---

Table of Contents

United States

SECURITIES AND
EXCHANGE COMMISSION 

Washington, D.C. 20549FORM 10-KAmendment No. 1

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

               
                 For the fiscal year ended December 31, 2005 or

[   ]    
            TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
          EXCHANGE ACT OF 1934
           
  For the transition period from ___________ to ___________.

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

|Delaware                                                       | 87-0642252                          
|-------------------------------------------------------------- | ------------------------------------
|(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.)

707 Wilshire Blvd. Suite 
2600 Los Angeles CA 90017

(Address of principal
executive offices and zip code)

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

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

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

Title of class

          
          
          
          
          
         Common Stock, $0.001
par value

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

Yes [x] No [ ]

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

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

Yes [ ] No [x]

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

DOCUMENTS INCORPORATED
BY REFERENCE

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

---

TMSF HOLDINGS, INC. 
2005 FORM 10-K
ANNUAL REPORT TABLE OF CONTENTS

|                                  |     | PART I                                                               |    |  | 
|--------------------------------- | --- | -------------------------------------------------------------------- | -- |  | 
|ITEM 1                            |     | BUSINESS                                                             | 1  |  | 
|ITEM 2                            |     | PROPERTIES                                                           | 57 |  | 
|ITEM 3                            |     | LEGAL PROCEEDINGS                                                    | 57 |  | 
|ITEM 4                            |     | SUBMISSION OF MATTERS
     TO A VOTE OF SECURITY HOLDERS             | 57 |  | 
|                                  |     | PART II                                                              |    |  | 
|ITEM 5                            |     | MARKET FOR REGISTRANT'S
     COMMON EQUITY                           |    |  | 
|                                  |     | AND RELATED STOCKHOLDER MATTERS                                      | 58 |  | 
|ITEM 6                            |     | SELECTED FINANCIAL DATA                                              | 59 |  | 
|ITEM 7                            |     | MANAGEMENT'S
     DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION     |    |  | 
|                                  |     | AND RESULTS OF OPERATIONS                                            | 60 |  | 
|ITEM 7A                           |     | QUANTITATIVE AND
     QUALITATIVE  DISCLOSURE ABOUT MARKET RISK      | 85 |  | 
|ITEM 8                            |     | FINANCIAL STATEMENTS
     AND SUPPLEMENTARY DATA                     | 87 |  | 
|ITEM 9                            |     | CHANGES IN AND DISAGREEMENTS
     WITH ACCOUNTANTS                   |    | 
|                                  |     | ON ACCOUNTING AND FINANCIAL
     DISCLOSURE                          | 87 |  | 
|ITEM 9A                           |     | CONTROLS AND PROCEDURES                                              | 87 |  | 
|                                  |     | PART III                                                             |    |  | 
|ITEM 10                           |     | DIRECTORS AND EXECUTIVE
      OFFICERS OF THE REGISTRANT             | 89 |  | 
|ITEM 11                           |     | EXECUTIVE COMPENSATION                                               | 90 |  | 
|ITEM 12                           |     | SECURITY OWNERSHIPOF
      CERTAIN BENEFICIAL                        |    |  | 
|                                  |     | OWNERS AND MANAGEMENT                                                | 92 |  | 
|ITEM 13                           |     | CERTAIN RELATIONSHIPS
     AND RELATED TRANSACTIONS                  | 94 |  | 
|ITEM 14                           |     | PRINCIPAL ACCOUNTANT
     FEES AND SERVICES                          | 95 |  | 
|                                  |     | PART IV                                                              |    |  | 
|ITEM 15                           |     | EXHIBITS, FINANCIAL
     STATEMENT SCHEDULES AND REPORTS ON FORM 8-K | 96 |  | 
|SIGNATURES                        |     |                                                                      | 97 |  | 
|CONSOLIDATED FINANCIAL STATEMENTS | F-1 |                                                                      |    |  | 

---

Table of Contents

# PART I

# ITEM 1. BUSINESS

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

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

General
        We are a financial holding company
previously operating as Little Creek, Inc. In November 2002, we acquired The Mortgage
Store  a nationwide mortgage lender  and changed our name to TMSF Holdings,
Inc. Prior to the acquisition of The Mortgage Store, Little Creek Inc. did not have any
significant operational activity.

On September 23, 2005 we announced
that our Board of Directors after careful consideration has determined that it is in the
best interest of our Company and our shareholders that we convert our business into a Real
Estate Investment Trust (REIT). We established a new subsidiary, TMSF REIT,
Inc., a Maryland corporation, for the purpose of consummating the planned reorganization,
which has been fully described in our Information Statement/Prospectus originally filed
with the SEC in September 2005 and subsequent amendments filed in December 2005 and January
and February 2006. The Board of Directors has determined that we will need to raise sufficient capital to meet the
REIT requirement and effect our planned business strategy. Recent changes in the financial
markets have lowered demand for capital investment in REITs and our plan of
reorganization has been delayed.

The following discussion pertains to
those of The Mortgage Store, our wholly owned subsidiary. The Mortgage Store is a
nationwide mortgage banker that originates, finances, and sells conforming and
non-conforming mortgage loans secured by single-family residences. Upon origination we
sell our loans, on a whole loan basis, for cash to investors who either retain these
mortgages for their own portfolio or pool them into mortgage backed securities offered in
the financial markets. Since 1996, we have been engaged in origination of specialty
products commonly known as Alt-A mortgages for residential borrowers. In recent years, we
expanded our loan programs to include Type-A conforming loans as well as sub-prime
mortgages for borrowers with lower credit ratings.

- 1 -

---

Table of Contents

Plan of Reorganization
        Historically,
The Mortgage Store sold all of its mortgage loans including the right to service such
loans, often referred to as selling loans on a servicing-released basis, for cash to
non-affiliated buyers. We recently formed a Maryland corporation to acquire The Mortgage
Store. Following our reorganization, we intend to retain, on our balance sheet, a
substantial portion of the mortgage loans we originate. We expect to finance this mortgage
loan portfolio over the long-term by issuing mortgage-backed securities through
securitization transactions that are treated as financings for tax and accounting
purposes. We believe that retaining the mortgage loans we originate rather than acquiring
mortgage loans through secondary market purchases from unrelated parties will provide us
with greater certainty regarding the expected performance of our mortgage loan portfolio.

We
expect to qualify and intend to elect to be taxed as a real estate investment trust, or
REIT, under the Internal Revenue Code of 1986, as amended, commencing with our taxable
year in which we complete the reorganization. If we qualify as a REIT, we generally will
not be subject to federal corporate taxes on income produced by our investment portfolio
or other REIT taxable income to the extent we distribute that income to our stockholders.
Our organizational structure will allow us the flexibility to continue originating and
selling mortgage loans through our subsidiary, The Mortgage Store, which we will elect to
treat as a taxable REIT subsidiary, to help us grow our capital base and operations. The
Mortgage Store, as a taxable REIT subsidiary, will continue to be subject to federal,
state, and local corporate taxes on its income.

Mortgage loan production
        We primarily originate non-conforming
mortgage loans, which we refer to as Alt-A loans and subprime loans. Alt-A loans accounted
for nearly 93.7% of our total loan production during the year ended December 31, 2005. Our
Alt-A mortgage loans are principally secured by first-lien and second-lien mortgages and
are made to borrowers whose credit profile meets the credit history and debt to income
ratio guidelines of the Federal National Mortgage Association, or Fannie Mae, and Federal
Home Loan Mortgage Corporation, or Freddie Mac, but have other loan characteristics that
make them non-conforming under the guidelines of those agencies. For instance, our Alt-A
mortgages may not have certain documentation or verifications that are required by the
Fannie Mae or Freddie Mac guidelines or the loan size exceeds these guidelines. We also
include our home equity line of credit, or HELOC, program in our Alt-A loan designation.

We
underwrite each mortgage loan we originate, and as a REIT, we plan to underwrite each
mortgage loan we purchase prior to the origination of that mortgage loan. We base our
underwriting decisions primarily on our assessment of a number of factors that may be used
to offset certain areas of credit weakness, including the borrowers willingness and
ability to pay, as reflected in the borrowers income, historical patterns of debt
repayment, and amount of equity in the borrowers property. We have developed
underwriting processes and criteria that we believe generate quality borrower data and
appraisals, allowing us to make informed underwriting and risk-based pricing decisions and
to approve and fund loans efficiently and profitably.

We
expect to continue to use warehouse facilities to provide short-term financing for our
mortgage loan originations. Prior to becoming a REIT, we hold and expect to continue to
sell originated mortgage loans through whole loan sales. We may also securitize our
mortgage loans. As a REIT, if we sell an originated mortgage loan through a loan sale, we
will fund it through The Mortgage Store. If we hold an originated mortgage loan in our
loan portfolio, we will generally fund it either at the REIT level, once those warehouse
facilities are in place, or fund it through The Mortgage Store and subsequently sell it to
the REIT level.

- 2 -

---

Table of Contents

As
a REIT, we expect to securitize substantially all of our mortgage loans through
transactions that will be structured as financings for both tax and financial accounting
purposes to provide long-term financing for our loan portfolio. In a securitization, we
will sell a pool of loans to a trust for cash and a certificate evidencing our residual or
ownership interest in the trust. The trust raises the cash to pay us by either selling
securities representing interests in loans in the trust or securities secured by loans in
the trust. We do not expect to generate a gain or loss on sale from these securitization
activities, and, following these securitizations, the loans will remain classified on our
consolidated balance sheet as assets with the securitization debt classified as a
liability. We expect that we will generate earnings from the loans in our on-balance sheet
portfolio primarily through: 

        net interest income, which is the difference between the:

- interest income we receive from the mortgage loans;
- fees from master servicing agreements, if any; and
- interest we pay to the holders of the mortgage-backed securities that we issue
in securitizations;

net of:

- losses due to defaults and delinquencies on the
loans;
- servicing fees and expenses we must pay;
and
- other ongoing securitization costs.

As a REIT, our net interest income
will vary based upon, among other things, the spread between the weighted average interest
earned on the mortgage loans and the interest payable to the holders of the
mortgage-backed securities, the performance of the underlying mortgages and the amount and
timing of the borrowers prepayments of the underlying mortgages.

As
a REIT, the performance of our portfolio of primarily non-conforming mortgage loans will
be subject to the higher delinquency and default rates characteristic of non-conforming
mortgage loans as compared to conforming mortgage loans. Delinquencies interrupt the flow
of projected interest income from the mortgage loans, and defaults 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.

As
a REIT, until we can retain a sufficient number of the mortgage loans we originate to meet
certain REIT asset composition requirements, we anticipate purchasing mortgage-backed
securities on a leveraged basis. While we have not established, and do not expect to
establish a limit on the amount of leverage we may incur, we generally expect to leverage
our equity by a factor of 10 to 15.

The
Mortgage Store has experience in selling loans through the loan sales market. Loan sales
are executed on a servicing-released basis, meaning that the loans are sold, together with
the servicing rights, to the buyers of the loans. Upon completion of the reorganization,
we will continue to sell a portion of our loans, primarily through our taxable REIT
subsidiary, The Mortgage Store, so that we can capture any gain on the sale of these loans
and thereby grow our equity capital base. The amount of loans we sell through The Mortgage
Store is difficult to predict and will vary over time depending on the market prices of
our loans and our need for equity as well as whether certain loans fail to meet our
securitization profile and these must be sold to third-party buyers. We expect that these
loans generally will be sold within 60 days of funding, and The Mortgage Store will
service these loans during the period between origination and the transfer of servicing to
the buyer, which is generally within 90 days after the sale of the loans. The Mortgage
Store will generate income primarily from:

- the sale of loans at a premium to our weighted average origination costs,
including overhead;
- net interest income, which is the
difference between the interest income generated by the mortgage loans and our interest
                  expense on the financing of our lending activities through our warehouse
facilities during the time we hold the
                  mortgages; and
- origination fee income.

- 3 -

---

Table of Contents

We have a wholesale division that
solicits business from mortgage brokers and a retail division that markets directly to the
general public. There are currently over 2000 approved brokers out of which
approximately 500 actively conduct business with us. For the year ended December 31,
2005, we originated approximately $1,738.6 million of mortgage loans, of which
approximately $1,544.6 million were generated through third party brokers.

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

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

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

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

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

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

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

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

In creating a strong retail
division, we have introduced an aggressive commission structure for those loan officers
who have established a long track record of profitable originations to maximize their
income through association with us as a direct lender. We intend to develop similar
networks in other states where we are licensed as a mortgage
broker.

Additionally,
we have established an exclusive arrangement with a mortgage franchisor in Southern
California to fund substantially all loans originated by each
franchisee.

- 4 -

---

Table of Contents

# Origination Channels

1. Wholesale Channel

Our
wholesale channel purchases and originates conforming and non-conforming residential
mortgage loans through relationships with various mortgage bankers and mortgage brokers.
Our wholesale channel currently has over 2,000 approved brokers of which
approximately 500 actively conduct business with us. We provide a variety of
mortgage products to our brokers that allow them to better serve their customers. Mortgage
brokers identify applicants, help the applicants complete the loan application paperwork,
gather required information and documents, and act as our liaison with the applicant
during the lending process. Since mortgage brokers generally submit a loan application to
several lenders to compare rates and terms for the best offer, our policy is to provide a
decision of pre-approval or denial of a loan within 24 hours after submission of the loan
application. Upon receipt of a loan application, the applicants information and loan
data are entered into the mortgage-banking database. Once the loan application is
registered, it is reviewed by a member of the pre-approval underwriting staff to determine
if the parameters of the loan applied for conform to program guidelines. The broker
is then informed of denial or pre-approval of the loan application. If the loan is
pre-approved, the broker submits the loan application file including required conditions
to one of our integrated loan processing teams for level one underwriting to determine
conditions for full underwriting and pricing of the loan. Once the rate and terms of the
loan are accepted, the level two underwriting team member reviews the pre-funding
conditions and the quality control team members conduct their pre-funding verification.
Once these processes have been completed, the loan is submitted for funding.

It
is possible for the broker to follow the loan application throughout this process by
accessing our network via the Internet. A loan liaison agent is also in continuous contact
with the broker, providing updates on the progress of the loan application and
communicating any additional conditions that may become necessary as a result of the
underwriting review and quality control examinations of the loan application. By relying
on brokers to market our products and assist the applicants throughout the loan
process, we believe we can increase loan volume without increasing marketing,
labor, and other overhead costs incurred in connection with retail loan production.

New
brokers enter our wholesale network from various sources. Our account executives and
marketing department as well as our website are the main sources for enlisting new
brokers. Currently, we have a team of in-house account representatives who introduce our
programs to an increasing numbers of brokers. We intend to expand our wholesale channel as
new geographic areas are added to our lending territories. Furthermore,
we have a group of wholesale field representatives whom we rely on to establish personal
relationships with mortgage brokers in their respective territories. Brokers must meet
various requirements and must complete the broker application package, provide evidence of
a state license, articles of incorporation, financial statements, resumes of key
personnel, and other information as needed. The broker approval department compiles the
broker files which are then reviewed by our in-house counsel to determine if the broker
should be approved. When appropriate, we may use services such as MIDEX, the Mortgage
Industry Data Exchange, to search for prior reports on a broker before final approval.

After
the reorganization, we intend to enter into loan purchase and sale agreements with
mortgage bankers, banks, thrifts, and credit unions to sell non-conforming residential
mortgage loans to us through our wholesale channel. These correspondent lenders close
their loans through their own financing.

After
the reorganization, we expect to buy most of the loans from correspondent lenders on an individual flow basis. We may also make bulk purchases of loans from our
correspondent lenders who close the loans and hold them until they have a pool of loans
ready to be sold at one time. On all loan purchases from correspondent lenders, we plan to
re-underwrite each loan and review all collateral before purchasing. We prefer the
flow-delivery method to bulk purchasing because we believe that the
flow-delivery method has lower premiums, costs, and delinquencies, and as a result, is
more profitable than bulk purchasing.

New
correspondent lenders become our customers from leads generated by our wholesale sales
force. Our account executives, our marketing department, and our website are the main
sources for new correspondent lenders. Generally, to become one of our approved
correspondent lenders, a correspondent must meet various requirements, including minimum
loan origination volume, and must complete the seller application package, provide
evidence of a state license, bank or thrift charter, financial statements, evidence of
insurance and regulatory compliance, a copy of quality control procedures, resumes of key
personnel, and other information as needed. Our broker approval department compiles this
information for review and final approval by our in-house counsel.

- 5 -

---

Table of Contents

2. Retail Channel

Our
retail channel has 23 loan officers that operate from our headquarters in Los
Angeles, California and 5 branch offices throughout California and Virginia. We interact with
our borrowers through loan officers and direct-to-the-borrower tools such as the Internet,
telemarketing, or direct mailings. As part of our efforts to manage credit risk, all loan
underwriting, closing, funding, and shipping is managed centrally out of our headquarters.
A typical retail branch consists of a branch manager, loan officers, and loan processors
who are each properly licensed, where applicable.

To
create a strong retail channel, we have introduced an aggressive commission structure for
our loan officers who have established a long track record of profitable originations to
maximize their income through association with us as a direct lender.

We
process loan applications that are generated by our retail channel in the same manner as
we do for our wholesale channel. The loan officer submits the loan application to our
pre-approval underwriting staff for pre-approval. Once the loan has been pre-approved, the
loan officer submits the entire loan application file to one of our integrated loan
processing teams for level one underwriting and pricing. The loan application is then
moved to the level two underwriter for underwriting conditions and funding review and the
quality control person on the team simultaneously begins the verification process.

# Underwriting

We
process our loan applications utilizing integrated teams of underwriting and quality
control personnel. The underwriters on our integrated loan processing teams underwrite
loans in accordance with our established underwriting guidelines described below. Except
for our conforming mortgage loan programs, which constitute a small percentage of our
originations, the mortgage loans we originate and purchase generally do not meet the
underwriting guidelines used by government-sponsored entities, such as Fannie Mae or
Freddie Mac. As a result, the mortgage loans in our portfolio are likely to have higher
delinquency and foreclosure rates than mortgage loans that meet the underwriting criteria
established by Fannie Mae or Freddie Mac.

We
have two primary classifications of non-conforming loan programs. Our Alt-A loan programs
are for prime and near-prime borrowers with alternative documentation or loan size in
excess of the Fannie Mae or Freddie Mac guidelines. Our subprime loan programs are for
borrowers with a lower credit score or with some credit blemishes. Generally, our Alt-A
programs do not allow more than one isolated late mortgage payment within the last 12
months while our subprime program allows for multiple late payments depending on the
borrowers credit score. In addition, the typical minimum credit score required for
an Alt-A loan program is 620 while subprime programs permit credit scores as low as 500.

Our
underwriting guidelines are designed to help us evaluate the advisability of making a
particular loan. For our full documentation program a borrowers credit history and
capacity to repay the loan are evaluated under the criteria set forth in our underwriting
guidelines. In addition, for all of our loan programs our underwriters determine if the
property that will secure the loan as collateral is adequate and review credit scores
derived from the application of one or more nationally recognized credit-scoring models.
Based on their analysis of these factors, our underwriters will determine loan terms,
including the interest rate and maximum combined loan-to-value "CLTV" ratio. We
generally offer loans with higher interest rates and lower CLTVs to borrowers that have
less favorable credit histories.

A
loans LTV is an important way for many loan originators and loan buyers to discern
risk within a mortgage loan. A LTV percentage is calculated by using the first-lien loan
principal balance as the numerator and, in the case of a purchase, the lower of the
homes sales price or appraised value as the denominator and in the case of a
refinance, the homes appraised value as the denominator. A loan is said to have an
80% LTV if, for example, the home was purchased for $100,000 and the first-lien loan
amount is $80,000. This assumes the appraised value of the home is at least $100,000.
Another important factor is the CLTV. This measure is
calculated the same way as the LTV except it includes not only the balance of the first lien
loan, but also the balance of all other loans on the same mortgaged property.

- 6 -

---

Table of Contents

Our
underwriting philosophy is to analyze the overall situation of the borrower and to take
into account compensating factors that may be used to offset certain areas of weakness,
including:

- mortgage payment history;
- disposable income;
- employment stability;
- number of years at residence;
- LTV and CLTV;
- income documentation type; and
- property type.

Our
underwriting guidelines are determined by our credit committee, which is comprised of
senior executives as well as underwriting and secondary marketing managers. The credit
committee meets frequently to review proposed changes to underwriting guidelines. To the
extent an individual loan does not qualify for a loan program or credit grade, our
underwriters can and will make recommendations to the underwriting manager for an approval
of the loan by underwriting exception.

We
underwrite every loan we originate although our underwriting guidelines for each of our
loan programs are different. This means we thoroughly review the borrowers credit
history, income documents (except to the extent our stated income and limited
documentation loan programs do not require income documentation), and appraisal for
accuracy and completeness. All of our mortgage loan applications are subjected to an
automated data integrity search and scoring system, which helps us identify discrepancies
in information provided by the borrower on their loan application and the information
retained by national credit reporting agencies.

Currently,
all our loans are underwritten manually by qualified personnel. Upon completion of the programming
process with our recently acquired Automated Underwriting System (AUS) w e will be able to provide instantaneous decision making on all
loan applications. Our AUS will be available through our Internet based portal to our
network of approved mortgage brokers for immediate approval and pricing of loan
applications. Declined loan applications may be reviewed by an underwriter. Furthermore,
the AUS assists our underwriting personnel in their evaluation of loan application by
providing a summary of pertinent information and variation to the established guidelines.
While we intend to expand the functionality of our automated decision system to enhance
efficiencies, we will continue to use our staff to review income, transaction details, and
appraisal documentation to ensure that the loan is underwritten in accordance with our
guidelines.

Our
underwriting standards are applied in accordance with applicable federal and state laws
and regulations, and require a qualified appraisal of the mortgaged property conforming to
Fannie Mae and Freddie Mac standards or in some cases an insured automated valuation. Each
appraisal is prepared by a nationally recognized independent appraiser and includes a market
data analysis based on recent sales of comparable homes in the area and a replacement cost
analysis based on the current cost of building a similar home. The appraisal may not be
more than 120 days old on the day the loan is originated. In most instances, we require a
second full appraisal for properties that have a value of more than $750,000.

- 7 -

---

Table of Contents

# Income Documentation

1. Alt-A Loan
Documentation Programs

We
offer a variety of income documentation options within our Alt-A program, including: (a)
Full Documentation, (b) Stated Income Documentation/Verified Assets, (c) Stated Income
Documentation/Stated Assets, (d) No Income Documentation/Verified Assets (also known as No
Ratio), (e) 12 Months Bank Statements, and (f) No Income/No Assets/No Employment. All of
the programs under the Alt-A credit guidelines require verification of employment with the
exception of No Income/No Assets/No Employment.

Set
forth below is a summary of our six Alt-A loan documentation programs:

- Full Documentation  Under this program, an underwriter reviews the
borrowers credit report, loan application, property appraisal, and the documents
that are provided to verify employment and bank deposits. This program requires
documentation very similar to that required under the guidelines established by Fannie Mae
and Freddie Mac, such as tax returns, W2s for the last 24 months and pay-stubs for the
last 30-days.
- Stated Income Documentation/Verified Assets  Loans under this program are
generally made to self-employed borrowers. The borrowers income as stated on the
loan application must be determined to be reasonable for the related occupation, because
the income is not independently verified. Verification of deposit from a bank/financial
institution or 2 months of personal/business bank statements are acceptable documentation
to verify the borrowers assets.
- Stated Income Documentation/Stated Assets  In this program, the
borrowers income as stated on the loan application must be determined to be
reasonable for the related occupation, because the income is not independently verified.
In addition, the borrowers assets as stated on the loan application must be
determined to be reasonable for the related occupation, because the assets are not
independently verified.
- No Income Documentation/Verified Assets  In this program, the borrowers
income is not stated on the loan application. Verification of Deposit from a
bank/financial institution or 2 months of personal/business bank statements are acceptable
documentation to verify the borrowers assets.
- 12 Months Bank Statements  In this program, we require 12 months most recent
personal/business bank statements. We use 75% of the average deposits for the last twelve
months as a basis for income calculation.
- No Income/No Assets/No Employment  In this program, also known as a No
Doc loan because the loan application is left blank on income, assets and employment
section, the loan is primarily extended based on the borrowers credit history and risk
scores.

On
all of our documentation options within the Alt-A program, we calculate the amount of
income from the sources indicated on the loan application or similar documentation, as per
the requirements of each documentation type, review the credit history of the applicant,
calculate the debt service-to-income ratio to determine applicants ability to repay
the loan, review the type and use of the property being financed, and appraise the
property value. The only Alt-A documentation options not requiring income to debt
calculations are the No Income/No Assets/No Employment and No
Income/Verified Assets options because income is not calculated or stated on the
loan application on either documentation type. In determining the ability of the applicant
to repay the loan, our underwriters use a qualifying rate that is equal to (i) the stated
interest on fixed rate loans, (ii) the initial interest rate on loans which provide for
two to seven years of fixed rate before the initial rate adjustment, or (iii) two percent
above the initial interest rate on other adjustable-rate loans.

