value, of the interests in the REIT.

The percentage of any REIT dividends treated as unrelated business taxable income under these rules is equal to the ratio of:


	•	the unrelated business taxable income earned by the REIT, less directly related expenses, treating the REIT as if it were a qualified trust and therefore subject to tax on unrelated business taxable income, to

	•	the total gross income, less directly related expenses, of the REIT.

A de minimis exception applies where this percentage is less than 5% for any year. As a result of the limitations on the transfer and ownership of stock contained in our charter, we do not expect to be classified as a pension-held REIT.

The rules governing U.S. federal income taxation of non-United States stockholders are complex and no attempt will be made herein to provide more than a summary of these rules. “Non-United States stockholders” mean beneficial owners of shares of our stock that are not United States stockholders (as such term is defined in the discussion above under the heading entitled “— Taxation of Taxable U.S. Stockholders”).

Prospective non-United States stockholders should consult their tax advisors to determine the impact of foreign, federal, state, and local tax laws with regard to an investment in our stock and of our election to be taxed as a REIT, including any reporting requirements.

Distributions. Distributions to non-United States stockholders that are not attributable to gain from our sale or exchange of U.S. real property interests and that are not designated by us as capital gain dividends or retained capital gains will be treated as dividends of ordinary income to the extent that they are made out of our current or accumulated earnings and profits. These distributions will generally be subject to a withholding tax equal to 30% of the distribution unless an applicable tax treaty reduces or eliminates that tax. However, if income from an investment in our stock is treated as effectively connected with the non-United States stockholder’s conduct of a U.S. trade or business (or, if an income tax treaty applies, is attributable to a U.S. permanent establishment of the non-United States stockholder), the non-United States stockholder generally will be subject to federal income tax at graduated rates in the same


	•	a lower treaty rate applies and any required form, for example IRS Form W-8BEN, evidencing eligibility for that reduced rate is filed by the non-United States stockholder with us; or

	•	the non-United States stockholder files an IRS Form W-8ECI with us claiming that the distribution is effectively connected income.

Any portion of the dividends paid to non-United States stockholders that is treated as excess inclusion income of a REMIC or taxable mortgage pool will not be eligible for exemption from the 30% withholding tax or a reduced treaty rate.

Distributions in excess of our current and accumulated earnings and profits that are not treated as attributable to the gain from our disposition of a U.S. real property interest will not be taxable to non-United States stockholders to the extent that these distributions do not exceed the adjusted basis of the stockholder’s stock, but rather will reduce the adjusted basis of that stock. To the extent that distributions in excess of current and accumulated earnings and profits exceed the adjusted basis of a non-United States stockholder’s stock, these distributions will give rise to tax liability if the non-United States stockholder would otherwise be subject to tax on any gain from the sale or disposition of its stock, as described below. Because it generally cannot be determined at the time a distribution is made whether or not such distribution may be in excess of current and accumulated earnings and profits, the entire amount of any distribution normally will be subject to withholding at the same rate as a dividend. However, amounts so withheld are creditable against U.S. tax liability, if any, or refundable by the IRS to the extent the distribution is subsequently determined to be in excess of our current and accumulated earnings and profits and the proper forms are filed with the IRS by the stockholder on a timely basis. We are also required to withhold 10% of any distribution in excess of our current and accumulated earnings and profits if we are not a domestically controlled REIT and our stock is a U.S. real property interest as a result, as discussed below under “— Taxation of Non-U.S. Stockholders — Disposition of Our Stock.” Consequently, although we intend to withhold at a rate of 30% on the entire amount of any distribution, to the extent that we do not do so, any portion of a distribution not subject to withholding at a rate of 30% may be subject to withholding at a rate of 10%.

Distributions attributable to our capital gains which are not attributable to gain from the sale or exchange of a U.S. real property interest generally will not be subject to income taxation, unless (1) investment in our stock is effectively connected with the non-United States stockholder’s U.S. trade or business (or, if an income tax treaty applies, is attributable to a U.S. permanent establishment of the non-United States stockholder), in which case the non-United States stockholder will be subject to the same treatment as United States stockholders with respect to such gain (and a corporate non-United States stockholder may also be subject to the 30% branch profits tax), or (2) the non-United States stockholder is a non-resident alien individual who is present in the U.S. for 183 days or more during the taxable year and certain other conditions are satisfied, in which case the non-resident alien individual will be subject to a 30% tax on the individual’s capital gains.

For any year in which we qualify as a REIT, distributions that are attributable to gain from the sale or exchange of a U.S. real property interest, which includes some interests in real property, but generally does not include an interest solely as a creditor in mortgage loans or mortgage-backed securities, will be taxed to a non-United States stockholder under the provisions of the Foreign Investment in Real Property Tax Act, or FIRPTA. Under FIRPTA, distributions attributable to gain from sales of U.S. real property interests are taxed to a non-United States stockholder as if that gain were effectively connected with the stockholder’s conduct of a U.S. trade or business. Non-United States stockholders thus would be taxed at the normal capital gain rates applicable to United States stockholders, subject to applicable alternative minimum tax and a special alternative minimum tax in the case of nonresident alien individuals. Distributions subject to FIRPTA also may be subject to the 30% branch profits tax in the hands of a

Disposition of Our Stock. Gains recognized by a non-United States stockholder upon a sale of our stock generally will not be taxed under FIRPTA if we are a domestically controlled REIT, which is a REIT in which at all times during a specified testing period less than 50% in value of the stock was held directly or indirectly by non-United States stockholders. Because our stock will be publicly traded, we cannot assure our investors that we are or will remain a domestically controlled REIT. Even if we are not a domestically controlled REIT, however, a non-United States stockholder that owns, actually or constructively, 5% or less of our stock throughout a specified testing period will not recognize taxable gain on the sale of our stock under FIRPTA if our shares are traded on an established securities market.

If gain from the sale of the stock were subject to taxation under FIRPTA, the non-United States stockholder would be subject to the same treatment as United States stockholders with respect to that gain, subject to applicable alternative minimum tax, a special alternative minimum tax in the case of nonresident alien individuals, and the possible application of the 30% branch profits tax in the case of non-U.S. corporations. In addition, the purchaser of the stock could be required to withhold 10% of the purchase price and remit such amount to the IRS.

Gains not subject to FIRPTA will be taxable to a non-United States stockholder if the non-United States stockholder’s investment in the stock is effectively connected with a trade or business in the U.S. (or, if an income tax treaty applies, is attributable to a U.S. permanent establishment of the non-United States stockholder), in which case the non-United States stockholder will be subject to the same treatment as United States stockholders with respect to that gain; or the non-United States stockholder is a nonresident alien individual who was present in the U.S. for 183 days or more during the taxable year and other conditions are met, in which case the nonresident alien individual will be subject to a 30% tax on the individual’s capital gains.

Information Reporting and Backup Withholding. If the proceeds of a disposition of our stock are paid by or through a U.S. office of a broker-dealer, the payment is generally subject to information reporting and to backup withholding (currently at a rate of 28%) unless the disposing non-United States stockholder certifies as to the stockholder’s name, address and non-U.S. status or otherwise establishes an exemption. Generally, U.S. information reporting and backup withholding will not apply to a payment of disposition proceeds if the payment is made outside the U.S. through a foreign office of a foreign broker-dealer. If the proceeds from a disposition of our stock are paid to or through a foreign office of a U.S. broker-dealer or a non-U.S. office of a foreign broker-dealer that is (1) a “controlled foreign corporation” for U.S. federal income tax purposes, (2) a foreign person 50% or more of whose gross income from all sources for a three-year period was effectively connected with a U.S. trade or business, (3) a foreign partnership with one or more partners who are U.S. persons and who in the aggregate hold more than 50% of the income or capital interest in the partnership, or (4) a foreign partnership engaged in the conduct of a trade or business in the U.S., then (a) backup withholding will not apply unless the broker-dealer has actual knowledge that the owner is not a foreign stockholder, and (b) information reporting will not apply if the non-United States stockholder satisfies certification requirements regarding its status as a foreign stockholder. Other information reporting rules apply to non-United States stockholders, and prospective non-United States stockholders should consult their own tax advisors regarding these requirements.

