UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                   FORM 10-QSB
          QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934
                  For the quarterly period ended March 31, 2005


                        Commission File Number 000-29049
                            SILVERADO FINANCIAL, INC.
      _____________________________________________________________________
        (Exact name of small business issuer as specified in its charter)

              Nevada                                86-0824125
-----------------------------------         ---------------------------
 (State or other jurisdiction of                   (IRS Employer
  incorporation or organization)              Identification Number)




      5976 W. Las Positas, Suite 116, Pleasanton, CA              94588
-----------------------------------------------------------    --------
    (Address of principal executive offices)                  (Zip Code)

                        Telephone Number: (925) 227-1500

Check  whether the issuer (1) filed all reports  required to be filed by Section
13 or 15(d) of the  Exchange  Act  during the  preceding  12 months (or for such
shorter period that the  registrant was required to file such reports),  and (2)
has been subject to such filing  requirements for the past 90 days.
Yes [X] No [ ]


As of March 31, 2005,  18,694,649 of the  registrant's  common stock,  $0.01 par
value per share, were issued and outstanding.


                                       1
<PAGE>

                             INDEX TO FORM 10-QSB


PART I. FINANCIAL INFORMATION .............................................. 3

Item 1. Financial Statements

        Consolidated Balance Sheet as of March 31, 2005  ............... 3 - 4

        Consolidated Statements of Income For the Three Months
          Ended March 31, 2005 and 2004 .................................... 5

        Consolidated Statements of Stockholders' Equity For the
          Three Months Ended March 31, 2005 and 2004 ....................... 6

        Consolidated Statements of Cash Flows For the Three
          Months Ended March 31, 2005 and 2004 ............................. 7

        Notes to Financial Statements ................................. 8 - 17

Item 2. Management's Plan of Operation ............................... 17 - 32

Item 3. Controls and Procedures ........................................... 32

PART II. OTHER INFORMATION ................................................ 33

Item 1. Legal Proceedings ................................................. 33

Item 2. Changes in Securities ............................................. 34

Item 3. Defaults Upon Senior Securities ................................... 34

Item 4. Submissions of Matters to a Vote of Security Holders .............. 34

Item 5. Other Information ................................................. 34

Item 6. Exhibits and Reports on Form 8-K .................................. 34

Signatures ................................................................ 34

                                       2
<PAGE>

PART I -- FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS


                            Silverado Financial, Inc.
                           Consolidated Balance Sheets


                                                                March 31,
                                                           2005            2004
                                                    -----------     -----------
Assets
Current assets
 Cash                                               $   172,489     $    36,779
 Accounts receivable                                     21,351           2,957
 Stock receivable                                         7,857            --
 Mortgage receivable                                    791,250            --
 Prepaid expenses                                        22,459            --
                                                    -----------     -----------
Total current assets                                  1,015,406          39,736

Property and equipment
 Furniture and equipment                                155,971         134,271
 Intellectual property                                  699,010            --
 Accumulated depreciation and amortization             (170,709)        (24,615)
                                                    -----------     -----------
Total property and equipment                            684,272         109,656

Other assets
 Deposits                                                27,277          10,114
 Other intangibles                                         --         1,398,020
                                                    -----------     -----------
Total other assets                                       27,277       1,408,134
                                                    -----------     -----------
Total assets                                        $ 1,726,955     $ 1,557,526
                                                    ===========     ===========

See accountants' report

                                       3
<PAGE>


                            Silverado Financial, Inc.
                           Consolidated Balance Sheets


                                                                 March 31,
                                                          2005             2004
                                                  ------------     ------------
Liabilities and stockholders' equity
Current liabilities
 Accounts payable                                 $     77,864     $    268,761
 Notes payable - other                                  25,000             --
 Notes payable - stockholders                           43,767             --
 Warehouse facility payable                            791,250             --
 Due to affiliates                                        --             48,890
 Equity advances                                        27,500             --
 Payroll taxes payable                                 144,716             --
 Income taxes payable                                    3,200             --
 Accrued wages                                         295,480             --
 Accrued liabilities                                    13,525           18,340
 Convertible notes                                      36,000           36,000
                                                  ------------     ------------
Total current liabilities                            1,458,302          371,991

Long-term debt
 Notes payable                                            --            275,000
                                                  ------------     ------------
Total long-term debt                                      --            275,000
                                                  ------------     ------------
Total liabilities                                    1,458,302          646,991

Stockholders' equity
 Preferred stock, $.001 par value,
  1,000,000 shares authorized,
  no shares issued and oustanding                         --               --
 Common stock, $.001 par value,
  20,000,000 shares authorized,
  18,694,649 and 15,438,025 shares issued               18,695           16,214
   and oustanding, respectively
 Additional paid in capital                         10,923,103       10,666,366
 Deferred compensation                                    --             (9,030)
 Accumulated deficit                               (10,673,145)      (9,763,015)
                                                  ------------     ------------
Total stockholders' equity                             268,653          910,535
                                                  ------------     ------------
Total liabilities and stockholders' equity        $  1,726,955     $  1,557,526
                                                  ============     ============

See accountants' report

                                       4
<PAGE>


                            Silverado Financial, Inc.
                        Consolidated Statements of Income


                                            For the Three Months Ended March 31,
                                                     2005            2004
                                             --------------  --------------
Income
 Net sales                                    $     518,762   $     108,685
 Cost of sales                                      144,560             --
                                             --------------  --------------
Gross profit                                        374,202         108,685
Operating expenses
 Selling, general and administrative expenses       425,204         307,877
 Depreciation and amortization                       66,133           6,714
                                             --------------  --------------
Total operating expenses                            491,337         314,591
                                             --------------  --------------
Operating loss                                     (117,135)       (205,906)
Other income (expense)
 Interest income                                        998             --
 Gain on sale of investments                            --            9,814
 Loss on sale of equipment                              --              --
 Interest expense                                    (1,984)         (6,382)
                                             --------------  --------------
Total other income (expense)                           (986)          3,432
                                             --------------  --------------

Loss before income taxes                           (118,121)       (202,474)
Provision for income taxes                            1,600             --
                                             --------------  --------------
Net loss                                      $    (119,721)  $    (202,474)
                                             ==============  ==============

Loss per share (basic)                        $       (0.01)  $       (0.01)
                                             ==============  ==============

See accountants' report


                                       5
<PAGE>


                 Consolidated Statements of Stockholders' Equity
               For the Three Months Ended March 31, 2005 and 2004

<TABLE>
<CAPTION>

                                                          Additional                                      Total
                                     Common Stock          Paid-in       Deferred       Accumulated    Stockholders'
                                 Shares        Amount      Capital     Compensation      Deficit         Equity
                             -----------   -----------   -----------   ------------    ------------    -------------
<S>                                <C>           <C>           <C>            <C>            <C>            <C>
Balance, December 31, 2003    14,839,492   $    14,839   $10,455,513   $    (16,000)   $ (9,560,541)   $     893,811

Shares issued for payables       193,802           445        68,273           --              --             68,718
Shares issued for services       404,731           930       142,580           6,970           --            150,480
Net loss                            --            --            --             --          (202,474)        (202,474)
                             -----------   -----------   -----------   ------------    -----------     -------------

Balance, March 31, 2004       15,438,025   $    16,214   $10,666,366   $     (9,030)   $(9,763,015)    $     910,535
                             ===========   ===========   ===========   ============    ===========     =============



                                                          Additional                                      Total
                                     Common Stock          Paid-in       Deferred       Accumulated    Stockholders'
                                 Shares        Amount      Capital     Compensation      Deficit         Equity
                             -----------   -----------   -----------   ------------    ------------    -------------


Balance, December 31, 2004    18,216,697   $     18,217  $10,889,713           --      $(10,553,424)   $    354,506

Shares issued for payables       194,910           195        11,270           --              --             11,465
Shares issued for services       283,042           283        22,120           --              --             22,403
Net loss                            --            --            --             --          (119,721)        (119,721)
                            ------------   -----------   -----------   ------------    ------------    -------------

Balance, March 31, 2005       18,694,649   $    18,695   $10,923,103           --      $(10,673,145)   $     268,653
                            ============   ===========   ===========   ============    ============    =============
</TABLE>
See accountants' report


                                       6
<PAGE>

                            Silverado Financial, Inc.
                      Consolidated Statements of Cash Flows

                                                            For the Three
                                                        Months Ended March 31,
                                                         2005          2004
                                                      ---------    ---------
Operating activities
 Net loss                                             $(119,721)   $(202,474)
 Adjustments to reconcile net loss to
 cash flows from operating activities:
  Depreciation and amortization                          66,133       13,684
  Loss on sale of marketable securities                    --         (9,814)
  Stock for services and payables                        29,868      156,878
  (Increase) decrease in:
   Accounts receivable                                   (4,465)       8,448
    Mortgage receivable                                (791,250)        --
    Prepaid expenses                                    (11,535)        --
    Deposits                                             (5,380)      (3,214)
  Increase (decrease) in:
    Accounts payable                                     21,994       23,941
    Warehouse facility payable                          791,250         --
    Due to affiliates                                      --        (41,221)
    Equity advances                                      27,500         --
    Payroll taxes payable                                58,419         --
    Income taxes payable                                    800         --
    Accrued wages                                        89,048         --
    Accrued liabilities                                   2,220        6,383
                                                      ---------    ---------
Net cash provided by (used in) operating activities     154,881      (47,389)

Investing activities
 Proceeds from the sale of investments                     --         27,588
 Purchases of property and equipment                     (2,000)        --
                                                      ---------    ---------
Net cash provided by (used in) investing activities     (2,000)      27,588

Financing activities
 Proceeds from private placements of stock                 --         55,350
                                                      ---------    ---------
Net cash provided by financing activities                  --         55,350

Net increase in cash                                    152,881       35,549
Cash at beginning of year                                19,608        1,230
                                                      ---------    ---------
Cash at end of year                                   $ 172,489    $  36,779
                                                      =========    =========

See accountants' report

                                       7
<PAGE>

                            Silverado Financial, Inc.
                   Notes to Consolidated Financial Statements


1. Organization and Basis of Presentation

Nature of Operations

Silverado  Financial,  Inc. (the Company) is incorporated  under the laws of the
State of Nevada and based in  Pleasanton,  California  in the San  Francisco Bay
Area. This Company  provides first and second mortgage  products to borrowers in
California through its subsidiary  Silverado  Mortgage,  formerly Realty Capital
Corporation.