- 8 -

---

Table of Contents

2. Subprime Documentation
Programs

Our
subprime underwriting guidelines include four levels of applicant documentation
requirements, referred to as the Full Documentation, Stated Income
Documentation and 12 Months Bank Statement programs. Under the Full
Documentation program, we review the actual income documentation such as tax returns and
W2s to calculate the borrowers income for the last 12 months (compared to 24 months
on Alt-A). On the 12 Months Bank Statement program, we use 75% of the average
deposits for the last twelve months as a basis for income calculation. On Stated
Documentation programs, we review the applicants source of income based on the
amount of income the borrower has stated on the loan application without any actual
documentation.

On
all of our subprime documentation programs, we calculate the amount of income from sources
indicated on the loan application or similar documentation, as per the requirements of
each documentation type, review the credit history of the applicant, calculate the debt
service-to-income ratio to determine applicants ability to repay the loan, review
the type and use of the property being financed, and appraise the property value. The
typical terms for subprime programs are 2, 3 and 30 yr fixed. However, in determining the
ability of the applicant to repay the loan, our underwriters use a qualifying rate that is
equal to (i) the stated interest on fixed rate loans, (ii) the initial interest rate on
loans which provide for one to seven years of fixed rate before the initial rate
adjustment, or (iii) two percent above the initial interest rate on other adjustable-rate
loans.

4. Documentation
Applicable to All Loans

Our
underwriting guidelines require that our mortgage loans be underwritten in standardized
procedure which complies with applicable federal and state laws and regulations and
requires our underwriters to be satisfied with the value of the property being financed,
as indicated by the appraisal and appraisal review. Our Alt-A and subprime loan programs have
a general maximum loan amount for mortgage loans originated under our programs of $1.0
million for Alt-A and $0.5 million for subprime; however, larger loans may be approved on
a case-by-case basis.

The
underwriting guidelines for Full Documentation and Stated Income Documentation programs
permit loans to have CLTVs at origination of up to 100% for a maximum combined loan amount
of $1.0 million and $0.5 million for Alt-A and subprime loans, respectively, depending on,
among other things, the borrowers credit score, purpose of mortgage loan, repayment
ability and debt service-to-income ratio, income documentation, as well as the type and
use of the property.

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

- 9 -

---

Table of Contents

Alt-A Underwriting Guidelines

Our underwriting guidelines for Alt-A loans are summarized in the chart below:

Alt-A Combo Loans (first and second liens)
    
    Combo Program Owner Occupied:
    
    Combo Program Investment/2nd home:Maximum CLTV/Loan Amt/FICO(1)
    
    Maximum CLTV/Loan Amt/FICO(1)Full Documentation
    
    100% / 620+
    
    95% / 620+; 100% / 681+Stated Income/Verified Assets
    
    100% / 620+
    
    95% / 640+Stated Income/Stated Assets
    
    100% / 620+
    
    95% / 640+12 months Bank Statements
    
    100% / 620+
    
    not allowed Investment/2nd homeNo Income/Verified Assets
    
    100% / 640+
    
    95% / 640+No Documentation
    
    100% / 640+
    
    95% / 640+Mortgage History(2)
    
    0x30 12 mos / 1x30 24 mos
    
    0x30 12 mos / 1x30 24 mosCredit ParametersBankruptcy
    
    36 mos since discharge
    
    36 mos since dischargeForeclosure
    
    36 mos since discharge
    
    36 mos since dischargeMaximum loan amount:(3)
    
    $1M combined(4)
    
    $650K combined


Alt-A (first liens only):
    
    Owner Occupied
    
    Investment & 2nd Home:Maximum LTV/Loan Amt/FICO(1)
    
    Maximum LTV/Loan Amt/FICO(1)Full Documentation
    
    95%/500K/620+
    
    90%/500K/620+Stated Income/Verified Assets
    
    95%/500K/620+
    
    90%/500K/660+Stated Income/Stated Assets
    
    95%/500K/620+
    
    90%/500K/680+12 months Bank StatementsNo Income/Verified Assets
    
    95%/500K/660+
    
    90%/500K/680+No Documentation
    
    90%/500K/660+
    
    80%/650K/620+Mortgage History(3)
    
    0x30 12 mos / 1x30 24
    
    mos 0x30 12 mos / 1x30 24 mosCredit ParametersBankruptcy
    
    24 mos since discharge
    
    24 mos since dischargeForeclosure
    
    36 mos since discharge
    
    36 mos since discharge





|    |  |                                                                                                                  
|--- |  | -----------------------------------------------------------------------------------------------------------------
|(1) |  | FICO means a credit score developed by Fair Issac & Co.                                                          
|   
|(2) |  | 0x30 means no late payment during the prior 12 months and 1x30 means one late payment during
the prior 12 months.
|   
|(3) |  | Maximum amount not available for all FICOs.                                                                      
|   
|(4) |  | First and second liens.                                                                                          

- 10 -

---

Table of Contents

Subprime Risk Categories

Under
our underwriting guidelines for sub-prime loans we have established six principal risks
categories ranging from A to C- for grading the credit history of
potential subprime borrowers. Generally, borrowers in lower credit grades are less likely
to satisfy the repayment of obligations of a mortgage loan, and therefore, are subjected
to lower LTV thresholds and are charged higher interest rates and loan origination fees.

The
following table summarizes our underwriting guidelines for subprime loans by risk
classification:

A Credit
    
    A- Credit
    
    B Credit
    
    B- Credit
    
    C Credit
    
    C- CreditAmount (1)
    
    $500,000 Full
    
    $500,000
    
    $500,000
    
    $400,000
    
    $350,000
    
    
    $300,000DocumentationMaximumLTV/CLTV:Full Documentation
    
    100%(2)
    
    100%(2)
    
    85%
    
    85%
    
    75%
    
    
    65%Stated Income
    
    90% / $400,000
    
    80%
    
    75%
    
    70%
    
    not allowed
    
    
    not allowed12 Month Bank
Statement
    
    90%
    
    85%
    
    80%
    
    75%
    
    70%
    
    
    not allowedFICO/Mortgage History(3)(4)
    
    580/0x30
    
    560/2x30
    
    520/1x30
    
    500/1x30
    
    500/3x30
    
    
    500/1x90600/2x30
    
    580/3x30
    
    540/2x30
    
    520/3x30
    
    520/1x60620/3x30
    
    620/1x60
    
    560/3x30
    
    560/1x60
    
    540/1x90580/1x60
    
    620/1x90Credit ParametersBankruptcy (5)
    
    36 months
    
    24 months
    
    18 months
    
    12 months
    
    12 months
    
    
    12 monthsForeclosure
    
    36 months
    
    24 months
    
    18 months
    
    12 months
    
    12 months
    
    
    12 months





|    |  |                                                                                                                                                                                                                                                                                                                       
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) |  | Maximum amount not available at all FICOs                                                                                                                                                                                                                                                                             
|   
|(2) |  | No late mortgage payments allowed for 100% CLTV.                                                                                                                                                                                                                                                                      
|   
|(3) |  | FICO means a credit score developed by Fair Issac Co.                                                                                                                                                                                                                                                                 
|   
|(4) |  | 0x30 means no late payments, 1x30 means maximum of one 30 day late payment, 2x30 means maximum of two 30-day late payments, 1x60 means
maximum of one 60 day late payment, 1x90 means maximum of one 90-day late payment; and 2x90 means maximum of two 90-day late payments, in each
case during the prior 12 months.
|   
|(5) |  | Bankruptcy means time from Chapter 7 discharge or from Chapter 13 filing.                                                                                                                                                                                                                                             

We
evaluate our underwriting guidelines on an ongoing basis and periodically modify the
guidelines to reflect our current assessment of various issues related to an underwriting
analysis. In addition, we may adopt new underwriting guidelines, or modify existing
underwriting guidelines as we deem appropriate for any new loan products that we may offer
or to comply with requirements of the buyers of the securities issued in our
securitizations or our loans.

- 11 -

---

Table of Contents

# Quality Control

Our
loan quality control process is designed to help us ensure sound lending practices and
compliance with our underwriting guidelines. As of December 31, 2005, we had 23
employees performing quality control and pre-funding and post-funding audits. Before
funding a loan, the quality control personnel on the loan processing team will perform a
pre-funding quality control audit, which consists of the verification of a
borrowers credit profile and employment utilizing automated services and verbal
verification. One of the services we use is an automated data integrity search and scoring
system, which helps us identify discrepancies between the information provided by the
borrower on their loan application and the information retained by national credit
reporting agencies. Properties underlying our mortgage loans are typically appraised by an
appraiser that is nationally recognized and selected by the submitting broker. We assign
all original appraisals for review to a nationally recognized independent appraisal review
company, which will perform either a desk or a field review of the subject property
depending on the size of the mortgage loan, to confirm the collateral securing the note
is adequate prior to funding. In addition to the quality control personnel assigned to our
integrated loan processing teams, we have two additional and separate groups of quality
control personnel. One quality control group conducts post-funding audits on each loan and
the other performs a random audit on approximately 10% of the number of our funded loans.
The post-funding audit on each loan is a review to ensure that every document required by
the underwriters for that loan is in the loan file. We do not release fees owed the broker
until this audit has been completed. The random audit also verifies that each document required
by the underwriters is in the loan file and verifies occupancy if the audited loan is
secured by owner-occupied real estate.

Funding and Sales of
Mortgage Loans

Warehouse and Repurchase
Facilities

As
of December 31, 2005, we had three warehouse facilities with two financial institutions
for a total funding capacity of $504 million. This included an early purchase facility
with Washington Mutual which had a maximum concentration amount of $400 million and a
repurchase agreement with Lehman Brothers which had a maximum commitment amount of $100
million. The cost of borrowing on these lines are a variable rate equal to 1 month LIBOR
plus a margin between 1.0% and 2.75%. On some of our warehouse lines, the cost of
borrowing on loans that are aged more than a specified time period would increase to a
margin of up to 5%. See Managements Discussion and Analysis of Financial
Condition and Results of Operations.

Mortgage Loan Production

# Our Loan Products

While
we originate some fixed rate mortgage "FRM" loans, a substantial portion of our loans
are adjustable rate mortgages "ARMs", which we divide into floating ARMs and hybrid
ARMs. Our floating ARMs are indexed to the one-to-six month LIBOR or the one month Moving
Treasury Average "MTA" to match the interest rate adjustment period of the loan. For
hybrid ARMs, however, the initial interest rate is fixed for a one-to-seven year period
before converting to an ARM. During the year ended December
31, 2005, 61.0% of our mortgage loan production was interest rate only ARMs, compared to
53.2% for the year ended December 31, 2004. We have recently begun to originate optional
payment ARMs, or Pay Option ARMs, which allow our borrowers to vary their monthly payment,
within certain parameters, to match their personal cash flow. These Pay Option ARMs have
a potential for a higher rate of borrower default than our other ARM products because Pay
Option ARMs allow deferred interest to be added to the principal balance (negative
amortization), up to a cap at which point the loan converts to a fully amortizing loan with
potentially larger monthly payments than the borrower had been making. For the year ended December 31,
2005, approximately 10.7% of the loans we originated were Pay Option ARMs. In addition,
most of our mortgage loans have prepayment penalties if the loan is prepaid in full before its
maturity. Some of our loans with prepayment penalties have an exception to that
penalty if the loan is prepaid in full because of the sale of the related real estate. For
the year ended December 31, 2005, approximately 76.3% of the loans we originated had
prepayment penalties as compared with 68.3% for the year ended December 31, 2004.

- 12 -

---

Table of Contents

The interest rate on ARMs is determined by adding the "gross margin" amount to the "index" rate.
The index most commonly used in our loan programs is the six-month LIBOR, however, we also offer alternative
indices such as one-month LIBOR and the one-month MTA. The gross margin is a predetermined
percentage that, when added to the index, gives the borrower the interest rate used in the calculation
to determine interest due. It is common in the beginning stages of an ARM loan to allow the borrower to
pay a rate lower than the rate that would be determined by adding the margin to the index. Over
time, the rate adjusts upward such that eventually the interest rate the borrower pays
will take into account the index plus the entire margin amount.

Our
Pay Option ARM, one of our floating ARM products, allows borrowers to choose each month,
subject to certain limitations, to repay their mortgage loan pursuant to one of four
options:

- (i)  a "minimum monthly payment" option, whereby an annually-adjusted minimum monthly payment is set and which may lead to
                  negative amortization, because any portion of interest not currently paid by the borrower is deferred interest and
                  is added to the principal balance of the mortgage loan;
- (ii)  an "interest only payment" option, whereby an amount in excess of the minimum monthly payment is paid to prevent
                  negative amortization;
- (iii)  a "fully amortized payment--30-years" option, whereby the interest rate is reset monthly and the monthly payment
                  equals the amount of accrued interest plus an amount of principal that will cause the mortgage loan to fully
                  amortize over a 30-year period from origination; and
- (iv)  a "fully amortized payment--15 years" option, whereby the interest rate is reset monthly and the monthly payment equals
                  the amount of accrued interest plus an amount of principal that will cause the mortgage loan to fully amortize over
                  a 15-year period.  If the unpaid principal balance on the mortgage loan exceeds a 115%,
of the original principal
                  balance due to the inclusion of deferred interest, the monthly payment will be recast to amortize fully the then unpaid principal
                  balance of the mortgage loan over its remaining term to maturity.  The new monthly payment will be in an amount that
                  will be sufficient to repay the then unpaid principal in full on the maturity date in substantially equal
                  installments at the current interest rate.  After the recast, the borrower will no longer have the four payment
                  options and may be required to make substantially larger payments than was required during the preceding payment
                  periods.

There
is increasing public policy debate focused on the rapid increase in the use of loans with
interest-only features that require no amortization of principal for a protracted period
or loans with potential negative amortization features, such as our Pay Option ARMs.
Federal Reserve Board Chairman Allan Greenspan has expressed particular concern that some
households may be using these loans to purchase homes that would otherwise be
unaffordable, which may leave some mortgagors vulnerable to adverse events and an
increased risk of default. Press reports indicate that a task force of federal regulatory
agencies is preparing new underwriting and credit risk guidelines on option ARMs, such as
our Pay Option ARMs, interest-only mortgages and reduced-documentation loans offered by
the nations lenders. While these guidelines may not be directly applicable to us,
they may reflect heightened regulatory scrutiny for non-amortizing or negative
amortization loan products for certain types of borrowers.

A
substantial portion of our loans contain prepayment penalties if the loan is prepaid in
full before maturity. Borrowers always retain the right to refinance their loan, but may have to pay a
charge of up to six-month interest on 80% of the remaining principal when prepaying their
loans. Some of our loans with prepayment penalties have an exception to that penalty if
the loan is prepaid in full because of the sale of the related real estate. For the year
ended December 31, 2005, approximately 76.3% of the loans we originated had prepayment
penalties as compared with 68.3% for the year ended December 31, 2004.

- 13 -

---

Table of Contents

The
table below sets forth our broad range of product types we offer to our borrowers:

PrepaymentProduct
    
    Term
    
    Rate(1)
    
    Penalties(2)Hybrid/Adjustable-Rate Mortgages6 month
    
    30 years
    
    Adjustable-rate after first 6 months
    
    Yes1/29
    
    30 years
    
    Adjustable-rate after first 12 months
    
    Yes2/28
    
    30 years
    
    Adjustable-rate after first 24 months
    
    Yes3/27
    
    30 years
    
    Adjustable-rate after first 36 months
    
    Yes5/25
    
    30 years
    
    Adjustable-rate after first 60 months
    
    Yes7/23
    
    30 years
    
    Adjustable-rate after first 72 months
    
    YesInterest
Only-Hybrid/Adjustable-Rate
Mortgage1/29
    
    30 years
    
    Interest only for first year,
    
    YesAdjustable rate after first year2/28
    
    30 years
    
    Interest only for first 24 months;
    
    YesAdjustable-rate after first 24 months3/27
    
    30 years
    
    Interest only for first 36 months;
    
    YesAdjustable-rate after first 36 months5/25
    
    30 years
    
    Interest only for first 60 months;
    
    YesAdjustable after first 60 months7/23
    
    30 years
    
    Interest only for first 84 months;
    
    YesAdjustable after first 84 monthsPay Option ARM
    
    30 years
    
    Monthly payment varies based on
    
    Yesborrower's option subject to anegative amortization cap.Fixed-Rate Mortgages15 Year(3)
    
    15 years
    
    Fixed
    
    Yes20 Year
    
    20 years
    
    Fixed
    
    Yes30 Year(4)
    
    30 years
    
    Fixed
    
    Yes





|    |  |                                                                                                                                                                                                     
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) |  | For our hybrid/adjustable-rate mortgage loans, the rate is calculated
every six months after the initial rate adjustment period.                                                                    
|   
|(2) |  | Certain prepayment penalties apply within the first three years
subject to state imposed limitations. We typically offer rate options that do not include
prepayment penalties on all loan products.
|   
|(3) |  | We also offer 15 year fixed-rate mortgages with interest-only payment for the first 60 months.                                                                                                      
|   
|(4) |  | We also offer 30 year fixed-rate mortgage loans with interest-only payments
for the first 120 months.                                                                                               

- 14 -

---

Table of Contents

# Mortgage Loan Production

Overview

We
originate mortgage loans through our wholesale (which includes our correspondent
production) and retail channels. Having two channels allows us to diversify our production
without becoming reliant on any one particular segment of the mortgage loan market. For
the year ended December 31, 2005 and the year ended December 31, 2004, we originated
approximately $1.7 billion and $1.0 billion of mortgage loans, respectively, of which
approximately 88.9% and 82.9%, respectively, were generated through our wholesale channel
and approximately 11.1% and 17.1%, respectively, were generated through our retail
channel. Over the past five calendar years our originations have grown at 61.0% compounded
growth rate.



# Total Loan Production

Our
total loan production increased 68.7% in the year ended December 31, 2005 compared with
the same period in 2004. This increase was driven primarily by 93.3% increase in our Alt-A originations, as our
conforming, other non-conforming, and subprime originations all experienced declines during this period. The
growth in our Alt-A originations was across all of our Alt-A product lines, but
originations in our Stated Income Documentation/Verified Assets and No
Income/Verified Assets programs showed the largest gain in dollar volume.
Our Stated Income
Documentation/Verified Assets program accounted for approximately 60.1% of
the increase in our Alt-A originations.We
experienced an increase in our average loan size and an increase in our weighted average
median credit scores during the year ended December 31, 2005. We believe that the increase
in our average loan balance was primarily attributable to the rising sales price and
appraisal value of homes for which we originated loans. 

        We also saw a slight decrease in
the weighted average interest rate on our adjustable rate production during the year ended
December 31, 2005, which we believe was primarily attributable to increased volume of
origination of Option ARM loans with lower starting rates. Our weighted average fixed
interest rate increased to 8.9% for the year ended December 31, 2005, from 7.7% for the
year ended December 31, 2004, primarily due to higher interest rates in the market. Our weighted
average interest rate on our adjustable rate mortgage loans decreased from 5.9% for the
year ended December 31, 2004 to 5.8% for the year ended December 31, 2005 as a result of
the introduction of lower initial rates on some of our adjustable rate products. The
percentage of our production with prepayment penalties increased to 76.3% in the year
ended December 31, 2005 from 68.3% in the year ended December 31, 2004, primarily as a
result of a change in our underwriting guidelines.

- 15 -

---

Table of Contents

The
following tables set forth selected information about our total loan production and
purchases for the years ended December 31, 2005, 2004, and 2003.

For the Year Ended December 31,2005
    
    
    2004
    
    
    2003(dollars in thousands)Alt-A LoansDocumentation:Full Documentation
    
    $
    145,629
    
    
    $
    79,323
    
    
    $
    21,491Stated Income Documentation/Verified Assets
    
    
    1,145,504
    
    
    
    660,651
    
    
    
    135,769Stated Income Documentation/Stated Assets
    
    
    76,146
    
    
    
    67,941
    
    
    
    22,41112 Months Bank Statements
    
    
    10,793
    
    
    
    -
    
    
    
    -No Income Documentation/Verified Assets
    
    
    214,601
    
    
    
    8,146
    
    
    
    4,212No Income Documentation/Stated Assets
    
    
    -
    
    
    
    -
    
    
    
    -No Income/No Assets/No Employment
    
    
    60,357
    
    
    
    35,929
    
    
    
    15,531HELOC
    
    
    18,627
    
    
    
    12,610
    
    
    
    2,085Total Alt-A Loans
    
    
    1,671,657
    
    
    
    864,600
    
    
    
    201,499Other Nonconforming Loans
    
    
    3,812
    
    
    
    6,517
    
    
    
    108,237Subprime Loans(1)
    
    
    5,113
    
    
    
    35,904
    
    
    
    29,314Total Non-Conforming (Alt-A, Other, Subprime)
    
    
    1,680,582
    
    
    
    907,021
    
    
    
    339,050Conforming Loans
    
    
    58,071
    
    
    
    123,403
    
    
    
    289,311Total Production
    
    $
    1,738,653
    
    
    $
    1,030,424
    
    
    $
    628,361





|    |  |                                                                                                                                                                                                         
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) |  | We defined subprime loans as loans made to borrowers with a weighted average credit score generally of
620 or less or have had more than one delinquent mortgage payment during the preceding 12
months.

For the Year Ended December 31,2005
    
    
    2004
    
    
    2003(dollars in thousands)(1)Loan production
    
    $
    1,738,653
    
    
    $
    1,030,424
    
    
    $
    628,361Average principal balance per loan
    
    
    199
    
    
    
    189
    
    
    
    214Number of loans originated
    
    
    8,726
    
    
    
    5,448
    
    
    
    2,933Percentage of first mortgage loans owner occupied
    
    
    62.7%
    
    
    
    68.5%
    
    
    
    85.0%Percentage with prepayment penalty
    
    
    76.3%
    
    
    
    68.3%
    
    
    
    27.6%Weighted average median credit score(2)
    
    
    694
    
    
    
    691
    
    
    
    703Percentage fixed rate mortgages
    
    
    17.5%
    
    
    
    18.3%
    
    
    
    57.6%Percentage adjustable rate mortgages
    
    
    82.5%
    
    
    
    81.7%
    
    
    
    42.4%Weighted average interest rate:Fixed rate mortgages
    
    
    8.9%
    
    
    
    7.7%
    
    
    
    6.2%Adjustable rate mortgages
    
    
    5.8%
    
    
    
    5.9%
    
    
    
    6.2%





| |  |                                                                                                           
| |  | ----------------------------------------------------------------------------------------------------------
| |  | (1) The credit score is determined based on the median of Equifax, TransUnion, and
Experian credit scores.

For the Year Ended December 31,2005
    
    
    2004
    
    
    2003(dollars in thousands)First lien
    
    $
    1,516,109
    
    
    $
    922,015
    
    
    $
    604,983Average balance  first lien
    
    
    278
    
    
    
    252
    
    
    
    243Second lien
    
    
    222,544
    
    
    
    108,409
    
    
    
    23,378Average balance  second lien
    
    
    68
    
    
    
    60
    
    
    
    52Total
    
    $
    1,738,653
    
    
    $
    1,030,424
    
    
    $
    628,361Weighted average LTV
    
    
    70.1%
    
    
    
    72.2%
    
    
    
    68.9%Weighted average CLTV
    
    
    89.5%
    
    
    
    85.8%
    
    
    
    75.9%


- 16 -

---

Table of Contents

# Loan Production by Product Type

We
experienced an overall increase in our total ARM and FRM productions in the year ended December
31, 2005, as compared to 2004. However, our ARM and FRM production as a percentage of total
origination showed little change in the year ended December 31, 2005 compared to 2004.
During the year ended December 31, 2005, 62.1% of our mortgage loan production was
interest rate only ARMs, compared to 53.2% in 2004. As a percentage of our total loan
originations, our ARMs increased to 82.5% for the year ended December 31, 2005, as
compared to 81.7% and 42.4% for the years ended December 31, 2004 and 2003, respectively.
We believe that the trend toward ARMs is the result of the rising interest rate
environment and low introductory rates on our ARMs.