New Legislation and Possible Legislative or Other Action Affecting Tax Consequences

Recently enacted legislation reduced the maximum tax rate of non-corporate taxpayers for capital gains generally from 20% to 15% (for taxable years ending on or after May 6, 2003 and before January 1, 2009) and for dividends payable to non-corporate taxpayers generally from 38.6% to 15% (for taxable years beginning after December 31, 2002 and before January 1, 2009). Without future congressional


	•	your long-term capital gains, if any, recognized on the disposition of our shares;

	•	our distributions designated as long-term capital gain dividends (except to the extent attributable to real estate depreciation, in which case such distributions continue to be subject to a 25% tax rate);

	•	our dividends distributed to you that are in turn attributable to dividends received by us from non-REIT corporations, such as taxable REIT subsidiaries; and

	•	our dividends distributed to you to the extent they are in turn attributable to income upon which we have paid corporate income tax (e.g., to the extent that we distribute taxable income that we retained and paid tax on in the prior taxable year).

Although this legislation does not adversely affect the taxation of REITs or dividends paid by REITs, the more favorable treatment of regular corporate dividends could cause investors who are individuals to consider stocks of other corporations that pay dividends as more attractive relative to stocks of REITs. It is not possible to predict whether this change in perceived relative value will occur, or what the effect will be on the market price of our stock.

You should recognize that the present U.S. federal income tax treatment of an investment in us may be modified by legislative, judicial or administrative action at any time and that any such action may affect investments and commitments previously made. The rules dealing with U.S. federal income taxation are constantly under review by persons involved in the legislative process and by the Internal Revenue Service and the Treasury Department, resulting in revisions of regulations and revised interpretations of established concepts as well as statutory changes. Revisions in federal tax laws and interpretations thereof could affect the tax consequences of an investment in us.

In particular, legislation was recently introduced in both the United States House of Representatives and the United States Senate that would amend certain rules relating to REITs. Among other changes, the proposed legislation would provide the Internal Revenue Service with the ability to impose monetary penalties, rather than a loss of REIT status, for reasonable cause violations of certain tests relating to REIT qualification. The proposed legislation would also change the formula for calculating the tax imposed for certain violations of the 75% and 95% gross income tests discussed above at “— Requirements for Qualification — Income Tests.” In general, the changes would apply to taxable years beginning after the date the legislation is enacted. As of the date hereof, this legislation has not been enacted into law, and it is not possible to predict with any certainty whether the proposed legislation will be enacted in its current form.

The following discussion summarizes certain federal income tax considerations applicable to our direct or indirect investment in any subsidiary partnerships or limited liability companies we form or acquire other than entities electing to be treated as taxable REIT subsidiaries (which are discussed under “— Taxation of Our Company — Taxable REIT Subsidiaries”) or our interests in partnerships which are owned by taxable REIT subsidiaries, each individually referred to as a Partnership and, collectively, as Partnerships, even though in most cases such entities will be limited liability companies for state law purposes. The following discussion does not cover state or local tax laws or any federal tax laws other than income tax laws. All of the interests we currently hold in entities classified as partnerships will be held by our mortgage subsidiary which will be a taxable REIT subsidiary. We may acquire interests in the future in entities classified as partnerships which would be held by the REIT rather than a taxable REIT subsidiary.

Classification as Partnerships. We will be able to include in our income our distributive share of each Partnership’s income and to deduct our distributive share of each Partnership’s losses only if such Partnership is classified for federal income tax purposes as a partnership (or an entity that is disregarded for federal income tax purposes if the entity has only one owner or member), rather than as a corporation or an association taxable as a corporation. An organization with at least two owners or members will be classified as a partnership, rather than as a corporation, for federal income tax purposes if it:


	•	is treated as a partnership under the Treasury regulations relating to entity classification (the “check-the-box regulations”); and

	•	is not a “publicly traded” partnership.

Under the check-the-box regulations, an unincorporated entity with at least two owners or members may elect to be classified either as an association taxable as a corporation or as a partnership. If such an entity does not make an election, it generally will be treated as a partnership for federal income tax purposes. We intend that each Partnership (except for those entities that we intend to treat as taxable REIT subsidiaries) will be classified as a partnership for federal income tax purposes (or else a disregarded entity where there are not at least two separate beneficial owners).

A publicly traded partnership is a partnership whose interests are traded on an established securities market or are readily tradable on a secondary market (or a substantial equivalent). A publicly traded partnership is generally treated as a corporation for federal income tax purposes, but will not be so treated for any taxable year for which at least 90% of the partnership’s gross income consists of specified passive income, including real property rents, gains from the sale or other disposition of real property, interest, and dividends (the “90% passive income exception”).

Treasury regulations, referred to as PTP regulations, provide limited safe harbors from treatment as a publicly traded partnership. Pursuant to one of those safe harbors, the private placement exclusion, interests in a partnership will not be treated as readily tradable on a secondary market or the substantial equivalent thereof if (1) all interests in the partnership were issued in a transaction or transactions that were not required to be registered under the Securities Act and (2) the partnership does not have more than 100 partners at any time during the partnership’s taxable year. For the determination of the number of partners in a partnership, a person owning an interest in a partnership, grantor trust, or S corporation that owns an interest in the partnership is treated as a partner in the partnership only if (1) substantially all of the value of the owner’s interest in the entity is attributable to the entity’s direct or indirect interest in the partnership and (2) a principal purpose of the use of the entity is to permit the partnership to satisfy the 100-partner limitation. Each Partnership should qualify for the private placement exclusion.

We have not requested, and do not intend to request, a ruling from the Internal Revenue Service that any Partnerships will be classified as partnerships for federal income tax purposes. If for any reason a Partnership were taxable as a corporation, rather than as a partnership, for federal income tax purposes, its income would not qualify for purposes of the 75% test and we would not be able to look through it for purposes of the asset tests. See “— Requirements for Qualification — Income Tests” and “— Requirements for Qualification — Asset Tests.” In addition, any change in a Partnership’s status for tax purposes might be treated as a taxable event, in which case we might incur tax liability without any related cash distribution. See “— Requirements for Qualification — Annual Distribution Requirements.” Further, items of income and deduction of such Partnership would not pass through to its partners, and its partners would be treated as stockholders for tax purposes. Consequently, such Partnership would be required to pay income tax at corporate rates on its net income, and distributions to its partners would constitute dividends that would not be deductible in computing such Partnership’s taxable income. As discussed above, our current interests in entities which are taxable as partnerships will be held by a taxable REIT subsidiary. The following discussions relate to the tax consequences to either the REIT or taxable REIT subsidiary owning an interest in the Partnership.

Partners, Not the Partnerships, Subject to Tax. A partnership is not a taxable entity for federal income tax purposes. We will therefore take into account our allocable share of each Partnership’s income,

Partnership Allocations. Although a partnership agreement generally will determine the allocation of income and losses among partners, allocations will be disregarded for tax purposes if they do not comply with the provisions of the federal income tax laws governing partnership allocations. If an allocation is not recognized for federal income tax purposes, the item subject to the allocation will be reallocated in accordance with the partners’ interests in the partnership, which will be determined by taking into account all of the facts and circumstances relating to the economic arrangement of the partners with respect to such item. Each Partnership’s allocations of taxable income, gain, and loss will be intended to comply with the requirements of the federal income tax laws governing partnership allocations.

Tax Allocations With Respect to Contributed Property. Income, gain, loss, and deduction attributable to (a) appreciated or depreciated property that is contributed to a Partnership in exchange for an interest in the Partnership or (b) property revalued on the books of a partnership must be allocated in a manner such that the contributing partner is charged with, or benefits from, respectively, the unrealized gain or unrealized loss associated with the property at the time of the contribution. The amount of such unrealized gain or unrealized loss, referred to as built-in gain or built-in loss, is generally equal to the difference between the fair market value of the contributed or revalued property at the time of contribution or revaluation and the adjusted tax basis of such property at that time, referred to as a book-tax difference. Such allocations are solely for federal income tax purposes and do not affect the book capital accounts or other economic or legal arrangements among the partners. The IRS has issued regulations requiring partnerships to use a “reasonable method” for allocating items with respect to which there is a book-tax difference and outlining several reasonable allocation methods.

Basis in Partnership Interest. Our adjusted tax basis in any Partnership interest we own generally will be:


	•	the amount of cash and the basis of any other property we contribute to the Partnership;

	•	increased by our allocable share of the Partnership’s income (including tax-exempt income) and our allocable share of indebtedness of the Partnership; and

	•	reduced, but not below zero, by our allocable share of the Partnership’s loss (including non-deductible expenses), the amount of cash and the basis of property distributed to us, and constructive distributions resulting from a reduction in our share of indebtedness of the Partnership.

Loss allocated to us in excess of our basis in a Partnership interest will not be taken into account until we again have basis sufficient to absorb the loss. A reduction of our share of Partnership indebtedness will be treated as a constructive cash distribution to us, and will reduce our adjusted tax basis. Distributions, including constructive distributions, in excess of the basis of our Partnership interest will constitute taxable income to us. Such distributions and constructive distributions normally will be characterized as long-term capital gain.