On May 9, 2003,  in a non-arms  length  transaction  with John E.  Hartman,  the
Company's  President,  the Company issued  729,452  shares of restricted  common
stock at a purchase price of $0.175 per share, which was based on the prior five
days average  trading price,  in exchange for all of the  outstanding  shares of
Realty Capital Corporation (RCC). The purchase price of RCC was $127,654 and was
the net  asset  value of RCC,  as  determined  by an  independent,  third  party
valuation. The shares were issued under Section 4(2) of the 1933 Securities Act.

Additionally Rockford,  Nanophase, ADEPT and RDT were held as subsidiaries until
sold in 2003.  Rockford,  Nanophase,  ADEPT and RDT were never active,  held any
assets or had any liabilities or operations. These subsidiaries were created for
the purpose of developing  specific  applications  from scientific  intellectual
property.  The Company  never  implemented  its plans to develop the  scientific
intellectual property. All of its scientific intellectual  properties,  together
with  certain  marketable  securities  held  for  sale,  were  sold in 2003 to a
director,  in exchange for the return of 62,000 shares of the  Company's  common
stock and the cancellation of $1,100 in debt.

Going Concern and Plan of Operations

The  accompanying  consolidated  financial  statements have been prepared on the
basis of accounting principles applicable to a going concern, which contemplates
the realization of assets and extinguishment of liabilities in the normal course
of business.

As shown in the accompanying financial statements, the Company had a net loss of
$125,101  for the  three  months  ended  March  31,  2005.  It has  incurred  an
accumulated  deficit of  $10,678,525  and has a deficit  in  working  capital of
$442,896 as of March 31, 2005. The ability of the Company to continue as a going
concern is dependent on obtaining additional capital and financing and operating
at a profitable  level.  The Company intends to seek  additional  capital either
through  debt  or  equity  offerings,  or a  combination  thereof,  and to  seek
acquisitions  which will generate sales volume with operating margins sufficient
to  achieve   profitability.   The  financial  statements  do  not  include  any
adjustments  that might be  necessary  if the Company is unable to continue as a
going concern.

Basis of Presentation

The  Company has  prepared  the  financial  statements  on the accrual  basis of
accounting in accordance with generally  accepted  accounting  principles in the
United  States  of  America.  In the  opinion  of  management,  all  adjustments
considered necessary for a fair presentation have been included.

                                       8
<PAGE>

Notes to Consolidated Financial Statements - continued

2. Summary of Significant Accounting Policies

Principles of Consolidation

The  accompanying  consolidated  financial  statements  include the  operations,
account   balances   and  cash  flows  of  the  Company  and  its  wholly  owned
subsidiaries,  Financial  Services,  Inc. and  Silverado  Mortgage  Corporation,
formerly  Realty Capital  Corporation.  Inter-company  transactions  and account
balances have been eliminated in consolidation.  The operations are consolidated
from  their  respective  acquisition  dates  of  November  19,  2002  (Financial
Services, Inc.) and May 9, 2003 (Silverado Mortgage Corporation).

Concentration of Credit Risk

The  Company  maintains  its cash  balances  in several  financial  institutions
located in  California.  The  balances  held are insured by the Federal  Deposit
Insurance  Corporation up to $100,000.  At March 31, 2005 the Company's  account
balances exceed these limits by $48,395.

The Company's revenues are concentrated in the mortgage industry which is highly
competitive  and subject to fluctuations  in economic  condition.  The Company's
results of  operations,  financial  condition  and business  prospects  could be
materially  adversely  affected if  competition  intensifies  or if  competitors
significantly expand their activities in the Company's markets.  Fluctuations in
interest  rates and general  economic  conditions  may also affect the Company's
competitive position.

Cash and Cash Equivalents

For the purpose of the  statements  of cash flows,  the  Company  considers  all
highly  liquid debt  instruments  purchased  with  original  maturities of three
months or less to be cash equivalents.

Financial Instruments

Financial  instruments  consist  primarily of cash,  investments  in  marketable
securities and  obligations  under accounts  payable and accrued  expenses.  The
carrying amounts of cash, accounts receivable,  accounts payable,  notes payable
and accrued  expenses  approximate fair value because of the short term maturity
of those instruments.

Investments

Statement of  Financial  Accounting  Standards  (SFAS) No. 115,  Accounting  for
Certain Investments in Debt and Equity Securities,  requires that all applicable
investments be classified as trading  securities,  available for sale securities
or held to  maturity  securities.  The  Company  did not  have  any  investments
classified as trading

securities or held-to-maturity  securities.  The statement further requires that
available for sale securities be reported at fair value,  with unrealized  gains
and losses  excluded  from  earnings  but  reported in a separate  component  of
stockholders' equity (net of the effect of income taxes) until they are sold. At
the time of sale, any gains or losses are recognized as a component of operating
results.

                                       9
<PAGE>

Notes to Consolidated Financial Statements - continued

At March 31, 2005, the Company's investments held for sale were $0.

Furniture and Equipment

Furniture  and  equipment  are  carried at cost less  accumulated  depreciation.
Depreciation is provided on the straight-line method over estimated useful lives
generally ranging from three to seven years. Intellectual property is carried at
cost less valuation  impairment expense and is amortized using the straight-line
method over its estimated useful life of three years. Leasehold improvements are
carried at cost and are  amortized  over the shorter of their  estimated  useful
lives or the related lease term (including options),  generally ranging from one
to six years.  Expenditures  for major  renewals  that  extend  useful  lives of
furniture,   equipment  and  improvements  are  capitalized.   Expenditures  for
maintenance  and  repairs  are  charged to expense as  incurred.  For income tax
purposes, depreciation is computed using the modified cost recovery system.

Depreciation expense for the three months ended March 31, 2005, was $7,882.
Amortization expense for the three months ended March 31, 2005, was $58,251.

Intellectual Property

The  Company's  intellectual  property  is  comprised  of  a  software  platform
purchased  with  Financial  Services,  Inc. in 2002.  The  Company  periodically
evaluates the  recoverability of intangible assets and takes into account events
or circumstances that warrant revised estimates of useful lives or that indicate
that an impairment  exists.  The Company put the software into productive use in
October 2004 and began amortizing the asset as of that date.

Impairment of Long-Lived Assets

On January  1, 2002,  the  Company  adopted  SFAS No.  144,  Accounting  for the
Impairment  or Disposal of Long-Lived  Assets,  which  requires that  long-lived
assets,  that are to be held and used, will be reviewed for impairment  whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable.

Impairment of Long-Lived Assets (continued)

In the event that facts and  circumstances  indicate that the cost of long-lived
assets,  primarily  intellectual  property  and patents,  may be  impaired,  the
Company performs a  recoverability  evaluation.  Recoverability  of assets to be
held and used is measured by a comparison of the carrying  amount of an asset to
future  undiscounted cash flows expected to be generated by the asset. If assets
are  considered to be impaired,  the  impairment to be recognized is measured by
the amount by which the carrying  amounts  exceed the fair values of the assets.
Assets to be  disposed of are  reported  at the lower of carrying  value or fair
value, less costs of disposal.

Compensating Absences

Employees  of the company  are  entitled  to paid  vacation,  paid sick days and
personal days off, depending on job classification,  length of service and other
factors.  It is  impracticable to estimate the amount of compensation for future
absences,  and, accordingly,  no liability has been recorded in the accompanying
financial  statements.  The  company's  policy  is to  recognize  the  costs  of
compensated absences when actually paid to employees.

                                       10
<PAGE>

Notes to Consolidated Financial Statements - continued

Convertible Notes

Statement of Financial  Accounting  Standards  No. 150,  Accounting  for Certain
Financial  Instruments with Characteristics of both Liabilities and Equity. This
Statement is effective for financial  instruments entered into or modified after
May 31, 2003,  and  otherwise is effective at the beginning of the first interim
period  beginning  after  June  15,  2003,  except  for  manditorily  redeemable
financial instruments of nonpublic entities.

This Statement  establishes  standards for how an issuer classifies and measures
certain  financial  instruments  with  characteristics  of both  liabilities and
equity.  It  requires  that an issuer  classify a financial  instrument  that is
within its scope as a  liability  (or an asset in some  circumstances).  Many of
those instruments were previously classified as equity. The Company has and will
continue to report convertible notes as liabilities.

Stock-Based Compensation

Statement of  Financial  Accounting  Standards  (SFAS) No. 123,  Accounting  for
Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure,  established accounting and disclosure
requirements  using a fair-value  based  method of  accounting  for  stock-based
employee  compensation.  The Company  periodically issues options to consultants
and members of the Board of Directors.  The estimated  value of these options is
determined in accordance  with SFAS No. 123 and expensed as the granted  options
vest to the grantees.

The price of any options granted pursuant to these grants is not to be less than
100  percent of the fair  market  value of the shares on the date of grant.  The
options expire one year from date of grant and are immediately vested. There was
no charge to expense for the value of the options  during the three months ended
March 31, 2005, as no options were issued.

Restatement of Share Amounts

Effective  April 29,  2003,  the Company  changed  its trading  name and trading
symbol to SLVO on the OTCBB and decreased  the number of issued and  outstanding
shares of common stock by issuing one new share for each five shares held.

Revenue Recognition

Sales are generally  recognized  at the time of loan  funding,  provided that no
significant vendor obligations exist and collections of accounts  receivable are
probable.

Advertising

Advertising costs are expensed as incurred. For the three months ended March 31,
2005, the Company incurred advertising costs of $0.

Research and Development

Expenditures  for  research  activities  relating  to software  development  and
improvement are charged to operations as incurred.

