UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

For the quarter ended March 31, 2004

For the transition period from __________to __________ .
Commission File Number 0-1100

HAWTHORNE FINANCIAL CORPORATION

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

     Indicate by check mark whether the registrant is an accelerated filer as defined in Rule 12b-2 of the Exchange Act. Yes x No o

     Indicate the number of shares outstanding of each of the issuer’s classes of Common Stock as of the latest practicable date: The Registrant had 11,808,871 shares of Common Stock, $0.01 par value, per share outstanding as of April 30, 2004.

HAWTHORNE FINANCIAL CORPORATION

FORM 10-Q INDEX
For the quarter ended March 31, 2004

CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS

Certain statements in this filing constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, which involve risks and uncertainties. Our actual results may differ significantly from the results discussed in such forward-looking statements. Factors that might cause such a difference include, but are not limited, to general economic conditions in our market area, particularly changes in economic conditions in the real estate industry or real estate values in our market, changes in market interest rates, loan prepayments continuing at the current pace or increasing, increased competition in the Company’s niche markets that impacts pricing and/or credit standards, risk associated with credit quality, outcome of pending litigation, inherent market risk associated with treasury activities, risks associated with management’s investment strategy and other factors discussed in our reports filed with the Securities and Exchange Commission (“SEC”), including our Annual Report on Form 10-K for the year ended December 31, 2003.

 i 

HAWTHORNE FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

See Accompanying Notes to Consolidated Financial Statements

1

HAWTHORNE FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

See Accompanying Notes to Consolidated Financial Statements

2

HAWTHORNE FINANCIAL CORPORATION

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

See Accompanying Notes to Consolidated Financial Statements

3

HAWTHORNE FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

See Accompanying Notes to Consolidated Financial Statements

4

HAWTHORNE FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

See Accompanying Notes to Consolidated Financial Statements

5

HAWTHORNE FINANCIAL CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 — Summary of Significant Accounting Policies

     The interim consolidated financial statements include the accounts of Hawthorne Financial Corporation (“Company”) and its wholly owned subsidiaries, Hawthorne Savings, F.S.B. and its wholly owned subsidiary, HS Financial Services Corporation, (“Bank”), HFC Capital Trust I, HFC Capital Trust II, HFC Capital Trust III and HFC Capital Trust IV, which are collectively referred to herein as the “Company.” All significant intercompany transactions and balances have been eliminated in consolidation.

     The unaudited interim consolidated financial statements contain all adjustments (consisting solely of normal recurring adjustments) which are, in the opinion of management, necessary to present fairly the Company’s results for the interim periods presented. These consolidated financial statements for the three months ended March 31, 2004, are not necessarily indicative of the results that may be expected for any other interim period or the full year ending December 31, 2004.

     Certain information and note disclosures normally included in the financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). These unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.

Recent Accounting Pronouncements

     In November 2002, the FASB issued Interpretation (FIN) No. 45, “Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees and Indebtedness of Others,” an interpretation of SFAS Nos. 5, 57 and 107, and rescission of FIN No. 34, “Disclosure of Indirect Guarantees of Indebtedness of Others.” FIN No. 45 elaborates on the disclosures to be made by the guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also requires that a guarantor recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and measurement provisions of the interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002, while the provisions of the disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. Adoption of such interpretation did not have a material impact on the results of operations, financial position or cash flows.

     In January 2003, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. (“FIN”) 46, “Consolidation of Variable Interest Entities,” an interpretation of Accounting Research Bulletin (“ARB”) No. 51. In December 2003, the FASB revised FIN 46 and codified certain FASB Staff Positions previously issued for FIN 46 (“FIN 46R”). The objective of FIN 46 as originally issued, and as revised by FIN 46R, was to improve financial reporting by companies involved with variable interest entities. Prior to the effectiveness of FIN 46, a company generally included another entity in its consolidated financial statements only if it controlled the entity through voting interests. FIN 46 changed that standard by requiring a variable interest entity to be consolidated by a company if that company was subject to a majority of the risk of loss from the variable interest entity’s activities or entitled to receive a majority of the entity’s residual returns or both. The consolidation requirements of FIN 46 applied immediately to variable interest entities created after January 31, 2003. The consolidation requirements will apply to entities established prior to January 31, 2003 in the first fiscal year or interim period beginning after December 15, 2003. The provisions of FIN 46R for the Company are required to be adopted prior to the first reporting period that ends after March 15, 2004. The Company deconsolidated its trust preferred securities as of March 31, 2004 and for all periods presented. The adoption of FIN 46 and FIN 46R did not have a significant impact on the financial position, results of operations, or cash flows of the Company.

     In December 2003, the Accounting Standards Executive Committee of the AICPA issued Statement of Position No. 03-3 (“SOP 03-3”), Accounting for Certain Loans or Debt Securities Acquired in a Transfer. SOP 03-3 addresses the accounting for differences between the contractual cash flows and the cash flows expected to be collected from purchased loans or debt securities if those differences are attributable, in part, to credit quality. SOP 03-3 requires purchased loans and debt securities to be recorded initially at fair value based on the present value of the cash flows expected to be collected with no carryover of any valuation allowance previously recognized by the seller. Interest income should be recognized based on the effective yield from the cash flows expected to be collected. To the extent that the purchased loans or debt securities experience subsequent deterioration in credit quality, a valuation allowance would be established for any additional cash flows that are not expected to be received. However, if more cash flows subsequently are expected to be received than originally estimated, the effective yield would be adjusted on a prospective basis. SOP 03-3 will be effective for loans and debt securities acquired after December 31, 2004. Although the Company anticipates that the implementation of SOP 03-3 will require

6

significant loan system and operational changes to track credit related losses on loans purchased starting in 2005, it is not expected to have a significant effect on the Consolidated Financial Statements.