Sale of a Partnership’s Property. Generally, any gain realized by a Partnership on the sale of property held for more than one year will be long-term capital gain, except for any portion of the gain treated as depreciation or cost recovery recapture. Any gain or loss recognized by a Partnership on the disposition of contributed or revalued properties will be allocated first to the partners who contributed the properties or who were partners at the time of revaluation, to the extent of their built-in gain or loss on those properties for federal income tax purposes. The partners’ built-in gain or loss on contributed or revalued properties is the difference between the partners’ proportionate share of the book value of those properties and the partners’ tax basis allocable to those properties at the time of the contribution or revaluation. Any remaining gain or loss recognized by the Partnership on the disposition of contributed or revalued properties, and any gain or loss recognized by the Partnership on the disposition of other

Unless our interest in a Partnership is held through a taxable REIT subsidiary, our share of any Partnership gain from the sale of inventory or other property held primarily for sale to customers in the ordinary course of the Partnership’s trade or business will be treated as income from a prohibited transaction subject to a 100% tax. Also, income from a prohibited transaction may have an adverse effect on our ability to satisfy the gross income tests for REIT status. See “— Requirements for Qualification — Income Tests.” We do not presently intend to acquire or hold, or to allow any Partnership, other than a Partnership in which we hold our interest through a taxable REIT subsidiary, to acquire or hold, any property that is likely to be treated as inventory or property held primarily for sale to customers in the ordinary course of our, or the Partnership’s, trade or business.

State, Local and Foreign Taxation. We may be required to pay state, local and foreign taxes in various state, local and foreign jurisdictions, including those in which we transact business or make investments, and our stockholders may be required to pay state, local and foreign taxes in various state, local and foreign jurisdictions, including those in which they reside. Our state, local and foreign tax treatment may not conform to the federal income tax consequences summarized above. In addition, a stockholder’s state, local and foreign tax treatment may not conform to the federal income tax consequences summarized above. Consequently, prospective investors should consult their tax advisors regarding the effect of state, local and foreign tax laws on an investment in our stock.

Tax Shelter Reporting. Under recently promulgated regulations, if a stockholder recognizes a loss with respect to the shares of $2.0 million or more for an individual stockholder or $10.0 million or more for a corporate stockholder, the stockholder may be required to file a disclosure statement with the IRS on Form 8886. Direct stockholders of portfolio securities are in many cases exempt from this reporting requirement, but stockholders of a REIT currently are not excepted. The fact that a loss is reportable under these regulations does not affect the legal determination of whether the taxpayer’s treatment of the loss is proper. Stockholders should consult their tax advisors to determine the applicability of these regulations in light of their individual circumstances.

We, the selling stockholders and the underwriters for the offering named below have entered into an underwriting agreement with respect to the shares of common stock offered by this prospectus. Friedman Billings Ramsey is acting as representative of the several underwriters. Subject to the terms and conditions contained in the underwriting agreement, we and the selling stockholders have agreed to sell to each underwriter, and each underwriter has agreed to purchase, the number of shares set forth opposite its name below. The underwriting agreement provides that the obligation of the underwriters to pay for and accept delivery of our common stock is subject to approval of certain legal matters by counsel and to certain other conditions. The underwriters must take and pay for all of the shares of common stock offered, other than those covered by the over-allotment option described below, if any of the shares are taken.

The following table shows the per share and total underwriting discount we and the selling stockholders will pay to the underwriters. These amounts are shown assuming both no exercise and full exercise of the underwriters’ option to purchase additional shares of common stock.

(1)

In addition to the underwriting discounts and commission to be paid by us, we will issue to Friedman Billings Ramsey warrants to purchase shares of our common stock ( shares if the over-allotment option is executed in full). These warrants, as well as the shares issuable upon their exercise, have been registered as part of this offering. Friedman Billings Ramsey may retain or transfer these warrants to its officers, directors or affiliates. The holder of a warrant will be entitled to purchase one share of our common stock at a price of $ per share during the period beginning one year after the effective date of this offering and ending five years after the effective date of this offering. Exercise of the warrants is governed by the terms and conditions detailed in this prospectus and in a warrant agreement we have entered into with Friedman Billings Ramsey.

The underwriters propose to offer our common stock directly to the public at the initial public offering price on the cover of this prospectus and to certain dealers at such price less a concession not in excess of $ per share. The underwriters may allow, and the dealers may reallow, a concession not in excess of $ per share to certain dealers.

We expect to incur expenses of approximately $ (excluding underwriting discounts) in connection with this offering.

We have granted the underwriters an option, exercisable for 30 days after the date of this prospectus, to purchase up to additional shares of common stock from us and certain stockholders to cover over-allotments, if any, at the initial public offering price less the underwriting discounts set forth on the cover page of this prospectus. If the underwriters exercise this option, the underwriters will have a firm

We have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act, or to contribute to payments the underwriters may be required to make in respect of those liabilities.

Prior to the completion of this offering, there has been no public market for the shares. The initial public offering price was negotiated by us and Friedman Billings Ramsey. Among the factors considered in determining the initial public offering price of the shares, in addition to prevailing market conditions, was our historical performance, estimates of the business potential and our earnings prospects, an assessment of our management and the consideration of the above factors in relation to market valuation of companies in related businesses.

We intend to apply to have our common stock listed on the Nasdaq National Market System under the symbol “OAKS.”

The underwriters do not expect to sell more than 5% of the shares of our common stock in the aggregate to accounts over which they exercise discretionary authority.

At our request, the underwriters have reserved for sale, at the initial public offering price, up to 2% of the shares offered by this prospectus for sale to some of our officers and directors and their families, certain of our affiliates and other persons associated with us who express an interest in purchasing shares of common stock in this offering. If these persons purchase reserved shares, this will reduce the number of shares available for sale to the general public. Any reserved shares that are not orally confirmed for purchase within one day of the pricing of this offering will be offered by the underwriters to the general public on the same terms as the other shares offered by this prospectus.

We and each of our directors and executive officers and certain stockholders have agreed not to, directly or indirectly, offer for sale, sell, contract to sell, grant any options for the sale of, or otherwise issue or dispose of, any shares of common stock, options or warrants to acquire shares of common stock, or any related security or instrument for a period of 180 days after the date of this prospectus, without the prior written consent of Friedman Billings Ramsey, except in limited circumstances.

Friedman Billings Ramsey advised us, on behalf of the underwriters, that the underwriters may make short sales of our common stock in connection with this offering, resulting in the sale by the underwriters of a greater number of shares than they are required to purchase pursuant to the underwriting agreement. The short position resulting from those short sales will be deemed a “covered” short position to the extent that it does not exceed the shares subject to the underwriters’ over-allotment option and will be deemed a “naked” short position to the extent that it exceeds that number. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the trading price of the common stock in the open market that could adversely affect investors who purchase shares in this offering. The underwriters may reduce or close out their covered short position either by exercising the over-allotment option or by purchasing shares in the open market. In determining which of these alternatives to pursue, the underwriters will consider the price at which shares are available for purchase in the open market as compared to the price at which they may purchase shares through the over-allotment option. Any “naked” short position will be closed out by purchasing shares in the open market. Similar to the other stabilizing transactions described below, open market purchases made by the underwriters to cover all or a portion of their short position may have the effect of preventing or retarding a decline in the market price of our common stock following this offering. As a result, our common stock may trade at a price that is higher than the price that otherwise might prevail in the open market.

Friedman Billings Ramsey advised us, on behalf of the underwriters, that, pursuant to Regulation M under the Exchange Act they may engage in transactions, including stabilizing bids or the imposition of penalty bids, that may have the effect of stabilizing or maintaining the market price of the shares of common stock at a level above that which might otherwise prevail in the open market. A “stabilizing bid” is a bid for or the purchase of shares of common stock on behalf of the underwriters for the purpose of

Neither we nor the underwriters make any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of our shares of common stock. In addition, neither we nor the underwriters make any representation that the underwriters will engage in these transactions or that these transactions, once begun, will not be discontinued without notice.

Each of the underwriters and their affiliates may in the future provide us with investment banking or other services, for which they expect to receive customary compensation. We are currently negotiating with an affiliate of Friedman, Billings, Ramsey & Co., Inc. to establish an alternative funding source for our mortgage loan originations. See “Business — Financing for Mortgage Lending Operations — Warehouse Lending Facilities.”

