RISK FACTORS

      An investment in our common stock involves risk, and you should not invest in our common stock unless you can afford to lose some or all of your investment. You should carefully read the risks described below, together with all of the other information included in this prospectus, before you decide to buy any of our common stock. Our business, prospects, financial condition and results of operations could be harmed by any of the following risks or other risks which have not been identified which we believe are immaterial or unlikely.

Risks Relating to Our Business

      We commenced banking operations in July 2000. We remain subject to the risks inherently associated with new business enterprises in general and, more specifically, the risks of a new financial institution and, in particular, a new Internet-based financial institution. Our prospects are subject to the risks and uncertainties frequently encountered by companies in their early stages of development, including the risk that we will not be able to implement our business strategy. In addition, we have a limited history upon which we can rely in planning and making the critical decisions that will affect our future operating results. Similarly, because of the relatively immature state of our business, it will be difficult to evaluate our prospects. Accordingly, our financial performance to date may not be indicative of whether our business strategy will be successful.

      We have grown substantially, from $217.6 million in total assets and $167.6 million in total deposits at June 30, 2002 to $453.9 million in total assets and $295.7 million in total deposits at September 30, 2004. We expect to continue to grow our assets, our deposits, the number of our customers and the scale of our operations generally and will seek to grow at an accelerated rate following completion of the offering. Our future success will depend in part on our continued ability to manage our growth. We may not be able to achieve our growth plans, or sustain our historical growth rates or grow at all. Various factors, such as economic conditions, regulatory and legislative considerations and competition, may also impede our ability to expand our market presence. If we are unable to grow as planned, our business and prospects could be adversely affected.

      Our business strategy involves, among other things, continuing to grow our assets and loan portfolio and our customer base. We intend to use the net proceeds from the offering to help us achieve this objective. Our ability to achieve profitable growth depends in part upon our ability to identify favorable loan and investment opportunities and successfully attract deposits. Our management may not be able to use the net proceeds from the offering to implement our business strategy effectively, and we may encounter unanticipated obstacles in implementing our strategy. If we are unable to expand our business as we anticipate, we may be unable to benefit from the investments we have made to support our future growth. If this occurs, we may not be able to maintain profitability.

      We anticipate that our asset size and deposit base will continue to grow over time, perhaps significantly. To manage the expected growth of our operations and personnel, we will be required to, among other things:

	•	improve existing and implement new transaction processing, operational and financial systems, procedures and controls;
	•	maintain effective credit scoring and underwriting guidelines; and
	•	expand our employee base and train and manage this growing employee base.

      If we are unable to manage growth effectively, our business, prospects, financial condition and results of operations could be adversely affected.

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      Our profitability depends substantially on our net interest income, which could be negatively affected by changes in interest rates. Net interest income is the difference between the income we earn on interest-earning assets, such as mortgage loans and investment securities, and the interest we pay on interest-bearing liabilities, such as deposits and other borrowings. Because of the differences in both maturities and repricing characteristics of our interest-earning assets and interest-bearing liabilities, changes in interest rates do not produce equivalent changes in interest income earned on interest-earning assets and interest paid on interest-bearing liabilities. Accordingly, fluctuations in interest rates could adversely affect our net interest income and therefore profitability. We may not be able to manage our interest rate risk.

      Interest rates are highly sensitive to many factors which are beyond our control, including general economic conditions and policies of various governmental and regulatory agencies and, in particular, the Federal Reserve Board, or the FRB. Changes in monetary policy, including change in interest rates, will influence not only the interest we receive on our loans and investment securities and the amount of interest we pay on deposits, it will also affect our ability to originate loans and obtain deposits and our costs in doing so. When interest rates rise, the cost of borrowing also increases. Our business model is predicated on our operating on levels of net interest income that other banks might find unacceptable or unsustainable, as we typically pay interest rates on deposits in the higher end of the spectrum and often charge lower interest rates and fees than those charged by competitors. Accordingly, changes in levels of market interest rates could materially and adversely affect our net interest income, asset quality, loan origination volume, business and prospects.