The
following table shows the composition of our loan production based on product type for the
years ended December 31, 2005, 2004, and 2003.

|                                                   | For the Year Ended December 31,
|-------------------------------------------------- | -------------------------------
|
|
|
|Floating adjustable rate mortgages                 | $215,703                       
|Floating adjustable rate mortgages - interest only | 198,068                        
|1 year hybrid                                      | 2,851                          
|1 year hybrid interest only                        | 94,974                         
|2 year hybrids (2)                                 | 115,459                        
|2 year hybrids interest only                       | 634,662                        
|3-5 year hybrids (2)                               | 17,484                         
|3-5 year hybrids interest only                     | 127,256                        
|7-10 hybrids                                       | 3,849                          
|7-10 hybrids interest only                         | 24,552                         
|                                                   |                                
|Total                                              | 1,434,858                      
|                                                   |                                
|Fifteen year                                       | 2,243                          
|Fifteen year-interest only                         | 19,616                         
|Thirty year                                        | 45,455                         
|Thirty year - interest only                        | 31,267                         
|Balloons, and other fixed rate mortgages (3)       | 205,214                        
|                                                   |                                
|Total                                              | 303,795                        
|                                                   |                                
|Total ARM & FRM                                    | $1,738,653                     

_________________

(1)    
Percentages may not sum because of rounding. 
(2)    Hybrid loans are loans that have a fixed component for two to seven years, and
                    after that specified time period, become adjustable rate loans.
(3)    Balloon loans are loans with payments calculated according to a 30-year
                    amortization schedule, but which require the entire unpaid principal and accrued
                    interest to be paid in full on a specified date that is less than 30 years after
                    origination.

- 17 -

---

Table of Contents

Mortgage Loan Production by Borrower Credit Score

Since
the year ended December 31, 2003, the mix of weighted average credit score of our borrower
has converged to the 620-709 range which we believe is a primarily result of the continued
growth in our Alt-A product lines.

The
following table sets forth information concerning our mortgage loan production by borrower
credit score for the periods shown:

|        | For the Year Ended December 31,
|------- | -------------------------------
|
|
|
|> 709   | $  638,168                     
|680-709 | 390,773                        
|660-679 | 278,766                        
|640-659 | 215,968                        
|620-639 | 159,366                        
|600-619 | 24,616                         
|580-599 | 14,803                         
|550-579 | 8,391                          
|520-549 | 5,182                          
|500-519 | 2,390                          
| 499   | 230                            
|        |                                
|        | $1,738,653                     

_________________

(1)    
          Credit score is determined based on the median of Equifax, TransUnion, and
          Experian credit scores. 
(2)     Percentages may not sum because of
rounding.

- 18 -

---

Table of Contents

Loan Production by Income Documentation

We
experienced significant change in our loan production by income documentation during the
year ended December 31, 2005 as compared to the year ended December 31, 2004. Our loan
production with full documentation declined from 15.6% of total production for year ended
December 31, 2004 to 10.1% of total production for the year ended December 31, 2005. Our
limited documentation programs saw corresponding increases during year ended December 31,
2005, as compared to the year ended December 31, 2004, especially our Stated
Income/Verified Assets program which increased from $743. 6 million for the year
ended December 31, 2004 to approximately $1,180.3 million for the year ended December 31,
2005 and our No Income Documentation/Verified Assets program which increased
from approximately $8.1 million for the year ended December 31, 2004 to approximately $214.6
million for the year ended December 31, 2005. To remain competitive, we will continue to
offer more limited document programs. Accordingly, we expect that the limited
documentation loan programs will constitute the majority of our production in the future.

The
following table shows the composition of our loan production based on income documentation
for the years ended December 31, 2005, 2004, and 2003.

For the Year Ended December 31,2005
    
    
    2004
    
    
    2003(dollars in thousands)Percentage of
    
    
    
    
    
    
    Percentage of
    
    
    
    
    
    
    Percentage ofIncome documentation
    
    Amount
    
    
    Production
    
    
    Amount
    
    
    Production
    
    
    Amount
    
    
    ProductionFull Documentation
    
    $
    176,054
    
    
    
    10.1
    %
    
    $
    160,849
    
    
    
    15.6
    %
    
    $
    413,131
    
    
    
    65.7
    %Stated Income Documentation/Verified
Assets
    
    
    1,180,291
    
    
    
    67.9
    %

    
    
    743,614
    
    
    
    72.2
    %

    
    
    167,934
    
    
    
    26.7
    %Stated Income Documentation/Stated Assets
    
    
    76,146
    
    
    
    4.4
    %

    
    
    67,941
    
    
    
    6.6
    %

    
    
    24,879
    
    
    
    4.0
    %12 Months Bank Statements
    
    
    10,646
    
    
    
    0.6
    %

    
    
    1,335
    
    
    
    0.1
    %

    
    
    590
    
    
    
    0.1
    %No Income Documentation/Verified Assets
    
    
    214,601
    
    
    
    12.3
    %

    
    
    8,146
    
    
    
    0.8
    %

    
    
    4,212
    
    
    
    0.7
    %No Income Documentation/Stated Assets
    
    
    -
    
    
    
    0.0
    %

    
    
    -
    
    
    
    0.0
    %

    
    
    -
    
    
    
    0.0
    %No Income/No Assets/No Employment
    
    
    62,287
    
    
    
    3.6
    %

    
    
    35,929
    
    
    
    3.5
    %

    
    
    15,531
    
    
    
    2.5
    %HELOC
    
    
    18,627
    
    
    
    1.1
    %

    
    
    12,610
    
    
    
    1.2
    %

    
    
    2,084
    
    
    
    0.3
    %TOTAL
    
    $
    1,738,653
    
    
    
    100.0
    %
    
    $
    1,030,424
    
    
    
    100.0
    %
    
    $
    628,361
    
    
    
    100.0
    %


_________________

(1)    
          Percentages may not sum because of rounding.

- 19 -

---

Table of Contents

Loan Production by Borrower Purpose

We
experienced little change in the mix of our borrower purpose within our loan production
between the year ended December 31, 2005 and the year December 31, 2004. We did, however,
experience a 99.2% increase in the volume of "cashout refinance" mortgage, and a 67.3% increase
 in the volume of purchase mortgage loans for the year ended
December 31, 2005 as compared to the same period ended December 31, 2004. We anticipate
the percentage of our purchase mortgage loan production may remain higher than those loans originated through
refinancings in the future as a result of our expansion into new geographic areas and our strategically
focused marketing efforts.

The
following table shows the composition of our loan production based on borrower purpose for
the years ended December 31, 2005, 2004, and 2003.

For the Years Ended December 312005
    
    
    2004
    
    
    2003(dollars in thousands)Percentage of
    
    
    
    
    
    
    Percentage of
    
    
    
    
    
    
    Percentage ofAmount
    
    
    Originations
    
    
    Amount
    
    
    Originations
    
    
    Amount
    
    
    OriginationsCash-out refinance
    
    $
    503,308
    
    
    
    28.9%
    
    
    $
    252,645
    
    
    
    24.5%
    
    
    $
    238,461
    
    
    
    38.0%Purchase
    
    
    1,157,722
    
    
    
    66.6%
    
    
    
    691,991
    
    
    
    67.2%
    
    
    
    211,930
    
    
    
    33.7%Rate or term refinance
    
    
    77,623
    
    
    
    4.5%
    
    
    
    85,788
    
    
    
    8.3%
    
    
    
    177,970
    
    
    
    28.3%Total
    
    $
    1,738,653
    
    
    
    100.0%
    
    
    $
    1,030,424
    
    
    
    100.0%
    
    
    $
    628,361
    
    
    
    100.0%


_________________

(1)    
          Percentages may not sum because of rounding.

- 20 -

---

Table of Contents

Geographic Distribution

Our
production levels by region fluctuated during the year ended December 31, 2005,
with a smaller percentage of total volume of our loans originated in California and a higher
percentage originated in the South and Mid-Atlantic regions compared to the year ended December 31,
2004. We have experienced similar trends over the past several years. For the year ended
December 31, 2005, our loan production in California constituted 64.2% of our total loan
production during that period, down from 71.4% for the year ended December 31, 2004.

The
following table sets forth the percentage of all loans originated or purchased by us by
region for the years ended December 31, 2005, 2004, and 2003.

For the Years Ended December 312005
    
    
    2004
    
    
    2003(dollars in thousands)Percentage of
    
    
    
    
    
    
    Percentage of
    
    
    
    
    
    
    Percentage ofAmount
    
    
    Originations
    
    
    Amount
    
    
    Originations
    
    
    Amount
    
    
    OriginationsCalifornia
    
    $
    1,116,519
    
    
    
    64.2%
    
    
    $
    735,838
    
    
    
    71.4%
    
    
    $
    574,108
    
    
    
    91.4%South (2)
    
    
    272,457
    
    
    
    15.7%
    
    
    
    103,763
    
    
    
    10.1%
    
    
    
    12,276
    
    
    
    2.0%Mid Atlantic (3)
    
    
    90,123
    
    
    
    5.2%
    
    
    
    29,180
    
    
    
    2.8%
    
    
    
    1,975
    
    
    
    0.3%Midwest (4)
    
    
    33,660
    
    
    
    1.9%
    
    
    
    36,098
    
    
    
    3.5%
    
    
    
    8,887
    
    
    
    1.4%West (5)
    
    
    113,412
    
    
    
    6.5%
    
    
    
    61,945
    
    
    
    6.1%
    
    
    
    23,044
    
    
    
    3.6%Southwest(6)
    
    
    98,640
    
    
    
    5.7%
    
    
    
    50,457
    
    
    
    4.9%
    
    
    
    6,163
    
    
    
    1.0%New England (7)
    
    
    13,842
    
    
    
    0.8%
    
    
    
    13,143
    
    
    
    1.2%
    
    
    
    1,908
    
    
    
    0.3%Total.
    
    $
    1,738,653
    
    
    
    100.0%
    
    
    $
    1,030,424
    
    
    
    100.0%
    
    
    $
    628,361
    
    
    
    100.0%


_________________

(1)    
Percentages may not sum because of rounding. 
          (2)       Alabama, Arkansas, Florida, Georgia, Kentucky, Louisiana, Mississippi,
           Missouri,
               North Carolina, South Carolina, Tennessee, Virginia, and West Virginia. 
          (3)      D.C., Delaware, Maryland, New Jersey, and Pennsylvania.
          (4)     Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Nebraska,
              North Dakota, Ohio, South Dakota, and
               Wisconsin. 

          (5)     Alaska, Colorado, Hawaii, Idaho, Montana, Nevada, Oregon, Utah,
               Washington, and Wyoming. 

          (6)     Arizona, New Mexico, Oklahoma, and Texas. 
          (7)     Connecticut, Maine, Massachusetts, and Rhode Island.

- 21 -

---

Table of Contents

# Loan Sales

Historically,
we have followed a strategy of selling for cash substantially all of our loan originations
on a servicing released basis. We have sold our loans to a variety of buyers including
Bear Stearns, CBASS, DLJ Mortgage Capital, IMPAC Funding Corporation, Lehman Brothers
Bank, and UBS Warburg, among others. We anticipate that we will continue to sell
the mortgage loans we originate in substantially the same manner. We sold $1,740.7 million of loans during 2005 as compared to $863.7 million of
loans during 2004 and $663.6 million during 2003. Loan sales are made on a regular basis
and as optimal pool size is accumulated. We did not sell any loans through securitization
during these periods.

Cash
gain on sale of mortgage loans represented 77.3% of our total revenue for 2005, as
compared to 81.6% and 83.2% of our total revenue for 2004 and 2003 respectively. We
maximize our cash gain on sale on mortgage loans by closely monitoring the buyers
requirements and grouping loan types that meet each buyers purchase criteria for
highest pricing.

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

During
the year ended December 31, 2005, we repurchased twenty-eight mortgage loans with an
aggregate principal loan value of $3.4 million due to early payment defaults by the
borrowers. These mortgages are classified as loans held for sale until sold or until we
foreclose at which time the asset would be reclassified as real estate held for sale. As
of December 31, 2005, we had outstanding requests to repurchase loans with an aggregate
value of $10.1 million, for which we have taken loss reserves of $1.0 million. As of
December 31, 2004, we had requests to repurchase loans due to early payment defaults in an
aggregate amount of $4.3 million. In addition, on December 31, 2005 we had loans with an
aggregate principal balance of $0.6 million wherein the buyer notified us of alleged
deficiencies in documentation or underwriting procedures. At December 31, 2005, we had a
$1.0 million reserve for impairment of mortgage loans to be repurchased and mortgage loans
held for sale compared to a $0.5 million reserve in the comparable period in 2004. The
increase in the reserve is the result of higher repurchase demands, which resulted
primarily from the significant increase in overall loan originations during 2005 versus 2004.

In
some cases where the buyers request us to repurchase loans due to early payment defaults,
we agree mutually with the purchaser to change the pricing for the purchased loan in lieu
of repurchase. The effect of repricing loans is realized as a reduction in our gain from
sale of loan during the period in which it occurs. Subsequently, we would not have any
obligation to repurchase the same loan for payment default. In other cases we provide
indemnification against losses to the purchaser in lieu of repurchase. We make a provision
to the reserve for losses due to impairment of such assets to the extent that such losses
are assessable at the close of the reporting period.

- 22 -

---

Table of Contents

Securitization Capability

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

Securitizations

In
a securitization, we will sell a pool of loans to a trust, established specifically for
the securitization, for a cash purchase price and a certificate evidencing our residual
interest ownership in the trust. The trust raises the cash portion of the purchase price
by either selling securities representing interests in the loans in the trust or
securities secured by the loans in the trust. Following the securitization, purchasers of
securities receive the principal collected, including prepayments, on the loans in the
trust. In addition, purchasers receive a portion of the interest on the loans in the trust
equal to the specified interest rate on the principal balance or the stated interest on
the bond. We receive the net interest income, if any, after payment of interest due to
holders of the securities issued, servicing fees (net of any fees from master servicing
agreements) if any, guarantor fees and other trust expenses, net of the losses due to
delinquencies and defaults on the mortgage loans, and provided the specified
over-collateralization requirements are met.

After
the reorganization, we intend to structure the securitization of the loans that we retain
in our mortgage loan portfolio as financings rather than sales for tax and accounting in
accordance with generally accepted accounting principles in the United States, or GAAP.
Securitizations that are structured as financings do not meet the qualifying special
purpose entity criteria under Statement of Financial Accounting Standards No. 140,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities, Replacement of FASB Statement No. 125 (SFAS No. 140) and related
interpretations because after the loans are securitized, the securitization trust may
acquire derivatives relating to beneficial interests retained by us. One of our qualified
REIT subsidiaries, as holder of the equity certificate, may also use its commercial
judgment in determining whether to sell or work out any loans securitized through the
securitization trust that become troubled or whether to exercise the cleanup call and
purchase the mortgage loans remaining in the securitization trust. Accordingly, following
a securitization, the mortgage loans remain on our balance sheet, and the securitization
indebtedness replaces the warehouse facility debt associated with the securitized mortgage
loans. We will record interest income on the mortgage loans and interest expense on the
securities issued in the securitization over the life of the securitization, and do not
recognize a gain or loss upon completion of the securitization. This accounting treatment
more closely matches the recognition of income with the actual receipt of cash payments,
and is expected to decrease our earnings volatility compared to those companies that
structure their securitizations as sale transactions for GAAP purposes. The cash flow
available to us will vary depending upon a number of factors, including the following:

Interest
rate spread. A substantial portion of the net interest income generated by our
securitized loans will be based upon the spread between the weighted average interest
earned on the mortgage loans and the interest payable to holders of the mortgage-backed
securities collateralized by our loans. The income we receive from the securitizations
structured as financings is subject to fluctuation from time to time. This is because, in
the case of hybrid/adjustable-rate loans, the interest rate on the underlying mortgage
loans is generally fixed for the first two or three years from origination, and fixed for
the life of the loan in the case of fixed rate loans, while the holders of the applicable
securities are generally paid based on a monthly adjustable LIBOR-based yield. Therefore,
an increase in LIBOR reduces the net income we receive from, and the value of, these
mortgage loans. In addition, the net interest income we receive from securitizations will
be reduced according to the terms of the securitization documents if there are a
significant amount of loan defaults or a large amount of loan prepayments, especially
defaults on, or prepayments of, loans with interest rates that are high relative to the
rest of the asset pool. We anticipate that we will attempt to mitigate at least a portion
of this net interest margin variability by purchasing interest rate caps or entering into
interest rate swap agreements.

Overcollateralization.
          We expect that our securitizations will also be structured to provide that all
          or a significant portion of the excess interest generated by the pool of loans
          be required to be used to create over-collateralization instead of being
          released to us, until the over-collateralization targets established by the
          applicable rating agencies, or the financial guaranty insurer, in the case of
          certain securitization trusts, are reached. The required level of over
          collateralization may be increased or may be prevented from decreasing as would
          otherwise be permitted if losses or delinquencies exceed defined levels. This
          could have the effect of reducing or even eliminating the net interest income
          payments distributed to us.

We
will record interest income on the mortgage loans and interest expense on the securities
issued in the securitization over the life of the securitization, and will not recognize a
gain or loss upon completion of the securitization for tax and GAAP purposes. This
accounting treatment will more closely match the recognition of income with our actual
receipt of cash payments, which we believe will report more stable results of operations
compared to companies that structure their securitizations as sale transactions for both
tax and GAAP purposes.

- 23 -

---

Table of Contents

# Servicing

Loan
servicing is the administration function whereby an entity collects monthly payments from
a mortgage borrower and disburses those funds to the appropriate parties. The servicer has
to account for all payments, maintain balances in certain accounts for each loan, maintain
escrow accounts for real estate taxes, remit the correct amount of principal and interest
monthly to the holder of the loan and handle foreclosures as required.

To
date, we have performed the servicing functions on the mortgage loans we originated on an
interim basis before the transfer of the servicing to the purchasers of the loans, which
is generally between 60 and 90 days after the origination of the loan. At December 31,
2005, we serviced approximately $301.4 million in mortgage loans on an interim
basis, with a staff of 8 people, as compared with $156.9 million with a staff of 8
people at December 31, 2004.

After
the reorganization, as we begin to accumulate loans in our portfolio we may retain the
mortgage servicing rights and subcontract our servicing obligations to independent third
parties pursuant to sub-servicing agreements. Retaining the servicing rights and
sub-contracting the servicing obligation, however, will provide us the responsibility and
opportunity to continually monitor the performance of servicers or sub-servicers through
performance reviews and regular site visits. Since a substantial increase in our
delinquency rate or foreclosure rate could adversely affect our ability to access the
capital markets for our financing needs (including securitizations), having the ability to
monitor our servicers and replace our servicers could be an effective quality control
tool. Depending on our reviews, we may in the future take an ever more active role to
assist servicers or sub-servicers in the servicing of our mortgages. These master
servicing rights would also require us to perform other services including
collecting loan payments from loan servicers and remitting loan payments, less master
servicing fees receivable and other fees, to a trustee or other purchaser for each series
of mortgage-backed securities or loans master serviced. In addition, as master servicer,
we would monitor compliance with our servicing guidelines and would be required to
perform, or to contract with a third party to perform, all obligations not adequately
performed by any loan sub-servicer. We may also be required to advance funds to cover
interest payments not received from borrowers depending on the status of their mortgages.
We may also earn income on principal and interest payments we receive from our borrowers
until those payments are remitted to the buyers in those mortgages. Currently, our
servicing operations are not capable of handling such master servicing duties with respect
to the mortgage loans in our portfolio. In addition, we may need to be rated by the
principal rating agencies. We cannot assure you that we will be able to successfully
expand our own servicing functions to fulfill master servicer duties.

Interest Rate Management

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

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

- 24 -

---

Table of Contents

# Our Operating and
Financial Policies

The
following is a discussion of our anticipated policies with respect to distributions,
investments, financing, lending, and certain other activities. After the reorganization,
our policies with respect to these activities may be reviewed and amended or revised from
time to time by our Board of Directors or as applicable, the directors of our
subsidiaries, without a vote of our stockholders.

Investment Policies

Following
completion of the reorganization, we intend to retain a substantial portion of the
mortgage loans we originate on our balance sheet. We expect that our mortgage loan
portfolio will consist primarily of a mix of fixed and adjustable rate, conforming and
non-conforming mortgage loans secured by first and second mortgages on residential real
property. We expect to finance these mortgage loan originations using our consolidated
equity capital, borrowed funds, and securitizations structured as financings. We intend to
follow this strategy until we have built our mortgage loan portfolio to a size that is
consistent with our leverage policy. Once we are fully leveraged, without raising
additional capital, we expect to begin selling a substantially larger portion of the
mortgage loans we originate to manage our financial leverage and maintain attractive risk
adjusted returns to our stockholders.

We
may acquire other investments that include mortgage-backed securities (not including any
such securities that we may issue), collateralized mortgage obligations, mortgage
derivative securities, including interest only securities and principal only securities,
equity and debt securities issued primarily by other mortgage-related finance companies,
interests in mortgage-related collateralized bond obligations, other subordinated
interests in pools of mortgage-related assets, and commercial mortgage loans and
securities.

Investments
in Real Estate or Interests in Real Estate. Our investment policies currently do not
include making direct investments in real estate or interests in real estate other than as
described below.

Investments
in Real Estate Mortgages. We will engage primarily in the business of originating,
purchasing and selling first-lien and second-lien conforming and non-conforming
residential mortgage loans. Initially, we expect to conduct our origination business
primarily through our taxable REIT subsidiaries. We will originate loans on the basis of
the borrowers ability to repay the mortgage loan, the borrowers historical
pattern of debt repayment, and the appropriateness of the loan collateral (including the
amount of equity in the borrowers property (as measured by the borrowers
loan-to-value ratio or LTV). The interest rate and maximum loan amount are determined
based upon our underwriting guidelines.

Securities
of or Interests in Persons Primarily Engaged in Real Estate Activities and Other
Issuers. We have not, and we currently do not expect to, invest in securities of
entities engaged in real estate activities or securities of other issuers, including to
exercise control over such entities, but we may make such investments to satisfy the REIT
qualification tests. If we determine to make such investments, subject to the percentage
of ownership limitations and gross income tests necessary for REIT qualification, we may
acquire all or substantially all of the securities or assets of other REITs or other
entities where such investments would be consistent with our investment policies. No such
investments will be made, however, if the proposed investment would cause us to be an
investment company under the Investment Company Act. We may also invest our
excess cash in short term, liquid instruments such as U.S. Treasury bills, short term debt
issued by Fannie Mae or Freddie Mac, overnight investments and short term commercial
paper. We may engage in the purchase and sale of investment securities. We do not, and do
not intend to, underwrite the securities of other issuers.

- 25 -

---

Table of Contents

Leverage Policy

We
expect to employ a leverage strategy to increase our REIT taxable income by securitizing
our mortgage loans in transactions that will be treated as financings for tax and
accounting purposes. We generally expect to borrow in excess of 10 to 15 times the amount
of our consolidated equity capital, although our actual debt to equity ratio may vary from
time to time depending on market conditions, our estimates of the stability of our
mortgage loan portfolio cash flows, and other factors deemed relevant from time to time by
our management and Board of Directors.

Hedging Policy

We
expect to conduct certain hedging activities intended to protect our mortgage loan
portfolio and related debt against the effects of major interest rate changes in a manner
consistent with our election to qualify as a REIT. Our hedging strategy will be intended
to enable us to earn consistent levels of net interest income in periods of generally
stable, as well as rising or declining, interest rates. Specifically, our hedging program
will likely be formulated with the intent of mitigating the potential adverse effects of
changes in interest rates on net interest income. We may also engage in interest rate risk
management to attempt to mitigate the volatility of earnings associated with fluctuations
in the unrealized gain (loss) on our mortgage-backed certificates, retained interests in
securitizations, mortgage servicing rights and loans held for sale.

We
intend to use several tools and risk management strategies to monitor and address interest
rate risk. These tools will allow us to monitor and evaluate our exposure to interest
rates and to manage the risk profile of our mortgage loan portfolio in response to changes
in market conditions. As part of our interest rate risk management process, we may use
swaps, caps, floors and other derivative instruments. We may also use other hedging
instruments including mortgage derivative securities, as necessary. Because we intend to
use derivative financial instruments to a greater extent than TMSF Holdings had in the
past, the aggregate costs to us of entering into contracts for these instruments are
likely to be significantly higher than in the past.

We
intend to carefully monitor, and may have to limit, our asset/liability management program
to assure that we do not realize hedging income, or hold hedges having a value, in excess
of the amounts permitted by the REIT gross income and asset tests. In the case of excess
hedging income, we may be required to pay a penalty tax for failure to satisfy one or both
of the REIT gross income tests under the Internal Revenue Code if the excess is due to
reasonable cause and not willful neglect. If our violation of the REIT gross income tests
is due to willful neglect or if the value of our hedging positions causes us to violate
one or more of the REIT asset tests, the penalty could be disqualification as a REIT. This
could leave us exposed to greater risks associated with changes in interest rates than we
would otherwise want to bear. In addition, our management may elect to have us bear a
level of risk that could otherwise be hedged when our management believes, based on all
relevant facts, that bearing such risks is advisable. We will engage in hedging for the
sole purpose of protecting against interest rate risk and not to speculate on changes in
interest rates.