The consolidated financial statements of Oak Street Financial Services, Inc. as of December 31, 2003 and for the three month period then ended, and the consolidated financial statements of Oak Street Mortgage LLC as of December 31, 2003, and 2002, and for each of the years in the three-year period ended December 31, 2003 included in this prospectus, have been audited by Deloitte & Touche LLP, independent auditors, as stated in their reports appearing herein, and have been so included in reliance upon the reports of such firm given upon their authority as experts in accounting and auditing.

Certain legal matters in connection with this offering will be passed upon for us by Barnes & Thornburg LLP, Indianapolis, Indiana. Venable LLP, Baltimore, Maryland, will issue an opinion to us regarding certain matters of Maryland law, including the validity of the common stock offered by this prospectus. Certain legal matters related to this offering will be passed upon for the underwriters by Sidley Austin Brown & Wood LLP, Chicago, Illinois.

We have filed with the Securities and Exchange Commission a registration statement on Form S-11, including exhibits, schedules and amendments filed with this registration statement, under the Securities Act with respect to the shares of our common stock to be sold in this offering. This prospectus does not contain all of the information set forth in the registration statement and exhibits and schedules to the registration statement. References in this prospectus to any of our contracts, agreements or other documents are not necessarily complete, and you should refer to the exhibits attached to the registration statement for copies of the actual contracts, agreements or documents. Copies of the registration statement, including the exhibits and schedules to the registration statement, may be examined without charge at the public reference room of the Securities and Exchange Commission, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549. Information about the operation of the public reference room may be obtained by calling the Securities and Exchange Commission at 1-800-SEC-0330. Copies of all or a portion of the registration statement can be obtained from the public reference room of the Securities and Exchange Commission upon payment of prescribed fees. Our Securities and Exchange Commission filings, including this registration statement, are also available to you on the Securities and Exchange Commission’s Web site, http://www.sec.gov.

Upon the effectiveness of the registration statement, we will be subject to the informational requirements of the Exchange Act and, in accordance with the Exchange Act, will file reports, proxy and information statements and other information with the Securities and Exchange Commission. Such annual, quarterly and special reports, proxy and information statements and other information can be inspected and copied at the locations set forth above. We will report our financial statements on a calendar year basis. We intend to furnish our stockholders with annual reports containing consolidated financial statements audited by our independent certified public accountants and with quarterly reports containing unaudited consolidated financial statements for each of the first three quarters of each fiscal year.

You may request copies of the filings, at no cost, by telephone at 317-805-3200 or by mail at: Oak Street Financial Services, Inc., 11595 North Meridian Street, Suite 400, Carmel, Indiana 46032, Attention: Investor Relations.

We have audited the accompanying consolidated balance sheet of Oak Street Financial Services, Inc. and Subsidiaries as of December 31, 2003, and the related consolidated statements of income, stockholders’ equity, and cash flows for the three month period ended December 31, 2003. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

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

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Oak Street Financial Services, Inc. and Subsidiaries as of December 31, 2003 and the results of their operations and their cash flows for the three month period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America.

Principles of Consolidation — The consolidated financial statements include the accounts of Oak Street Financial Services, Inc. (the “Company” or “Financial Services”) and its majority owned subsidiary Oak Street Operations LLC, which wholly owns Oak Street Mortgage LLC (the “Mortgage Company”). Inter-company accounts and transactions are eliminated in consolidation.

On September 23, 2003, the Company reorganized its corporate structure to provide greater flexibility for its operations, avoid adverse tax consequences to a stockholder, and enhance its ability to raise capital by forming Oak Street Operations LLC (“Operations”) and Oak Street Financial Services, Inc. (“Financial Services”). In connection with the reorganization, the existing members of the Mortgage Company voluntarily transferred their ownership units to Operations in exchange for units of Operations. Thus, the Mortgage Company is a wholly-owned subsidiary of Operations. Immediately after this exchange, members comprising approximately 63.85% of the ownership units transferred their ownership units in Operations to Financial Services in exchange for shares of Financial Services. Thus, Operations is a majority-owned subsidiary of Financial Services.

This reorganization was accounted for in a manner similar to a merger of companies under common control. This accounting treatment results in carryover basis for Oak Street Financial Services, Inc.

For financial reporting purposes, the Company reported the transaction effective September 30, 2003.

Description of Business — The Carmel, Indiana based Company was established in October 1999. The Company originates and purchases residential mortgage loans for sale in 26 states.

Use of Estimates — The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. Areas involving the use of management’s estimates and assumptions, which are susceptible to change in the near term, include the valuation of loans held for sale, the fair value of its interest rate swap, and the fair value of its commitments to originate and sell conforming mortgage loans.

Concentrations of Risk — The Company’s ability to continue to originate and purchase loans is dependent, in part, upon its ability to sell loans in the secondary market in order to generate cash proceeds for new originations and purchases. The value of, and market for, the Company’s loans are dependent upon a number of factors, including general economic conditions, interest rates and governmental regulations. Adverse changes in those factors, among others, may affect the Company’s ability to sell loans for acceptable prices within reasonable periods of time.

A prolonged, substantial reduction in the size of the secondary market for loans of the types originated and purchased by the Company may adversely affect the Company’s ability to sell loans with a consequent adverse impact on the Company’s profitability and ability to fund future originations and purchases, which could have a significant effect on the Company’s financial position, results of operations or cash flows.

The Company regularly reviews the interest rates on its loan products and makes adjustments to the interest rates it offers to reflect current market conditions. The Company, from time to time in the normal course of business, uses derivative financial instruments in order to reduce exposure to fluctuations in interest rates and market prices on loans held for sale, and to reduce exposure to changes in the cash flows related to its warehouse borrowing facilities.

Significant Customers — For the three months ended December 31, 2003, the Company sold approximately $316 million in loans to six investors, which represented 87.1% of $363 million in total loans sold.

Cash and Cash Equivalents — The Company considers all highly liquid investments with maturities of three months or less to be cash equivalents.

Restricted Cash — Restricted cash consists of funds held in reserve accounts in compliance with the terms of the credit facility agreements.

Loans Held for Sale, Net — The Company originates and purchases loans for sale to investors. Loans held for sale are stated at the principal amount of the loan originated, plus loan origination fees, net of certain direct loan origination costs and are valued at the lower of cost or fair value determined on an aggregate basis.

Premises and Equipment — Premises and equipment are stated at cost, net of accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets (primarily 3 to 5 years). Routine maintenance and repairs are charged to expense as incurred.

Collateralized Financing — The Company funds certain loan originations through the use of a repurchase agreement. The repurchase agreement is treated as a collateralized financing transaction and carried at the contractual amount, including accrued interest, as specified in the agreement.

Income Taxes — The Company is taxed as an “S” Corporation under the Internal Revenue Code and a similar section of the state income tax laws. In lieu of corporate income taxes, the stockholders are taxed on their distributive share of the Company’s taxable income. As a result, the financial statements do not include a provision for corporate income taxes.

Revenue Recognition — The Company sells loans on a servicing-released basis. Gain or loss is recognized upon delivery of the loans and transfer of title to the purchaser, equal to the difference between the sales price and the carrying amount of the loans sold. Nonrefundable loan origination fees, net of certain direct loan origination costs, are deferred and recognized as a yield adjustment over the life of the underlying loan. Any unamortized net fees on loans sold are included in determining the gain/loss on sale of loans at the time of sale.

Advertising Expense — Advertising costs are expensed in the period in which the advertising occurs. Advertising expense for the three months ended December 31, 2003 was $318,000.

Derivative Instruments and Hedging Activity — The Company accounts for its derivative financial instruments in accordance with Statement of Financial Accounting Standard (“SFAS”) No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended. SFAS No. 133 requires that an entity recognize its derivative financial instruments as assets or liabilities in the balance sheet and measure them at fair value. If certain conditions are met, an entity may elect to designate a derivative instrument either as a cash flow hedge, a fair value hedge or a hedge of foreign currency exposure.

Interest rates on liabilities of the Company adjust frequently, while interest rates on the Company’s assets adjust annually, or not at all. The fair value of the Company’s derivative instruments are included in accrued expenses and other liabilities. Any changes in fair value of derivative instruments related to hedge effectiveness are reported in accumulated other comprehensive income. Changes in fair value of derivative instruments related to hedge ineffectiveness are recorded as adjustments to earnings.

The Company designates certain derivative financial instruments to hedge exposure to changes in its variable rate warehouse lines of credit. These instruments and the hedging relationship are identified, designated and documented in accordance with SFAS No. 133. For derivative financial instruments

designated as hedge instruments, the Company evaluates the effectiveness of the hedge against the variable rate debt being hedged to ensure that there remains a highly effective correlation in the hedge relationship.