Note 2 — Reclassifications

     Certain amounts in the 2003 consolidated financial statements have been reclassified to conform to classifications in 2004.

Note 3 — Three-For-Two Stock Split

     On September 25, 2003, the Company announced that its Board of Directors approved a 3-for-2 stock split to be effected in the form of a 50% stock dividend. The additional shares were distributed to shareholders of record as of October 6, 2003 on October 27, 2003.

     The effect of the stock split has been recognized and reflected in all share and per share amounts for all periods presented.

Note 4 — Earnings Per Share Calculation

     The following table sets forth the Company’s earnings per share calculations for the quarter ended March 31, 2004 and 2003. In the following table, (1) “Warrants” refer to the Warrants issued by the Company in December 1995, which are currently exercisable and which expire December 11, 2005, and (2) “Options” refer to stock options previously granted to employees and directors of the Company and which were outstanding at each measurement date.

7

Book Value Calculation:

Stock Option Plans

     SFAS No. 123, “Accounting for Stock-Based Compensation,” permits entities to apply the provisions of Accounting Principles Board Opinion No. 25 (“APB 25”), and related interpretations. SFAS No. 123 requires proforma disclosure of net income and, if presented, earnings per share, as if the fair value based method of accounting defined in this statement had been applied. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price, rather than recognizing the fair value of all stock-based awards on the date of grant as compensation expense over the vesting period. The Company has elected to apply the provisions of APB 25 and provide the proforma disclosure requirements of SFAS No. 123.

     If compensation costs for the Stock Incentive Plan and Stock Option Plans had been determined based on the fair value at the grant date for awards for the quarters ended March 31, 2004 and 2003, consistent with the provisions of SFAS No. 123, the Company’s net income and net earnings per share would have been reduced to the proforma amounts as follows.

     The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. There were no grants issued during the quarter ended March 31, 2004 and March 31, 2003.

     On May 21, 2001, the Company adopted the Hawthorne Financial Corporation 2001 Stock Incentive Plan (“Stock Incentive Plan”), which assumed all outstanding stock options that had previously been issued to directors and employees of the Company under its prior two stock option plans and added 375,000 shares for future grants. The Stock Incentive Plan provides for the grant of incentive and nonqualified stock options and other stock-related compensation to employees, the non-employee directors, consultants and other independent advisors who provide services to the Company. At December 31, 2003, the Stock Incentive Plan provides for the issuance of 1,528,350 maximum aggregate shares of Company common stock upon the exercise of awards granted under the plan. The exercise price of any option generally may not be less than the fair market

8

value of the common stock on the date of grant, although under limited circumstances, set forth in the Stock Incentive Plan, the exercise price may be as low as 85% of the fair market value of the Common Stock on the grant date, and the term of any option may not exceed 10 years. As of March 31, 2004, the number of stock options available under the Stock Incentive Plan was 191,886.

Note 5 — Commitments and Contingencies

     From time to time, the Company is party to claims and legal proceedings arising in the ordinary course of business. Management evaluates the Company’s and/or the Bank’s exposure to the cases individually and in the aggregate and provides for potential losses on such litigation, if the amount of the loss is estimable and the loss is probable. Management believes that there are no pending litigation matters at the current time that are material. However, litigation is inherently uncertain and no assurance can be given that any current or future litigation will not result in any loss that might be material to the Company.

Note 6 — Off-Balance Sheet Activity

     The Company is a party to credit-related financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. Financial instruments include letters of credit (“LCs”). These commitments involve, to varying degrees, elements of credit and interest rate risk (“IRR”) in excess of the amount recognized in the consolidated statements of financial condition. The contractual amounts of the commitments reflect the extent of involvement the Company has in the financial instruments. The Company follows the same credit policies in making commitments as it does for on-balance sheet instruments. There were no outstanding LCs issued by the Bank at March 31, 2004 and 2003.

     As of March 31, 2004, the Federal Home Loan Bank (“FHLB”) issued six LCs for a total of $203.5 million. The purpose of the LCs is to fulfill the collateral requirements for six deposits totaling $185.0 million placed by the State of California with the Bank. The LCs are issued in favor of the State Treasurer of the State of California and mature over the next six months. The maturities coincide with the maturities of the State’s deposits. There are no issuance fees associated with these LCs; however, the Bank pays a maintenance fee of 15 basis points per annum monthly.

     At March 31, 2004, the Bank had commitments to fund the undisbursed portion of existing construction and land loans of $147.2 million and income property and residential loans of $3.5 million. The Bank’s commitments to fund the undisbursed portion of existing lines of credit totaled $7.0 million. The Bank follows the same credit policies in making commitments as it does for on-balance sheet instruments.

     In addition, as of