                                       11
<PAGE>

Notes to Consolidated Financial Statements - continued

Income Taxes

The Company  accounts for income taxes under the asset and  liability  method as
prescribed  by  Statement  of  Financial  Accounting  Standards  (SFAS) No. 109,
Accounting for Income Taxes. As such, deferred income tax assets and liabilities
are recognized for the future tax  consequences of the  differences  between the
financial statement carrying amount of existing assets and liabilities and their
respective tax bases.  Deferred  income tax assets and  liabilities are measured
using  enacted  tax rates  expected  to apply to taxable  income in the years in
which those temporary differences are expected to be recovered or settled.

Use of Estimates

The preparation of financial  statements in conformity  with generally  accepted
accounting  principles  in the United States of America  requires  management to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Accordingly, actual results could differ from
those estimates.

3. Intellectual Property

During the fourth quarter of 2004, Silverado Financial,  Inc. began implementing
its FinanCenter  Software system, but in doing so found that the software was in
need  of  upgrades  in both  programming  and  technology.  With  that in  mind,
management  felt that it was  necessary  to impair  the  original  valuation  of
$1,398,020 down 50% to $699,010. Additionally, on November 24, 2004 the purchase
price of the intellectual property was renegotiated as follows: SRD Technologies
(former  owner of Financial  Services,  Inc.),  signed a debt  cancellation  and
release  agreement which included the release of any and all liabilities owed to
SRD Technologies,  the relinquishment of 574,953 shares of Silverado  Financial,
Inc.  stock,  and a payment for  auditing  expenses in the amount of $7,500.  An
additional   44,000   shares   were   relinquished   from  Mike  Shultz  in  the
re-negotiation. On the date of the agreement 618,953 shares were valued at $0.05
a share or $30,948.

At March 31, 2005 there remains  157,131  shares or $7,857  receivable  from SRD
Technologies.  The note payable of $275,000, with corresponding accrued interest
of $41,047 and $7,500 in accounts  payable have been reversed as of December 31,
2004 with a resulting impairment expense of $389,753.

The Company  placed the software  into service in October 2004 and is amortizing
the  software  over a three year period  commencing  upon the  in-service  date.
Amortization  expense for the three  months  ended  March 31, 2005 was  $58,251.
Amortization  expense is estimated to be as follows for the years ended December
31,

                                       12
<PAGE>

Notes to Consolidated Financial Statements - continued

         Year                         Amount
        ------                 ------------------
         2005                   $         233,003
         2006                             233,003
         2007                             174,761
                               ------------------
                                $         640,767
                               ==================

4. Acquisitions

As of March 31, 2005, the Company executed no acquisitions.

5. Accounts Payable

As of March 31, 2005, the Company owes its vendors a total of $77,864,  of which
approximately $31,560 were outstanding over ninety days.

6. Equity Advance

As of March 31, 2005, the Company had received  advance payments on the issuance
of common stock for $27,500. The related stock was issued in April, 2005.

7. Long-Term Debt

Notes Payable

     Through the acquisition of Financial  Software,  Inc. (FSI),
     the  Company  became  obligated  for the  acquired  accounts
     payable in the amount of $30,000.  In June 2003, the Company
     issued  33,000  shares of stock at a value of  $5,000  and a
     note payable for $25,000 in satisfaction of accounts payable
     to one of the FSI vendors. The note carries interest at 5.0%    $  25,000

     On October 11, 2004 John E. Hartman returned 729,452 shares,
     valued at $43,767,  of Silverado  Financial,  Inc.  stock to
     alow the  Company  the  capability  to issue more shares for
     financing  transactions and services.  Silverado  Financial,
     Inc. will satisfy the note  obligation  with  re-issuance of
     shares and a 5% bonus of 36,472 shares, valued at $2,188.          43,767
                                                                   -----------
                                                                        68,767
     Current portion                                                    68,767
                                                                   -----------
     Long-term debt                                                  $     --
                                                                   ===========


Convertible Notes Payable

The Company has three  convertible  notes  payable  totaling  $36,000 at 10% per
annum,  maturing  in  2005  as a  result  of  the  Company's  extensions  of two
convertible  notes that were originated during 2002. At March 31, 2005 there was
$8,032 of accrued unpaid interest on these notes.

                                       13
<PAGE>

Notes to Consolidated Financial Statements - continued

A  schedule  of the  maturity  dates of the  convertible  debentures  with their
attached warrants are as follows:

                     Original       Extended
         Amount    Maturity Date  Maturity Date     Warrants Outstanding
     ------------ -------------- -------------- --------------------------------
     $  16,000      10/11/2003     10/11/2005   40,000 shares at $.40 per share
     $  10,000      11/16/2003     11/16/2005   25,000 shares at $.40 per share
     $  10,000       7/23/2004      7/23/2005   25,000 shares at $.40 per share

These notes can be converted  into common stock for the same amount of shares as
their right to purchase  shares  through  their  warrants.  Management  plans to
convert these to equity in 2005;  however if the Company has the ability to make
all note payments  under their terms and does not convert or further  extend the
convertible notes payable, the minimum annual payment is as follows:


                              Year       Amount
                            ---------  ----------
                              2005      $ 36,000

Warehouse Facility

On September 3, 2004, the Company's wholly owned subsidiary,  Silverado Mortgage
Corporation signed an agreement for a $2,000,000 mortgage warehouse and security
facility.

The warehouse  facility requires a demand note. The demand note, in the event of
a default, stipulates that any outstanding balance of the warehouse facility can
be called at any time, inclusive of interest. Interest is payable when loans are
sold (no later than 45 days) at 4.5% above the one month LIBOR rate. The note is
subject to mandatory prepayments and is collateralized by the mortgage loans and
other predetermined assets.

As of March 31, 2005 the outstanding balance was $791,250.

8. Operating Lease Commitments

During April 2004, the Company became  responsible  for a lease for 2,512 square
feet in an office building in Pleasanton,  California. The lease is for a period
of three years ending on May 31, 2007 with an option to renew for an  additional
three years.  The base rental  under the lease is $52,752 per annum  ($4,396 per
month)  during the first  twelve-month  period,  $54,259  per annum  ($4,522 per
month) for the second  twelve-month  period and  $55,766  per annum  ($4,647 per
month) during the third twelve-month  period. The lease provides for the Company
to pay its proportionate share of the landlord's common costs.

During  September  2004,  the Company became  responsible  for a lease for 6,000
square feet in an office  building in Campbell,  California.  The lease is for a
period of three years  ending on October  31,  2007.  The base rental  under the
lease is $108,000  per annum  ($9,000 per month)  during the first  twelve-month
period and  $120,000 per annum  ($10,000 per month) for the second  twelve-month
period and $126,000 per annum ($10,500 per month) during the third  twelve-month
period. The lease provides for the Company to pay its proportionate share of the
landlord's common costs.

                                       14
<PAGE>

Notes to Consolidated Financial Statements - continued

During  November  2004,  the Company  became  responsible  for a lease for 6,000
square feet in an office building in Phoenix, Arizona. The lease is for a period
of three years  ending on January 31,  2008.  The base rental under the lease is
$99,000 per annum  ($8,250 per month) during the first  thirty-six  month period
except the Company  shall pay $2,750 for the first ninety (90) days,  $4,125 for
the second  ninety  (90) days and $6,875 for the third  ninety  (90) days of the
lease. The lease provides for the Company to pay its proportionate  share of the
landlord's common costs.

Lease expense for the three months ended March 31, 2005 was $55,296.

Minimum  future  commitments  under all operating  leases are as follows for the
years ended December 31,


         Year          Amount
       ---------    -----------
         2005       $   193,881

         2006           275,138

         2007           227,236

         2008             8,250
                    -----------
                    $   704,505
                    ===========

9. Income Taxes

The  components of the provision for income tax consist of the following for the
three months ended March 31, 2005:


     Current tax expense - state                   $      1,600
     Deferred tax benefit:
     Federal                                            141,933
     California                                          45,058
     Change in valuation allowance                     (186,991)
                                                 --------------
     Total deferred tax expense                               -
                                                 --------------
     Provision for income taxes                    $      1,600
                                                 ==============

The Company's effective income tax rate is higher than what would be expected if
the  federal  statutory  rate were  applied  to loss from  operations  primarily
because of net operating losses deductible for financial reporting purposes that
are not deductible  for tax purposes.  A full  valuation  allowance  against net
deferred  tax  assets  was  recorded  at March 31,  2005,  due to the  Company's
uncertainty as to future realization of income tax loss carry-forwards.

                                       15
<PAGE>

Notes to Consolidated Financial Statements - continued

A  reconciliation  of the  Company's  income tax  expense  rate to U.S.  federal
statutory rate for the three months ended March 31, 2005 is as follows:

     Federal statutory rates                               (15%)
     State statutory rates                                  (9%)
     Change in valuation allowance                          23%
                                                 --------------
                                                             1%
                                                 ==============

9. Income Taxes (continued)

At March 31, 2005,  the Company had  realized  federal net  operating  losses of
approximately  $8,825,215.  Future realization of the net deferred tax assets is
dependent on generating sufficient taxable income prior to their expiration. The
net operating losses expire, as follows:

                                      Realty Capital
                     Consolidated      Corporation      Financial Services, Inc.
    Expiration          Federal           State                  State
-----------------   --------------   ---------------   -------------------------
       2009          $      44,994
       2010                379,485    $    2,109,954
       2011                461,101           318,228
       2012                236,028            76,034
       2013                                  522,756
       2014                                  119,873        $         389,827
       2018                861,526
       2019                603,950
       2020              3,670,269
       2021                578,596
       2022                126,723
       2023                871,260
       2024                991,283
                    --------------   ---------------   ----------------------
                     $   8,825,215    $    3,146,845        $         389,827
                    ==============   ===============   ======================

10. Loss Per Share

At March 31,  2005,  there  were  convertible  notes with  exercisable  warrants
outstanding.   Outstanding  options,  warrants  and  convertible  securities  to
purchase  common  stock  were not  considered  in the  calculation  for  diluted
earnings per share for the three months ended March 31, 2005, because the effect
of their inclusion would be anti-dilutive. A reconciliation of the numerator and
denominator  of the basic and diluted per share  calculations  for the loss from
continuing operations is as follows:


                                         Basic Loss        Diluted Loss
                        Net (Loss)        Per Share          Per Share
                    -----------------------------------------------------
       Loss           $   (125,101)     $   (125,101)
       Shares                             18,694,649
       Per share                        $      (0.01)        $     (0.01)


                                       16
<PAGE>

Notes to Consolidated Financial Statements - continued

Convertible notes and warrants to purchase 90,000, 90,000 and 65,000 shares, and
options  to  purchase  90,000,  90,000 and  65,000  shares of common  stock were
outstanding  at March  31,  2005.  All  shares  which  could be  exercised  from
convertible notes, warrants and stock options were excluded from the computation
of  diluted  loss per  share  because  the  effect of their  inclusion  would be
anti-dilutive.