The Company’s objective and strategy for using derivative instruments is to mitigate the risk of increased cost on its variable rate liabilities during a period of rising rates. The Company utilizes an interest rate swap to manage this risk. The interest rate swap agreement to which the Company is party stipulates that the Company pay a fixed rate of 1.97% of interest to the counterparty and receives LIBOR based on the notional amount of the contract. The liabilities the Company hedges are borrowings under its warehouse line of credit agreement as discussed in Note 4. While the Company is exposed to credit loss on its interest rate swap in the event of non-performance by the counterparty to the swap, management believes such non-performance is unlikely to occur given the financial resources of the counterparty.

The Company has a $100 million cash flow hedge as of December 31, 2003 with a fair value of ($556,556) recorded in accrued expenses and other liabilities. The hedge will expire on February 8, 2005.

Commitments to Originate, Purchase and Sell Mortgage Loans — Commitments to originate, purchase and sell non-conforming mortgage loans are not readily convertible to cash and cannot readily be settled net, and are not considered to be a derivative under GAAP. Accordingly, they are not recorded in the consolidated financial statements. Commitments to originate and sell conforming mortgage loans are considered to be a derivative and are recorded at fair value in loans held for sale.

Comprehensive loss — Amounts presented for the three months ended December 31, 2003 are as follows:

Earnings Per Share — The Company calculates basic earnings per share by dividing net earnings for the period by the weighted-average shares outstanding for that period. Diluted earnings per share takes into account the effect of dilutive instruments, such as stock options, but uses the average share price for the period in determining the number of incremental shares that are to be added to the weighted-average number of shares outstanding.

Segment Reporting — While the Company’s management monitors its revenue streams through wholesale and retail loan originations, operations are managed and financial performance is evaluated by the Company’s Chief Executive Officer on a company wide basis. Accordingly, the Company operates in one reportable operating segment.

New Accounting Pronouncements — In December 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure, which amends SFAS No. 123. SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based compensation. Under the fair value based method, compensation cost for stock options is measured when options are issued. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require more prominent and more frequent disclosures in financial statements of the effects of stock-based compensation. The transition guidance and annual disclosure provisions of SFAS No. 148 are effective for fiscal years ended after December 15, 2002. The disclosure requirements are included in the consolidated financial statements. The adoption of this statement did not have a significant impact on the Company’s consolidated financial statements.

In May 2003, the FASB issued SFAS No. 149, Amendments of Statement 133 on Derivative Instruments and Hedging Activities. This statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133. This statement was effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. SFAS No. 133 Implementation Issues that are effective for fiscal quarters beginning prior to June 15, 2003 will continue to be effective based on their respective effective dates, and the paragraphs relating to forward purchases or sales of “when issued” or other securities that do not yet exist would be applicable to both existing transactions as well as new transactions entered into after June 30, 2003. The Company’s adoption of this statement did not have a significant impact on its consolidated financial statements.

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 on the classification and measurement of certain financial instruments with characteristics of both liabilities and equity. The provisions of SFAS No. 150 are effective for financial instruments entered into or modified after May 31, 2003 and to all instruments that exist as of the beginning of the first interim financial reporting period beginning after June 15, 2003. Subsequent to its issuance certain provisions of SFAS No. 150 were indefinitely deferred for private companies. The Company believes that this statement will not have a significant impact on its consolidated financial statements.

In November 2002, the FASB issued Financial Interpretation (“FIN”) No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, which expands on the accounting guidance of Statements No. 5, 57 and 107 and incorporates without change the provisions of FIN No. 34, which is being superseded. FIN No. 45 requires a guarantor to recognize, at the inception of the guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. It also provides additional guidance on the disclosure of guarantees. The recognition and measurement provisions are effective for guarantees made or modified after December 31, 2002. The disclosure provisions are effective for fiscal periods ending after December 15, 2002 and have been implemented herein. The Company’s adoption of FIN No. 45 did not have a significant impact on its consolidated financial statements.

In January 2003, the FASB issued FIN No. 46, Consolidation of Variable Interest Entities, which was replaced by FIN No. 46 (Revised December 2003), Consolidation of Variable Interest Entities (FIN No. 46[R]). FIN No. 46 requires consolidation by business enterprises of variable interest entities that meet certain requirements. FIN No. 46[R] changes the effective date of FIN No. 46 for certain entities. Public companies shall apply either FIN No. 46 or FIN No. 46[R] to their interest in special purpose entities (SPEs) as of the first interim or annual period ending after December 15, 2003. The decision to apply FIN No. 46 or FIN No. 46[R] may be made on an SPE by SPE basis. The Company’s adoption of FIN No. 46 and FIN No. 46[R] did not have a significant impact on its consolidated financial statements.

Mortgage loans, all of which are secured by residential properties and are held for sale, consist of the following:

The Company funds mortgage loan activity using warehouse lines of credit, which are collateralized by the mortgage loans funded by the lines. Warehouse lines of credit consist of the following:

The Company’s warehouse facilities contain various affirmative and negative covenants customary for credit arrangements of their type. The warehouse facilities also contain certain financial covenants requiring the maintenance of certain levels of tangible equity or certain debt-to-equity or debt-to-net worth ratios, as well as establishing limits on the Company’s ability to incur unsecured indebtedness.

On April 29, 2004, subsequent to year end, the Company amended its repurchase agreement. Under the terms of the amendment, the Company has available a $100,000,000 repurchase agreement with a lender. The repurchase agreement will expire on October 13, 2004. The Company transfers loans to the lender under this agreement. The lender has the option for a limited period to require the Company to repurchase the loans. Accordingly, loans transferred to the lender under this agreement are considered collateralized financing transactions and are recorded on the consolidated balance sheet at the lower of cost or market including accrued interest as specified in the agreement. The repurchase agreement bears interest at LIBOR plus a spread based on product type (2.49% at December 31, 2003). At December 31, 2003, there was $25,176,680 of outstanding borrowings under this facility.

The Company’s collateralized financing facility contains various affirmative and negative covenants customary for this type of credit arrangement. The facility also contains certain financial covenants requiring the maintenance of certain levels of tangible equity or certain debt-to-equity or debt-to-net worth ratios, as well as establishing limits on the Company’s ability to incur unsecured indebtedness.

The Company has term loans with a bank with a 5.50% fixed rate and balances totaling $834,288 at December 31, 2003. Principal payments due in the years ending December 31 are as follows:

On September 30, 2003, the Company signed an agreement which provides for a $1,000,000 term loan with a lender. No funds were advanced for the term loan as of December 31, 2003. The term loan bears interest at the prime rate of the bank (4% at December 31, 2003). The loan is collateralized by all assets not pledged to other lenders.

A subsidiary of the Mortgage Company has a bank revolving line of credit agreement for $2,500,000. The line of credit agreement expires November 30, 2005 and provides for the payment of monthly interest at the bank’s prime rate (4% at December 31, 2003) or LIBOR plus 2.5%. At December 31, 2003, the Company had $440,000 outstanding on this line of credit.

During March 2004, the Mortgage Company signed a $10,000,000 revolving line of credit with a lender which is due on demand and no later than May 5, 2005. Interest accrues at a variable rate equal to the bank’s prime rate and is payable monthly.

The Mortgage Company’s subsidiary, Oak Street Funding LLC, has a line of credit in an amount that is the lesser of (a) $5,000,000 prior to February 1, 2004 and $15,000,000 after February 1, 2004 and (b) 80% of Oak Street Funding LLC’s notes receivable from commission loans made to insurance agents. This loan is collateralized by substantially all of the assets of Oak Street Funding LLC and a $2.5 million guarantee from the Mortgage Company. The loan will bear interest at the bank’s prime rate plus 0.25% or LIBOR plus 2.75%. At December 31, 2003, the Company did not have any borrowings outstanding on this line of credit.

At December 31, 2003, the Company has authorized 312,378,693 non-voting shares of Common Stock and 3,000,000 voting shares of Common Stock of which 198,378,743 non-voting shares of Common Stock and 3,000,000 voting shares of Common Stock are issued and outstanding. The Company has reserved 113,999,950 non-voting shares for issuance upon exercise of an option that the minority stockholder has to convert its member units in Operations to shares of the Company.

The Company’s exchange agreement restricts the assignment, transfer, sale or other disposal of any part of a stockholder’s interest in the Company to specific permitted transfers defined in the agreement. In the event of bankruptcy or death of a stockholder, the Company is obligated to repurchase the stockholder’s shares based on independent valuations and on a payment schedule that conforms to the cash flows of the Company. These provisions expire upon the Company completing an initial public offering.