      We expect more of our interest-bearing liabilities will mature or reprice within one year than will our interest-earning assets, resulting in a one year negative interest rate sensitivity gap (the difference between our interest rate sensitive assets maturing or repricing within one year and our interest rate sensitive liabilities maturing or repricing within one year, expressed as a percentage of interest-earning assets). In a rising interest rate environment, an institution with a negative gap generally would be expected, absent the effects of other factors, to experience a greater increase in its cost of liabilities relative to its yield on assets, and thus a decrease in its net interest income. For a further discussion of our interest rate risks and the assumptions underlying our interest rate risk calculations, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Quantitative and Qualitative Disclosures about Market Risk.”

      Due to applicable capital adequacy regulations and sound banking practices, our growth will require that we generate additional capital either through retained earnings or the issuance of additional shares of common stock or other capital instruments. We may choose to raise additional capital even if we believe we have sufficient funds for our current operating plan. Additional capital may not be available on terms acceptable to us, if at all. Any equity financings could result in dilution to our stockholders or reduction in the earnings available to our common stockholders. If adequate capital is not available or the terms of such capital are not attractive, we may have to curtail our growth and our business, and our business, prospects, financial condition and results of operations could be adversely affected.

      We are an independent Internet-based bank, as distinguished from the Internet banking services of an established “brick and mortar” bank. Independent Internet-based banks often have found it difficult to achieve profitability and revenue growth. Several factors contribute to the unique problems that Internet-based banks face. These include concerns for the security of personal information, the absence of personal relationships between bankers and customers, the absence of loyalty to a conventional hometown bank, customers’ difficulty in understanding and assessing the substance and financial strength of an Internet-based bank, a lack of confidence in the likelihood of success and permanence of Internet-based banks and many

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      Conventional “brick and mortar” banks, in growing numbers, are offering the option of Internet-based banking services to their existing and prospective customers. The public may perceive conventional banks as being safer, more responsive, more comfortable to deal with and more accountable as providers of their banking services, including their Internet-based banking services. We may not be able to offer Internet-based banking services that have sufficient advantages over the Internet-based banking services and other characteristics of conventional “brick and mortar” banks to enable us to compete successfully.

      Moreover, both the Internet and the financial services industry are undergoing rapid technological changes, with frequent introductions of new technology-driven products and services. In addition to improving the ability to serve customers, the effective use of technology increases efficiency and enables financial institutions to reduce costs. Our future success will depend in part upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in our operations. We may not be able to effectively implement new technology-driven products and services or be successful in marketing theses products and services to our customers. If we are unable, for technical, legal, financial or other reasons, to adapt in a timely manner to changing market conditions, customer requirements or emerging industry standards, our business, prospects, financial condition and results of operations could be adversely affected.

      Many of our competitors have substantially greater resources to invest in technological improvements. To remain competitive, we must continue to enhance and improve the responsiveness, functionality and features of our Internet-based services. Most of our software and computer systems are comprised of “off-the-shelf” applications, and we have limited proprietary computer software, information databases and applications. Others may develop and offer superior banking products and services that may gain greater acceptance among potential customers. Our success will depend in part on our ability both to license and develop leading technologies to enhance our existing services, develop new services and technologies that address the increasingly sophisticated and varied needs of our customers and respond to technological advances and emerging industry standards and practices on a cost effective and timely basis.

      Our business strategy depends on our ability to remain competitive. There is strong competition for customers from existing banks and other types of financial institutions, including those that use the Internet as a medium for banking transactions or as an advertising platform. Our competitors include:

	•	large, publicly-traded, Internet-based banks, as well as smaller Internet-based banks;
	•	“brick and mortar” banks, including those that have implemented websites to facilitate online banking; and
	•	traditional banking institutions such as thrifts, finance companies, credit unions and mortgage banks.