11. Related Party Transactions

On October 11, 2004 John E. Hartman returned 729,452 shares,  valued at $43,767,
of Silverado Financial,  Inc. stock to allow the Company the capability to issue
more shares for financing transactions and services.  Silverado Financial,  Inc.
will satisfy the note  obligation  with  re-issuance of shares and a 5% bonus of
36,472 shares, valued at $2,188.


12. Contingencies

On  January  27,  2004 DL Pacific  Center LP (DL  Pacific)  filed a lawsuit  for
$40,444 plus costs and  attorney's  fees against the Company in San Diego County
Superior  Court.  The suit alleges  that,  after the  purchase of San  Francisco
Funding,  Inc.  (SFF) in November 2003,  the Company  assumed SFF's  obligations
pursuant to DL Pacific's  lease with SFF by accepting the benefits of such lease
and by negotiating with DL Pacific for amendments to the lease. The purchase was
never consummated. Silverado Financial Inc. has agreed to settle the lawsuit for
the nuisance value of $2,500.

Silverado Financial,  Inc. has filed a cross-complaint against SFF and its major
stockholder Mr. and Mrs.  Daniel Selis,  for indemnity for the cost of defending
the Vener lawsuit, and punitive damages resulting from breach of contract, fraud
and/or interference with the Company's advantageous business relationships.

On May 12, 2004 The Subway.Com  filed for  arbitration for $60,000 plus interest
against the Company in the state of Florida.  The suit claims breach of contract
for stock promotion  services.  The Company believes it has meritorious  defense
and that no contract was ever  consummated.  Arbitration is scheduled for August
22, 2005.

On July 16,  2004,  the  Company  was served  with a  complaint  by the State of
California,  Department of Industrial Relations on behalf of a former contractor
for back wages of $10,938 and penalties of $288 for an  indeterminate  number of
days.  Outside  counsel for the  company  has advised  that at this stage in the
proceedings he cannot offer an opinion as to the probable  outcome.  The company
believes the suit is without merit and is vigorously defending its position.

13. Subsequent Events

On May 5, 2005 Silverado Financial,  Inc., entered into an agreement to purchase
Core One Mortgage,  Inc., an Illinois Corporation,  and fifty percent of Liberty
Settlement  Services,  Inc., a Pennsylvania  limited liability  corporation,  in
exchange  for  $3,062,674.  The  purchase  will be in the form of $62,674  cash,
$1,000,000 worth of Silverado Financial,  Inc. convertible preferred stock which
shall be convertible into not less than $1,000,000 worth of Silverado Financial,
Inc.  common  stock,  and a $2,000,000 8%  promissory  note,  payable over three
years.

                                       17
<PAGE>

ITEM 2. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

THIS REPORT CONTAINS  FORWARD-LOOKING  STATEMENTS  WITHIN THE MEANING OF SECTION
21E OF THE  SECURITIES  EXCHANGE  ACT OF 1934,  INCLUDING,  WITHOUT  LIMITATION,
STATEMENTS REGARDING OUR EXPECTATIONS,  BELIEFS, INTENTIONS OR FUTURE STRATEGIES
THAT ARE SIGNIFIED BY THE WORDS "EXPECTS", "ANTICIPATES", "INTENDS", "BELIEVES",
OR  SIMILAR  LANGUAGE.  SUCH  FORWARD-LOOKING  STATEMENTS  INCLUDE,  BUT ARE NOT
LIMITED TO, THE SEEKING OF REVENUE PRODUCING ACQUISITIONS, THE DEVELOPMENT PLANS
FOR THE  TECHNOLOGIES OF THE COMPANY,  TRENDS IN THE RESULTS OF OUR DEVELOPMENT,
ANTICIPATED  DEVELOPMENT PLANS,  OPERATING EXPENSES AND OUR ANTICIPATED  CAPITAL
REQUIREMENTS AND CAPITAL  RESOURCES.  THESE  FORWARD-LOOKING  STATEMENTS INVOLVE
RISKS,  UNCERTAINTIES AND OTHER FACTORS. ALL FORWARD-LOOKING STATEMENTS INCLUDED
IN THIS DOCUMENT ARE BASED ON  INFORMATION  AVAILABLE TO THE COMPANY ON THE DATE
HEREOF AND SPEAK ONLY AS OF THE DATE HEREOF.  THE FACTORS  DISCUSSED BELOW UNDER
"FORWARD-LOOKING  STATEMENTS"  AND  ELSEWHERE IN THIS  QUARTERLY  REPORT ON FORM
10-QSB ARE AMONG THOSE  FACTORS THAT IN SOME CASES HAVE AFFECTED OUR RESULTS AND
COULD CAUSE THE ACTUAL RESULTS TO DIFFER  MATERIALLY FROM THOSE PROJECTED IN THE
FORWARD-LOOKING STATEMENTS. IN ADDITION, THE FOLLOWING DISCUSSION IS INTENDED TO
PROVIDE AN ANALYSIS OF OUR FINANCIAL  CONDITION AND PLAN OF OPERATION AND SHOULD
BE READ IN CONJUNCTION WITH OUR FINANCIAL STATEMENTS AND THE NOTES THERETO.

MANAGEMENT'S PLAN OF OPERATION

Silverado Financial, Inc. (the "Company",  "We", "Us" and "Our") is incorporated
under the laws of the State of Nevada and based in Pleasanton, California in the
East San  Francisco Bay Area.  The Company  provides  first and second  mortgage
products  to  borrowers  in  California  and  Colorado   through  its  operating
subsidiary, Silverado Mortgage Corporation (SMC).

In May of 2003 the Company  acquired  Realty Capital  Corporation,  a California
based  mortgage  brokerage,  and renamed the wholly owned  subsidiary  Silverado
Mortgage Corporation in August of 2004.

During the 1st Quarter the company had one wholly  owned  subsidiary:  Silverado
Mortgage Corporation ("SMC").

SMC operates as a mortgage  brokerage and mortgage  banking company  licensed by
the  California  Department of Real Estate and by the  California  Department of
Corporations as a Consumer  Finance  Lender.  SMC generated all of the Company's
2004 revenue  through its offices in Campbell  and  Pleasanton,  California  and
Phoenix Arizona.

In addition to continuing, and expanding, the operation of SMC, other activities
have consisted of developing  the business  plan,  obtaining a warehouse line of
credit,  raising  capital,  business  plan  implementation  and  recruiting  and
training  sales people.  For the year ending  December 31, 2004, the Company had
revenues  of  $919,930,  and has  expensed  operating  costs  in the  amount  of
$1,590,650.  Historically,  the Company has had nominal cash  resources  and has
been largely  dependent on the direct financial support from a few shareholders,
directors and officers along with limited revenue to pay for cash  expenditures.
In addition,  the Company has been  dependent  on its  officers;  directors  and
certain key vendors accepting restricted common stock for their services.


                                       18
<PAGE>

ITEM 2. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS - continued

BUSINESS OF THE ISSUER

General

Silverado  Financial  Incorporated  is a  mortgage  banking  company  focused on
providing  non-prime  borrowers,  individuals  who  generally do not satisfy the
credit,  documentation or other  underwriting  standards set by more traditional
sources  of  mortgage  credit,  with  access to  capital  for the  purchase  and
refinancing of one to four-family residential properties. The Company originates
mortgage loans, which include fixed and adjustable-rate loans, for purposes such
as debt consolidation,  refinancing, education, home improvement and real estate
purchase.

As the primary aspect of the Company's business and finance strategy,  Silverado
sells  its  loans to  third-party  investors  (correspondent  investors)  in the
secondary  mortgage market.  Presently the Company sells its loans through whole
loan sales to correspondent  investors, but as the Company grows it will dispose
of  its  loan  production   through  a  combination  of  whole  loan  sales  and
securitization.

The Company's mortgage business has two principal components.  First,  Silverado
makes  mortgage loans to individual  borrowers.  Each loan is a cash and expense
outlay for the Company,  because its total cost  incurred in  originating a loan
exceeds the fees it collects at the time it originates  the loan. At the time of
origination,  Silverado  either finances the loan by borrowing under a warehouse
line of credit,  or acts as an agent and  brokers  the loan to another  mortgage
lender.  Second, the Company sells the loans on a whole-loan basis, and uses the
net proceeds from these  transactions to repay its warehouse lines of credit and
for working capital.

Silverado currently operates 3 offices in California, corporate headquarters and
retail  sales  office in  Pleasanton,  California,  a sales  office in Campbell,
California,  a sales  office in Walnut  Creek  California  and a sales office in
Phoenix, Arizona.

Because of  Silverado's  focus on the  Non-Prime  borrower,  and the  subsequent
growth of that market  segment,  the Company is largely  insulated from interest
rate increases  unlike many of its competitors in the highly sensitive Prime "A"
paper market segment.