On December 17, 2003, the minority stockholder signed an agreement that upon closing of a initial public offering it will exchange its member units in Operations for shares of Common Stock of the Company.

The Company sponsors a 401(k) defined contribution profit sharing plan, covering substantially all employees that have attained the age of 18. Employee contributions are limited to the maximum contributions allowed by the Internal Revenue Service. The plan allows for discretionary matching contributions. Participants become 100% vested after four years of service. The Company’s contributions charged to expense were $66,000 for the three months ended December 31, 2003.

Leases — The Company has entered into various operating leases for office facilities with various renewal options extending through 2016. Amounts included in occupancy and equipment expense for leased office facilities was $606,000 for the three months ended December 31, 2003. In addition to minimum lease payments, the Company is obligated to pay its share of building operating costs in excess of a base amount for certain leases.

Loan Commitments — Contract amounts of these financial instruments are summarized as follows:

At December 31, 2003, the Company had forward commitments to sell $50 million per month of loans. On March 31, 2004, this commitment is reduced to $25 million per month.

The Company’s exposure to credit loss in the event of nonperformance by the borrower for commitments to extend credit is represented by the contractual amount of the commitment. Because some commitments to make loans expire without being used, the contract amount does not necessarily represent future cash commitments. Collateral obtained upon exercise of the commitment consists of the residential real estate purchased or constructed with the loan proceeds. Commitments to make loans are generally at a specified interest rate and are subject to market risk resulting from fluctuations in interest rates.

The Company’s exposure to credit risk for commitments to sell loans is dependent upon the ability of the counter-party to purchase the loans. This is generally assured by the use of large, reputable institutions. These commitments are subject to market risk resulting from fluctuations in interest rates. Commitments outstanding at December 31, 2003 do not require or permit net settlement, and, therefore, no derivative fair value amount has been recorded in the financial statements for these commitments.

include commitments to extend credit, commitments to sell loans, and obligations to repurchase sold loans from certain investors.

From time to time, the Company enters into certain types of contracts that contingently require the Company to indemnify parties against third party claims and other obligations customarily indemnified in the ordinary course of the Company’s business. The terms of such obligations vary and, generally, a maximum obligation is not explicitly stated. Therefore, the overall maximum amount of the obligations cannot be reasonably estimated. The Company’s obligation to stand ready to perform is minimal.

Although the Company sells loans without recourse, certain investor purchase agreements provide for conditions, such as borrower default on the first payment, which would require the Company to reacquire the related loans. This risk is managed by the Company’s quality control program. Since its inception, the Company’s repurchase of loans from investors has not been significant.

Certain loans are sold under agreements that provide for partial purchase premium recapture or other limited recourse provisions in the event of early prepays, generally one year. The Company estimates, based on current experience and prepayment estimates, that there is presently no significant recourse liability and no liability has been recorded.

Legal — In the normal course of its business, the Company is subject to various legal proceedings and claims, the resolution of which, in the opinion of management, will not have a material adverse effect on the Company’s financial condition or results of operations.

The following disclosure of the estimated fair value of financial instruments presents amounts that have been determined using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that could be realized in a current market exchange. The use of different market assumptions or estimation methodologies could have a material impact on the estimated fair value amounts.

The estimated fair values of the Company’s financial instruments are as follows:

The fair value of loans held for sale and borrowings is estimated by discounting projected future cash flows at appropriate rates. Expected prepayments are used in estimating the fair value of mortgage assets. The fair values of cash and cash equivalents and accrued interest receivable and payable approximate their carrying value.

We have audited the accompanying consolidated balance sheets of Oak Street Mortgage LLC and Subsidiaries (a wholly-owned subsidiary of Oak Street Operations LLC, a majority-owned subsidiary of Oak Street Financial Services, Inc.) (the “Company”) as of December 31, 2003 and 2002, and the related consolidated statements of income, members’ equity, and cash flows for each of the years in the three year period ended December 31, 2003. 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 auditing standards generally accepted in the United States of America. 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, such consolidated financial statements present fairly, in all material respects, the consolidated financial position of Oak Street Mortgage LLC and Subsidiaries as of December 31, 2003 and 2002, and the consolidated results of their operations and their cash flows for each of the years in the three year period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America.

Principles of Consolidation — The consolidated financial statements include the accounts of Oak Street Mortgage LLC (the “Company”) and its wholly-owned subsidiaries KS&K, LLC, Oak Street Mortgage of Tennessee, LLC, Oak Street Mortgage, Inc., Oak Street Investment Services LLC, and its controlled subsidiaries, Oak Street Funding LLC (90% ownership interest), Creations Title LLC (24% ownership interest), Great Western Loans and Investments, LP (50% ownership interest), and Hudson & Keyse LLC (50% ownership interest). Inter-company accounts and transactions are eliminated in consolidation.

On September 23, 2003, the Company reorganized its corporate structure to provide greater flexibility for its operations, avoid adverse tax consequences to a shareholder, and enhance its ability to raise capital by forming Oak Street Operations LLC (“Operations”) and Oak Street Financial Services, Inc. (“Financial Services”). In connection with the reorganization, the existing members of the Company voluntarily transferred their ownership units to Operations in exchange for units of Operations. Thus, the Company is a wholly-owned subsidiary of Operations. Immediately after this exchange, members comprising 63.85% of the ownership units transferred their ownership units in Operations to Financial Services in exchange for shares of Financial Services. Thus, Operations is a majority-owned subsidiary of Financial Services.

Description of Business — The Carmel, Indiana based Company was established in October 1999. The Company originates and purchases residential mortgage loans for sale in 26 states.

Significant Customers — For the year ended December 31, 2003, the Company sold approximately $1.2 billion in loans to six investors, which represented 77.0% of $1.6 billion in total loans sold. For the year ended December 31, 2002, the Company sold approximately $699 million in loans to six investors,

which represented 77.6% of $901 million in total loans sold. For the year ended December 31, 2001, the Company sold approximately $284 million in loans to six investors, which represented 92.2% of $309 million in total loans sold.

Cash and Cash Equivalents — The Company considers all highly liquid investments with maturities of three months or less to be cash equivalents.

Restricted Cash — Restricted cash consists of funds held in reserve accounts in compliance with the terms of the credit facility agreements.

Income Taxes — The Company is taxed as a partnership under the Internal Revenue Code and a similar section of state income tax laws. In lieu of corporate income taxes, the members are taxed on their distributive share of the Company’s taxable income. As a result, the consolidated financial statements do not include a provision for corporate income taxes.

Advertising Expense — Advertising costs are expensed in the period in which the advertising occurs. Advertising expense for the years ended December 31, 2003, 2002 and 2001 were $1,139,000, $1,402,000 and $1,169,000, respectively.

designated and documented in accordance with SFAS No. 133. For derivative financial instruments designated as hedge instruments, the Company evaluates the effectiveness of the hedge against the variable rate debt being hedged to ensure that there remains a highly effective correlation in the hedge relationship.

The Company has a $100 million cash flow hedge as of December 31, 2003 with a fair value of ($556,556) which expires on February 8, 2005.

Commitments to Originate, Purchase and Sell Mortgage Loans — Commitments to originate, purchase and sell non-conforming mortgage loans are not readily convertible to cash and cannot readily be settled net, and are not considered to be a derivative under generally accepted accounting principles. Accordingly, they are not recorded in the consolidated financial statements. Commitments to originate and sell conforming mortgage loans are considered to be a derivative and are recorded at fair value in loans held for sale.

Comprehensive Income — Amounts presented for the year ended December 31, 2003 are as follows:

At December 31, 2003, the Company had an interest rate swap with a fair value of $(556,556) included in accrued expenses and other liabilities.

Stock Compensation — The Company had 16,000 stock options outstanding as of December 31, 2002. These stock options were exercised during the year ended December 31, 2003. The Company accounts for stock options issued under the recognition and measurement principles of Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees. Stock options are accounted for based on the specific terms of the options granted. Options with variable terms, including those options for

which the strike price (fair value) has been adjusted and options issued by the Company with exercise prices below the market price on the date of grant, result in adjustments to compensation expense.

In May 2003, the FASB issued SFAS No. 149, Amendments of Statement 133 on Derivative Instruments and Hedging Activities. This statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS 133. This statement was effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. SFAS No. 133 Implementation Issues that are effective for fiscal quarters beginning prior to June 15, 2003 will continue to be effective based on their respective effective dates, and the paragraphs relating to forward purchases or sales of “when issued” or other securities that do not yet exist would be applicable to both existing transactions as well as new transactions entered into after June 30, 2003. The Company’s adoption of this statement did not have a significant impact on its consolidated financial statements.

deferred for private companies. The Company believes that this statement will not have a significant impact on its consolidated financial statements.