      Some of these competitors have been in business for a long time and have name recognition and an established customer base. Most of our competitors are larger and have greater financial and personnel resources. In order to compete profitably, we may need to reduce the rates we offer on loans and investments and increase the rates we offer on deposits, which actions may adversely affect our business, prospects, financial condition and results of operations.

      To remain competitive, we believe we must successfully implement our business strategy. Our success depends on, among other things:

	•	having a large and increasing number of customers who use our bank for their banking needs;
	•	our ability to attract, hire and retain key personnel as our business grows;
	•	our ability to secure additional capital as needed;

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	•	the relevance of our products and services to customer needs and demands and the rate at which we and our competitors introduce them;
	•	our ability to offer products and services with fewer employees than competitors;
	•	the satisfaction of our customers with our customer service;
	•	ease of use of our websites; and
	•	our ability to provide a secure and stable technology platform for financial services that provides us with reliable and effective operational, financial and information systems.

      If we are unable to implement our business strategy, our business, prospects, financial condition and results of operations could be adversely affected.

      We are based in San Diego, California, and approximately 63.5% of our total loan portfolio was secured by real estate located in California at September 30, 2004. In addition, the computer systems that operate our Internet websites and some of their back-up systems are located in San Diego, California. Historically, California has been vulnerable to natural disasters. Therefore, we are susceptible to the risks of natural disasters, such as earthquakes, wildfires, floods and mudslides. Natural disasters could harm our operations directly through interference with communications, including the interruption or loss of our websites which would prevent us from gathering deposits, originating loans and processing and controlling our flow of business, as well as through the destruction of facilities and our operational, financial and management information systems. A natural disaster or recurring power outages may also impair the value of our largest class of assets, our loan portfolio, which is comprised substantially of real estate loans. Uninsured or underinsured disasters may reduce borrowers’ ability to repay mortgage loans. Disasters may also reduce the value of the real estate securing our loans, impairing our ability to recover on defaulted loans through foreclosure and making it more likely that we would suffer losses on defaulted loans. California has also experienced energy shortages which, if they recur, could impair the value of the real estate in those areas affected. Although we have implemented several back-up systems and protections (and maintain business interruption insurance), these measures may not protect us fully from the effects of a natural disaster. The occurrence of natural disasters or energy shortages in California could have a material adverse effect on our business, prospects, financial condition and results of operations.

      At September 30, 2004, our multifamily residential loans held for investment were $318.9 million, or 90.0% of our total loans held for investment, and the average loan size of our multifamily residential loans was $673,000. At September 30, 2004, our commercial real estate loans held for investment were $11.7 million, or 3.3% of our total loans held for investment, and the average loan size of our commercial real estate loans was $617,000. The payment on such loans is typically dependent on the cash flows generated by the projects, which are affected by the supply and demand for multifamily residential units and commercial property within the relative market. If the market for multifamily residential units and commercial property experiences a decline in demand, multifamily and commercial borrowers may suffer losses on their projects and be unable to repay their loans.

      We may incur significant losses because approximately 90.0% of our loans are secured by multifamily properties. Loans secured by multifamily properties may have a greater risk of loss than loans secured by single family properties because they typically involve larger loan balances to single borrowers or groups of related borrowers. Significant losses on loans secured by multifamily properties are possible because the cash flows from multifamily properties securing the loans may become inadequate to service the loan payments. The payment experience on these loans typically depends upon the successful operation of the related real

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      Multifamily underwriting typically requires inspection of each property and familiarity with the location of the property and the local real estate market. While we have a policy to conduct a site visit of the property underlying every multifamily loan and focus our multifamily originations in only four states with which we believe we have greater familiarity, we intend to expand our multifamily loan originations beyond those four states. We may not be able to develop the requisite experience with other markets to be able to underwrite successfully multifamily loans in additional communities and states. We also may not be able to assess correctly relevant criteria such as the level of vacancies with respect to a particular property or the community in which it is located or that we will be able to continue to physically inspect each multifamily property. Our inability to successfully underwrite multifamily loans could lead to delinquencies and charge-offs and could adversely affect our business, prospects, financial condition and results of operations.