Recent Operating Highlights

Management achieved several significant operational milestones during 2004,
including the following:

     o    Grew revenue to approximately $1mm approximately 10x 2003 revenue
     o    Year-End 2004 Originations of approximately $75mm
     o    Continual Quarter-Over-Quarter growth in excess of 1.5x
     o    Established Silverado as a Mortgage Bank with a $2mm Warehouse Line
     o    Established 12 new Correspondent Relationships
     o    Tripled the size of the Campbell office
     o    Expanded into Pleasanton, California
     o    Expanded into Phoenix, Arizona
     o    Created a Spanish/Latino hub operation
     o    Acquired Software Platform Upgraded and Operational
     o    Developed and Implemented proprietary training program
     o    Hired and trained 50+ new Lending Associates

                                       19
<PAGE>

ITEM 2. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS - continued

Strengths and Competitive Advantages

We believe that we have several strengths and competitive  advantages that allow
us to compete effectively in our business, including:

     o    Low  Interest  Rate  Sensitivity:  Due  to  Silverado's  focus  on the
          non-prime  borrower,   and  the  subsequent  growth  of  that  market,
          Silverado is largely insulated from increases in interest rates.

     o    Performance-Based  Compensation Structure.  Our compensation structure
          helps keep fixed costs at a minimum and allows us to weather  industry
          down-turns.

     o    Proprietary  Training  Program.  We have  developed and  implemented a
          proprietary training program, which broadens the hiring pool and helps
          to accelerate internal growth.

     o    Position as a Direct Lender. As the industry consolidates  Silverado's
          position  as a  direct  lender  helps  it  to  attract  employees  and
          insulates it against the proposed regulatory changes


Competition

We face  competition  in the  business of  originating,  purchasing  and selling
mortgage  loans.  Our  competitors  include other  consumer  finance  companies,
mortgage   banking   companies,   commercial   banks,   credit  unions,   thrift
institutions,  credit  card  issuers  and  insurance  finance  companies.  Other
financial institutions have gradually expanded their lending capabilities.  Many
of these  companies have greater access to capital at a cost lower than our cost
of capital under our warehouse,  aggregation,  and asset backed commercial paper
facilities.  Federally chartered banks and thrifts can preempt some of the state
and  local  lending  laws  to  which  we  are  subject,  thereby  giving  them a
competitive advantage.  In addition, many of these competitors have considerably
greater technical and marketing resources than we have.

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.
Additional  competition  may lower the rates we can  charge  borrowers,  thereby
potentially lowering gain on future loan sales and securitizations. In 2004, the
most  significant  form of  competition  was  pricing  pressure  among  mortgage
originators.  Some of our  competitors  lowered  rates and fees to  preserve  or
expand their market share.

FORWARD LOOKING STATEMENTS

Certain  statements  made in this  report on Form 10-QSB are  "forward  looking"
statements within the meaning of the Private Securities Litigation Reform Act of
1995. Such statements  involve known and unknown risks,  uncertainties and other
factors that may cause our actual  results,  performance or  achievements  to be
materially  different  from any future results  implied by such forward  looking
statements.  Although we believe that the expectations reflected in such forward
looking  statements are based upon  reasonable  assumptions,  our actual results
could differ materially from those set forth in the forward-looking  statements.
Certain factors that might cause such a difference might include: the failure of
the registrants  efforts to secure additional  equity capital,  the inability to


                                       20
<PAGE>

ITEM 2. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS - continued

successfully  execute  the  revised  business  plan,  the  success or failure to
implement the management to operate possible  acquisitions  profitably,  and the
registrant's planned marketing, public relations and promotional campaigns.

RISK FACTORS

Stockholders  and  prospective  purchasers of our common stock should  carefully
consider the risks  described  below before  making a decision to buy our common
stock.  If any of the following  risks  actually  occurs,  our business could be
harmed.  In that case, the trading price of our common stock could decline,  and
you may lose all or part of your investment. When determining whether to buy our
common stock,  stockholders and prospective  purchasers should also refer to the
other information in this Form 10-K,  including our financial statements and the
related notes.

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.

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 consumer  credit 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 a substantial number of loans to
credit-impaired  borrowers, the actual rates of delinquencies,  foreclosures and
losses on these loans could be higher during economic  slowdowns.  Any sustained
period of increased delinquencies, foreclosures or losses could adversely affect
our ability to sell loans, the prices we receive for our loans, the value of our
mortgage loans held for investment or our residual interests in securitizations,
which  could  have a  material  adverse  effect on our  results  of  operations,
financial condition and business prospects.

Our earnings may decrease  because of increases or decreases in interest  rates.
Our  profitability  may be directly  affected by changes in interest rates.  The
following  are some of the risks we face  related  to an  increase  in  interest
rates:

o An interest  rate  increase  may affect our  earnings  by reducing  the spread
between the interest we receive on our loans and our funding costs.

o A substantial and sustained  increase in interest rates could adversely affect
our loan origination  volume because  refinancing an existing loan would be less
attractive and qualifying for a purchase loan may be more difficult.

o During periods of rising interest rates,  the value and  profitability  of our
loans may be negatively affected between the date of origination or purchase and
the date we sell or securitize the loan.

o When and if we securitize loans, the value of residual interests we retain and
the income we receive from the  securitizations  structured  as  financings  are
based primarily on the London Inter-Bank Offered Rate ("LIBOR"). This is because
the interest on the underlying mortgage loans is based on fixed rates payable on
the loans for the first two or three years while the  bondholders  are generally
paid based on an adjustable  LIBOR-based yield. An increase in LIBOR reduces the
net income we would receive  from,  and the value of, these  mortgage  loans and
residual interests.

                                       21
<PAGE>

ITEM 2. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS - continued

o Our  adjustable-rate  mortgage loans have periodic and lifetime  interest rate
caps above,  which the interest  rate on the loans may not rise. In the event of
general  interest rate  increases,  the rate of interest on these mortgage loans
could be limited, while the rate payable on the senior certificates representing
interests  in a  securitization  trust  into which  these  loans are sold may be
uncapped.  This would  reduce the amount of cash we receive over the life of the
loans in  securitizations  structured as financings and our residual  interests,
and could require us to reduce the carrying value of our residual interests.

We are also subject to risks from  decreasing  interest  rates.  For example,  a
significant  decrease in interest  rates could  increase the rate at which loans
are prepaid,  which also could  require us to reduce the  carrying  value of any
residual interests. If prepayments were greater than expected, the cash we would
receive   over  the  life  of  our   residual   interests   would  be   reduced.
Higher-than-expected  prepayments could also have a negative effect on the value
of any servicing portfolio.

Any such changes in interest  rates could have a material  adverse effect on our
results of operations, financial condition and business prospects.

An interruption or reduction in the  securitization and whole loan markets could
hurt our financial position.

As we implement our plan to become a full service mortgage  banking company,  we
will become increasingly  dependent on the securitization market for the sale of
our loans because we intend to securitize  loans directly in the future and many
of the  whole  loan  buyers  who  purchase  loans  do so with the  intention  to
securitize  them.  The  securitization  market  is  dependent  upon a number  of
factors,  including  general economic  conditions,  conditions in the securities
market   generally  and  conditions  in  the  asset-backed   securities   market
specifically.  In addition,  poor  performance of previously  securitized  loans
could harm our access to the securitization  market.  Accordingly,  a decline in
the  securitization  market or a change in the  market's  demand for loans could
have a material adverse effect on our results of operations, financial condition
and business prospects.

If we are unable to maintain adequate  financing  sources,  our earnings and our
financial   position  will  suffer  and   jeopardize  our  ability  to  continue
operations.

We require  substantial  cash to support  our  operating  activities  and growth
plans.  Our primary  sources of cash are profits  generated by sales of mortgage
products  and the sale of our  capital  stock;  however,  we intend to  generate
income from warehouse and aggregation credit facilities, asset-backed commercial
paper and the  proceeds  from the sales and  securitizations  of loans.  We also
intend to finance residual  interests in securitization  transactions  using Net
Interest  Margin,  or  NIM,  structures.  As of  December  31,  2003,  we had no
short-term   warehouse  and  aggregation   credit   facilities  or  asset-backed
commercial  paper  providing  us with any  committed  or  uncommitted  borrowing
capacity to fund loan originations and purchases pending the pooling and sale of
such loans.

On August 11, 2004 our wholly owned subsidiary,  Silverado Mortgage  Corporation
(formerly  Realty  Capital  Corporation)  received  approval  for  a  $2,000,000
Mortgage  Warehouse and Security  Facility.  A signed  agreement was executed on
September 3, 2004 and we started  utilizing the warehouse and security  facility
on November 22, 2004.

                                       22
<PAGE>

ITEM 2. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS - continued

During volatile times in the capital and secondary markets, access to warehouse,
aggregation and residual  financing as well as access to the  securitization and
secondary markets for the sale of loans has been severely constricted. If we are
unable to  maintain  adequate  financing  or other  sources of  capital  are not
available, we would be forced to suspend or curtail our operations,  which could
have a material adverse effect on our results of operations, financial condition
and business prospects.

New legislation  could restrict our ability to make mortgage loans,  which could
adversely impact our earnings.

Several states and cities are  considering  or have passed laws,  regulations or
ordinances aimed at curbing predatory lending practices.  The federal government
is also  considering  legislative  and regulatory  proposals in this regard.  In
general, these proposals involve lowering the existing federal Homeownership and
Equity   Protection  Act  thresholds  for  defining  a  "high-cost"   loan,  and
establishing  enhanced  protections  and remedies for borrowers who receive such
loans.  However,  many of these laws and rules extend beyond  curbing  predatory
lending practices to restrict commonly  accepted lending  activities,  including
some of our  planned  activities.  For  example,  some of these  laws and  rules
prohibit any form of prepayment charge or severely restrict a borrower's ability
to finance the points and fees charged in  connection  with his or her loan.  In
addition,  some of these laws and  regulations  provide for  extensive  assignee
liability for warehouse lenders,  whole loan buyers and  securitization  trusts.
Because of  enhanced  risk and for  reputation  reasons,  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,  these laws and rules  could
severely  constrict the secondary  market for a significant  portion of our loan
production.  This would  effectively  preclude us from  continuing  to originate
loans that fit within  the newly  defined  thresholds.  For  example,  after the
October 1, 2002 effective date of the Georgia Fair Lending Act, many lenders and
secondary  market  buyers  refused to finance or purchase  Georgia  loans.  As a
result, many companies were forced to cease providing mortgages in Georgia until
the law's  amendment a few months  later.  Similar laws have gone into effect in
New Jersey,  as of November 27, 2003 ("New Jersey Home  Ownership Act of 2002"),
and in New  Mexico,  as of  January 1, 2004 ("New  Mexico  Home Loan  Protection
Act"),  that have impacted  origination of loans in those states.  The potential
long-term  reduction  in loans in New Jersey  and in New  Mexico  could be quite
severe.  Moreover,  some of our  competitors who are national banks or federally
chartered  thrifts may not be subject to these laws and may as a consequence  be
able to capture market share from us and other lenders.  For example, the Office
of the Comptroller of the Currency recently issued regulations effective January
7, 2004 that preempt state and local laws that seek to regulate mortgage-lending
practices.  Passage of such laws could  increase  compliance  costs,  reduce fee
income and reduce origination volume, all of which would have a material adverse
effect on our results of operations, financial condition and business prospects.