In January 2003, the FASB issued FIN No. 46, Consolidation of Variable Interest Entities, which was replaced by FIN No. 46 (Revised December 2003), Consolidation of Variable Interest Entities (FIN No. 46[R]). FIN No. 46 requires consolidation by business enterprises of variable interest entities that meet certain requirements. FIN No. 46[R] changes the effective date of FIN 46 for certain entities. Public companies shall apply either FIN No. 46 or FIN No. 46[R] to their interest in special purpose entities (SPEs) as of the first interim or annual period ending after December 15, 2003. The decision to apply FIN No. 46 or FIN No. 46[R] may be made on an SPE by SPE basis. The Company’s adoption of FIN No. 46 and FIN No. 46[R] did not have a significant impact on its consolidated financial statements.

Mortgage loans, all of which are secured by residential properties and are held for sale, consist of the following:

The Company funds mortgage loan activity using warehouse lines of credit, which are collateralized by the mortgage loans funded by the lines. Warehouse lines of credit consist of the following:

On April 29, 2004, subsequent to year end, the Company amended its repurchase agreement. Under the terms of the amendment, the Company has available a $100,000,000 repurchase agreement with a lender. The repurchase agreement will expire on October 13, 2004. The Company transfers loans to the lender under this agreement. The lender has the option for a limited period to require the Company to repurchase the loans. Accordingly, loans transferred to the lender under this agreement are considered collateralized financing transactions and are recorded on the consolidated balance sheet at the lower of cost or market including accrued interest as specified in the agreement. The repurchase agreement bears interest at LIBOR plus a spread based on product type (2.49% at December 31, 2003). At December 31, 2003 and 2002, there were $25,176,680 and $81,211,032, respectively, of outstanding borrowings under this facility.

The Company has term loans with a bank with a 5.50% fixed rate and balances totaling $834,288 and $1,276,359 at December 31, 2003 and 2002, respectively. Principal payments due in the years ending December 31 are as follows:

The Company’s subsidiary, Hudson & Keyse LLC, has a bank revolving line of credit agreement for $2,500,000. The line of credit agreement expires November 30, 2005 and provides for the payment of monthly interest at the bank’s prime rate (4% at December 31, 2003) or LIBOR plus 2.5%. At December 31, 2003, the Company had $440,000 outstanding on this line of credit.

During March 2004, the Company signed a $10,000,000 revolving line of credit with a lender which is due on demand and no later than May 5, 2005. Interest accrues at a variable rate equal to the bank’s prime rate and is payable monthly.

The Company’s subsidiary, Oak Street Funding LLC, has a line of credit in an amount that is the lesser of (a) $5,000,000 prior to February 1, 2004 and $15,000,000 after February 1, 2004 and (b) 80% of Oak Street Funding LLC’s notes receivable from commission loans made to insurance agents. This loan is collateralized by substantially all of the assets of Oak Street Funding LLC and a $2.5 million guarantee from the Company. The loan will bear interest at the bank’s prime rate plus 0.25% or LIBOR plus 2.75%. At December 31, 2003, the Company did not have any borrowings outstanding on this line of credit.

Loans held for sale, net at December 31, 2002 included $764,000 of mortgage loans to shareholders which were subsequently sold.

During 2003, 2002 and 2001, a bank owned by a company controlled by a shareholder provided a warehouse line of credit (see Note 4) to the Company. The warehouse line of credit expired in 2003.

At December 31, 2002, certain officers and shareholders were members of a company which is a member of one of the Company’s controlled subsidiaries. The interests in this company were disposed effective January 1, 2003.

At December 31, 2003 and 2002, members’ capital included 315,379 and 298,546 member shares, of which 3,000 are voting shares and the remainder are non-voting, all of which are owned by Operations (see Note 1).

During 2002, an employee purchased 2,500 shares at $30 per share when the fair market value was $90 per share. During 2003, an employee purchased 833 shares at $30 per share when the fair market value was $90 per share. As a result, the Company recorded compensation expense of $50,000 and $150,000 for the years ended December 31, 2003 and 2002, with a corresponding increase to members’ capital.

The Company sponsors a 401(k) defined contribution profit sharing plan, covering substantially all employees that have attained the age of 18. Employee contributions are limited to the maximum contributions allowed by the IRS. The plan allows for discretionary matching contributions. Participants become 100% vested after four years of service. The Company’s contributions charged to expense were $263,000, $304,000 and $214,000 for the years ended December 31, 2003, 2002 and 2001, respectively.

Leases — The Company has entered into various operating leases for office facilities with various renewal options extending through 2016. Amounts included in occupancy and equipment expense for leased office facilities was $2,318,000, $1,845,000 and $1,186,000 for the years ended December 31, 2003, 2002 and 2001, respectively. In addition to minimum lease payments, the Company is obligated to pay its share of building operating costs in excess of a base amount for certain leases.

Loan Commitments — Contract amounts of these financial instruments are summarized as follows:

At December 31, 2003, the Company had forward commitments to sell $50 million per month of loans. On March 31, 2004, this commitment is reduced to $25 million per month.

The Company’s exposure to credit risk for commitments to sell loans is dependent upon the ability of the counter-party to purchase the loans. This is generally assured by the use of large, reputable institutions. These commitments are subject to market risk resulting from fluctuations in interest rates. Commitments outstanding at December 31, 2003 and 2002 do not require or permit net settlement, and, therefore, no derivative fair value amount has been recorded in the financial statements for these commitments.

Other — In the normal course of business, the Company is a party to financial instruments to meet the needs of its customers, which are not reflected in the financial statements. These financial instruments include commitments to extend credit, commitments to sell loans, and obligations to repurchase sold loans from certain investors.

The Company has granted non-qualified stock options (“NQSOs”) to certain employees. All options have been granted at exercise prices greater than or equal to the estimated fair value of the underlying stock at the date of grant. Generally, options vest over a three-year period and expire ten years after the date of grant. There were no stock options outstanding at December 31, 2003.

The estimated fair values of the Company’s financial instruments are as follows:

No dealer, salesperson or other individual has been authorized to give any information or to make any representation other than those contained in this prospectus and, if given or made, such information or representations must not be relied upon as having been authorized by us or the underwriters. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any securities in any jurisdiction in which such an offer or solicitation is not authorized or in which the person making such offer or solicitation is not qualified to do so, or to any person to whom it is unlawful to make such offer or solicitation. Neither the delivery of this prospectus nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in our affairs or that information contained herein is correct as of any time subsequent to the date hereof.

Until , 2004, 25 days after the date of this prospectus, all dealers that buy, sell or trade our shares of common stock, whether or not participating in this offering, may be required to deliver a prospectus. This requirement is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

The following table itemizes the expenses incurred by us in connection with this offering. All amounts are estimates except for the SEC registration fee and the NASD filing fee. None of these expenses will be borne by the selling stockholders.

Item 33 discloses recent sales of unregistered securities and a proposed sale of unregistered securities subject to the closing of this offering. There have been no other sales within the last six months and no other sales proposed of the issuer’s securities.

In connection with our incorporation on September 23, 2003 and pursuant to an Exchange Agreement dated as of September 23, 2003, among the Registrant, Oak Street Operations LLC (“OSO”) and the Unitholders of Oak Street Mortgage LLC (“OSM”) (the “Unitholders”), the Unitholders exchanged their interest in OSM for units in OSO. The Unitholders, except for Sotseks Corp., then transferred their ownership units in OSO to the Company, which delivered, in exchange for each transferred unit, 1,000 shares of its common stock. Pursuant to these transactions, the Company issued an aggregate of 201,378,743 shares of common stock, $.01 par value per share, which included 3,000,000 shares of voting and 198,378,743 shares of non-voting shares. The issuance of this stock was effected in reliance upon an exemption from registration provided by Section 4(2) under the Securities Act of 1933, as amended (the “Act”).

In connection with a certain Exchange Agreement dated as of December 17, 2003 and upon the closing of this offering, Sotseks Corp. will exchange each of the 113,999.95 units it owns in OSO for 1,000 shares of non-voting common stock in the Registrant, subject to appropriate adjustments for stock splits, stock dividends, recapitalizations, and similar events occurring after the date of the Exchange Agreement. Sotseks Corp. is obligated to make the exchange, subject only to the closing of the public offering which is the subject of this registration statement. The issuance of this stock will be effected in reliance upon an exemption from registration provided by Section 4(2) under the Act.