      Our loans are generally secured by multifamily and, to a lesser extent, commercial and single family real estate properties, each initially having a fair market value generally greater than the amount of the loan secured. However, even though our loans are typically secured, the risk of default, generally due to a borrower’s inability to make scheduled payments on his or her loan, is an inherent risk of the banking business. In determining the amount of the allowance for loan losses, we make various assumptions and judgments about the collectibility of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate serving as collateral for the repayment of our loans. Defaults by borrowers could result in losses that exceed our loan loss reserves. We have originated or purchased many of our loans recently, so we do not have sufficient repayment experience to be certain whether the allowance for loan losses we have established is adequate. We may have to establish a larger allowance for loan losses in the future if, in our judgment, it is necessary. Any increase in our allowance for loan losses will increase our expenses and consequently may adversely affect our profitability, capital adequacy and overall financial condition.

      Substantially all of the loans in our portfolio are secured by real estate. At September 30, 2004, approximately 63.5% of our total loan portfolio was secured by real estate located in California. If there is a significant decline in real estate values, especially in California, the collateral for our loans will become less valuable. If such an event were to occur, we may experience charge-offs at a greater level than we would otherwise experience, as the proceeds resulting from foreclosure may be significantly lower than the amounts outstanding on such loans. Declining real estate values frequently accompany periods of economic downturn or recession and increasing unemployment, all of which can lead to lower demand for mortgage loans of the types we originate. These changes would likely have a material adverse effect on our business, prospects, financial condition and results of operations.

      From time to time, we purchase loans in bulk or “pools.” When we determine the purchase price we are willing to pay to purchase loans in bulk, management makes certain assumptions about, among other things, how fast borrowers will prepay their loans, the real estate market and our ability to collect loans successfully and, if necessary, to dispose of any real estate that may be acquired through foreclosure. When we purchase loans in bulk, we perform certain due diligence procedures and we purchase the loans subject to customary limited indemnities. To the extent that our underlying assumptions prove to be inaccurate or the basis for those assumptions change (such as an unanticipated decline in the real estate market), the purchase price paid for the “pool” of loans may prove to have been excessive, resulting in a lower yield or a loss. For example, if we purchase a “pool” of loans at a premium and some of the loans are prepaid before we expected, we will

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      Acquiring loans through bulk purchases may involve acquiring loans of a type or in geographic areas where management may not have substantial prior experience. We may be exposed to a greater risk of loss to the extent that bulk purchases contain such loans.

      The amount that we can lend to a single borrower is limited to 15.0% of the unimpaired capital and surplus of our subsidiary bank. At September 30, 2004, no single loan was larger than $2.9 million and our bank’s largest single lending relationship had an outstanding balance of $4.3 million. We expect that our lending limit will increase to approximately $           million immediately following the offering, assuming $           million is raised in the offering and that $           million of the net proceeds are contributed to our bank, based on the assumptions set forth below the table in “Capitalization.” Because our lending limits may be significantly lower than those of our competitors, we may be at a competitive disadvantage in pursuing relationships with larger borrowers in our market areas. Notwithstanding our loan limits, we may elect not to make loans up to our maximum loan limit for any reason. If we do elect to make larger loans, we may seek to reduce our exposure by making the loan with one or more other financial institutions which become solely liable for their portion of the loan. We may not be successful in securing other institutions to make loans with us or in successfully administering those loans, if we elect to make larger loans.