We are no longer able to rely on the Alternative  Mortgage  Transactions  Parity
Act to preempt  certain state law  restrictions on prepayment  penalties,  which
could adversely impact our earnings.

The value of a mortgage loan depends,  in part, upon the expected period of time
that the mortgage  loan will be  outstanding.  If a borrower pays off a mortgage
loan in advance of this  expected  period,  the holder of the mortgage loan does
not realize the full value  expected to be received  from the loan. A prepayment
penalty  payable by a borrower  who repays a loan earlier  than  expected  helps
offset the reduction in value resulting from the early payoff. Consequently, the


                                       23
<PAGE>

ITEM 2. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS - continued

value  of a  mortgage  loan is  enhanced  to the  extent  the  loan  includes  a
prepayment penalty, and a mortgage lender can offer a lower interest rate and/or
lower loan fees on a loan which has a prepayment penalty.  Prepayment  penalties
are an important feature used to obtain value on loans.

Certain state laws restrict or prohibit prepayment  penalties on mortgage loans,
and until July 2003,  lenders  could rely on the  federal  Alternative  Mortgage
Transactions  Parity Act (the "Parity Act") and related rules issued in the past
by the Office of Thrift  Supervision (the "OTS") to preempt state limitations on
prepayment  penalties.  The  Parity  Act was  enacted  to  extend  to  financial
institutions,  other  than  federally  chartered  depository  institutions,  the
federal  preemption  that federally  chartered  depository  institutions  enjoy.
However,  on September  25,  2002,  the OTS released a new rule that reduced the
scope of the Parity Act preemption and, as a result;  we are not able to rely on
the  Parity Act to preempt  state  restrictions  on  prepayment  penalties.  The
effective date of the new rule,  originally  January 1, 2003,  was  subsequently
extended by the OTS until July 1, 2003 in response to concerns  from  interested
parties about the burdens  associated with  compliance.  The elimination of this
federal  preemption  requires us to comply with state restrictions on prepayment
penalties.  These restrictions  prohibit us from charging any prepayment penalty
in eight  states  and limit  the  amount or other  terms and  conditions  of our
prepayment penalties in several other states. This may place us at a competitive
disadvantage  relative to financial  institutions that continue to enjoy federal
preemption  of such state  restrictions.  Such  institutions  are able to charge
prepayment  penalties without regard to state restrictions and, as a result, may
be able to offer loans with interest rate and loan fee structures  that are more
attractive  than the interest rate and loan fee  structures  that we are able to
offer.

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

Currently,  we are  licensed to  originate  mortgage  loans only in  California,
however we are in the process of applying for licenses to generate  loans in all
50  states,  and when  licensed  we will be forced  to comply  with the laws and
regulations,  as well as judicial and administrative decisions, for all of these
jurisdictions,  as well as an extensive body of federal law and regulations. The
volume of new or modified  laws and  regulations  has increased in recent years,
and,  individual  cities and  counties  have  begun to enact laws that  restrict
non-prime loan origination activities in those cities and counties. The laws and
regulations of each of these  jurisdictions are different,  complex and, in some
cases, in direct  conflict with each other. As our operations  continue to grow,
it may be more difficult to comprehensively  identify,  to accurately  interpret
and to  properly  program  our  technology  systems  and  effectively  train our
personnel with respect to all of these laws and regulations, thereby potentially
increasing  our  exposure  to the risks of  noncompliance  with  these  laws and
regulations.

                                       24
<PAGE>

ITEM 2. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS - continued

Our failure to comply with these laws can lead to:

o civil and criminal liability;

o loss of approved status;

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

o class action lawsuits; or

o administrative enforcement actions.

Any of these  results  could have a material  adverse  effect on our  results of
operations, financial condition and business prospects.

If warehouse lenders and securitization underwriters face exposure stemming from
legal  violations  committed by the companies to whom they provide  financing or
underwriting  services,  this could increase our borrowing  costs and negatively
affect the market for whole loans and mortgage-backed securities.

In June 2003,  a  California  jury found a warehouse  lender and  securitization
underwriter liable in part for fraud on consumers  committed by a lender to whom
it  provided  financing  and  underwriting  services.  The jury  found  that the
investment bank was aware of the fraud and substantially  assisted the lender in
perpetrating  the fraud by providing  financing and  underwriting  services that
allowed the lender to  continue to operate,  and held the bank liable for 10% of
the  plaintiff's  damages.  This is the  first  case we  know  of in,  which  an
investment  bank was held partly  responsible  for  violations  committed by the
bank's  mortgage  lender  customer.  If other  courts or  regulators  adopt this
theory,  investment  banks may face  increased  litigation  as they are named as
defendants in lawsuits and  regulatory  actions  against the mortgage  companies
with which they do business. Some investment banks may exit the business, charge
more for  warehouse  lending or reduce the  prices  they pay for whole  loans in
order to build in the costs of this potential  litigation.  This could, in turn,
have a negative  effect on our results of  operations,  financial  condition and
business prospects.

High delinquencies or losses on mortgage loans in  securitizations  may decrease
cash flows or impair our ability to sell or securitize loans in the future.

Loans made to lower credit grade borrowers, including credit-impaired borrowers,
entail a higher  risk of  delinquency  and  higher  losses  than  loans  made to
borrowers with better credit. We plan to make a substantial portion of our loans
to borrowers who do not qualify for loans from conventional mortgage lenders. No
assurance  can be given that our  underwriting  criteria or methods  will afford
adequate protection against the higher risks associated with loans made to lower
credit grade  borrowers.  We will be subject to risks of default and foreclosure
following  the sale of loans through  securitization.  To the extent such losses
are greater than expected;  the cash flows received through  residual  interests
and from  securitizations  structured as financings would be reduced.  Increased
delinquencies  or losses may also  reduce or  eliminate  our  ability to sell or
securitize  loans in the future and could have a substantial,  material  adverse
effect on our operations, financial condition and business prospects.

Our inability to realize cash proceeds  from loan sales and  securitizations  in
excess  of the loan  acquisition  cost  could  adversely  affect  our  financial
position.

                                       25
<PAGE>

ITEM 2. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS - continued

The net cash proceeds  received from loan sales consist of the premiums received
on sales of loans in excess of the outstanding  principal balance, plus the cash
proceeds  received from  securitizations,  minus the discounts on any loans that
are sold for less than the outstanding  principal  balance.  If we are unable to
originate loans at a cost lower than the cash proceeds realized from loan sales,
our results of operations,  financial  condition and business prospects could be
materially adversely affected.

Warehouse  and  aggregation  financing  is subject to margin  calls based on the
lender's opinion of the value of loan collateral.  An unanticipated large margin
call could adversely affect our liquidity.

The   amount   of   financing   we  may   receive   under  any   warehouse   and
aggregation-financing agreements depends in large part on the lender's valuation
of the mortgage loans that secure the financings.  Asset-backed commercial paper
facilities have similar  provisions.  Each such facility provides the lender the
right,  under certain  circumstances,  to reevaluate  the loan  collateral  that
secures  outstanding  borrowings at any time. In the event the lender determines
that  the  value of the  loan  collateral  has  decreased,  it has the  right to
initiate a margin  call.  A margin  call would  require us to provide the lender
with additional collateral or to repay a portion of the outstanding  borrowings.
Any such  margin  call could have a material  adverse  effect on our  results of
operations, financial condition and business prospects.

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

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

Competitors with lower costs of capital have a competitive advantage over us. In
addition,  establishing  a lending  operation such as ours requires a relatively
small  commitment  of capital  and human  resources.  This low  barrier to entry
permits new  competitors to enter our markets  quickly and compete with us. This
could have a material  adverse  effect on our results of  operations,  financial
condition and business prospects.

Some thrifts, national banks and their operating subsidiaries are also expanding
their lending  activities.  By virtue of their charters,  these institutions are
exempt  from  complying  with many of the state and local  laws that  affect our
operations.  For example,  they can offer loans with prepayment  charges in many
jurisdictions where we cannot. If more of these federally chartered institutions
are able to use their preemptive ability to provide more competitive pricing and


                                       26
<PAGE>

ITEM 2. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS - continued

terms than we can offer, it could have a material  adverse effect on our results
of operations, financial condition and business prospects.

The  intense  competition  in the  mortgage  industry  has  also  led  to  rapid
technological developments, evolving industry standards and frequent releases of
new  products  and  enhancements.  As mortgage  products are offered more widely
through  alternative  distribution  channels,  such as the  Internet,  we may be
required  to make  significant  changes  to our  information  systems to compete
effectively. Our inability to continue enhancing our current capabilities, or to
adapt to other  technological  changes  in the  industry,  could have a material
adverse  effect on our results of operations,  financial  condition and business
prospects.  Our hedging strategies may not be successful in mitigating our risks
associated with changes in interest rates.