Financing Policies

We
do not have a policy limiting the amount of indebtedness that we may incur. Our charter
and bylaws do not limit the amount or percentage of indebtedness that we may incur. In the
future, we may seek to extend, expand, reduce or renew our warehouse facilities or obtain
new warehouse facilities or lines of credit that may contain certain limitations on
indebtedness.

We
expect to finance our mortgage loans on a short-term basis under one of our secured and
committed warehouse facilities on a recourse basis. These loans will subsequently be
financed on a long-term basis by issuing mortgage-backed securities through securitization
transactions that are treated as financings for tax and accounting purposes.

- 26 -

---

Table of Contents

To
qualify as a REIT under the Code, we generally are required each year to distribute to our
stockholders at least 90% of our REIT taxable income (determined without regard to the
dividends paid deduction and by excluding net capital gain). We may be required to borrow
funds on a short-term basis or liquidate investments to meet the distribution requirements
that are necessary to qualify as a REIT, even if management believes that it is not in our
best interests to do so.

We
will consider a number of factors when evaluating our level of indebtedness and when
making decisions regarding the incurrence of indebtedness, including overall prudence, the
purchase price of assets to be acquired with debt financing, the estimated market value of
our assets upon refinancing and our ability to generate cash flow from our operations or
from particular assets to cover expected debt service. For additional information, see
Managements Discussion and Analysis of Financial Condition and Results of
Operations  Liquidity and Capital Resources.

Policies with Respect to Other Activities

We
have authority to offer common stock or other equity or debt securities in exchange for
assets and to repurchase or otherwise reacquire our shares of common stock or any other
securities and may engage in such activities in the future. We may issue preferred stock
from time to time, in one or more series, as authorized by our Board of Directors, without
the need for stockholder approval. We have not engaged nor do we currently intend to
engage in trading, underwriting or agency distribution or sale of securities of other
issuers. We do not presently intend to invest in the securities of other issuers other
than our wholly-owned subsidiaries. From time to time, we will evaluate investment
opportunities in other real estate related entities and may in the future invest in one or
more of these entities. At all times, we intend to make investments in such a manner as to
be consistent with the requirements for REIT qualification unless, because of changing
circumstances or changes in the Internal Revenue Code (or in Treasury Regulations), the
Board of Directors determines that it is no longer in our best interests to qualify as a
REIT.

Report to Investors

Upon
the completion of the reorganization, we will be subject to the information and reporting
requirements of the Exchange Act. Our annual reports on Form 10-K will contain financial
statements certified by independent public accountants.

# Competition

We
face intense competition in the business of originating and selling conforming and
non-conforming mortgage loans. Our competitors in the industry include other consumer
finance companies, mortgage banking companies, commercial banks, credit unions, thrift
institutions, credit card issuers and insurance finance companies. Many of these entities
are substantially larger and have considerably greater financial, technical and marketing
resources than we do. From time to time, one or more of these companies may be dominant in
the origination and sale of mortgage loans. In addition, many financial services
organizations that are much larger than us have formed national loan origination networks
offering loan products that are substantially similar to our loan programs. Competition
among industry participants can take many forms, including convenience in obtaining a
loan, customer service, marketing and distribution channels, amount and term of the loan,
loan origination fees and interest rates. In addition, the current level of gains realized
by us and our competitors on the sale of non-conforming loans could attract additional
competitors into this market. Additional competition may lower the rates we can charge
borrowers, thereby potentially lowering gain on future loan sales and future
securitizations. In the future, we may also face competition from, among others,
government-sponsored entities that may enter the non-conforming mortgage market. Existing
or new loan purchase programs may be expanded by Fannie Mae or Freddie Mac, to include
non-conforming mortgages, particularly those in the A- category, which
constitutes a significant portion of our loan production.

As
the Federal Reserve continues to raise interest rates and if the number of mortgage
refinance opportunities diminish, the mortgage industry may experience a consolidation
that may reduce the number of current correspondents and independent mortgage bankers and
brokers, reducing our potential customer base and resulting in our mortgage operations
acquiring and originating a larger percentage of mortgages from a smaller number of
customers. In addition, until and if the consolidation occurs in the mortgage industry,
price competition among competitors can affect the profitability on the sale of mortgage
loans or the return on investments if mortgage lenders are willing to cut their
profitability margins to maintain current production levels. Changes of this nature could
negatively impact our businesses.

- 27 -

---

Table of Contents

Competition
can take place on various levels, including convenience in obtaining a mortgage, service,
marketing, origination channels and pricing. We depend primarily on correspondents and
independent mortgage bankers and brokers for the acquisition and origination of mortgages.
These independent mortgage bankers and brokers deal with multiple lenders for each
prospective borrower. We compete with these lenders for the independent bankers and
brokers business on the basis of price, service, loan fees, costs and other factors.
Our competitors also seek to establish relationships with such bankers and brokers, who
are not obligated by contract or otherwise to maintain their business with us.

Regulation

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

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

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

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

- 28 -

---

Table of Contents

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

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

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

Employees

At December 31, 2005 we had 235
salaried employees and 76 commission based employees. None of our employees are subject to
a collective bargaining agreement. We believe that our relations with our employees are
satisfactory.

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

- 29 -

---

Table of Contents

# RISK FACTORS

# Risks Related to Our
Business

We may not be able to obtain the
cash required to execute our business plan.

Execution
of our business plan. We require a significant amount of cash to fund our mortgage
loan originations, to pay our mortgage loan origination expenses and to hold our mortgage
loans pending securitization or sale. We also need cash to meet our working capital
requirements, debt repayment obligations and other cash needs. We may also require cash to
meet margin calls under the terms of our warehouse facilities if there is a decline in the
market value of the mortgage loans that collateralize our indebtedness under our warehouse
facilities.

We
expect that our primary sources of cash to fund our operations will consist of:

- our warehouse facilities;
- repurchase agreements;
- the issuance of asset-backed securities in connection with
 the securitization of our mortgage loans;
- the net interest income we receive from
our mortgage loan portfolio;
- our operating profits;
- the proceeds from the sale or repayment
 of our mortgage loans; and
- the net proceeds from any offerings of
our equity or other debt securities.

We cannot
assure you that we will be able to generate the amount of cash required to successfully
execute our business plan. Our inability to access the capital markets could have a
negative impact on our growth of taxable income and also our ability to pay dividends.

We depend on our warehouse
facilities to execute our business plan and our inability to access funding could have a
material adverse effect on our results of operations, financial condition, and business.

Our
ability to fund our mortgage loans depends to a large extent upon our ability to secure
warehouse financing on acceptable terms. The Mortgage Store currently funds the mortgage
loans it originates through warehouse facilities under which it is the borrower. We can
provide no assurance that we will be successful in establishing sufficient warehouse
facilities either by increasing the amounts available under existing warehouse facilities
or by the addition of new warehouse facilities. Pending the securitization of a pool of
mortgage loans, if any, or other sale thereof, we will fund the origination of our
mortgage loans through borrowings from warehouse facilities. The majority of The Mortgage
Stores current warehouse facilities contain a sub-limit for wet funding,
which is the funding of loans for which the collateral custodian has not yet received the
related loans documents. Substantially all of our mortgage loans are initially
wet funded. As of December 31, 2005, the aggregate amount of funds
available to wet fund loans under the warehouse facilities was $111 million.

As
of December 31, 2005, we financed substantially all of our existing loans through three
warehouse facilities with two financial institutions. Each of our existing warehouse
facilities is renewable for one-year terms. Because our warehouse facilities are
short-term commitments of capital, the lenders may respond to market conditions, which may
favor an alternative investment strategy for them, making it more difficult for us to
secure continued financing. If we are not able to renew our existing warehouse facilities
or arrange for new financing on terms acceptable to us, or if we default on our covenants
or are otherwise unable to access funds under any of these facilities, we will have to
curtail our mortgage loan origination activities. This would result in decreased revenues
and profits from mortgage loan sales and our portfolio of mortgage loans.

- 30 -

---

Table of Contents

It
is possible that the lenders that provide us with financing, either under our existing
warehouse facilities or under any new warehouse facilities, could experience changes in
their ability to advance funds to us, independent of our performance or the performance of
our mortgage loans. In addition, if the regulatory capital requirements imposed on our
lenders change, they may be required to significantly increase the cost of the warehouse
facilities that they provide to us. Our lenders also may revise their eligibility
requirements for the types of residential mortgage loans they are willing to finance or
the terms of such financings, based on, among other factors, the regulatory environment
and their management of perceived risk, particularly with respect to assignee liability.
Financing of equity based lending, for example, may become more difficult in the future.
Moreover, the amount of financing we receive under our mortgage loan warehouse facilities
is directly related to the lenders valuation of the mortgage loans that secure the
outstanding borrowings. Our current mortgage loan warehouse facilities grant the
respective lender the absolute right to reevaluate the market value of the mortgage loans
that secure our outstanding borrowings at any time. In the event a lender determines that
the value of the mortgage loans has decreased, it has the right to initiate a margin call.
A margin call would require us to transfer additional mortgage loans to such lender
without any advance of funds from the lender for such transfer of mortgage loans 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.

In
July 2004, we entered into an early purchase facility with Washington Mutual where
qualifying loans are purchased by Washington Mutual immediately upon funding, provided
that we retain the right to service and resell the loans to a takeout investor for a
period of 90 days. Loan originations under provisions of this facility are recognized as
sales of loans and are not reflected on our balance sheet. For loans that we originate
through this facility, we recognize the origination fee and other lender fees at the time
of funding and all corresponding commissions and fees to be paid are recognized
immediately. If a loan is not purchased by a takeout investor within 90 days of the sale
under the early purchase facility, we are required to repurchase those loans and the loans
are put back on our balance sheet. If we were to breach the takeout investor requirement
and did not have sufficient funds to repurchase the related loans under this facility,
that breach might trigger cross-defaults in our other warehouse facilities and have a
material adverse effect on our business. In addition, if loan originations under
provisions of this facility are not recognized as sales of loans and are required to be
reflected on our balance sheet, we may breach financial covenants triggering defaults
under our warehouse facilities which may have a material adverse effect on our business.
Moreover, failure to obtain sales treatment under this facility may require us to restate
our prior financial statements which may have a material adverse effect on our business.

After the reorganization, our
investment and leverage strategy could reduce our net income and the amount available for
distributions and cause us to suffer substantial losses.

After
the reorganization, we generally expect to borrow in the range of 10 to 15 times the amount
of our consolidated equity capital, although at times our borrowings may be above or below
our expectation. We intend to incur this indebtedness by borrowing against a substantial
portion of the market value of the mortgage loans held in our portfolio. Our total
indebtedness, however, is not expressly limited by our policies and will depend on our and
each of our warehouse lenders estimates of the stability of our investment
portfolios cash flow. We may not be able to meet our debt service obligations from
our income and, to the extent we cannot, we may be required to liquidate our mortgage
loans at disadvantageous prices or raise capital, which may not be available on reasonable
terms or at all, each of which could have a material adverse effect on our results of
operations, financial condition and business. Our use of leverage could also amplify the
risks associated with other risk factors, which could reduce our net income and the amount
available for distributions or cause us to suffer a loss. For example, most of our
borrowings will be secured by the mortgage loans held in our investment portfolio. A
decline in the market value of the mortgage loans used to secure these debt obligations
could limit our ability to borrow or result in lenders requiring us to pledge additional
collateral to secure our borrowings. In that situation, we could be required to sell
mortgage loans under adverse market conditions in order to obtain the additional
collateral required by the lender. If these sales are made at prices lower than the
carrying value of the mortgage loans, we would experience losses.

- 31 -

---

Table of Contents

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

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

The covenants and restrictions in our warehouse facilities may restrict our ability to,
among other things:

- incur or guarantee additional debt;
- make certain investments or acquisitions;
- make distributions on or repurchase or redeem
 capital stock;
- engage in mergers or consolidations;
- finance mortgage loans with certain
attributes;
- reduce liquidity below certain levels;
- grant liens, incur operating losses for more
than a specified period
- enter into transactions with affiliates;
 and
- hold mortgage loans for longer than
established time periods.

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

In the future, and in any event
after the reorganization, we expect, securitize, our mortgage loans
to generate stable cash flow which may not be successful.

In
the future and in any event after the reorganization, we expect to securitize
our mortgage loans to generate cash proceeds for repayment of our warehouse facilities,
to originate additional mortgage loans and to make distributions to our stockholders. We,
however, have no experience in securitizing mortgage loans. Accordingly, we cannot assure
you that we will be successful in securitizing a substantial portion of the mortgage loans
we originate. In addition, even if we are successful in launching a securitization
program, we cannot assure you that the securitization market will continue to be available
to us on favorable terms. Also, many of our whole-loan buyers purchase our mortgage loans
intending to securitize them. The securitization market is dependent upon a number of
factors, including economic conditions in the securities markets generally and more
specifically, conditions in the asset-backed securities market. A decline in the
securitization market or a change in the markets demand for our loans could harm our
results of operations, financial condition, and business. If it is not possible or
economical for us to complete the securitization of a substantial portion of our mortgage
loans, we may be unable or limited in our ability to pay down our warehouse facilities and
originate future mortgage loans and may need to liquidate mortgage loans under adverse
circumstances, which would have a material adverse effect on our results of operations,
financial condition, liquidity, and business.

- 32 -

---

Table of Contents

Once we begin our securitization
program, poor performance of the mortgage loans in our securitization pools may impact our
ability to complete future securitizations.

Once
we begin our securitization program, the poor performance of mortgage loans we have sold
or securitized could limit our ability to sell or securitize mortgage loans in the future.
In addition, the historical performance of the mortgage loans we originate may impact the
perceived value of any future securities we may attempt to issue, and if such historical
performance is poor, could adversely affect the ratings of our securities. If rating
agencies issue unfavorable ratings or lower their rating relating to our securities, the
costs of our future securitizations could increase and we may be limited in our ability to
securitize our mortgage loans, which could have a material adverse effect on our business,
financial condition, liquidity, and results of operations. Furthermore, the rating
agencies could require us to increase the overcollateralization level for our
securitizations. Increases in our overcollateralization levels would have a negative
impact on the value of our retained interests in our securitizations and could require
additional capital to fund the overcollateralization, which may not be available on
reasonable terms, or at all, and which could have a material adverse effect on our
business, financial condition, liquidity, and results of operations.

The lack of specific loan
performance data on the mortgage loans we have originated and sold previously makes it
difficult to predict the performance of loans we intend to retain and any revenues from
those loans.

Historically,
we have sold substantially all of the mortgage loans that we originate on a
servicing-released basis and until recently we have not received loan performance data on
these loans from the third-party servicers. As a result, we have been unable to track the
delinquency, loss, and prepayment experience of our mortgage loans. Consequently, we do
not have representative historical delinquency, bankruptcy, foreclosure, default or
prepayment experience that may be referred to for purposes of estimating future
delinquency, loss, and prepayment experience of the mortgage loans we will originate in
the future. In view of our lack of historical loan performance data, it is extremely
difficult to validate our loss or prepayment assumptions used to calculate assumed net
interest income in future securitizations of our loans, which could cause us to receive
less favorable pricing terms on the mortgage-backed securities we issue compared to more
seasoned issuers with proven performance records. Differences between our assumptions and
actual performance may have a material adverse effect on the pricing, interest rates and
over-collateralization levels of our mortgage-backed securities and could have a material
adverse effect on the timing and receipt of our future revenues and our cash flow.

We may not be able to successfully
execute our credit enhancement strategies, which could restrict our access to financing
and adversely affect our business.

In
connection with our proposed future securitizations, we may provide credit enhancement for
a portion of the securities that we sell, called senior securities, to improve
the price at which those securities are sold. In the future, when we securitize our mortgage
loans, we currently expect that the credit enhancement for the senior securities will
primarily be in the form of excess interest to create and maintain overcollateralization,
which refers to the extent to which the mortgage loan balance in our securitizations
exceeds the balance of the issued debt securities, designating another portion of the
securities we issue as subordinate securities (which have a lower payment
priority and on which the credit risk from the mortgage loans is concentrated), paying for
financial guaranty insurance policies for the loans, or a combination of the foregoing.
There are no direct financial costs to the use of overcollateralization. By applying
excess cash flow (mortgage interest income net of interest on the asset-backed securities,
losses, and servicing fees) to pay down the asset-backed securities of the trust faster
than the underlying mortgages, we will be able to create and maintain any required
overcollateralization. If we use financial guaranty insurance policies and the expense of
these insurance policies increases, the net interest income we receive will be reduced. We
cannot assure you that credit enhancement features will allow us to achieve desirable
levels of net interest income from the future securitizations of our mortgage loans.

- 33 -

---

Table of Contents

The market for the subordinate
securities we will retain from our securitization may be illiquid and we may not be able
to sell subordinate securities at their stated value.

Depending
on market conditions, we may be required to issue a large amount of subordinate securities
in a future securitization to improve the price of our senior securities. We have not
issued any subordinate securities in a securitization. Accordingly, we cannot assure you
that we can sell all of the subordinate securities we issue, which means may be required
to retain a portion of the subordinate securities. These securities will have a lower
payment priority, and thus the subordinate securities are the first to bear the credit
risk from the mortgage loans and thus have the greatest risk of loss. In addition, an
active trading market for our subordinate securities may never develop. As a result, the
market for any subordinate securities we will issue could become temporarily illiquid or
trade at steep discounts, thereby reducing the cash we would receive from a sale of our
mortgage securities. This illiquidity could have a material adverse effect on our
operations.

Our delinquency ratios, our
performance, and financial condition may be adversely affected by the performance of third
parties who service our mortgages.

Historically,
The Mortgage Store sold its mortgage loans on a servicing released basis. We do not expect
to have significant servicing operations in the future and we will need to contract with a
servicer to service our mortgage loans. We cannot assure you that we will be able to
contract with a suitable servicer or if we do so that the servicer will continue servicing
our mortgage loans. If we are unable to engage a servicer, in addition to providing the
servicing of the mortgage loans, we could be required to make advances for delinquent
payments and other servicing related costs, which could have a negative effect on our
results of operations and financial condition

We
sell servicing rights or contract with third-parties for the servicing of all mortgages,
and intend to do so for those loans in our securitizations. Our operations are subject to risks
associated with inadequate or untimely servicing. Poor performance by a servicer may
result in greater than expected delinquencies and losses on our mortgages. A substantial
increase in our delinquency or foreclosure rate could adversely affect our ability to
access the capital and secondary markets for our financing needs. Also, with respect to
mortgages subject to a securitization, greater delinquencies would adversely impact the
value of our equity interest, if any, we hold in connection with that securitization.

Representations and warranties and
protections against early payment default made by us in our loan sales and in our future
securitizations may subject us to liability.

We
transfer and intend to transfer mortgages acquired and originated by us to the third
parties or into a trust in exchange for cash in connection with our loan sales to third
parties and our planned securitizations. The purchaser or trustee will have recourse
against us with respect to the breach of the standard representations and warranties made
by us at the time such mortgages are transferred. While we generally have recourse against
our customers for any such breaches, there can be no assurance of our customers
abilities to honor their respective obligations. Also, we engage in whole loan sales
pursuant to agreements that generally provide for recourse by the purchaser against us in
the event of a breach of one of our representations or warranties, any fraud or
misrepresentation during the mortgage origination process, or upon early default on such
mortgage. We generally limit the potential remedies of such purchasers to the potential
remedies we receive from the customers from whom we acquired or originated the mortgages.
In some cases, however, the remedies available to a purchaser of mortgages from us may be
broader than those available to us against the sellers of the mortgages and should a
purchaser enforce its remedies against us, we may not always be able to enforce whatever
remedies we have against our customers. Furthermore, if we discover, prior to the sale or
transfer of a loan, that there is any fraud or misrepresentation with respect to the
mortgage and the originator fails to repurchase the mortgage, then we may not be able to
sell the mortgage or we may have to sell the mortgage at a discount.

In
the ordinary course of our business, we are subject to claims made against us by borrowers
and in the future, by trustees in our securitizations arising from, among other things, losses that are
claimed to have been incurred as a result of alleged breaches of fiduciary obligations,
misrepresentations, errors and omissions of our employees, officers and agents (including
our appraisers), incomplete documentation and our failure to comply with various laws and
regulations applicable to our business. Any claims asserted against us may result in legal
expenses or liabilities that could have a material adverse effect on our results of
operations or financial condition.

- 34 -

---

Table of Contents

A prolonged economic downturn or
recession would likely result in a reduction of our mortgage origination activity which
could adversely affect our financial results.

The
United States economy has undergone in the past and may undergo in the future, a period of
economic slowdown, which some observers view as a recession. An economic downturn or a
recession may have a significant adverse impact on our operations and our financial
condition. For example, a reduction in new mortgages may adversely affect our ability to
maintain or expand our long-term mortgage portfolio, our principal means of generating
earnings. In the case of our mortgage operations, a decline in mortgage activity may
result in fewer loans that meet the criteria for purchase and securitization or sale, thus
resulting in a reduction in interest income and fees and gain on sale of loans. We may
also experience larger than previously reported losses on our long-term mortgage portfolio
due to a higher level of defaults or foreclosures or higher loss rates on our mortgages
should there be a period of economic slowdown.

Concentration of our mortgage loan
originations in certain geographic areas, such as California, increases our exposure to
the economic and natural hazard risks associated with those areas and could have a
material adverse effect on our business, financial condition, and results of operations.
Our business may be significantly harmed by a slowdown in the economy of California, where
we conduct a significant amount of business.

Since
inception, a significant portion of the mortgage loans we have originated have been
secured by property in California. For the years ended December 31, 2005, 2004, and 2003
approximately 64.2%, 71.4%, and 91.4% by loan amount respectively, of the loans we
originated were collateralized by property located in California. An overall decline in
the economy or the residential real estate market, or the occurrence of a natural disaster
that is not covered by standard homeowners insurance policies, such as an earthquake
or wildfire, in California could decrease the value of mortgaged properties in California.
This, in turn, would increase the risk of delinquency, default or foreclosure on mortgage
loans in our portfolio or that we have sold to others. This could restrict our ability to
originate or sell mortgage loans or cause losses in our investment portfolio, and
significantly harm our business, financial condition, liquidity and results of operations.

The residential mortgage
origination business is a cyclical industry, is currently at a relatively high level and
is expected to decline in subsequent years, which could reduce our current levels of loan
origination and our ability to generate net income in the future.

The
residential mortgage origination business historically has been a cyclical industry,
enjoying periods of strong growth and profitability followed by periods of shrinking
volumes and industry-wide losses. The residential mortgage industry has experienced rapid
growth over the past three years largely due to historically low interest rates. During
periods of rising interest rates, rate and term refinancing originations decrease, as
higher interest rates provide reduced economic incentives for borrowers to refinance their
existing mortgages. Our historical performance may not be indicative of results in a
rising interest rate environment, and our results of operations may be materially
adversely affected if interest rates rise. In addition, our recent and rapid growth may
distort some of our ratios and financial statistics and may make period-to-period
comparisons difficult. In light of this growth and our change in business strategy, among
other factors, our historical performance and operating and origination data may be of
little relevance in predicting our future performance.

- 35 -

---

Table of Contents

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

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

We
also compete with federally chartered institutions and their operating subsidiaries that
operate in a multi-state market environment. Federal statutes and rules governing
federally chartered banks and thrifts allow those entities to engage in mortgage lending
in multiple states on a substantially uniform basis and without the need to comply with
state licensing and other laws including state and local anti-predatory
lending laws affecting mortgage lenders. Federal regulators have expressed their
position that these preemption provisions benefit mortgage subsidiaries of federally
chartered institutions, as well. In January 2004, the Comptroller of the Currency
finalized preemption rules that confirm and expand the scope of this federal preemption
for national banks and their operating subsidiaries. Such federal preemption rules and
interpretations generally have been upheld in the courts. In addition, such federally
chartered institutions and their operating subsidiaries have defenses under federal law to
allegations of noncompliance with such state and local laws that are unavailable to us.
Moreover, at least one national rating agency has announced that, in recognition of the
benefits of federal preemption, it will not require additional credit enhancement by
federal institutions when they issue securities backed by mortgages from a state with
predatory lending laws. As a non-federal entity, we will continue to be subject to such
rating agency requirements arising from state or local lending-related laws or
regulations should we issue public mortgage securities. Accordingly, as a mortgage lender that is generally subject to the laws of
each state in which we do business, except as may specifically be provided in federal
rules applicable to all lenders (such as the Fair Credit Reporting Act, Real Estate
Settlement Procedures Act or Truth in Lending Act), unlike those competitors, we are
generally subject to all state and local laws applicable to mortgage lenders in each
jurisdiction where we lend, including new laws directed at nonconforming mortgage lending.
This disparity may have the effect of giving those federal entities legal and competitive
advantages.