      Our success depends substantially on the skill and abilities of our senior management team, including our President and Chief Executive Officer Gary Lewis Evans, our Chief Financial Officer Andrew J. Micheletti and our bank’s Chief Credit Officer Patrick A. Dunn, each of whom performs multiple functions that might otherwise be performed by separate individuals at larger banks, as well as our Chairman Jerry F. Englert and our Vice Chairman Theodore C. Allrich. These individuals may not be able to fulfill their responsibilities adequately, and they may not remain with us. The loss of the services of any of these individuals or other key employees, whether through termination of employment, disability or otherwise, could have a material adverse effect on our business. In addition, our ability to grow and manage our growth depends on our ability to continue to identify, attract, hire, train, retain and motivate highly skilled executive, technical, managerial, sales and marketing, customer service and professional personnel. The implementation of our business plan and our future success will depend on such qualified personnel. Competition for such employees is intense, and there is a risk that we will not be able to successfully attract, assimilate or retain sufficiently qualified personnel. If we fail to attract and retain the necessary technical, managerial, sales and marketing and customer service personnel, as well as experienced professionals, our business, prospects, financial condition and results of operations could be adversely affected. We maintain a “key man” life insurance policy on Gary Lewis Evans and bank-owned life insurance on other executive officers.

      We rely substantially upon third-party service providers for our core banking technology and to protect us from bank system failures or disruptions. This reliance may mean that we will not be able to resolve operational problems internally or on a timely basis, which could lead to customer dissatisfaction or long-term disruption of our operations. Our operations also depend upon our ability to replace a third-party service provider if it experiences difficulties that interrupt operations or if an essential third-party service terminates. If these service arrangements are terminated for any reason without an immediately available substitute arrangement, our operations may be severely interrupted or delayed. If such interruption or delay were to

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      A deterioration in economic conditions, whether caused by national events or local events, in particular an economic slowdown in California, where approximately 63.5% of our total loan portfolio was located at September 30, 2004, could result in the following consequences, any of which could hurt our business materially:

	•	loan delinquencies may increase;
	•	problem assets and foreclosures may increase;
	•	demand for our products and services may decline; and
	•	the value of collateral supporting our loans, especially real estate, may decline, in turn reducing customers’ borrowing power and reducing potential proceeds from foreclosures and from sales of loans.

      The State of California continues to face its own fiscal challenges, the long term effect of which on the State’s economy cannot be predicted.

      We rely on other companies to administer and service some of our loans by collecting payments, disbursing proceeds of collection and, if necessary, conducting foreclosures. We also rely on other companies to support our loan underwriting process by providing us with, among other things, appraisals, credit reports, environmental inspections and reports and title searches. The value to our customers of the services we offer and the success of our business ultimately depend in large part on third parties providing these ancillary services without errors, interruptions, delays and fraud. If third parties commit fraud or perform their services negligently, such as by intentionally or negligently reporting false or misleading information, we could suffer losses by relying on that information in conducting our business. Errors, interruptions or delays by third parties providing these ancillary services could also cause losses, as well as delays, in the processing and closing of loans for our customers. If we cannot manage these third parties so that they deliver these ancillary services as we expect, we likely will experience customer dissatisfaction, and our business, prospects, financial condition and results of operations could be adversely affected.

      We are subject to a large body of laws governing our business, such as laws governing our charter, state laws determining our remedies as lenders, laws governing labor relations, taxation, contracts, consumer issues and many other aspects of our business. We are regulated primarily by the OTS, the Federal Deposit Insurance Corporation, or the FDIC, and, to a lesser extent, the FRB. Because we are an Internet-based bank, we are subject to various electronic funds transfer rules adopted by the FRB. We are also subject to various general commercial and consumer laws and regulations, such as the Truth-in-Lending Act, the Truth-in-Savings Act, the Real Estate Settlement Procedures Act of 1974 and the Uniform Commercial Code, among many others. Any significant change in applicable laws, rules and regulations, as well as new laws, rules and regulations could significantly increase our cost of compliance and adversely affect our business, prospects, financial condition and results of operations.