We intend to use various derivative financial  instruments to provide a level of
protection  against  changes in  interest  rates,  but no hedging  strategy  can
protect us  completely.  When rates change we expect to record a gain or loss on
derivatives, which would be offset by an inverse change in the value of loans or
residual interests.  We cannot assure you, however,  that our use of derivatives
will offset the risks  related to changes in interest  rates.  It is likely that
there will be periods in the future,  during  which we will incur  losses  after
accounting for our derivative  financial  instruments.  The derivative financial
instruments  we select may not have the effect of  reducing  our  interest  rate
risk. In addition,  the nature and timing of hedging  transactions may influence
the effectiveness of these strategies.  Poorly designed strategies or improperly
executed  transactions could actually increase our risk and losses. In addition,
hedging  strategies  involve  transaction  and other costs. We cannot assure you
that our hedging strategy and the derivatives that we use will adequately offset
the risk of interest rate volatility or that our hedging  transactions  will not
result in losses.

The  complex  federal,   state  and  municipal  laws  governing   loan-servicing
activities could increase our exposure to the risk of noncompliance.

We intend to service the loan we originate on a nationwide basis.  Therefore, we
must  comply  with  the  laws  and   regulations,   as  well  as  judicial   and
administrative  decisions,  of all  relevant  jurisdictions  pertaining  to loan
servicing,  as well as an extensive  body of federal laws and  regulations.  The
volume of new or modified  laws and  regulations  has increased in recent years,
and, in addition,  some individual  municipalities have begun to enact laws that
restrict  loan-servicing  activities.  The laws and regulations of each of these
jurisdictions are different, complex and, in some cases, in direct conflict with
each  other.  As our  servicing  operations  continue  to  grow,  it may be more
difficult to comprehensively  identify,  to accurately interpret and to properly
program our technology  systems and effectively train our personnel with respect
to all of  these  laws  and  regulations,  thereby  potentially  increasing  our
exposure to the risks of noncompliance with the laws and regulations  pertaining
to loan  servicing.  Our failure to comply with these laws could lead to,  among
other things:  (i) civil and criminal  liability,  including  potential monetary
penalties; (ii) legal defenses causing delaying or otherwise adversely affecting
the  servicer's  ability to enforce  loans,  or giving the borrower the right to
rescind or cancel the loan  transaction;  (iii) class action lawsuits;  and (iv)
administrative  enforcement  actions.  This could  result in a material  adverse
effect on our results of operations, financial condition and business prospects.

                                       27
<PAGE>

ITEM 2. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS - continued

Any non-prime  loans we originate  will generally  have higher  delinquency  and
default  rates,  which could  result in losses on loans that we are  required to
repurchase.

Non-prime  mortgage loans  generally have higher  delinquency  and default rates
than prime mortgage loans. Delinquency interrupts the flow of projected interest
income from a mortgage loan,  and default can  ultimately  lead to a loss if the
net  realizable  value  of the  real  property  securing  the  mortgage  loan is
insufficient to cover the principal and interest due on the loan. Also, our cost
of financing and servicing a delinquent  or defaulted  loan is generally  higher
than for a performing loan. We bear the risk of delinquency and default on loans
beginning  when we originate  them. In whole loan sales our risk of  delinquency
typically only extends to the first payment,  but when we securitize we continue
to bear some exposure to delinquencies and losses through our residual interests
and the loans underlying our on-balance sheet  securitization  transactions.  We
are required to establish  reserves based on our anticipated  delinquencies  and
losses.  We also  re-acquire the risks of delinquency and default for loans that
we are obligated to repurchase. We attempt to manage these risks with risk-based
loan pricing and appropriate  underwriting policies and loan collection methods.
However,   if  such  policies  and  methods  are  insufficient  to  control  our
delinquency and default risks and do not result in appropriate  loan pricing and
appropriate  loss reserves,  our business,  financial  condition,  liquidity and
results of operations could be harmed.

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

When we originate  mortgage loans, we rely heavily upon information  supplied by
third  parties  including  the  information  contained in the loan  application,
property appraisal,  title information and employment and income  documentation.
If any of this information is intentionally  or negligently  misrepresented  and
such  misrepresentation  is not detected prior to loan funding, the value of the
loan may be significantly lower than expected.  Whether a  misrepresentation  is
made by the loan applicant,  the mortgage broker,  another third party or one of
our  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,  and the persons and entities involved are often difficult to
locate and it is often  difficult  to collect any  monetary  losses that we have
suffered from them.

There are controls  and  processes  designed to help us identify  misrepresented
information in our loan origination  operations.  We cannot assure you, however,
that we have detected or will detect all misrepresented  information in our loan
originations.

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

The mortgage  brokers from whom we obtain loans have parallel and separate legal
obligations to which they are subject.  While these laws may not explicitly hold
the  originating  lenders  responsible  for the  legal  violations  of  mortgage
brokers,  increasingly  federal  and state  agencies  have sought to impose such
assignee  liability.  Recently,  for example,  the United  States  Federal Trade
Commission  ("FTC")  entered into a settlement  agreement with a mortgage lender
where the FTC  characterized a broker that had placed all of its loan production
with a single lender as the "agent" of the lender. The FTC imposed a fine on the


                                       28
<PAGE>

ITEM 2. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS - continued

lender in part because,  as "principal," the lender was legally  responsible for
the mortgage broker's unfair and deceptive acts and practices. The United States
Justice  Department in the past has sought to hold a non-prime  mortgage  lender
responsible for the pricing practices of its mortgage brokers, alleging that the
mortgage lender was directly  responsible for the total fees and charges paid by
the borrower under the Fair Housing Act even if the lender neither dictated what
the  mortgage  broker  could  charge  nor kept the  money  for its own  account.
Accordingly,  we may be  subject  to  fines or other  penalties  based  upon the
conduct of our independent mortgage brokers.

Our business is  dependent  upon  conditions  in  California  where we conduct a
significant amount of our business.

In 2004,  100% of the mortgage  loans we originated  were secured by property in
California.  An overall  decline in the economy or the  residential  real estate
market,  or the occurrence of a natural  disaster,  such as an earthquake,  or a
major terrorist  attack in California  could  adversely  affect the value of the
mortgaged  properties  in  California  and  increase  the  risk of  delinquency,
foreclosure,  bankruptcy, or loss on mortgage loans in our portfolio. This would
negatively  affect our ability to purchase,  originate and  securitize  mortgage
loans,  which could have a material  adverse  effect on our business,  financial
condition and results of operations.

If many of our borrowers  become  subject to the  Soldiers'  and Sailors'  Civil
Relief Act of 1940, as amended our cash flows from our residual  securities  and
our securitizations structured as financings may be adversely affected.

Under the Soldiers' and Sailors' Civil Relief Act of 1940, a borrower who enters
military service after the origination of his or her mortgage loan generally may
not be  charged  interest  above an annual  rate of 6% during  the period of the
borrower's  active duty  status.  The Act also  applies to a borrower who was on
reserve  status and is called to active duty after  origination  of the mortgage
loan.  A  prolonged,  significant  military  mobilization  as part of the war on
terrorism or the war in Iraq could  increase the number of the  borrowers in our
securitized  pools who are subject to this Act and thereby  reduce the  interest
payments  collected from those borrowers.  To the extent the number of borrowers
who are subject to this Act is significant, the cash flows we receive from loans
underlying our on-balance sheet  securitizations and from our residual interests
would be  reduced,  which  could  cause us to reduce the  carrying  value of our
residual interests and would decrease our earnings.  In addition,  the Soldiers'
and Sailors' Civil Relief Act of 1940, imposes limitations that would impair the
ability of the  servicer to foreclose  on an affected  mortgage  loan during the
borrower's period of active duty status, and under certain circumstances, during
an  additional  three month period  thereafter.  Any such  reduction in our cash
flows or impairment in our performance  could have a material  adverse effect on
our results of operations, financial condition and business prospects.

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

We are dependent on our account  executives  and retail loan officers to attract
borrowers  by,  among other  things,  developing  relationships  with  financial
institutions,   other  mortgage  companies  and  brokers,  real  estate  agents,
borrowers  and others.  We believe that these  relationships  lead to repeat and
referral  business.  The market for skilled account executives and loan officers
is highly  competitive and historically has experienced a high rate of turnover.
In addition,  if a manager leaves New Century,  there is an increased likelihood


                                       29
<PAGE>

ITEM 2. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS - continued

that other  members of his or her team will follow.  Competition  for  qualified
account  executives and loan officers may lead to increased hiring and retention
costs.  If we are  unable to attract  or retain a  sufficient  number of skilled
account  executives  at  manageable  costs,  we will be  unable to  continue  to
originate  quality  mortgage loans that we are able to sell for a profit,  which
would have a material  adverse  effect on our results of  operations,  financial
condition and business prospects.

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

We rely  heavily  upon  communications  and  information  systems to conduct our
business.  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,  slower  processing  of  applications  and reduced  efficiency in loan
servicing.  We are  required  to  comply  with  significant  federal  and  state
regulations with respect to the handling of customer information, and a failure,
interruption  or breach of our  information  systems  could result in regulatory
action and  litigation  against us. We cannot  assure you that such  failures or
interruptions  will not occur or if they do occur  that they will be  adequately
addressed by the third  parties or us on which we rely.  The  occurrence  of any
failures or interruptions could have a material adverse effect on our results of
operations, financial condition and business prospects.

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

Our mortgage loan origination  business is currently  dependent upon our ability
to effectively interface with our brokers, borrowers and other third parties and
to efficiently  process loan applications and closings.  The origination process
is becoming more dependent upon technological  advancement,  such as the ability
to process applications over the Internet, accept electronic signatures, provide
process status updates instantly and other  customer-expected  conveniences that
are  cost-efficient  to our  process.  In  addition,  we are in the  process  of
implementing a new loan origination system. Implementing and becoming proficient
with the new loan  origination  system  and other new  technology  will  require
significant  financial and personnel  resources.  There is no guarantee that the
implementation  of our new loan origination  system or other new technology will
be successful. To the extent that we become reliant on any particular technology
or technological  solution, we may be adversely affected to the extent that such
technology or  technological  solution (i) becomes  non-compliant  with existing
industry  standards,  (ii)  fails  to meet or  exceed  the  capabilities  of our
competitors'  equivalent  technologies  or  technological  solutions,  or  (iii)
becomes  increasing  expensive  to service,  retain and  update.  Any failure to
acquire  technology  or  technology  solutions  when  necessary  could limit our
ability to remain  competitive  in our industry and could also limit our ability
to increase the  cost-efficiencies  of our operating  model,  which would have a
material  adverse effect on our results of operations,  financial  condition and
business prospects.