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

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

- 36 -

---

Table of Contents

Competition
in the industry can take many forms, including interest rates and costs to originate a mortgage
loan, less stringent underwriting standards, convenience in obtaining a mortgage loan,
type of mortgage loans, customer service, amount and term of a mortgage loan and marketing
and distribution channels. Increased competition could have the effect of:

- lowering gains that may be realized on
our mortgage loan sales or securitizations;
- lowering the interest rates, origination
points and fees we are able to charge borrowers or otherwise affecting mortgage
         loan terms;
- reducing the volume of our mortgage
loan originations and securitizations;
- lowering the value of our mortgage
loans held for sale or retained in our mortgage loan portfolio;
- increasing our costs of originating,
securitizing and selling mortgage loans;
- increasing our costs in connection with
providing customer service and marketing;
- increasing the demand for our experienced
 personnel and, therefore, the possibility that our personnel may be recruited by
         our competitors; and
- lowering the industry standard for non-conforming
underwriting guidelines by for example, providing for less stringent
         LTV ratio requirements as competitors attempt to increase or maintain market
 share in the face of increased
         competition.

The
need to maintain mortgage loan volume in this competitive environment creates a risk of
price competition in the non-conforming mortgage market. Any increase in these pricing
and underwriting pressures could reduce the volume of our mortgage loan originations and
sales and significantly harm our business, financial condition, liquidity, and results of
operations.

The
expected cyclical decline in the mortgage industrys overall level of originations
following 2005 may lead to increased competition for the remaining loans. We cannot assure
you that we will be able to continue to compete effectively in the markets we serve and
our results of operations, financial condition, and business could also be materially
adversely affected to the extent our competitors significantly expand their activities in
our markets.

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

In
recent years, we have experienced rapid growth that has placed, and will continue to
place, certain pressures on our management, administrative, operational, and financial
infrastructure. As of December 31, 2004 and December 31, 2005, we had 170 and 235 salaried
employees, respectively, in addition to 83 and 76 commission-based employees,
respectively. Many of our current employees have very limited experience with us and a
limited understanding of our systems and controls. The increase in the size of our
operations may make it more difficult for us to ensure that we originate quality mortgage
loans and that we service them effectively. We will need to attract and hire additional
sales and management personnel in an intensely competitive hiring environment to preserve
and increase our market share. At the same time, we will need to continue to upgrade and
expand our financial, operational and managerial systems and controls. We also intend to
continue to grow our business in the future, which could require capital, systems
development and human resources beyond what we currently have. As a result of these
pressures, we cannot assure you that we will be able to:

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

- 37 -

---

Table of Contents

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

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

We
depend upon our wholesale account executives and retail mortgage loan officers to attract
borrowers by, among other things, developing relationships with financial institutions,
other mortgage companies and brokers, real estate agents, borrowers, and others. We
believe that these relationships lead to repeat and referral business. The market for
skilled executive officers, account executives, and loan officers is highly competitive
and historically has experienced a high rate of turnover. In addition, if a manager leaves
our company there is an increased likelihood that other members of his or her team will
follow. Competition for qualified account executives and loan officers may lead to
increased hiring and retention costs. We cannot guarantee that we will be able to attract
or retain qualified personnel at reasonable costs or at all. If we are unable to attract
or retain a sufficient number of skilled executive officers, account executives, or loan
officers, we will be unable to effectuate our business strategy.

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

A
significant majority of our originations of mortgage loans come from independent brokers.
For the year ended December 31, 2005, approximately 1330 brokers, from a list of
over 5,000 approved brokers, submitted loans to us; except for one broker that represented
6.8% of our origination, no other broker represented more than 5% of our loan originations. Our brokers are not contractually obligated to do
business with us. Further, our competitors also have relationships with our brokers and
actively compete with us in our efforts to expand our broker networks. Accordingly, we
cannot assure you that we will be successful in maintaining our existing relationships or
expanding our broker networks, the failure of which could significantly harm our business,
financial condition, liquidity, and results of operations.

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

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

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 effectively and
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, and provide process status updates
instantly, as well as, other customer-expected conveniences that are cost-efficient to our
process. Implementing and maintaining this new technology and becoming proficient with it
may also require significant capital expenditures.

- 38 -

---

Table of Contents

# Our mortgage products
expose us to greater credit risks.

We
are an originator of Alt-A mortgages, and to a lesser extent, subprime mortgages. These
are mortgages that do not qualify for purchase by government-sponsored agencies such as
Fannie Mae and Freddie Mac and are not considered conforming loans. Our
operations may be negatively affected by any investments in these mortgages. Credit risks
associated with these mortgages are greater than those associated with conforming
mortgages. The interest rates we charge on these mortgages are often higher than those
charged for conforming loans to compensate for the higher risk and lower liquidity. Lower
levels of liquidity may cause us to hold loans or other mortgage-related assets supported
by these loans that we otherwise would not hold, thereby, assuming the potential risk of
increased delinquency rates or credit losses as well as interest rate risk. Additionally,
the combination of underwriting criteria that differ from those applicable to conforming
loans and higher rates of interest leads to greater risk, including higher prepayment
rates and higher delinquency rates or credit losses.

There
is increasing public policy debate focused on the rapid increase in the use of loans with
interest-only features that require no amortization of principal for a protracted period
or loans with potential negative amortization features, such as our Pay Option ARMs.
Federal Reserve Board Chairman Allan Greenspan has recently expressed particular concern
that some households may be using these loans to purchase homes that would otherwise be
unaffordable, which may leave some mortgagors vulnerable to adverse events. Press reports
indicate that a task force of federal regulatory agencies is preparing new underwriting
and credit risk guidelines on option ARMs, interest-only mortgages and
reduced-documentation loans offered by the nations lenders. While these guidelines
may not be directly applicable to us because we are not an affiliate of a depository
institution subject to supervision by a federal banking agency, they may reflect
heightened regulatory scrutiny for non-amortizing or negative amortization loan products
for certain types of borrowers.

Originations of no income
documentation/no verified assets loans may expose us to a higher risk of
delinquencies, foreclosures, and losses.

We
have experienced a rapid increase in our originations of no income documentation/no
verified assets loans as we have focused on marketing these new products. In making
no income documentation/no verified assets loans we generally place the most
significant emphasis on the value of the property relative to the amount of the loan,
rather than on a determination of the borrowers ability to repay the loan from
salary or savings. While the risk of losing ones home is a powerful incentive to
make scheduled mortgage payments, it is possible that a borrower simply does not have
enough money to meet loan obligations and the lack of verification may thus make it more
likely that a borrower will default on the loan. In this regard, the Mortgage Bankers
Association of America, or MBAA, issued Housing and Mortgage Markets: An
Analysis on August 23, 2005 in which it raised the issue of the relationship between
borrower default and lack of verification of a borrowers ability to repay a loan. It
referenced other studies finding an increasing volume of stated income and no income
lending in the Alt-A market. The MBAA suggested that this could indicate that these
lending practices are extending beyond the intended creditworthy clientele and noted
anecdotal evidence that some brokers or lenders are using the stated income programs to
qualify borrowers who would not qualify under standard underwriting. When layered with
other risk factors, the report comments that such lending practices are a risk factor that
could lead to increases in default and loss rates in certain areas if unfavorable economic
circumstances occur.

Lending to our type of borrowers
based on our underwriting guidelines may expose us to a higher risk of delinquencies,
foreclosures, and losses.

The
vast majority of loans we originate are underwritten generally in accordance with
standards designed for non-conforming residential mortgages. Our market includes borrowers
who may be unable to obtain mortgage financing from conventional mortgage sources.
Mortgages made to such borrowers based on these underwriting standards generally entail a
higher risk of delinquency and higher potential losses than mortgages made to borrowers
who qualify for conventional mortgage sources. Delinquency, foreclosures and losses
generally increase during economic slowdowns or recessions. The actual risk of
delinquencies, foreclosures and losses on mortgages made to our borrowers based on our
underwriting guidelines could be higher under adverse economic conditions than those
currently experienced in the mortgage lending industry in general.

- 39 -

---

Table of Contents

Many
of the mortgage loans we make are underwritten under a limited or no
documentation program, which generally places the most significant emphasis on the
LTV ratio based on the full value of the property and not on a determination of
a borrowers ability to repay the loan. On May 16, 2005, the Office of the
Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the
Federal Deposit Insurance Corporation, the Office of Thrift Supervision, and the National
Credit Union Administration jointly issued Credit Risk Management Guidance for Home
Equity Lending. The guidance promotes sound credit risk management practices for
institutions engaged in home equity lending both home equity lines of credit and
closed-end home equity loans. Among other risk factors, the guidance cautions lenders to
consider all relevant risk factors when establishing product offerings and underwriting
guidelines, including a borrowers income and debt levels, credit score (if
obtained), and credit history, as well as the loan size, collateral value, lien position,
and property type and location. It stresses that prudently underwritten home equity loans
should include an evaluation of a borrowers capacity to adequately service the debt,
and that reliance on a credit score is insufficient because it relies on historical
financial performance rather than present capacity to pay. While not specifically
applicable to loans originated by us, the guidance is instructive of the regulatory
climate covering low and no documentation loans.

Further,
any material decline in real estate values increases the LTV ratios of mortgages
previously made by us, thereby weakening collateral coverage and increasing the
possibility of a loss in the event of a borrower default. Any sustained period of
increased delinquencies, foreclosures or losses after the mortgages are sold could
adversely affect the pricing of our future loan sales and our ability to sell or
securitize our mortgages in the future. In the past, certain of these factors have caused
revenues and net earnings of many participants in the mortgage industry, including us, to
fluctuate from quarter to quarter.

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

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

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

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

In
the course of our activities, we may foreclose and take title to residential properties
and become subject to environmental liabilities with respect to those properties. The laws
and regulations related to environmental contamination often impose liability without
regard to responsibility for the contamination. We may be held liable to a governmental
entity or to third parties for property damage, personal injury, investigation and
clean-up costs incurred by these parties in connection with environmental contamination,
or may be required to investigate or clean up hazardous or toxic substances, or chemical
releases at a property. The costs associated with investigation or remediation activities
could be substantial. Moreover, as the owner or former owner of a contaminated site, we
may be subject to common law claims by third parties based upon damages and costs
resulting from environmental contamination emanating from the property. If we ever become
subject to significant environmental liabilities, our business, financial condition,
liquidity, and results of operations would be significantly harmed.

- 40 -

---

Table of Contents

Interest rate fluctuations may
adversely affect our operating results, the market values of our mortgage loans held
for sale and our retained interests in mortgage loan securitizations.

Our operations.Our operations, as a mortgage loan originator, and as an investor in
mortgage loans, may be adversely affected by rising and falling interest rates. Interest
rates have been low over the past few years; however increases in interest rates may
discourage potential borrowers from refinancing mortgages, borrowing to purchase homes or
seeking second mortgages. These effects could decrease the amount of mortgages available
to be acquired or originated by our mortgage operations which could adversely affect our
operating results. If short-term interest rates exceed long-term interest rates, there is
a higher risk of increased loan prepayments, as borrowers may seek to refinance their
fixed and adjustable rate mortgages at lower long-term fixed interest rates. Increased
loan prepayments could lead to a reduction in the number of loans in our long-term
mortgage portfolio and reduce our net interest income. Rising interest rates may also
increase delinquencies, foreclosures and losses on our adjustable rate mortgages.

We
are subject to the risk of rising mortgage interest rates between the time we commit to
purchase mortgages at a fixed price through the issuance of individual or other interest rate-locks
and the time we sell or securitize those mortgages. An increase in interest rates will
generally result in a decrease in the market value of mortgages that we have committed to
purchase at a fixed price, but have not been sold or securitized or have not been properly
hedged. As a result, we may record a smaller gain, or even a loss, upon the sale of those
mortgages or reduced income from our securitized portfolio of mortgage loans.

The
market values of our mortgage loans held for sale, our retained interests in mortgage loan
securitizations and any mortgage-backed securities in which we may invest. Increases
in interest rates might cause the fair market value of our mortgage loans, any retained
interests in mortgage loan securitizations and any mortgage-backed securities in which we
may invest, to decline. Our fixed-rate mortgage loans generally will be more negatively
affected by increases in interest rates than will our adjustable-rate mortgage loans. In
accordance with GAAP, we will be required to reduce the carrying value of our mortgage
loans held for sale, retained interests in mortgage loan securitizations
and any mortgage-backed securities by the amount of any decrease in the fair value of such
assets compared to amortized cost. If unrealized losses in fair value occur, we will have
to either reduce current earnings or reduce stockholders equity without immediately
affecting current earnings. In each case, our net book value will
decrease to the extent of any realized or unrealized losses in fair value, and could have
a material adverse effect on our results of operations, financial condition, and business.

Net
interest income.The interest payable on the floating-rate mortgage-backed securities
we issue in securitizations generally will adjust monthly and will be based on shorter
term floating interest rates, while the interest income we receive from our mortgage loans
generally will either be fixed, adjust less frequently than monthly or be subject to caps
on the rates the borrowers pay. Accordingly, when interest rates rise, the interest rates
that we pay to finance our mortgage loan originations may rise faster than the interest
rates on our mortgage loans, which could cause the net interest income generated by
our mortgage loan portfolio to decrease.

- 41 -

---

Table of Contents

After the reorganization, we may
experience reduced net earnings or losses if our liabilities re-price at different rates
than our assets.

After
the reorganization, one of our business strategies is to begin securitizing our loan
production. Should this occur, our balance sheet will grow dramatically as we begin to build a loan
portfolio that remains on our balance sheet. We expect, should this strategy be implemented,
that our principal source of revenue in the future will be
net interest income or net interest spread from our long-term mortgage portfolio, which is
the difference between the interest we earn on our interest earning assets and the
interest we pay on our interest bearing liabilities. The rates we pay on our borrowings
are independent of the rates we earn on our assets and may be subject to more frequent
periodic rate adjustments. Therefore, we could experience a decrease in net earnings or a
loss because the interest rates on our borrowings could increase faster than the interest
rates on our assets, if the increased borrowing costs are not offset by reduced cash
payments on derivatives recorded in other non-interest income. If our net interest spread
becomes negative, we will be paying more interest on our borrowings than we will be
earning on our assets and we will be exposed to a risk of loss.

Additionally,
the rates paid on our borrowings and the rates received on our assets may be based upon
different indices. Our long-term mortgage portfolio will include mortgages that are
six-month LIBOR and one-to-seven year LIBOR hybrid ARMs. These are mortgages with fixed
interest rates for an initial period of time, after which they begin bearing interest
based upon short-term interest rate indices and adjust periodically. We generally fund
mortgages with adjustable interest rate borrowings having interest rates that are indexed
to short-term interest rates and adjust periodically at various intervals. To the extent
that there is an increase in the interest rate index used to determine our adjustable
interest rate borrowings and that increase is not offset by a corresponding increase in
the rates at which interest accrues on our assets or by various cash payments on interest
rate derivatives that we have in place at any given time, our net earnings will decrease
or become a loss.

ARMs
typically have interest rate caps, which limit interest rates charged to the borrower
during any given period. Our borrowings are not subject to similar restrictions. As a
result, in a period of rapidly increasing interest rates, the interest rates we pay on our
borrowings could increase without limitation, while the interest rates we earn on our ARMs
would be capped. If this occurs, our net interest spread could be significantly reduced or
we could suffer a net interest loss if not offset by a decrease in the cash payments on
interest rate derivatives that we have in place at any given time.

The potential for negative
amortization in the Pay Option ARM product could have an adverse effect on our credit.

The
Pay Option ARM loan is a unique adjustable-rate mortgage that can provide the borrower
with up to four payment options each month and an introductory rate of interest, or start
rate, that is usually much lower than the loans fully-indexed interest rate and will
last from one month to five years, depending on the type of Pay Option ARM selected by the
borrower. The minimum monthly payment is a fully amortizing payment based on the start
rate and is the lowest payment that the borrower may select, which means that any other
payment option, such as interest only, will not be available in any month that it is less
than the minimum payment. After an initial introductory period, the interest rate can
adjust monthly based on movements in the index. The minimum monthly payment, however,
adjusts no more frequently than annually and each annual payment adjustment cannot exceed,
in amount, a specified percentage of the previous years minimum monthly payment. As
a result, depending on how the interest rate adjusts, the minimum monthly payment may not
be sufficient to pay all the interest that accrued during the previous month. When this
occurs and the borrower selects the minimum payment option, the unpaid interest is added
to the principal balance. This is called negative amortization. Holding mortgage loans
with negative amortization creates risks for our business through the increased amounts of
debt owed on a borrowers mortgage loan without any corresponding determination that
the borrower is capable of paying such increased amount. The increased amount of debt may
make it more likely that a borrower may be delinquent or default in payments after payment
caps are no longer in effect because the increased principal amount of the mortgage loan
and corresponding interest payment due on such amounts may be larger than a
borrowers ability to repay such amounts. In addition, unless the value of the
property increases in an amount at least equal to the amount of the negative amortization,
the increased debt owed may be insufficient to satisfy the original LTV or CLTV ratios for such property and, following a foreclosure, the value we realize
upon a sale of such a property may not be sufficient to satisfy the increased debt owed to
us as a result of negative amortization. If credit risks associated with the Pay Option
ARM were to increase in severity, our earnings could be adversely affected.

- 42 -

---

Table of Contents

Increased levels of early
prepayments of mortgages may accelerate our expenses and decrease our net income.

Mortgage
prepayments generally increase on our ARMs when fixed mortgage interest rates fall below
the then-current interest rates on newly originated ARMs. Prepayments on mortgages are also
affected by the terms and credit grades of the mortgages, conditions in the financial
markets, housing appreciation and general economic conditions. If we were to acquire
mortgages at a premium and they are subsequently repaid, we would have to expense the
unamortized premium at the time of the prepayment. We could possibly lose the opportunity
to earn interest at a higher rate over the expected life of the mortgage. Also, if
prepayments on mortgages increase when interest rates are declining, our net interest
income may decrease if we cannot reinvest the prepayments in mortgage assets bearing
comparable net interest margins. If prepayment rates differ from our projections, we may
experience a change in net earnings due to a change in the ratio of derivatives to loans
being interest rate risk managed. This change in net earnings may result in a reduction of
cash flows from our mortgage loans net of financing costs as we have a higher percentage
of derivatives costs related to these loans than originally projected.

If
the prepayment rates for our mortgage loans are higher than expected, our results of
operations may be significantly harmed. When a borrower pays off a mortgage loan prior to
the loans scheduled maturity, the impact on us depends upon when such payoff or
prepayment occurs. Our prepayment losses generally occur after we sell (or
securitize in the future) our mortgage loans and the extent of our losses depends on when
the prepayment occurs. If the prepayment occurs within 12 to 18 months following a whole
mortgage loan sale, we may have to reimburse the purchaser for all or a portion of the
premium paid by the purchaser for the mortgage loan, again resulting in a loss of our
profit on the mortgage loan. In addition, once we begin our securitization program, the
net interest we receive from the securitizations will be reduced if there are prepayments,
especially if the prepayments occur with respect to loans with interest rates high
relative to the rest of the mortgage loan pool.

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

We may be subject to losses on
mortgages for which we do not obtain credit enhancements.

We
do not obtain credit enhancements such as mortgage pool or special hazard insurance for
all of our mortgages and investments. Generally, we require mortgage insurance on any
mortgage with an LTV ratio greater than 80%. During the time we hold mortgages for
investment, we are subject to risks of borrower defaults and bankruptcies and special
hazard losses that are not covered by standard hazard insurance. If a borrower defaults on
a mortgage that we hold, we bear the risk of loss of principal to the extent there is any
deficiency between the value of the related mortgaged property and the amount owing on the
mortgage loan and any insurance proceeds available to us through the mortgage insurer. In
addition, since defaulted mortgages, which under our financing arrangements are mortgages
that are generally 60 to 90 days delinquent in payments, may be considered ineligible
collateral under our borrowing arrangements, we could bear the risk of being required to
own these loans without the use of borrowed funds until they are ultimately liquidated or
possibly sold at a loss.

- 43 -

---

Table of Contents

# Declining real estate
values could harm our operations.

We
believe the risks associated with our business will be more acute during periods of
declining real estate values. Declining real estate values will likely reduce our level of
new mortgage loan originations, since borrowers often use increases in the value of their
existing homes to support the refinancing of their existing mortgage loans or the purchase
of new homes at higher levels of borrowings. Furthermore, declining real estate values
will likely reduce our volume of cash-out refinancings and debt consolidation loans as the
level of home equity available to secure such loans will be reduced. A cash-out
refinancing occurs when a borrower obtains a new mortgage loan in an amount that exceeds
the existing balance on the current mortgage in order to refinance the original mortgage
and receive additional cash for other uses such as paying down or off consumer debt with a
higher interest rate than on the mortgage loan. For the year ended December 31,
2005, approximately 33.4% by loan amount of our loan originations were cash-out
refinancings and debt consolidation loans. In addition, declining real estate values
significantly increase the likelihood that we will incur increased foreclosures and losses
on our loans in the event of default. Therefore, any sustained period of declining real
estate values could adversely affect both our net interest income from loans in our
portfolio, as well as our ability to originate, sell and securitize loans, which would
significantly harm our revenues, results of operations, financial condition, business
prospects and our ability to make distributions to you.

# Second
mortgages exposes us to greater credit risks.

Our
security interest in the property securing second mortgages is subordinated to the
interest of the first mortgage holder. Second mortgages also have a higher combined LTV
ratio than the first mortgage. Upon foreclosure, if the value of the property is equal to or less than the
amount needed to repay the borrowers obligation to the first mortgage holder
our second mortgage loan will not be repaid.

We may change our policies in ways
that harm our financial condition or results of operations.

Our
investment and financing policies with respect to other activities, including our growth,
debt, capitalization, distributions and operating policies are determined by our board of
directors. Our Board of Directors may change these policies at any time without a vote of
our stockholders. A change in these policies might harm our financial condition, results
of operations or business prospects.

We are exposed to potential risks
from recent legislation with respect to internal controls under Section 404 of the
Sarbanes-Oxley Act of 2002.

While
we believe that we currently have adequate internal control procedures in place, we are
evaluating our internal control systems to allow management to report on, and our
independent auditors to attest to, our internal controls over financial reporting, as
required by Section 404 of the Sarbanes-Oxley Act of 2002. During this process, we will
identify what might be deemed to be potential control deficiencies and will establish a
process to investigate and, as appropriate, remediate such matters before the required
deadline. We like all other public companies are incurring additional expenses and taking
significant amounts of managements time in an effort to comply with Section 404.
Although we have made this project a top priority, we cannot assure you that all potential
control deficiencies will be remediated before the mandated deadline or that we will
receive an unqualified opinion from our external auditors regarding our internal controls
over financial reporting.

- 44 -

---

Table of Contents

For
example, in April 2005, we provided a loan for purchase of a multi-family property to its
primary stockholder at existing market rates. The funds were wired to a licensed escrow
company for the purchase of real estate. Upon review and advice of our outside counsel, it
was determined that this loan potentially constituted a control deficiency as defined by
Auditing Standard No. 2 of the Public Company Accounting Oversight Board as defined under
Sarbanes-Oxley Act of 2002, because we, while engaged in the business of extending loans
for real estate purchases, are not in the business of extending loans for multi-family
properties. Thus, the loan was immediately recalled, and funds were returned to us.

We
now have policy of not making loans to directors, officers or stockholders beneficially
owning 3% or more of our outstanding stock, major stockholder, that do not fall within its
ordinary course of business of making loans secured by residential (properties with four
or fewer units) real estate. Thus, it will be our policy not to extend funds or make loans
of any type other than residential real estate loans to our officers, directors, or major
stockholders, which loans include but are not limited to personal loans, loans secured by
multi-family properties, and loans secured by commercial real estate.

Compliance with proposed and
recently enacted changes in securities laws and regulations are likely to increase our
costs and until shares of our stock are listed on a national securities exchange you may
not get the full protections afforded by the Sarbanes-Oxley Act.

The
Sarbanes-Oxley Act of 2002 and rules and regulations promulgated by the Commission and the
national securities exchanges have increased the scope, complexity and cost of corporate
governance, reporting and disclosure practices. We believe that these rules and
regulations will make it more costly for us to obtain director and officer liability
insurance, and we may be required to accept reduced coverage or incur substantially higher
costs to obtain coverage. These rules and regulations could also make it more difficult
for us to attract and retain qualified members of management and our Board of Directors,
particularly to serve on our audit committee.

Because
shares of our common stock are not listed on any national securities exchange, we
currently are not subject to the rules such exchanges have adopted in connection with
Sarbanes-Oxley. Accordingly, you may not get the full protection afforded shareholders by
those rules, such as the independence requirements for members of our boards audit
committee.

- 45 -

---

Table of Contents

# Risks and Effects of
the Proposed Reorganization

Our business plan after the
reorganization differs from our historical plan and we may not be able to successfully
execute our new plan.