      Laws and regulations directly applicable to the Internet and electronic commerce may become more prevalent in the future. In the event Congress or state legislatures or regulators such as the OTS, the FDIC, the FRB, the Federal Trade Commission or other governmental authorities enact or modify laws or adopt regulations relating to the Internet, our business, prospects, financial condition and results of operations could

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      As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company, including costs associated with our public company reporting requirements. We also anticipate that we will incur costs associated with recently adopted corporate governance requirements, including requirements under the Sarbanes-Oxley Act of 2002, as well as new accounting pronouncements and new rules implemented by the Securities and Exchange Commission, or the SEC, and the Nasdaq National Market. Any expenses required to comply with evolving standards may result in increased general and administrative expenses and a diversion of management time and attention from our business. In addition, these new laws and regulations could make it more difficult or more costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially greater costs to obtain the same or similar coverage. The effect of these events could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, on our board committees or as executive officers. We are presently evaluating and monitoring developments with respect to these laws and regulations and cannot predict or estimate the amount or timing of additional costs we may incur to respond to their requirements.

      Our executive officers, directors and their affiliates beneficially owned or controlled approximately 33.0% of our outstanding common stock at November 30, 2004, and will beneficially own or control approximately      %, or approximately      % assuming full exercise of the underwriters’ over-allotment option, of our outstanding common stock following the offering, in each case assuming the exercise of all outstanding warrants held by them and the conversion of all shares of Series A preferred stock held by them into common stock (based on current conversion terms). Accordingly, these executive officers, directors and their affiliates, acting as a group, will have substantial influence over the outcome of corporate actions requiring stockholder approval, including the election of directors, any merger, consolidation or sale of all or substantially all of our assets or any other significant corporate transactions. This concentration of ownership may also delay or prevent a change of control of us, even if such a change of control would benefit our other stockholders, and might affect our stock price.

      Provisions of our certificate of incorporation and bylaws may delay or prevent a change in control, discourage bids at a premium over the market price of our common stock and adversely affect the market price of our common stock and the voting or other rights of the holders of our common stock. These provisions, among other things:

	•	authorize our board of directors to issue preferred stock with voting and other rights to be determined by them;

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	•	limit the persons who can call special meetings of stockholders;
	•	prohibit stockholder action by written consent;
	•	create a classified board of directors pursuant to which our directors are elected for staggered three-year terms; and
	•	provide that a supermajority vote of our stockholders is required to amend certain provisions of our certificate of incorporation and bylaws.

      We are subject to the provisions of the Delaware corporation law that, in general, prohibit any business combination with a beneficial owner of 15.0% or more of our common stock for five years unless the holder’s acquisition of our stock was approved in advance by our board of directors or other conditions are met.

      Acquisition of control of a federal savings bank such as Bank of Internet USA requires advance approval by the Office of Thrift Supervision, Department of the Treasury, or the OTS. Under federal law, acquisition of more than 10.0% of our common stock would result in a rebuttable presumption of control of Bank of Internet USA and the ownership of more than 25% of the voting stock would result in conclusive control of Bank of Internet USA. Depending on the circumstances, the foregoing requirements may prevent or frustrate a change in control of us, discourage bids at a premium over the market price of our common stock and adversely affect the market price of our common stock and the voting or other rights of the holders of our common stock.

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

      Our earnings will be affected by domestic economic conditions and the monetary and fiscal policies of the U.S. government and its agencies. The monetary policies of the FRB have had, and will continue to have, an important effect on the operating results of commercial banks and other financial institutions through its power to implement national monetary policy in order, among other things, to curb inflation or combat a recession.

      The monetary policies of the FRB, effected principally through open market operations and regulation of the discount rate and reserve requirements, have had major effects upon the levels of bank loans, investments and deposits. For example, in 2001, several drops in the discount rate by the Federal Open Market Committee placed tremendous pressure on the profitability of all financial institutions because of the resulting contraction of net interest margins. Any increase in prevailing interest rates due to changes in monetary policies may adversely affect banks such as us, whose liabilities tend to reprice quicker than their assets. It is not possible to predict the nature or effect of future changes in monetary and fiscal policies.