We may be required to  repurchase  mortgage  loans or indemnify  investors if we
breach  representations  and  warranties,   which  could  adversely  impact  our
earnings.

When we sell  loans,  we are  required  to make  customary  representations  and
warranties  about  such  loans  to the  loan  purchaser.  Our  whole  loan  sale


                                       30
<PAGE>

ITEM 2. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS - continued

agreements require us to repurchase or substitute loans in the event we breach a
representation   or   warranty   given   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 in the
event of early payment default on a mortgage loan. Likewise,  we are required to
repurchase  or  substitute  loans if we breach a  representation  or warranty in
connection with our  securitizations.  The remedies  available to a purchaser of
mortgage  loans are  generally  broader  than those  available to us against the
originating  broker or  correspondent.  Further,  if a  purchaser  enforces  its
remedies  against us, we may not be able to enforce the remedies we have against
the sellers.  The  repurchased  loans  typically can only be financed at a steep
discount to their repurchase price, if at all. They are also typically sold at a
significant  discount to the unpaid principal  balance.  Significant  repurchase
activity could negatively affect our cash flow and results of operations.

We are exposed to risk of  environmental  liabilities with respect to properties
to which we take title.

In the course of our business,  we may  foreclose and take title to  residential
properties,  and could be subject to  environmental  liabilities with respect to
these  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, as 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  ever  become  subject  to  significant
environmental  liabilities,  our  business,  financial  condition and results of
operations could be materially and adversely affected.

Our charter and bylaws and Nevada law contain provisions that could discourage a
takeover.

Our  amended  and  restated  certificate  of  incorporation  and our amended and
restated bylaws include various  provisions that could delay, defer or prevent a
takeover  attempt that may be in the best  interest of our  stockholders.  These
provisions include the existence of a classified board of directors, the ability
of our board of  directors to issue shares of our  preferred  stock  without any
further  stockholder  approval and requirements  that (i) our stockholders  give
advance notice with respect to certain  proposals they may wish to present for a
stockholder  vote, (ii) our  stockholders act only at annual or special meetings
and  (iii)  two-thirds  of all  directors  approve  a change  in the  number  of
directors  on our board of  directors.  Issuance  of our  preferred  stock could
discourage bids for the common stock at a premium as well as create a depressive
effect on the market price of our common stock.

We are also subject to Nevada General  Corporation  Law, which could  discourage
potential  acquisition  proposals,  delay or  prevent  a change of  control  and
prevent changes in our management.

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

                                       31
<PAGE>

ITEM 2. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS - continued

Rapid  growth  places,  and will  continue to place,  certain  pressures  on our
management,  administrative,  operational  and financial  infrastructure.  As of
December 31, 2003, we had no employees, as all of our personnel were independent
contractors;   however,  we  have  recently  applied  for  licensure  under  the
California  Department of  Corporations  as a Consumer  Finance  Lender and will
begin  hiring loan  executives  as  employees.  Many of these  employees  have a
limited  understanding of our systems and controls.  The increase in the size of
our  operations  may make it more  difficult  for us to ensure that we originate
quality loans and that we service them effectively.  We will need to attract and
hire  additional  sales and  management  personnel in an  intensely  competitive
hiring  environment  in order to preserve and increase our market share.  At the
same  time,  we will need to  continue  to upgrade  and  expand  our  financial,
operational and managerial systems and controls.

Various  factors  may  cause  the  market  price of our  common  stock to become
volatile, which could adversely affect our ability to access the capital markets
in the future.

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 additional  secondary offerings of our common
stock, regardless of our financial performance.

ITEM 3: CONTROLS AND PROCEDURES

a)  Evaluation  of  disclosure  controls  and  procedures.  Our Chief  Executive
Officer,  after evaluating the effectiveness of the our "disclosure controls and
procedures"  (as defined in the Securities  Exchange Act of 1934 Rules 13a-15(e)
and  15d-15(e))  as of the end of the period  covered by this annual report (the
"Evaluation Date"), has concluded that as of the Evaluation Date, our disclosure
controls and  procedures  were  adequate  and  designed to ensure that  material
information  relating to the Company and our consolidated  subsidiaries would be
made known to him by others within those entities.

(b)  Changes  in  internal  control  over  financial  reporting.  There  were no
significant  changes in the our internal control over financial reporting during
the fourth fiscal quarter that materially affected,  or are reasonably likely to
materially affect, the our internal control over financial reporting.


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PART II -- OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

On January  27,  2004 DL Pacific  Center LP ("DL  Pacific")  filed a lawsuit for
$40,444 plus costs and attorney's  fees against us in San Diego County  Superior
Court.  The suit alleges that,  after we purchased San Francisco  Funding,  Inc.
("SFF") in November 2003, we assumed SFF's obligations  pursuant to DL Pacific's
lease with SFF by accepting the benefits of such lease and by  negotiating  with
DL  Pacific  for  amendments  to the lease.  Silverado  has agreed to settle the
lawsuit.

On March 9, 2004 Robert E. Vener ("Vener") filed an amendment to his lawsuit for
$7,500 per month from November 2003 to March 2006 plus costs and attorney's fees
against us in Marin  County  Superior  Court.  The suit alleges  that,  after we
purchased San Francisco Funding, Inc. ("SFF") in November 2003, we assumed SFF's
obligations  pursuant to Vener's lease with SFF by stating and  representing  to
Vener that we would be responsible  for any amounts due from SFF pursuant to the
lease, and that Vener relied on our representations by allowing SFF to remain on
the premises  following  SFF's  default in the payment of rent on the lease.  We
have agreed to settle the suit.

We have filed a cross-complaint against SFF and its major stockholder(s) Mr. and
Mrs.  Daniel Selis,  for indemnity for the cost of defending the Veneer lawsuit,
and  punitive   damages   resulting  from  breach  of  contract,   fraud  and/or
interference with our advantageous business  relationships because of: (1) SFF's
material  breaches  of the SFF  stock  purchase  agreement  and  SFF's  material
misrepresentations to us of SFF's liabilities and obligations, (2) SFF's written
false statements to its creditors that we had assumed their debts, and (3) SFF's
forwarding of its phone calls tour offices and directing their creditors to call
our offices concerning payment of their liabilities and obligations.

On May 12, 2004 The Subway.  Com filed for Arbitration for $60,000 plus interest
against us in the state of Florida. The suit claims breach of contract for stock
promotion services.  The Company believes it has meritorious defense and that no
contract was ever  consummated.  On July 16, 2004, the company was served with a
complaint by the State of  California,  Department  of  Industrial  Relations on
behalf of a former  contractor  for back wages of  $10,937.50  and  penalties of
$288.46 for an indeterminate  number. It is management's  opinion,  that we have
meritorious  defenses  based upon the facts,  among  others,  that  claimant was
acting as an independent  contractor who was paid for services performed and her
claims are baseless.

On November 24, 2004, SRD  Technologies  signed a debt  cancellation and release
agreement  which  included  the release of any and all  liabilities  owed to SRD
Technologies,  the relinquishing of 574,953 shares of Silverado Financial,  Inc.
(SLVO) stock, and a payment to be made by SRD Technologies for auditing expenses
in the amount of $7,500.  On the date of the agreement  the 574,953  shares were
worth $.05 a share or  $28,748.  The affect on our books would be the release of
debt in the form of a note  payable  in the  amount  of  $275,000  plus  accrued
interest of $41,047. The $7,500 payment would reduce our payable to our auditors
and there would be a reduction in shares issued and outstanding.

On November 24, 2004, John Shebanow signed a general  release  agreement,  which
included the  relinquishing of any and all shares of Silverado  Financial,  Inc.
held by himself (575,870 shares), friends and family and releases any and all of
Silverado  Financials liability to Mr. Shebanow on the date of the agreement the
575,870  shares  were worth  $0.05 a share or  $28,794.  The affect on our books
would  be a  reduction  in  accounts  payable  of  approximately  $20,660  and a
reduction in the number of shares issued and outstanding.

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ITEM 2. CHANGES IN SECURITIES

On January 14, 2005 the Company  issued  410,000 S-8 shares in payment for legal
services  and as retainer for future  service to out  corporate  attorney  David
Kahn.  The value of the  securities  at the time was  $37,000.  The company also
issued 32,675  shares to Martin  Fisher for work on the  Company's  software the
value of the shares was $$2,950.  We also issued  20,750  shares to Allen Suzuki
for accounting  services the value of the shares was $1,867.50.  Juan Negron was
issued  4,572  S-8  shares  in  payment  for  work  on  computers   and  network
infrastructure at a value of $1000.00.

On January 14, 2005 the Company issued 10,000 shares of restricted stock in
exchange for furniture and fixtures for the Phoenix, Arizona of to Justin Berry.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.

ITEM 5. OTHER INFORMATION
Not applicable.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

31.1      Quarterly  Certification pursuant to Section 302 of the Sarbanes-Oxley
          act of 2002

31.2      Quarterly  Certification pursuant to Section 302 of the Sarbanes-Oxley
          act of 2002

32.1      Certificate of Chief Executive  Officer pursuant to 18 U.S.C.  Section
          1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of
          2002.


(b) Reports on Form 8-K
None

SIGNATURES

Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the
registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned, thereunto duly authorized.

SILVERADO FINANCIAL, INC.



                                            /s/ John E. Hartman
                                            ------------------------------------
                                            Date: May 28, 2005
                                            By: John E. Hartman
                                            President, Chief Executive Officer &
                                            Interim Chief Financial Officer


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