Historically,
our business consisted primarily of the sale of mortgage loans, on a whole loan basis,
within 30 to 60 days after origination. We intend to retain a substantial portion of the
mortgage loans we originate on a long-term basis. Therefore, our historical financial
results may not be indicative of our future financial performance. By retaining a
substantial portion of our mortgage loans, we will be assuming significantly more interest
rate, loan default, and prepayment risk than we were subject to under its business plan
where it sold loans quickly.

To
finance the mortgage loans we retain in our portfolio, we intend to begin a securitization
program in addition to our warehouse facilities. We have no experience in securitizing
mortgage loans. Securitizations are complex financing transactions. If we are not
successful in our efforts to develop a securitization program and have to rely on
warehouse facilities, we will likely have less cash available to fund our operations or to
distribute to our stockholders than would be the case had we been able to undertake
securitizations. In addition, the cost of borrowings under our financing facilities
corresponds to a referenced interest rate plus or minus a margin. The margin varies
depending on factors such as the nature and liquidity of the underlying collateral and the
availability of financing in the market. We will experience net interest losses if the
returns on our assets financed with borrowed funds fail to cover the cost of our
borrowings.

# There are additional
risks associated with our proposed reorganization.

If
we are successful in effectuating our proposed reorganization, we will be faced with
additional risks, such as: (1) our ability to satisfy complex rules in order to qualify as
a REIT for federal income tax purposes, (2) the ability of certain of our subsidiaries to
qualify as taxable REIT subsidiaries for federal income tax purposes and our ability and
the ability of our subsidiaries to operate effectively within the limitations imposed by
these rules, (3) changes in federal income tax laws and regulations applicable to REITs,
(4) our inability to obtain third party consents and authorizations in connection with the
proposed reorganization, (5) increased cash requirements to meet our minimum REIT
distribution requirements, (6) our hedging strategies may be limited by REIT requirements,
(7) our failure or the failure of our subsidiaries to obtain and maintain licenses in the
jurisdictions in which we do business, (8) the market price and trading volume of our
common stock may be volatile following the proposed reorganization, and (9) various other
REIT related risks that are further detailed in our preliminary information
statement/prospectus as filed by TMSF REIT, Inc. with the SEC on September 30, 2005.

There are additional risks
associated with a failure to accomplish the reorganization.

If
we fail to qualify as a REIT for our taxable year in which we complete the reorganization,
we would be subject to federal income tax at regular corporate rates. If we fail to
qualify as a REIT, we would have to pay significant income taxes and would therefore have
less money available for investments or for distributions to our stockholders. This would
likely have a significant adverse effect on the value of our securities. In addition, we
would no longer be required to make distributions to our stockholders.

- 46 -

---

Table of Contents

# Regulatory and Legal
Risks

The nationwide scope of our
mortgage origination and servicing 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.

The
mortgage banking industry is a highly regulated industry. Our origination business is
subject to extensive federal and state laws and regulations, as well as judicial and
administrative decisions of all jurisdictions. The volume of new or modified laws and
regulations has increased in recent years, and, in addition, individual cities and
counties have begun to enact laws that restrict subprime mortgage loan origination
activities in those cities and counties. The laws and regulations of each of these
jurisdictions are different, complex and, in some cases, in direct conflict with each
other. As our operations continue to grow, it may be more difficult to comprehensively
identify, to accurately interpret and to properly program our technology systems and
effectively train our personnel with respect to all of these laws and regulations, thereby
potentially increasing our exposure to the risks of noncompliance with these laws and
regulations. At the federal level, these laws and regulations include:

- the Equal Credit Opportunity Act and
Regulation D;
- the Federal Truth in Lending Act
and Regulation Z;
- the Home Ownership and Equity
Protection Act, or HOEPA;
- the Real Estate Settlement Procedures
Act, or RESPA, and Regulation X;
- the Fair Credit Reporting Act;
- the Fair Debt Collection Practices Act;
- the Home Mortgage Disclosure Act and
Regulation C;
- the Fair Housing Act;
- the Telemarketing and Consumer Fraud
and Abuse Prevention Act;
- the Telephone Consumer Protection Act;
- the Gramm-Leach-Bliley Act;
- the Soldiers and Sailors Civil Relief Act;
- the USA Patriot Act;
- the Fair and Accurate Credit Transactions
Act; and
- the CAN-SPAM Act.

These laws and regulations among
other things:

- impose licensing obligations and financial
requirements on us;
- limit the interest rates, finance charges,
and other fees that we may charge;
- prohibit discrimination both in the
extension of credit and in the terms and conditions on which credit is extended;
- prohibit the payment of kickbacks for
the referral of business incident to a real estate settlement service;
- impose underwriting requirements;
- mandate various disclosures and notices
 to consumers, as well as disclosures to governmental entities;
- mandate the collection and reporting
of statistical data regarding our customers;
- require us to safeguard non-public
 information about our customers;
- regulate our collection practices;
- require us to avoid doing business
with suspected terrorists;
- in some cases, impose assignee
liability on the entities that purchase our mortgage loans or on us for loans we purchase.

Our
failure to comply with these laws can lead, among other things, to:

- civil and criminal liability, including potential
monetary damages;
- loss of lending licenses or approved
status required for continued lending operations;
- demands for indemnification or loan
repurchases from purchasers of our loans;
- individual and class action lawsuits;
- administrative enforcement actions;
- inability to sell our loans; and
- inability to obtain credit to fund
our operations.

- 47 -

---

Table of Contents

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

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

Several
federal, state and local laws, rules and regulations have been adopted, or are under
consideration, that are intended to eliminate so-called predatory lending
practices. The federal Home Ownership and Equity Protection Act, or HOEPA, identifies a
category of mortgage loans and subjects such loans to restrictions not applicable to other
mortgage loans. Loans subject to HOEPA consist of loans on which certain points and fees
or the annual percentage rate, which is based on the interest rate and certain finance
charges exceed specified levels. Liability for violations of applicable law with
regard to loans subject to HOEPA would extend not only to us, but to the purchasers of our
loans as well.

Laws,
rules and regulations have been adopted, or are under consideration, at the state and
local levels, including in California, that are similar to HOEPA in that they impose
certain restrictions on loans on which certain points and fees or the APR exceeds
specified thresholds. The restrictions include prohibitions on steering
borrowers into loans with high interest rates and away from more affordable products,
selling unnecessary insurance to borrowers, flipping or repeatedly refinancing
loans, and making loans without a reasonable expectation that the borrowers will be able
to repay the loans without regard to the value of the underlying property.

Compliance
with some of these restrictions requires lenders to make subjective judgments, such as
whether a loan will provide a net tangible benefit to the borrower. These
restrictions expose a lender to risks of litigation and regulatory sanction no matter how
carefully a loan is underwritten and impact the way in which a loan is underwritten. The
remedies for violations of these laws are not based solely on actual harm to the consumer
and can result in damages that exceed the loan balance. Liability for violations of HOEPA,
as well as violations of many of the state and local equivalents, could extend not only to
us, but to our secured warehouse lenders, institutional loan purchasers and securitization
trusts that hold our loans and other assignees, regardless of whether such assignee knew
of or participated in the violation.

Local
anti-predatory lending ordinances were passed in the cities of Oakland and Los Angeles
California in 2001 and 2002, respectively. Each of these ordinances imposes additional and
limitations and requirements that go significantly beyond those imposed under HOEPA and
Californias anti-predatory lending statutes. The American Financial Services
Association, or AFSA, brought an action against the City of Oakland, alleging that the
Oakland ordinance is preempted by Californias law. Both the trial court and the
appellate court held for the City of Oakland. The matter was appealed to the California
Supreme Court, which heard arguments on November 4, 2004 and reversed the lower
courts decision. The City of Los Angeles repealed its ordinance effective May 23,
2005. However, many other jurisdictions have indicated their intent to enact similar
ordinances. It is possible that these ordinances might impair our ability or willingness
to make loans in those jurisdictions, which in turn might result in a significant
reduction in the value or volume of loans we make in those jurisdictions.

- 48 -

---

Table of Contents

It
is our policy not to originate loans that are subject to HOEPA or these state and local
high cost loan laws, because the companies that buy our loans or provide financing for our
loan origination operations generally do not want to buy or finance such loans. If we
miscalculate the numerical thresholds described above, however, we may mistakenly
originate or purchase such loans and bear the related marketplace and legal risks and
consequences. These thresholds below which we try to originate loans create artificial
barriers to production and limit the price at which we can offer loans to borrowers and
our ability to underwrite, originate, sell and finance mortgage loans. We may cease doing
business in jurisdictions in the future where we, or our counterparties, make similar
determinations with respect to anti-predatory lending laws. In California, for example, a
proposed amendment to its state anti-predatory lending law substantially could broaden the
trigger test for loans subject to its restrictions. To the extent we do have financing and
purchasers for such loans, we may, on a limited basis, make loans which exceed the APR or
points and fees thresholds of these laws, rules and regulations.

The
continued enactment of these laws, rules and regulations may prevent us from making
certain loans and may cause us to reduce the APR or the points and fees on loans that we
do make. In addition, the difficulty of managing the risks presented by these laws, rules
and regulations may decrease the availability of warehouse financing and the overall
demand for subprime loans, making it difficult to fund, sell or securitize any of our
loans. If we decide to originate or buy loans subject to these laws, rules and
regulations, we will be subject to greater risks for actual or perceived non-compliance
with such laws, rules and regulations, including demands for indemnification or loan
repurchases from our lenders and loan purchasers, class action lawsuits, increased
defenses to foreclosure of individual loans in default, individual claims for significant
monetary damages and administrative enforcement actions. If nothing else, the growing
number of these laws, rules and regulations will increase our cost of doing business as we
are required to develop systems and procedures to ensure that we do not violate any aspect
of these new requirements.

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

HOEPA
and state and local high cost loan laws are not the only regulatory restrictions on
lending based solely on the value of the mortgaged property without regard to a
borrowers ability to repay. The Office of the Comptroller of the Currency, the
regulator of national banks, issued a final regulation last year that prescribed an
explicit anti-predatory lending standard without regard to a trigger test based on the
cost of the loan, which prohibits a national bank from, among other restrictions, making a
loan based predominately on the foreclosure value of the borrowers home, rather than
the borrowers repayment ability, including current and expected income, current
obligations, employment status and relevant financial resources. On May 16, 2005, all of
the federal banking agencies issued guidelines cautioning lenders to consider all relevant
risk factors when establishing product offerings and underwriting guidelines, including a
borrowers income and debt levels, credit score (if obtained), and credit history, as
well as the loan size, collateral value, lien position, and property type and location. It
stresses that prudently underwritten home equity loans should include an evaluation of a
borrowers capacity to adequately service the debt, and that reliance on a credit
score is insufficient because it relies on historical financial performance rather than
present capacity to pay. Similarly, the Interagency Guidelines Establishing Standards for
Safety and Soundness, which are applicable to federally chartered and certain other types
of depository institutions, call for documenting the source of repayment and assessing
ability of the borrower to repay the debt in a timely manner. This restriction would
prevent national banks and their operating subsidiaries from purchasing the variation of
our loans where no assessment is made of the borrowers ability to repay the loan.
While not specifically applicable to loans originated by us, the guidance and related
banking regulations are instructive of the regulatory climate relating to low and no
documentation loans, such as the stated income and no documentation loan products made by
us. Our ability to finance the origination of our alternative documentation or no
documentation loans and sell such loans to or the related securities to third parties
could be impaired if our financing sources or mortgage investors are required or choose to
incorporate prohibitions or requirements from certain anti-predatory lending practices
into their eligibility criteria, even if the laws do not specifically apply to us.

- 49 -

---

Table of Contents

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

State Attorneys General are
working collectively to seek to use state deceptive and unfair trade practices laws and
otherlaws to attack lending practices that are not otherwise known to be unlawful.

In
addition to complying with the myriad of federal, state and local consumer credit laws
regulating mortgage lending practices, lenders have to be vigilant of efforts by state
attorneys general to create new lending restrictions through enforcement actions. State
attorneys general announce their application of state unfair and deceptive trade practices
acts to mortgage lending through the filing of both complaints against individual
companies identifying the allegedly illegal conduct and the corresponding consent order
detailing the prospective practices the defendant has agreed to implement in connection
with the settlement of the complaint. In 2002, several state attorneys general settled a
case with a large subprime lender pursuant to which the lender agreed to implement
practices that the related mortgage lending laws did not explicitly require. These
practices included a limitation on lender fees of five percent of the original loan
amount, a disclosure to potential borrowers of the interest rates available to such
borrowers and the corresponding discount points available to buy down the interest rate, a
prohibition on the imposition of a prepayment penalty term greater than 24 months from the
date of loan origination, a determination that each loan provide a net tangible benefit to
the borrower, and a prohibition on lender fees in connection with the refinancing of an
existing mortgage loan owned by the lender or a lending subsidiary of the lender that was
originated or refinanced within 12 months of the current refinancing. In many cases, the
particular requirements are more restrictive than existing consumer credit laws that
address the same topics. By its terms, the settlement applied only to the lender that
executed the settlement agreement.

On
July 18, 2005, the New Mexico Attorney General wrote a form letter to 150 lenders of which
we were not one, asking each lender to furnish information regarding its lending practices
pertaining to those that were the subject of the 2002 settlement. In the accompanying
press release, the New Mexico Attorney General expressed disappointment that the subprime
lending industry has not adopted the consumer protection standards purportedly established
for the industry as a whole within the settlement agreement involving a single lender. She
further noted in the press release that the requested information will help her office
determine if the other members of the subprime lending industry are following these
consumer protection standards. Like most companies in the industry, we have not adopted
the terms of the 2002 settlement, and New Mexico Attorney Generals recent letter
suggests that there may be an increased effort by state attorneys general to leverage
settlements with individual companies into industry wide restrictions, even if the related
mortgage banking laws addressing the same issues are less restrictive that the terms of
the settlement agreements.

In
this regard, a prospectus supplement filed with the Securities Exchange Commission on July
29, 2005 by an affiliate of a non-prime lender, states that the lenders holding
company was taking a financial charge to reflect estimated liability in connection with
concerns raised by regulatory agencies and attorneys general in 30 states. A final
settlement has not yet been reported, and the state attorneys general have not filed a
complaint or a consent order. Presumably, the parties continue to negotiate prospective,
injunctive relief provisions relating to the various matters at issue in the
investigation. The prospectus supplement states that one of these issues involves stated
income loans. Whether and how the issue of stated loans will be addressed in any final
settlement in either a complaint or consent order will not be publicly known unless and
until a final settlement is reached and announced. It is possible that the terms of a
settlement, if any, resulting from this matter may reflect an interpretation of the law by
the state regulatory agencies and attorneys general involved that raises questions as to
the appropriateness of making stated income loans in general, rather than with respect to
particular practices in which the lender may have engaged. In such event, the legal and
business risks posed by certain of the types of loans made or acquired by us might be
materially increased, and new legal considerations may become applicable to our business.

- 50 -

---

Table of Contents

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

The
regulatory environments in which we operate have an impact on the activities in which we
may engage, how the activities may be carried out, and the profitability of those
activities. Therefore, changes to laws, regulations or regulatory policies can affect
whether and to what extent we are able to operate profitably. For example, recently
enacted and proposed local, state and federal privacy laws and laws prohibiting or
limiting marketing by telephone, facsimile, email and the Internet may limit our ability
to market and our ability to access potential loan applicants. The Can Spam Act of 2003
establishes the first national standards for the sending of commercial email allowing,
among other things, unsolicited commercial email provided it contains certain information
and an opt-out mechanism. Similarly, the federal Telephone Consumer Protection Act and
Telemarketing Consumer Fraud and Abuse Prevention Act statutes, designed to restrict
unsolicited advertising using the telephone and facsimile machine, regulate unwanted
telephone solicitations and the use of automated telephone dialing systems, prerecorded or
artificial voice messages, and telephone facsimile machines.

In
2003, The Federal Communications Commission, or the FCC and the United States Federal
Trade Commission, or FTC, amended its rules to establish a national do not
call registry. Generally, vendors are prohibited from calling anyone on that
registry unless the consumer has initiated the contact or given prior consent. These rules
generally have survived legal challenge. In view of the public concern with privacy, we
cannot provide any assurance that the proposed laws, rules and regulations, or other
similar laws, rules or regulations, will not be adopted in the future. Adoption of these
laws and regulations could have a material adverse impact on our business by substantially
increasing the costs of compliance with a variety of inconsistent federal, state and local
rules, or by restricting our ability to charge rates and fees adequate to compensate us
for the risk associated with certain loans.

In
addition, we will be subject to greater costs and potential liability under new do
not fax rules adopted by the FCC that will become effective on January 9, 2006.
These rules will make it unlawful for any person to send an unsolicited facsimile to
another machine that contains any material advertising the commercial availability or
quality of any property, good, or service, unless the recipient has expressly permitted
the sending of such a facsimile in a signed written statement. In addition, the FCCs
rules require that each facsimile advertisement must contain the identity and telephone
number of the business on whose behalf the facsimile is being sent, whether sent directly
by that business or through a third-party service provider. Recipients of unwanted
facsimiles thus will receive information allowing them to seek redress. Violators of these
rules may be subject not only to enforcement actions by government agencies, but also to
private suits by affected persons. Implementation of these rules and compliance therewith
may increase our costs and increase our legal risks as well as reduce the overall size of
the customer base from which we may solicit.

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

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

Competitive
forces currently demand that we pay mortgage brokers yield spread premiums on many of the
loans we originate. The federal Real Estate Settlement Procedures Act, or RESPA, prohibits
the payment of fees for the mere referral of real estate settlement service business. This
law does permit the payment of reasonable value for services actually performed and
facilities actually provided unrelated to the referral. There have been many lawsuits over
the years questioning whether mortgage broker compensation paid by lenders constitutes
illegal referral fees or permissible fees for services actually performed. Appellate court
decisions have held, and the Department of Housing and Urban Development has issued a
policy statement taking the position, that lender payments to mortgage brokers, including
yield spread premiums, are not per se illegal. Nevertheless, if other circuit courts that
have not yet reviewed this issue disagree, there could be a substantial increase in
litigation regarding lender payments to brokers and in the potential costs of defending
these types of claims and in paying any judgments that might result.

- 51 -

---

Table of Contents

Brokers are subject to separate
regulation, and we may be subject to fines or other penalties based upon the conduct of
our independent brokers.

The
mortgage brokers from which we obtain loans have parallel and separate legal obligations
to which they are subject. While these laws may not explicitly hold the originating
lenders responsible for the legal violations of mortgage brokers, increasingly federal and
state agencies have sought to impose such assignee liability. For example, the FTC,
entered into a settlement agreement with a mortgage lender where the FTC characterized a
broker that had placed all of its mortgage loan production with a single lender as the
agent of the lender. The FTC imposed a fine on the lender in part because, as
principal, the lender was legally responsible for the mortgage brokers
unfair and deceptive acts and practices. The United States Justice Department in the past
has sought to hold a subprime mortgage lender responsible for the pricing practices of its
mortgage brokers, alleging that the mortgage lender was directly responsible for the total
fees and charges paid by the borrower under the Fair Housing Act even if the lender
neither dictated what the mortgage broker could charge nor kept the money for its own
account. Accordingly, we may be subject to fines or other penalties based upon the conduct
of our independent mortgage brokers.

If financial institutions face
exposure stemming from legal violations committed by the companies to which they
providefinancing 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 it liable
for 10% of the plaintiffs damages. This instance of liability is the first case we
know of in which an investment bank was held partly responsible for violations committed
by a mortgage lender customer. Shortly after the announcement of the jury verdict in the
California case, the Florida Attorney General filed suit against the same financial
institution, seeking an injunction to prevent it from financing mortgage loans within
Florida, as well as damages and civil penalties, based on theories of unfair and deceptive
trade practices and fraud. The suit claims that this financial institution aided and
abetted the same lender involved in the California case in its commission of fraudulent
representations in Florida. As of the date of this information statement/prospectus, there
has been no ruling in this case. If other courts or regulators adopt this aiding and
abetting theory, investment banks may face increased litigation as they are named as
defendants in lawsuits and regulatory actions against the mortgage companies with which
they do business. Some investment banks may charge more for warehouse lending and reduce
the prices they pay for whole-loans to build in the costs of this potential litigation or
exit the business entirely, thereby increasing our cost of borrowing. Any such increases
could, in turn, 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, and we may be unable to compete effectively with financial
institutions that are exempt from such restrictions.

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

- 52 -

---

Table of Contents

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

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

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

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

Our failure or the failure of our
subsidiaries to obtain and maintain licenses in the jurisdictions in which we do business
could have a material adverse effect on our results of operations, financial condition,
and business.

We
operate in a highly regulated industry, and we and our subsidiaries are subject to
licensing requirements in the various states where we do business. Failure to maintain
these licenses and approvals would limit, delay and disrupt our operations in certain
geographical regions, and perhaps nationwide, and could have a material adverse effect on
our business, financial condition, liquidity, and results of operations.

- 53 -

---

Table of Contents

We may be subject to various legal
actions, which if decided adversely, could have a material adverse effect on us.

Because
the non-conforming mortgage lending and servicing business, by its nature, involves the
collection of numerous accounts, the validity of liens and compliance with local, state
and federal lending laws, mortgage lenders and servicers are subject to, and we may become
subject to, numerous claims and legal actions in the ordinary course of business. These
legal actions include lawsuits brought as class actions that allege violations of various
federal, state and local consumer protection laws. While we cannot predict the ultimate
legal and financial liability with respect to legal actions brought against us, an adverse
judgment in one or more legal actions could have a material adverse effect on our
financial condition. In addition, in recent years, both state and federal regulators have
subjected the practices of non-conforming mortgage lenders to particularly intense
regulatory scrutiny, which has resulted in a number of well-publicized governmental and
other investigations of other mortgage lenders in our industry. Lawsuits can be very
expensive, harm a companys reputation and otherwise disrupt operations. We cannot
assure you that we will not be the subject of legal actions that could materially and
adversely affect our financial condition. Any such investigation of us could have a
material adverse effect on our business, results of operations, liquidity, and financial
condition.

If many of our borrowers become
subject to Service members Civil Relief Act of 2003, our cash flows and interest income
maybe adversely affected.

Under
the Servicemembers Civil Relief Act, which re-enacted in 2003 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 required to pay interest
above an annual rate of 6%, and the lender is restricted from exercising certain
enforcement remedies, during the period of the borrowers active duty status. This
act also applies to a borrower who was on reserve status and is called to active duty
after origination of the mortgage loan. The recent significant mobilization by the U.S.
Armed Forces could increase the number of our borrowers who are subject to this Act,
thereby reducing our cash flow and the interest payments collected from those borrowers,
and in the event of default, delaying or preventing it from exercising the remedies for
default that otherwise would be available to us.

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

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

Recent cases may limit our ability
to foreclose on a defaulted loan in Florida if the loan is registered on the Mortgage
Electronic Registration System

Mortgage
Electronic Registration Systems, Inc., or MERS, operates a national electronic
registration system, or MERS System for mortgages and related instruments. As a subscriber
to the MERS System, we designate MERS as our nominee or the mortgagee of record for the
purpose of recording mortgages and related instruments, or MERS Instruments, in the county
where the subject real property is located. The MERS Instruments are registered in a
central database, which tracks all future transfers of the beneficial ownership interests
and servicing rights among MERS members.

Two
recent Florida cases raise a question whether MERS may bring a foreclosure action on our
behalf. Circuit courts in the sixth and eleventh judicial districts in Florida, have
recently held that MERS does not have standing to bring a foreclosure action against a
borrower in default in Florida. Unless these cases are overturned on appeal, we will have
to assign defaulted loans in Florida to someone other than MERS. Assigning default loans
to third parties in Florida will result in increased costs. If a substantial number of our
loans in Florida become defaulted, or if other states follow the decisions of the Florida
courts, the resulting increased costs of foreclosure may have a materially adverse effect
on our results of operation, business, or financial condition.

- 54 -

---

Table of Contents

# Risks Related to Our
Organizational Structure

Our Chief Executive Officer and
President owns a significant amount of our outstanding common stock and may significantly
influence the management and policies of our company, in ways with which you may disagree.

Raymond
Eshaghian, our Chief Executive Officer, President, Secretary and Chairman of our board of
directors, directly and indirectly through others beneficially owns or controls over 60.1%
of our outstanding shares of common stock, assuming the exercise of all options and
warrants currently outstanding. Mr. Eshaghian is able to exercise significant influence
over the election of our directors, and therefore, our management and policies, through
his voting power. He may vote his or cause his affiliations to vote its shares of our
common stock in ways with which you may disagree or which may be adverse to your interests
as a stockholder, and this voting concentration may discourage, delay or prevent a change
in control or acquisition of our company, even one that you believe is beneficial to you
as a stockholder.

Loss of Messrs. Eshaghian, Najand
could result in a material adverse effect on our business.