      The computer systems and network infrastructure utilized by us and others could be vulnerable to unforeseen problems. This is true of both our internally developed systems and the systems of our third-party service providers. Our operations are dependent upon our ability to protect computer equipment against

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      Our operations depend upon encryption and authentication technology to provide secure transmission of confidential information and upon our ability to generally protect the computer systems and network infrastructure utilized by us against damage from security breaches and other disruptive problems associated with Internet-related technological problems or malicious behavior of other users. Advances in computer capabilities, new discoveries in the field of cryptography or other developments could result in a compromise or breach of the processes and systems used to protect customer data. Notwithstanding such possible advances and developments, “hackers” and other disruptions could jeopardize the security of information stored in, and transmitted through, such computer systems and network infrastructure, which may result in significant liability to us and deter potential customers. With the rise in business conducted over the Internet, incidents of “identity theft” have become more frequent. Although management has implemented security technology and established operational procedures to prevent these and other threats to security, these security measures may not continue to be successful. A failure of such security measures, or the failure of our third-party service providers to design, implement and monitor their own security systems, could adverse affect our business, prospects, financial condition and results of operations.

      Any disruption in our operations due to systems failure or security breach could deter potential customers or cause existing customers to leave, could cause losses for which we would be liable and could adversely affect our reputation. Any such system failure or security breach could adversely affect our business, prospects, financial condition and results of operations.

Risks Relating to the Offering

      Prior to the offering, there has been no public market for our common stock. The offering price for our common stock in the offering will be determined by negotiations between us and the representatives of the underwriters participating in the offering. Among the factors to be considered in determining the offering price of our common stock, in addition to prevailing market conditions, are our historical performance, estimates regarding our business potential and earnings prospects, an assessment of our management and the consideration of the above factors in relation to market valuation of companies in related businesses. The initial public offering price of our common stock may bear no relationship to the price at which our common stock will trade upon completion of the offering, and you may not be able to resell your shares at or above the initial public offering price.

      Investors purchasing shares of our common stock in the offering will pay more for their shares than the amount paid by existing stockholders who acquired shares prior to the offering. Accordingly, if you purchase common stock in the offering, you will incur immediate dilution in pro forma net tangible book value of approximately $           per share. In the past, we issued options and warrants to acquire common stock at exercise prices significantly below the initial public offering price and Series A preferred stock that is currently convertible at a conversion price of $10.50 per share. If the holders of outstanding options and warrants exercise those securities or, depending on the per share initial public offering price, holders of Series A preferred stock convert their securities into common stock, you will incur further dilution. See “Dilution.”

      We have applied to have our common stock listed for quotation on the Nasdaq National Market under the symbol “BOFI.” However, we cannot assure you that an established and liquid trading market for our common stock will develop, that it will continue if it does develop or that after the completion of the offering the common stock will trade at or above the initial public offering price. The representatives of the underwriters have advised us that they intend to make a market in our common stock. However, neither the

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      We have never paid cash dividends on our common stock and do not expect to pay cash dividends on our common stock following the offering. Rather, we intend to retain earnings and increase capital in furtherance of our overall business objectives. We will periodically review our dividend policy in view of our operating performance and may declare dividends in the future if such payments are deemed appropriate and in compliance with applicable law and regulations. Cash and stock dividends are subject to determination and declaration by our board of directors, which will take into account our consolidated earnings, financial condition, liquidity and capital requirements, applicable governmental regulations and policies and other factors deemed relevant by our board of directors. Our ability to pay dividends, should we elect to do so, depends largely upon the ability of our bank to declare and pay dividends to us, which are subject to, among other things, the regulations of the OTS and the FDIC. The principal source of our revenues is dividends paid to us by our bank.