We have also entered into Indemnification Agreements with our directors, effective April 21, 2004, which provide indemnification and advance of expenses to the fullest extent permitted by Maryland law, as amended from time to time. However, no change in Maryland law will have the effect of reducing any benefits available to the directors under the Indemnification Agreements based on Maryland law as in effect on the effective date of the Indemnification Agreements.

Furthermore, our officers and directors will also be indemnified against specified liabilities by the underwriters, and the underwriters will be indemnified against certain liabilities by us, under the underwriting agreement relating to this offering. See “Underwriting.”

It is the position of the SEC that indemnification of directors and officers for liabilities arising under the Act is against public policy and is unenforceable pursuant to Section 14 of such Act.

None of the proceeds will be credited to an account other than the appropriate capital share account.

See page F-1 of the Prospectus for an index to the financial statements of the issuer included in the Prospectus.

The Exhibits listed on the Exhibit Index following the signature page are included in this Registration Statement.


	(1) For purposes of determining any liability under the Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon rule 430A and contained in the form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Act shall be deemed to be part of this registration statement as of the time it was declared effective.

	(2) For the purpose of determining any liability under the Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

The undersigned registrant hereby further undertakes to provide to the underwriters at the closing specified in the underwriting agreement certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser.

Insofar as indemnification for liabilities arising under the Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.

Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant, Oak Street Financial Services, Inc., certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-11 and has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Indianapolis, State of Indiana, on this 12th day of May, 2004.


	By:	/s/ STEVEN ALONSO



	Steven Alonso
	Chairman, President and Chief Executive Officer

Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated.






	Proposed Maximum	Amount of
	Aggregate Offering	Registration
Title of securities being registered	Price	Fee


Common Stock, $.01 par value per share	$150,000,000(1)	$19,005(2)

Warrants	(3)	(3)


	Per Share	Total

Public offering price	$	$
Underwriting discounts and commissions	$	$
Proceeds, before expenses, to us	$	$
Proceeds, before expenses, to the selling stockholders	$	$



		As of December 31, 2003

					Pro Forma
		Actual			As Adjusted(1)


		(Dollars in thousands)
Borrowings:
Warehouse lines of credit		$	124,571		$
Collateralized financing			25,177
Other borrowings			1,274

	Total borrowings		151,022

Stockholders’ Equity:
Preferred stock, $0.01 par value per share; shares authorized and shares authorized pro forma as adjusted; no shares outstanding
Common stock, $0.01 par value per share; shares authorized and shares authorized pro forma as adjusted; shares issued and outstanding and shares issued and outstanding pro forma as adjusted, and paid-in capital			10,608
Warrants			—
Accumulated other comprehensive loss			(355	)
Retained earnings			—

	Total stockholders’ equity		10,253	(2)		(3)

Total capitalization		$	161,275		$


Assumed initial public offering price per share		$
Historical net tangible book value per share as of December 31, 2003(1)		$
Increase in pro forma net tangible book value per share to existing stockholders attributable to this offering(2)		$
Pro forma net tangible book value per share after this offering(3)		$
Dilution in pro forma net tangible book value per share to new investors(4)		$



		Year Ended December 31,

		2003		2002


		(In thousands)
Residential Funding Corporation		$	456,125	$	221,217
Household Financial Services			263,495		75,936
CitiFinancial			137,648		75,584
Countrywide Home Loans, Inc.			151,409		133,492
Sovereign Bank			124,178		137,216
Credit Suisse First Boston			154,095		36,317
American General Finance			49,951		36,141
First Union/Wachovia			15,925		55,658
Other			198,145		129,536

	Total	$	1,550,971	$	901,097


Claudia V. Swhier, Esq. Thomas M. Maxwell, Esq. Barnes & Thornburg LLP 11 S. Meridian Street Indianapolis, Indiana 46204 (317) 236-1313		John J. Sabl, Esq. Sidley Austin Brown & Wood LLP Bank One Plaza, 10 S. Dearborn Street Chicago, Illinois 60603 (312) 853-7000


	•	expanding our direct-to-customer retail business (which allows us to generate revenue by collecting fees and discount points and reduces our reliance on back-end fees) by filling existing excess capacity with qualified loan officers and by realizing critical mass in each of our retail branches;

	•	expanding the geographic presence of our retail lending network to become a nationwide lender;

	•	expanding our wholesale division’s brokerage relationships and geographic presence, and by beginning to purchase loans from correspondent lenders;

	•	expanding and improving our database marketing approach and our brand recognition;

	•	improving our per-person sales and operations efficiency and underwriting disciplines by incorporating new technologies in our lending processes;

	•	using the proceeds of this offering, along with prudent leverage, to hold loans in our mortgage portfolio, which we expect will generate favorable risk-adjusted returns for our stockholders and create a new earnings stream for us that is less volatile than selling whole loans into the secondary market;

	•	continuing to utilize the ability of each of our loan officers to generate non-conforming, jumbo and conforming loans, which permits us to reduce the inefficiencies associated with creating separate divisions and processes for each of these loan products;

	•	developing the capacity, within 24 to 36 months of this offering, to service the loans that we hold in our mortgage portfolio; and

	•	continuing to provide responsive service to our retail customers and wholesale loan brokers.


	•	Oak Street Financial Services, Inc.’s historical summary consolidated financial and operating data as of December 31, 2003 and for the three-month period then ended; and

	•	Oak Street Mortgage LLC’s historical summary consolidated financial and operating data as of and for each of the years in the four-year period ended December 31, 2003 and as of and for the period from October 17, 1999 (inception) through December 31, 1999.


	An increase in interest rates could reduce our loan origination volumes, increase our delinquency, default and foreclosure rates and reduce the value of and the income we receive from our loans.


	*The residential mortgage origination business is a cyclical industry and originations in 2003 were at their highest levels ever.*


	If we are unable to securitize or otherwise finance the loans we expect to hold in our mortgage portfolio, our results of operations, financial condition and business prospects as well as our REIT status could be adversely affected.


	*If we are unable to generate liquidity or access funding sources, our results of operations will be adversely affected.*


	*If we are unable to hedge effectively against interest rate changes, our results of operations could be adversely affected.*


	Our rights to cash flow from the loans we securitize in the future may be subordinate to senior interests and may fail to generate any revenues for us if the revenue stream only generates enough revenues to pay the senior interest holders.


	Our lack of loan performance data makes it difficult to predict future loan delinquencies and losses and could adversely affect our ability to leverage the loans we will hold in our portfolio.


	*Variations in anticipated mortgage prepayment rates may adversely affect our results of operations.*


	*The interest expense we incur in leveraging our mortgage portfolio, or our inability to leverage our portfolio to the extent we desire, could adversely affect our results of operations.*


	*A decline in the market value of our mortgage assets could cause our lenders to initiate margin calls, which could affect our ability to maintain our status as a REIT.*


	*A geographic concentration of the loans we originate or of the loans that we hold in our portfolio could adversely affect our financial condition.*


	*A prolonged economic slowdown or a lengthy or severe recession could hurt our operations, particularly if it results in a decline in the real estate market.*


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


	*High delinquencies or losses on the mortgage loans we hold in our portfolio in the future may decrease our cash flows or impair our ability to sell or securitize loans.*


	*Our full deployment of the net proceeds of this offering may be delayed, which would affect our profitability.*


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


	*If we are unable to obtain the state licenses we need to originate mortgage loans, our ability to develop our portfolio of mortgage loans could be adversely affected.*


	We intend to develop the capacity to service the portfolio mortgage loans that we will hold following this offering. If we are unable to service these loans effectively, the value of our mortgage portfolio could be reduced and our profitability from selling or securitizing loans in the future could be adversely affected.


	*New legislation could restrict our ability to make mortgage loans, which could adversely impact our earnings.*


	*We may be required to repurchase mortgage loans or indemnify investors if we breach representations and warranties in our loan sale agreements, which would adversely impact our earnings.*


	*Compliance with complex federal, state and local laws and regulations could be burdensome and result in penalties and losses due to non-compliance.*


	*An interruption in or breach of our information systems could impair our ability to originate loans on a timely basis and may result in lost business.*


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


	*We depend on key personnel with long-standing business relationships, the loss of whom could threaten our ability to operate our business successfully.*


	*The amount of our dividends will depend upon our operating results.*


	*Our board of directors may authorize the issuance of additional shares that may cause dilution.*


	Our rights and the rights of our stockholders to take action against our directors and officers are limited, which could limit your recourse if our directors or officers take actions you do not believe are in your best interests.