Our
future success depends to a significant extent on the continued services of Messrs.
Eshaghian, Najand. The loss of the services of Messrs. Eshaghian, Najand could have a material adverse effect on our results of operations, financial
condition, and business.

# Risks of Ownership of
Our Common Stock

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

Lack
of trading market. Although the our common stock trades on the OTC Bulletin Board, the
public market for our common stock historically has not been very liquid and a regular
trading market for the securities may not be sustained in the future. The OTC Bulletin
Board is an inter-dealer, over-the-counter market that provides significantly less
liquidity than the NASDAQs automated quotation system, or the NASDAQ Stock Market.
Quotes for stocks included on the OTC Bulletin Board are not listed in the financial
sections of newspapers, as are those for the NASDAQ Stock Market. Therefore, prices for
securities traded solely on the OTC Bulletin Board may be difficult to obtain and holders
of common stock may be unable to resell their securities at or near their original
offering price or at any price.

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

- 55 -

---

Table of Contents

Broker-dealer
requirements may affect trading and liquidity. Section 15(g) of the Securities
Exchange Act of 1934, as amended, and Rule 15g-2 promulgated thereunder by the Commission
require broker-dealers dealing in penny stocks to provide potential investors with a
document disclosing the risks of penny stocks and to obtain a manually signed and dated
written receipt of the document before effecting any transaction in a penny stock for the
investors account. Potential investors in our common stock are urged to obtain and
read such disclosure carefully before purchasing any shares that are deemed to be
penny stock. Moreover, Rule 15g-9 requires broker-dealers in penny stocks to
approve the account of any investor for transactions in such stocks before selling any
penny stock to that investor. This procedure requires the broker-dealer to (i) obtain from
the investor information concerning his or her financial situation, investment experience
and investment objectives; (ii) reasonably determine, based on that information, that
transactions in penny stocks are suitable for the investor and that the investor has
sufficient knowledge and experience as to be reasonably capable of evaluating the risks of
penny stock transactions; (iii) provide the investor with a written statement setting
forth the basis on which the broker-dealer made the determination in (ii) above; and (iv)
receive a signed and dated copy of such statement from the investor, confirming that it
accurately reflects the investors financial situation, investment experience and
investment objectives. Compliance with these requirements may make it more difficult for
investors in our common stock to resell their shares to third parties or to otherwise
dispose of them in the market or otherwise.

Shares of our common stock
available for future sale could have an adverse effect on our stock price.

Sales
of a substantial number of shares of our common stock, or the perception that such sales
could occur, could adversely affect prevailing market prices for our common stock. The
issuance of additional shares of our common stock may be available for sale in the public
markets. In addition, a substantial number of shares of our common stock may, pursuant to
employee benefit plans, be issued or reserved for issuance from time to time and these
shares of common stock may be available for sale in the public markets from time to time.
We presently have 1,585,733 shares of our common stock subject to options that are
immediately exercisable and an additional 299,267 shares subject to options that vest over
the next [five] years. We cannot predict the effect that future sales of shares of our
common stock will have on the market price of our common stock.

The market price and trading
volume of our common stock may be volatile.

The
market price of our common stock may be highly volatile and be subject to wide
fluctuations. In addition, the trading volume in our common stock may fluctuate and cause
significant price variations to occur. We cannot assure you that the market price of our
common stock will not fluctuate or decline significantly in the future. Some of the
factors that could negatively affect our stock price or result in fluctuations in the
price or trading volume of our common stock include:

- market reaction to our reorganization;
- issuance of new equity securities pursuant to
 a future offering;
- actual or anticipated variations in our
quarterly operating results or distributions;
- changes in our funds from operations or earnings estimates or publication of research reports about us, if any, or the real
         estate industry;
- changes in market interest rates;
- changes in market valuations of similar
companies;
- competitive developments, including announcements by us or our competitors of new products or services or significant
         contracts, regulations, strategic partnerships, joint ventures or capital commitments;
- adverse market reaction to any increased
indebtedness we incur in the future;
- additions or departures of key management
personnel;
- actions by institutional stockholders;
- depth and liquidity of the market for our
common stock;
- speculation in the press or investment
community; and
- general market and economic conditions.

- 56 -

---

Table of Contents

# ITEM 2. PROPERTIES

Our
primary executive and administrative offices are located in Los Angeles, California. We
have a sub- lease expiring May 31, 2007. The current aggregate annual rent for the leased
property is approximately $611,500.

# ITEM 3. LEGAL PROCEEDINGS

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

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

On June 15, 2005, we held our annual
meeting of stockholders. Of 15,000,000 shares eligible to vote, 10,110,779 votes were
returned, or 67.4%, formulating a quorum. At the annual stockholders meeting, the
following matters were submitted to stockholders for vote: Proposal I  Election of
Directors, Proposal II  Ratification of the appointment of Singer Lewak Greenbaum
& Goldstein, LLP (SLGG) as our independent auditors for the year ending
December 31, 2005,  Proposal IIIApproval of an amendment to the Companys
certificate of Incorporation to Decrease the Number of Authorized Common Stock from
100,000,000 to 30,000,000 shares and to decrease the number of authorized preferred stock
from 50,000,000 to 100,000 shares.

Proposal I 
Election of Directors.

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

|Director            | FOR        | AGAINST | WITHHELD  | ELECTED
|------------------- | ---------- | ------- | --------- | -------
|Raymond Eshaghian   | 10,110,629 | 100     | 4,889,271 | Yes    
|H. Wayne Snavely    | 10,110,629 | 100     | 4,889,271 | Yes    
|M. Aaron Yashouafar | 10,110,629 | 0       | 4,889,271 | Yes    

Proposal II  Ratification of
the appointment of Singer Lewak Greenbaum & Goldstein, LLP (SLGG) as our
independent auditors for the year ending December 31, 2005. This proposal was approved
with 10,110,729 shares voted FOR, 0 voted AGAINST, and 4,889,271 votes WITHHELD.

Proposal III  Approval of an
amendment to the Companys certificate of Incorporation to Decrease the Number of
Authorized Common Stock from 100,000,000 to 30,000,000 shares and to decrease the number
of authorized preferred stock from 50,000,000 to 100,000 shares.  This proposal was
approved with 9,075,495 shares voted FOR, 1,000 voted AGAINST, 150 abstained and
5,923,355 votes WITHHELD.

- 57 -

---

Table of Contents

# PART II

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

Our
Common Stock is currently quoted on the OTC Bulletin Board under the symbol
TMFZ. Although shares of our Common Stock have been quoted on the OTC Bulletin
Board since April 24, 2001, there has not been any public market activity prior to
the quarter ending December 31, 2002. No assurance can be given that any public
market activity for our Common Stock will continue to develop or be maintained. During the
year ending December 31, 2005, the high and low closing price of our Common Stock was
$4.00 and $1.90, respectively. Such quotations reflect inter-dealer prices, without
retail mark-ups, mark-downs or commissions and may not necessarily represent actual
transactions in an established trading market.

As
of April 4, 2006, there were 86 holders of record of our Common Stock (including holders
who are nominees for an undetermined number of beneficial owners). These figures do not
include beneficial owners who hold shares in nominee name.

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

# EQUITY COMPENSATION PLAN
INFORMATION

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

- 58 -

---

Table of Contents

# ITEM 6. SELECTED
FINANCIAL DATA

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

|                                                   | Years Ended December 31,
|-------------------------------------------------- | ------------------------
|                                                   | 2005                    
|Revenue                                            |                         
|Income from sales of loans                         | $61,157                 
|Mortgage interest income                           | 17,380                  
|Commission fee                                     | 640                     
|Escrow service fee                                 | 0                       
|Total revenue                                      | 79,177                  
|                                                   |                         
|Cost of sales                                      |                         
|Commission expense                                 | 20,075                  
|Warehouse interest expense                         | 14,270                  
|Other closing expenses                             | 2,398                   
|Reserve for loans to be repurchased                | 967                     
|Total cost of sales                                | 37,710                  
|                                                   |                         
|Gross profit                                       | 41,467                  
|                                                   |                         
|Operating expenses                                 |                         
|Salaries and wages                                 | 18,978                  
|Occupancy                                          | 961                     
|General and administration                         | 5,912                   
|Total expenses                                     | 25,851                  
|                                                   |                         
|Income (loss) from operations                      | 15,616                  
|                                                   |                         
|Other Income (loss)                                | (86)                    
|                                                   |                         
|Income (loss) before provision for    income taxes | 15,530                  
|                                                   |                         
|Provision for income taxes                         | 6,328                   
|                                                   |                         
|Net income (loss)                                  | $  9,202                

|                                                     | As of December 31,
|---------------------------------------------------- | ------------------
|Balance sheet data:                                  | 2005              
|Cash and cash equivalent                             | 10,247            
|Restricted cash                                      | 413               
|Loans held for sale                                  | 65,460            
|Other assets                                         | 19,542            
|Total assets                                         | 95,662            
|Total liabilities                                    | 72,151            
|Preferred stock                                      | -                 
|Total stockholder's equity                           | 23,511            
|                                                     |                   
|Weighted average of issued and    outstanding shares | 15,000,000        
|Basic earnings per share                             | 0.61              

- 59 -

---

Table of Contents

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

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

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

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

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

# General

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

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

Financing, Revenues, and Interest Rate Management

Historically,
our business model relied primarily on our ability to originate mortgage loans and sell
those loans on a servicing-released basis in the secondary mortgage market at prices that
resulted in a competitive operating margin. Our primary components of revenue have been
gain from the sale of loans, which is the excess of the sale price of the loan over its
outstanding principal balance reduced by the direct costs of originating the loan,
mortgage interest income, and loan origination fees.

- 60 -

---

Table of Contents

Following
our reorganization, we intend to retain, on our balance sheet, a substantial portion of
the mortgage loans we originate. We expect to finance this mortgage loan portfolio over
the long-term by issuing mortgage-backed securities through securitization transactions
that are treated as financings for tax and accounting purposes, and therefore, do not
expect to recognize gain or loss at the time of securitization. Accumulating mortgage
loans on our balance sheet is an important aspect of our REIT compliance strategy. Under
the REIT rules, we will need to accumulate sufficient REIT qualifying assets so that the
value of our taxable REIT subsidiaries, which will initially be The Mortgage Store, will
constitute no more than 20% of our total assets at the close of each calendar quarter.
Additionally, at least 75% of our assets must consist of real estate assets such as real
property or loans secured by real property at the close of each calendar quarter.
Initially, we will meet these asset tests by acquiring mortgage-backed certificates and
over the long term by having a sufficiently large on-balance sheet portfolio of mortgage
loans. Finally, we will need to grow our on-balance sheet portfolio to a size sufficient
to generate sufficient gross income so that we meet the annual requirement that 75% of our
income is real estate related income such as rents from real property and interest on
obligations secured by mortgages on real property.

Initially,
the source of the mortgage loans that we will retain in our portfolio will be the closed
loans we purchase from The Mortgage Store. In the future we may provide The Mortgage Store
with funds to close loans on our behalf in which case we will pay The Mortgage Store a fee
for originating and processing the loans it closes on our behalf. While we have not
determined the amount of any fees we may, in the future, pay The Mortgage Store, such fees
will be set at an arms-length rate to comply with the tax rules applicable to
REITs as well as comply with any other legal or regulatory requirements applicable to us.
In addition, if, in the future, we either originate our own mortgage loans rather than
purchasing closed loans from The Mortgage Store or we provide loan closing funds to The
Mortgage Store, we may pay The Mortgage Store a fee, at the then current market rate, for
any interim servicing it provides us. Although we intend to retain a substantial portion
of our and The Mortgage Stores mortgage loan production, The Mortgage Store will
continue to sell a portion of the loans it originates through either loan sales or through
securitizations structured as sales for tax and accounting purposes and to generate
origination fees, enabling us to increase our capital by retaining the after tax income in
The Mortgage Store, which will help us maintain the financial ratio covenants contained in
our warehouse facilities. We do not expect, however, that The Mortgage Store will sell
loans until we have built our on-balance sheet portfolio to a sufficient size to allow us
to comply with the REIT rules, other than those loans we are unable to securitize. Since
retaining after tax income increases the value of The Mortgage Store, we will need to
monitor the value of The Mortgage Store to ensure that it does not exceed 20% of our total
assets.

We
expect to fund our mortgage loans on a short-term basis directly through our revolving
warehouse lines of credit and repurchase agreements, which we refer to as our warehouse
facilities. As a condition to the closing of the asset purchase agreement, The Mortgage
Store will need to obtain consents from the warehouse lenders and those warehouse
facilities may also need to be amended as to financial covenants, commitment amount, and
other terms. Additionally, we will need to enter into our own warehouse facilities or
become a co-borrower on The Mortgage Stores warehouse facilities to purchase and
fund loans from The Mortgage Store. We have begun to discuss obtaining the necessary
consents and amendments with our warehouse lenders and expect to obtain such consents and
amendments prior to consummating this reorganization. Those negotiations are currently
underway and should be finalized in the first quarter of 2006. We cannot, however, assure
you that we will be able to obtain the consents and amendments we need to the existing
warehouse facilities or to obtain new warehouse facilities at the REIT level.

Our
REIT compliance strategy will significantly affect our balance sheet. After the
reorganization, we expect that our principal elements of revenues will be interest income
generated from our mortgage loan portfolio, rather than gains on sale from the sale of
loans, and loan origination fees, all initially expected to be generated at The Mortgage
Store. Our primary components of expenses are expected to be interest expense on and costs
associated with our warehouse facilities and securitizations and general and
administrative expenses and payroll and related expenses arising from our origination
business.

- 61 -

---

Table of Contents

To
the extent consistent with our qualification as a REIT, we expect to follow an interest
rate risk management program intended to protect our portfolio of mortgage loans and
related debt against the effects of major interest rate changes. We expect to primarily
use securitization transactions to manage our long-term interest rate risk. We believe
securitizations are an attractive source of long-term funding because the aggregate
weighted average life of the securities issued in such transactions approximates the
weighted average life of the securitized mortgage loans and the payments due on the
securities generally match the cash-flow from such mortgage loans. Our interest rate
management program will be formulated with the intent to offset, to some extent, the
potential adverse effects resulting from the differences between interest rate adjustment
indices and interest rate adjustment periods of our ARMs and related borrowings. In the
future we may also hedge the debt we issue or anticipate issuing in our securitization
transactions with hedging transactions, which may include swaps, interest rate caps and
floors and other derivatives. The nature and quantity of hedging will be determined by our
management based on various factors, including market conditions and the expected volume
of mortgage loan originations. We cannot assure you that any such hedging transaction will
offset the risks of changes in the interest rates, and it is possible that there will be
periods during which we may incur losses after accounting for our hedging activities.

The
Mortgage Store maintains revolving warehouse lines of credit and repurchase agreements,
which we collectively refer to as our warehouse facilities, to finance the origination of
mortgage loans prior to sale. We recognize interest income on loans held in inventory and
interest expense on any associated warehouse facility throughout the period preceding the
sale of the loans. Gains or losses on loan sales are recognized when we surrender control
over the loans, generally on the settlement date, based upon the difference between the
proceeds received from the sale and the net carrying value of the loans. The proceeds from
the sales are used to repay our warehouse facilities, fund new originations, and grow our
operations.

Currently,
The Mortgage Store is an interim loan servicer, meaning that it services all of its loans
on a temporary basis. The Mortgage Store will typically service the loans for purchasers
of its loans for a period of up to 90 days after the sale date, at which time the
servicing is transferred to the purchaser. Monies form the loans sold to non-affiliated buyers
is typically received within a period between 30 and 60 days from origination.

Mortgage
loans enter our integrated team origination process through our wholesale channel, which
solicits business from mortgage brokers, and our retail channel, which markets directly to
the general public. Our wholesale channel currently has over 5,000 approved brokers
of which approximately 1,330 actively conducted business with us in 2005. In the future, we
intend to enter into loan purchase and sale agreements with mortgage bankers, banks,
thrifts, and credit unions to sell residential mortgage loans to us through our wholesale
channel. Unlike our mortgage brokers, these sellers, or correspondent lenders, will close
their loans through their own financing. Our retail channel has over 23 loan officers that
operate from our headquarters and four branch offices throughout California and Virginia. For the year
ended December 31, 2005 and the year ended December 31, 2004, we originated approximately
$1.7 billion and $1.0 billion of mortgage loans, respectively, of which approximately
88.9% and 82.9%, respectively, were generated through our wholesale channel and
approximately 11.1% and 17.1%, respectively were generated through our retail channel.
Over the past five calendar years our originations have grown at a compound annual rate of
61.0%. For a discussion of our wholesale and retail operations, see Business.

Our
business and profitability are sensitive to movements in interest rates. The past few
years have exhibited a period of relatively low interest rates, resulting in a robust,
residential loan origination market as consumers sought new mortgages and refinancings. We
believe that interest rates will gradually increase over the course of the next year, but
we expect that they will remain low compared to historical levels during this period.

Conversely,
we expect the current level of total origination activity in the mortgage industry at
large, which includes both conforming and non-conforming mortgage loans, to decrease, as
higher interest rates make home buying more costly for consumers and refinancing of
existing mortgages less attractive to current borrowers. Our current business model
contemplates growth, even in an increasing interest rate environment with declining originated volume for the industry, by
capturing additional market share. We, however, expect that our volume growth will
increase more slowly in a rising interest rate environment than in a declining interest
rate environment. Our ongoing business strategy will be to
continue to grow volume. We intend to do that by expending the geographical footprint of
our sales organization into new territories, and to continue to expand our sales efforts
in our current markets. We will greatly expand our sales presence in Mid-America and on
the East Coast, as well as other Western markets we do not currently service.

- 62 -

---

Table of Contents

The
mortgage industry is highly competitive. As a result, we are not able to originate loans
at rates higher than the market rate. We primarily operate in the non-conforming
sector and our borrowers typically have a combination of risk characteristics for which we
can charge a higher interest rate than those for conforming loans. Our borrowers
tend to engage more in cash-out refinances than rate or term refinances for conforming
mortgage loans and borrowing activity is generally less sensitive to increases in interest
rates. The Alt-A and subprime markets have historically had higher percentages of cash-out
refinances because of the borrowers characteristics, and because borrowers are
accustomed to paying a higher interest rate than is available on conforming loans.
Borrowers in these categories tend to use the equity in their property to fund other
consumer needs, including debt consolidation and major consumer purchases.

Change in Business Strategy

Our
business strategy currently relies on our ability to originate mortgage loans and to sell
those loans in the secondary mortgage market at prices that result in a competitive
operating margin. We calculated our operating margin as the sum of the price we receive
for our loans, plus origination fees, plus the net interest income we earn for the period
of time we hold the loans, less the cost to originate and fund the loans. Loans held for
sale are aggregated into mortgage pools, and, generally within a period between 30 and 60
days of funding the loans, sold to third parties. We finance our mortgage loan
originations on a short-term basis through our warehouse facilities. Loans are generally
held through our warehouse facilities for less than 90 days and we expect that this will
continue to be the case even after we begin our securitization program. Under our existing loan
sale strategy, our income is generated primarily by:

- the sale of loans at a price greater
than our
weighted average origination costs (including overhead);
- net interest income, which is the
difference between the interest income generated by the mortgage loans and interest
                  expense on the financing of our lending activities through our warehouse facilities during the time we hold the
                  mortgages; and
- origination fee income.

Following
completion of the reorganization, although we will continue to sell a portion of the loans
we originate, our strategy will include retaining a substantial portion of our mortgage
loans in an investment portfolio, financed on a long-term basis by securitization.

By
retaining a substantial portion of our mortgage loans in an investment portfolio, we will
be assuming significantly more interest rate and loan default risk than under our existing
business strategy, where we sold the mortgage loans we originated generally within 30 to
60 days of funding the loans. The securitizations we expect to undertake after the
reorganization to finance our loan portfolio are intended to be structured as financings
for tax and accounting purposes; therefore, we do not expect to recognize a gain or loss
on sale for tax and accounting purposes. We expect to hold loans for 60 to 75 days prior
to securitization. Following the securitizations, the loans will remain on our
consolidated balance sheet as an asset, the securitization debt will be listed as a
liability on our balance sheet, and we will record interest income generated by the
mortgage loans over the life of the loan and recognize interest expense on the
mortgage-backed securities over the life of the securities. We expect to generate earnings
from the loans we retain primarily through:

net interest income, which is the difference between the:

- interest income we receive from the
mortgage loans; and
- interest we pay to the holders of the
mortgage-backed securities;

net of:

- losses due to defaults and delinquencies on
the loans;
- servicing fees and expenses we must pay;
 and
- amortization of securitization, hedging
and loan acquisition costs.

- 63 -

---

Table of Contents

We
expect our net interest income will vary based upon, among other things, the spread
between the weighted average interest earned on the mortgage loans and the interest
payable to holders of the mortgage-backed securities, the performance of the underlying
mortgages, and the amount and timing of borrower prepayments of the underlying mortgages.
The rates we pay on our borrowings are independent of the rates we earn on our assets and
may be subject to more frequent periodic rate adjustments. Therefore, we could experience
a decrease in net earnings or a loss because the interest rates on our borrowings could
increase faster than the interest rates on our assets, if the increased borrowing costs
are not offset by reduced cash payments on derivatives recorded in other non-interest
income. If our net interest spread becomes negative, we will be paying more interest on
our borrowings than we will be earning on our assets and we will be exposed to a risk of
loss.

In
addition, we expect to issue subordinate securities as part of our securitizations. An
active trading market for our subordinate securities may never develop. As a result, the
market for any subordinate securities we issue could become temporarily illiquid or trade
at steep discounts, thereby reducing the cash we would receive from a sale of these
securities. This illiquidity could have a material adverse effect on our operations.

This
change in our business strategy will significantly affect our balance sheet. Our
management intends to continuously evaluate our new business strategy, taking into
consideration trends in actual cash flow performance, industry and economic developments,
as well as other relevant factors. As a result of our new business strategy, as discussed
above, we expect the net interest income generated by our portfolio of loans to become,
over time, the largest component of our revenues, rather than the net gain received by us
as a result of our loan sales, which has been the largest component of our revenues up to
now. Since we did not previously hold the loans we originated for an extended period of
time and because we sold all of the loans we originated on a servicing-released basis, our
historical results of operations and managements discussion of those results are not
likely to be indicative of our future results. We expect, however, that the accounting
treatment of our securitizations will more closely match the recognition of income with
the actual receipt of cash payments and is expected to decrease the volatility of our
earnings, which will no longer be almost entirely dependent on the timing of loan sales.

Forward Looking Financial Statement Effects

As
a result of the proposed changes in the way we expect to conduct our business after the
reorganization, we believe it is important to describe some of the differences that a
stockholder would expect to see in our financial statements. Upon implementing our new
business plan, we will employ new policies related to our accounting and financing
activities.

REIT Compliance

We
expect to qualify and intend to elect to be taxed as a REIT for federal income tax
purposes. U.S. Federal income tax law requires that a REIT distribute to its stockholders
annually at least 90% of its REIT taxable income (determined without regard to the
dividends paid deduction and by excluding net capital gains). REIT taxable income does not
include the retained earnings of any taxable REIT subsidiary until such earnings are
distributed to the REIT. So long as we comply with the requirements for REIT
qualification, we will not be subject to U.S. Federal or state corporate income tax at the
REIT level, if our dividends paid equals our REIT taxable income (determined without
regard to the dividends paid deduction). We expect that we will make regular quarterly
distributions of at least 90% of our REIT taxable income to holders of our common stock.
Any taxable income generated by our taxable REIT subsidiaries will be subject to regular
corporate income tax as will any REIT taxable income that is not distributed to our common
stockholder. Therefore, we will continue to record U.S. Federal or state corporate income
tax expense because of our taxable REIT subsidiaries. Our taxable REIT subsidiaries may
retain any income they generate net of any tax liability they incur on that income without
affecting the REIT distribution requirements (although accumulation of earnings within our
taxable REIT subsidiaries may be limited by the U.S. Federal income tax rules applicable
to REITs that limit the total value of a REITs assets that may be represented by the
REITs interests in its taxable REIT subsidiaries). If any of our taxable REIT
subsidiaries choose to pay a dividend to us, the dividend will be included in our REIT
taxable income and will be included in the calculation of our required distributions. Any
distributions we make in the future will be at the discretion of our Board of Directors
and will depend upon, among other things, our actual results of operations.

- 64 -

---

Table of Contents

As
described in more detail under the heading Material Federal Income Tax Consequences
 REIT Taxation Generally, to qualify as a REIT, we are required to meet
certain asset tests at the end of each calendar quarter and certain income tests annually.
These asset tests require, among other things, that at least 75% of our assets must be
qualified real estate assets, government securities and cash and cash items. In addition,
the securities issued by our taxable REIT subsidiaries cannot represent more than 20% of
our total assets. The need to comply with the quarterly asset tests may cause us to
acquire assets that are qualified real estate assets for purposes of satisfying the tests
(for example, interests in our mortgage loan portfolios) but are not part of our overall
business strategy and might not otherwise be the best investment alternative for us.