      We intend to contribute approximately $           million of the net proceeds of the offering to Bank of the Internet USA to provide additional capital to support its growth, including the addition of loans secured by single family and multifamily residential properties and commercial real estate and U.S. government agency mortgage-backed and other securities, as well as to increase deposits and advances from Federal Home Loan Bank, or the FHLB. We also intend to use a portion of the net proceeds of the offering to prepay in full a note payable. Although we have no current plans, agreements or commitments with respect to any acquisition, we may, if the opportunity arises, use an unspecified portion of the net proceeds to acquire or invest in products, technologies or companies. Our management will have broad discretion in the use of the net proceeds from the offering and may spend the proceeds in ways that our stockholders may not deem desirable. The timing and amount of our actual expenditures will be based on many factors, including cash flows from operations and the growth of our business.

      Until we use the net proceeds of the offering for the above purposes, we intend to invest the funds in short term, investment grade securities and other qualified investments, such as federal funds sold. We cannot predict whether the net proceeds invested will yield a favorable return.

      The market price of our common stock could decline as a result of sales of substantial amounts of our common stock in the public market after the offering, or even the perception that such sales could occur. We have agreed, and our directors, executive officers and certain holders of our outstanding common stock have also agreed, not to sell, offer, agree to sell, contract to sell, hypothecate, pledge, grant any option to purchase, make any short sale or otherwise dispose of or hedge, directly or indirectly, any of our common stock or securities that are substantially similar to our common stock, including but not limited to any securities that are convertible into or exchangeable for, or that represent the right to receive, our common stock or any substantially similar securities, or publicly announce an intention to do any of the foregoing for a period of 180 days in the case of directors, executive officers and certain holders of our common stock, and 90 days in the case of certain other holders of our common stock, after the date of this prospectus without the prior written consent of WR Hambrecht + Co, LLC.

      Notwithstanding the restrictions, and based on the number of shares of common stock outstanding at September 30, 2004 and on the assumptions set forth below the table in “Capitalization,” there will be

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	•	shares will be eligible for sale upon completion of the offering;
	•	shares will be eligible for sale 180 days from the date of this prospectus upon the expiration of the lock-up agreements described above;
	•	shares will be eligible for sale 90 days from the date of this prospectus upon expiration of the lock-up agreements described above; and
	•	shares will be eligible for sale upon the exercise of vested options 180 days after the date of this prospectus.

Risks Relating to the Auction Process

      We will determine the initial public offering price for the shares sold in the offering through an auction conducted by us and our underwriters. We believe the auction process will reveal a clearing price for the shares of our common stock offered in the offering. The clearing price is the highest price at which all of the shares offered (including the shares subject to the underwriters’ over-allotment option) may be sold to potential investors. Although we and our underwriters may elect to set the initial public offering price below the auction clearing price, the public offering price may be at or near the clearing price. If there is little to no demand for our shares at or above the initial public offering price once trading begins, the price of our shares would decline following the offering. If your objective is to make a short term profit by selling the shares you purchase in the offering shortly after trading begins, you should not submit a bid in the auction.

      Our underwriters may require that bidders confirm their bids before the auction for the offering closes. If a bidder is requested to confirm a bid and fails to do so within a required time frame, that bid will be rejected and will not receive an allocation of shares even if the bid is at or above the initial public offering price. In addition, we, in consultation with our underwriters, may determine, in our sole discretion, that some bids that are at or above the initial public offering price are manipulative and disruptive to the bidding process, in which case such bids will be rejected.

      If the initial public offering price is at or near the clearing price for the shares offered in the offering, the number of shares represented by successful bids will equal or nearly equal the number of shares offered by this prospectus. Successful bidders may therefore be allocated all or nearly all of the shares that they bid for in the auction. Therefore, we caution investors against submitting a bid that does not accurately represent the number of shares of our common stock that they are willing and prepared to purchase.

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