The
annual gross income tests require that, to maintain qualification as a REIT, we must
derive directly or indirectly at least 75% of our gross income from rents on real
property, interest on debt secured by mortgages on realty property or on interests
in real property, dividends or other distributions on, and gain from the sale of, shares
in other REITs, and the gain from the sale of real property or mortgage loans. In
addition, we must derive at least 95% of our gross income (excluding gross income from
prohibited transactions) from sources described in the preceding sentence or from other
types of dividends and interest, including dividends from our taxable REIT subsidiaries,
gain from the sale or disposition of stock or securities, or income from qualified hedging
transactions (or from a combination of the foregoing). Income derived from hedging
transactions not specified in these provisions is not treated as qualifying income for
purposes of the gross income tests applicable to REITs.

Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities

While
generating a portfolio of loans for securitization, we have to comply with the provisions
of Financial Accounting Standards Board Statement, or FASB, No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities related
to each securitization. Depending on the structure of the securitization, it will either
be treated as a sale or secured financing for financial statement purposes. It is our
intent that our securitizations be treated as secured financings under the standards set
forth in FASB Statement No. 140. Our strategy of retaining the mortgage loans in our
securitization pools on our consolidated balance sheet will reduce the number of loans
available for sale, and ultimately, the number of loans we sell. Therefore, we anticipate
that our total gains on sale under GAAP will be lower than we have historically
recognized.

Accounting for Net
Interest Income

After
the reorganization, as we grow our on-balance sheet portfolio, accounting for net interest
income will become one of our critical accounting policies. Net interest income is
calculated as the difference between our interest income and interest expense. Interest
income on our mortgage loan portfolio is a combination of accruing interest based on the
outstanding balance and contractual terms of the mortgage loans and the amortization of
yield adjustments using the interest method in accordance with SFAS 91.

Accounting for
Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial
Direct Costs of Leases

Principally the amortization of premiums, discounts, and other
net capitalized fees or costs associated with originating our mortgage loans. These yield
adjustments are amortized against interest income over the lives of the assets using the
interest method adjusted for the effects of estimated prepayments. Because we expect to
hold a large number of similar loans for which prepayments are probable, we expect to use
a prepayment model to project loan prepayment activity based upon loan age, loan type,
customer characteristics and remaining prepayment penalty coverage. Estimating prepayments
and estimating the remaining lives of our mortgage loan portfolio requires management
judgment, which involves consideration of possible future interest rate environments and
an estimate of how borrowers will behave in those environments. Reasonableness tests will
be performed against past history, mortgage asset pool specific events, current economic
outlook and loan age to verify the overall prepayment projection. If these mortgage loans
prepay at faster or slower speeds than originally projected, GAAP requires us to write
down the remaining capitalized premiums at a faster or slower speed than was originally
projected, which would decrease or increase our current net interest income.

- 65 -

---

Table of Contents

Interest
expense on our warehouse and securitization financings is a combination of accruing
interest based on the contractual terms of the financing arrangements and the amortization
of premiums, discounts, bond issuance costs, and accumulated other comprehensive income
relating to cash flow hedging using the interest method.

Mortgage
prepayments generally increase on our adjustable rate mortgages when fixed mortgage
interest rates fall below the then-current interest rates on outstanding adjustable rate
mortgage loans. Prepayments on mortgage loans are also affected by the terms and credit
grades of the loans, conditions in the housing and financial markets and general economic
conditions. We will seek to minimize the effects caused by faster than anticipated
prepayment rates by purchasing and originating mortgage loans with prepayment penalties
and lowering premium paid to acquire loans that do not require prepayment penalties.

Allowance for Loan
Losses

We
intend to maintain a substantial portion of our mortgage loans on our balance sheet for
the life of the loans, and consequently we will need to maintain an allowance for losses
related to the mortgage loans held for investment. This will be a critical accounting
policy because of the subjective nature of the estimation required and the potential for
imprecision.

We
will periodically conduct reviews of all mortgage loans held in our portfolio to determine
collectibility. In determining the adequacy of the allowance for loan losses, we will
consider such factors as historical loss experience, underlying collateral values, known
problem loans, assessment of economic conditions and other relevant data to identify the
risks in our mortgage loan portfolio. We plan to compare actual loss performance to
original loss assumptions and, if necessary, make adjustments to the provision for loan
losses. We will charge losses to the allowance for loan losses when we deem the loan not
fully collectible. As our portfolio of loans held for investment increases, we would
expect a corresponding increase in our provision for loan losses.

Our
estimate of expected losses could increase if our actual loss experience is different than
originally estimated, or if economic factors change the value we could reasonably expect
to obtain from a sale of our non-performing loans, or if property values supporting our
loans decrease. In particular, if actual losses increase or if values reasonably expected
to be obtained from a sale of non-performing loans decrease, the provision for loan losses
would increase. Any increase in the provision for loan losses relating to these factors
may adversely affect our results of operations.

Hedging

We
expect hedging will be a critical aspect of our business strategy because the value of our
loans are sensitive to the fluctuation of interest rates. From time to time, we expect to
use various financial instruments to hedge our exposure to changes in interest rates. The
following summarizes the primary hedging instruments that, subject to limitations imposed
by the REIT requirements, we expect to use to reduce interest rate risks on the loans that
we hold for investment and the loans that we hold for sale.

- Interest Rate Swap Agreements. Interest rate swap agreements allow us to exchange floating rate obligations for fixed-rate
                  obligations effectively locking in our borrowing costs for a period of time.  When we enter into a swap agreement we
                  agree to pay a fixed-rate of interest and to receive a variable interest rate, generally
 based on LIBOR.
- Interest Rate Cap Agreements.  Interest rate cap agreements allow us to receive cash payments if the interest rate index
                  specified in the cap agreement increases above contractually specified levels.  Therefore, the interest rate cap
                  agreements have the effect of capping the interest rate on a portion of our borrowings to the rate specified by the
                  interest rate cap agreement.

We
also may use, from time to time, other derivative instruments to mitigate risk from
interest rate changes.

- 66 -

---

Table of Contents

We
presently do not intend to enter into derivative instruments, except for hedging purposes.
Further, it is unlikely that we will be able to obtain hedging instruments that perfectly
offset all of the risks of our assets and liabilities. No hedging strategy can completely
insulate us from risk, and certain of the federal income tax requirements that we must
satisfy to qualify as a REIT may limit our ability to hedge. We intend to monitor and may
have to limit our hedging strategies to ensure that we do not realize excessive hedging
income or hold hedging assets having excess value in relation to total assets.

In
accordance with SFAS No. 133, Accounting for Derivative Investments and Hedging
Activities, and SFAS No. 149, Amendment of Statement 133 on Derivative Instruments
and Hedging Activities, an amendment to SFAS No. 133 all derivative instruments are
recorded at fair value. To qualify for hedge accounting under SFAS No. 133, we must
demonstrate, on an ongoing basis, that our interest rate risk management activity is
highly effective. We must also formally assess, both at inception of the hedge and on an
ongoing basis, whether the derivative instruments used are highly effective in offsetting
changes in cash flows of hedged items. If we are unable to qualify certain of its interest
rate risk management activities for hedge accounting, then the change in fair value of the
associated derivative financial instruments would be reflected in current period earnings,
but the change in fair value of the related asset or liability may not, thus creating a
possible earnings mismatch.

We
will employ a number of risk management monitoring procedures that are designed to ensure
that our hedging arrangements are demonstrating, and are expected to continue to
demonstrate, a high level of effectiveness in meeting our hedging programs risk
management and economic objectives. Hedge accounting is discontinued on a prospective
basis if it is determined that the hedging relationship is no longer highly effective or
expected to be highly effective in offsetting changes in fair value of the hedged item.
Additionally, we may elect, pursuant to SFAS No. 133, to re-designate a hedging
relationship during an interim period and re-designate upon the rebalancing of a hedge
relationship.

When
hedge accounting is discontinued because it is determined that the derivative no longer
qualifies as an effective hedge, the derivative will continue to be recorded on the
balance sheet at its fair value. Any change in the fair value of derivative no longer
qualifying as an effective hedge is recognized in current period earnings. When a hedge is
terminated, it is derecognized at the time of termination. For terminated hedges or hedges
that no longer qualify as effective, the effective position previously recorded remains in
other comprehensive income and continues to be amortized or accreted into earnings with
the hedged item.

For
derivative financial instruments not designated as hedge instruments, realized and
unrealized changes in fair value are recognized in the period in which the changes occur.

Mortgage-Backed
Certificates

Following
the reorganization, until we have fully developed our loan portfolio, we expect to invest
in mortgage-backed securities primarily those issued by Fannie Mae and Freddie Mac, to
assist us in complying with the REIT requirements. We would record any mortgage-backed
certificates as trading securities and, accordingly, carry them at fair value on our
consolidated balance sheet. The allocated cost of retained mortgage-backed certificates is
determined by allocating the net carrying value between the assets sold and the interests
retained, including equity interests, mortgage-backed certificates and servicing rights,
based upon their relative fair values, on the date of sale. Unrealized gains and losses
are included in gain on sale and recorded in the period of the change in fair value.

We
will determine the fair value of mortgage-backed certificates, including collateralized
debt obligation securities, at origination and at each reporting period by discounting the
estimated net future cash flows using assumptions that market participants would use to
estimate fair value, including assumptions about interest rates, credit losses, and
prepayment speeds. The range of values attributable to the factors used in determining
fair value is broad. Accordingly, our estimate of fair value will be subjective and may
significantly differ from the amount that could be realized in a sale.

Our
estimate of the fair value of our mortgage-backed certificates could decrease if actual
cash flows from our mortgage-backed certificates are lower than originally estimated, or
if economic factors or market analyses cause us to change the assumptions we use to value
mortgage-backed certificates. In particular, if we increase the loss or discount rate that
we apply, if we experience a substantial increase in interest rates, or if we have a
significant increase in our prepayment speeds, the fair value of our mortgage-backed
certificates would decrease. Any decrease in the fair value would adversely affect our
results of operations and the assets we carry on our consolidated balance sheet.

- 67 -

---

Table of Contents

# Primary Components of
Revenues and Expenses in the Mortgage Loan Business

Interest
Income. After the reorganization, we expect interest income to become the largest
component of our revenues as we initiate our on-balance sheet securitization strategy.
Interest income represents interest earned on loans, securitizations, and other
interest-earning assets. Partially offsetting interest income is interest expense paid
under our warehouse facilities, and other notes payable. Net interest income varies based
on the outstanding amount of interest-earning assets (interest-bearing obligations), the
length of time the assets (obligations) are held, and the volatility of interest rates.

Historically,
our primary interest-earning assets have been the mortgage loans that we have originated
and held for sale. We earn interest from the time we originate the mortgage loan until we
sell the mortgage loan in the secondary market. Under our new business strategy, we will
earn interest over the life of the mortgage loans held in our portfolio. Currently, our
primary interest-bearing obligations are our borrowings under our warehouse facilities,
which are secured by unsold loans. After the reorganization, our primary interest bearing
obligations will also include the debt securities issued in our securitizations. We expect
that the interest rate earned on the mortgage loans will exceed the interest rate paid on
the warehouse facilities resulting in a positive interest spread.

Gain
on Sale of Loans. We expect to continue to sell our mortgage loans through loan sales
and, in the future and in any event after the reorganization, through securitizations
accounted for as sales.

The
components of gain on sale include:

- the premium, which is the excess cash selling price over the outstanding principal balance of the mortgage loan sold.  The
                  amount of the premium is affected by market conditions, loan type, credit quality, interest rate and other factors
                  negotiated between us and institutional purchasers;
- the portion of the points and fees paid
by the borrower that we retain; and
- mortgage servicing rights, MSRs, the capitalized value of which is an asset that represents the present value of future
                  receipts, net of costs, to service the loans.  We base this estimate on various assumptions, including expected cost
                  to service and estimated prepayment rates.

Gain
on sale is reduced by the direct costs that are incurred to originate the mortgage loan,
such as the premium yield adjustments or the amounts paid to brokers for brokering the
loans for us, and a provision for losses from loan repurchases. Realized and unrealized
gains and losses from hedging transactions that do not meet the criteria for hedge
accounting under SFAS No. 149, an amendment to SFAS No. 133, are also included as a
component of gain on sale.

Expenses.       
          Our primary components of expenses are expected to be interest expense on our
          warehouse facilities and debt issued in and cost of our securitizations and
          general and administrative expenses and payroll and related expenses arising
          from our origination business. As our loan production and loan portfolio
          increase, we would generally expect to hire additional employees and we would
          also expect our variable expenses to increase. Also, we may incur additional
          marketing and advertising expenses to achieve our production goals. We would
          also expect to incur higher expenses in years where we open additional retail
          branches, which would result in increased office rent, equipment rent and
          insurance costs that would be incurred. There are also increased expenses that
          are associated with being a public company, such as investor relations
          responsibilities and compliance with the requirements set forth by
          Sarbanes-Oxley, the Commission, and others.

- 68 -

---

Table of Contents

# Historical Critical
Accounting Policies

We
established various accounting policies that apply accounting principles generally
accepted in the United States of America in the preparation of its historical financial
statements. Certain accounting policies require us to make significant estimates and
assumptions that may have a material impact on certain assets and liabilities or our
results of operations, and we consider these to be critical accounting policies in our
historical operation and we expect to continue these policies after the reorganization.
The estimates and assumptions we used are based on historical experience and other
factors, which we believe to be reasonable under the circumstances. Actual results could
differ materially from these estimates and assumptions, which could have a material impact
on the carrying value of assets and liabilities and our results of operations.

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

- Accounting for income taxes;
- Income from sales of loans;
- Gain
on sale;
- Provisions for losses;
- Loans held for sale;
- Loans held for investment;
- Real Estate Owned;
- and Stock-based compensation.

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

Significant
management judgment is required in determining our provision for income taxes, our
deferred tax assets and liabilities and any valuation allowance recorded against our net
deferred tax assets. The net deferred tax asset as of December 31, 2005 was $966,072.

Income
from Sales of Loans. To date our income from sales of mortgage loans has consisted
primarily of cash gain that resulted from loan sales. Historically, we have sold all of
our loans on a servicing released basis. In the future, however, we may decide to retain
the right to service any of the loans that we sell, in which case we may also record
non-cash sales related to the value of those servicing rights.

Gain
on Sale. Gains or losses resulting from our loan sales are recorded at the time of
sale. At the closing of a sale, we remove the mortgage loans held for sale and related
warehouse debt from our books and record the net gain or loss to our income statement.
Accordingly, our financial results are significantly impacted by the timing of our loan
sales. If we hold a significant pool of loans at the end of a reporting period, those
loans will remain on our balance sheet, along with the related debt used to fund the
loans. The revenue that we generate from those loans will not be recorded until the
subsequent reporting period when we sell the loans. A number of factors influence the
timing of our loan sales, including the current market demand for our loans, liquidity
needs, and our strategic objectives. We have, from time to time, delayed the sale of loans
to a later period, and may do so again in the future.

- 69 -

---

Table of Contents

Under
the terms of an early purchase facility with Washington Mutual Bank, FA, or Washington
Mutual, we sell certain qualifying loans to Washington Mutual immediately upon origination
subject to a commitment by a takeout buyer to purchase those loans within 90 days of the
sale to Washington Mutual. We retain the right to service the loans. We recognize gain or
loss from this transaction to the extent of the difference between the price at which
loans are acquired by Washington Mutual and the outstanding principal balance of the loans
plus costs to originate the loans. We recognize additional revenue (loss) equal to the
difference between takeout buyers price and the acquisition price by Washington
Mutual at the time that it releases its interest to the takeout buyer. Although this
transaction is treated as a sale and the loans are not held on our balance sheet, we may
face losses due to changes in the value of servicing rights for such loans because we have
retained the servicing rights.

Provisions
for Losses. We may make market valuation adjustments on certain non-performing loans,
loans that we are obligated to repurchase, other loans we hold for sale, and real estate
owned. These adjustments are based upon our estimate of expected losses and are based upon
the value that we could reasonably expect to obtain from a sale. An allowance for losses
on loans held for sale, loans sold that we are obligated to repurchase, and real estate
owned is recorded in an amount sufficient to maintain adequate coverage for probable
losses on such loans. As of December 31, 2005, the reserve for losses on loans held for
sale, which includes previously repurchased loans, loans sold which we are obligated to
repurchase, and real estate owned were $234,000, $955,000, and $34,000, respectively. Our
estimate of expected losses could increase or decrease if our actual loss experience or
repurchase activity is different than originally estimated, or if economic factors change
the value we could reasonably expect to obtain from a sale. In particular, if actual
losses increase or if values reasonably expected to be obtained from a sale decrease, the
provision for losses would increase. Any increase in the provision for losses would
adversely affect our results of operations.

Loans
Held for Sale. We carry mortgage loans held for sale at the lower of cost or estimated
fair value. We defer points and fees and
related direct origination costs until the related loan is sold. We recognize interest
income under the accrual method. We cease the accrual of interest on any loan when payment
of interest is 90 days or more delinquent or earlier if the collection of interest appears
doubtful.

Our
estimate of the fair value of our loans held for sale could decrease if interest rates
increased. Any decrease in the fair value would adversely affect our results of operations
and the assets we carry on our consolidated balance sheets.

Loans
Held for Investment. We will carry loans held for investment at their net amortized
cost. Mortgage loan origination fees and related direct loan origination costs are
deferred as an adjustment to the carrying value of the loans and amortized over the life
of the loan using a constant yield method. These mortgage loans are tested for impairment
whenever events or changed circumstances indicate carrying amounts may not be recoverable.
Following completion of the reorganization, mortgage loans collateralizing on-balance
sheet securitizations that will be accounted for as on-balance sheet financings will be
included in this category.

Real
Estate Owned. Properties held for sale are stated at cost, not to exceed fair value.
Real estate acquired in settlement of loans, or REO, generally results when property
collateralizing a loan is foreclosed upon or is otherwise acquired in satisfaction of the
loan and is carried at fair value less estimated costs to dispose. A propertys fair
value is based on the net amount that we could reasonably expect to receive for the asset
in a current sale between a willing buyer and a willing seller, that is, other than in a
forced or liquidation sale. Adjustments to the carrying value of real estate acquired
through foreclosure are made through valuation allowances and charge-offs recognized
through a charge to earnings. Recovery of the carrying value of real estate is dependent
to a great extent on economic, operating, and other conditions that may be beyond our
control. A decrease in real estate values may adversely affect our results of operations
and the value of assets we carry on our consolidated balance sheet.

Stock-Based
Compensation. We account for stock-based employee compensation arrangements in
accordance with the provisions of Accounting Principles Board, or APB, Opinion No. 25,
Accounting for Stock Issued to Employees, and comply with the disclosure provisions
of SFAS No. 123, Accounting for Stock-based Compensation and SFAS No. 148,
Accounting for Stock-Based CompensationTransition and Disclosure. Under APB
Opinion No. 25, compensation cost is recognized based on the difference, if any, on the
date of grant between the fair value of our stock and the amount an employee must pay to
acquire the stock. SFAS No. 123 defines a fair value based method of
accounting for an employee stock option or similar equity investment.

- 70 -

---

Table of Contents

# Financial Highlights For
2005

Net
Income. For year ended December, 31, 2005 we had income of approximately
$15.5 million before provision for income taxes. The net income after provision for income
tax was approximately $9.2 million or approximately $0.61 per common share and
approximately $0.57 per diluted common share.

Loan
originations. For the year ended December 31, 2005 we funded approximately $1.7
billion of mortgage loans compared to approximately $1.0 billion for the comparable period
of 2004. Purchase money mortgages accounted for approximately 66.6% of our originations
during the year ended December 31, 2005 compared to approximately 67.2% for the comparable
period in 2004. Our wholesale channel, which originates loans through independent mortgage
brokers, accounted for approximately 88.9% of our origination during the year ended
December 31, 2005 compared to approximately 83.1% for the comparable period of 2004.

We
continued to expand our geographical reach and increased origination throughout the
country. During the year ended December 31, 2005 and 2004 we
originated mortgage loans in 42 and 37 states, respectively. Loans originated in
California constituted approximately 64.2% and 71.4%, respectively, of our total mortgage
loan originations during those periods. Even though our loan origination in California
increased approximately 51.7% for the year ended December 31, 2005 compared to the same
period ended December 31, 2004, our loan originations in other states increased at higher
percentages.

Mortgage
loan sales  cash income from sale. For the year ended December 31, 2005 we sold
approximately $1.7 billion in loans compared to approximately $863.6 million during
the comparable period in 2004. Our revenue from sales of loans was approximately $61.2 million
during the year ended December 31, 2005 compared to approximately $42.4 million for the
comparable period in 2004. With the rising interest rates and flattening yield curve we
have seen increasing compression in our loan sale premiums. The weighted average premium
collected from sales of loans during the year ended December 31, 2005 was approximately
2.69% compared to approximately 3.41% for the same period in 2004. During
the twelve months ended December 31, 2005 the rebate or yield spread premium paid to
the loan originators was approximately 0.75% compared to approximately 0.76% for the same
period ended December 31, 2004.

Our
cash and cash equivalents at December 31, 2005 was approximately $10.2 million compared to
approximately $8.6 million at December 31, 2004.

As
of December 31, 2005, we had three warehouse facilities to fund our loan originations with
two financial institutions for a total funding capacity of approximately $504 million.
This included an early purchase facility with Washington Mutual with a maximum
concentration amount of approximately $400 million. During the year ended December 31,
2005 we renegotiated terms of financing for our warehouses. At December 31, 2005 the cost
of borrowing on these warehouse facilities are a variable rate equal to one-month LIBOR
plus a margin ranging between approximately 1.0% and approximately 2.75%.

- 71 -

---

Table of Contents

# Results of Operations

Results of operations for the year ended December 31, 2005 compared to the year ended
 December 31, 2004

|                                                |  |                                 |        |  |         |                        |       |        |  |   |         |  |            |  |       |  
|----------------------------------------------- |  | ------------------------------- | ------ |  | ------- | ---------------------- | ----- | ------ |  | - | ------- |  | ---------- |  | ----- | -
|                                                |  | For the Year Ended December 31, |       
|                                                |  | 2005                            |        |  | 2004    |                       
|                                                |  |                                 |        |  |         | Percentage             |       |        |  |   |         |  | Percentage | 
|                                                |  |                                 |        |  |         | of Total               |       |        |  |   |         |  | of Total   | 
|                                                |  | Amount                          |        |  | Revenue |                        |       | Amount |  |   | Revenue | 
|                                                |  |                                 |        |  |         | (dollars in thousands) |       |        |  |   |        
|Loan Income:                                    |  |                                 |        |  |         |                        |       |        |  |   |         |  |            |  |       |  
|Income from sales of loans                      |  | $                               | 61,157 |  |         |                        | 77.2  | %      |  | $ | 42,421  |  |            |  | 81.6  | %
|Mortgage interest income                        |  |                                 | 17,380 |  |         |                        | 22.0  | %      |  |   | 8,711   |  |            |  | 16.8  | %
|Commission fee income                           |  |                                 | 640    |  |         |                        | 0.8   | %      |  |   | 777     |  |            |  | 1.5   | %
|Escrow fee income                               |  |                                 | -      |  |         |                        | 0.0   | %      |  |   | 85      |  |            |  | 0.2   | %
|                                                |  |                                 |        |  |         |                        |       |        |  |   |         | 
|Total Revenue                                   |  |                                 | 79,177 |  |         |                        | 100.0 | %      |  |   | 51,994  |  |            |  | 100.0 | %
|Cost of loan origination and sale of mortgages: |  |                                 |        |  |         |                        |       |        |  |   |         |  |            |  |       |  
|Commission expense                              |  |                                 | 20,075 |  |         |                        | 25.4  | %      |  |   | 14,770  |  |            |  | 28.4  | %
|Warehouse interest expense                      |  |                                 | 14,270 |  |         |                        | 18.0  | %      |  |   | 5,739   |  |            |  | 11.0  | %
|Reserve for impairment of loans                 |  |                                 | 967    |  |         |                        | 1.2   | %      |  |   | 531     |  |            |  | 1.0   | %
|Other closing expenses                          |  |                                 | 2,398  |  |         |                        | 3.0   | %      |  |   | 1,692   |  |            |  | 3.3   | %
|                                                |  |                                 |        |  |         |                        |       |        |  |   |         | 
|Total cost of originations and loan sales       |  |                                 | 37,710 |  |         |                        | 47.6  | %      |  |   | 22,732  |  |            |  | 43.7  | %
|Gross profit                                    |  |                                 | 41,467 |  |         |                        | 52.4  | %      |  |   | 29,262  |  |            |  | 56.3  | %
|Operating expenses:                             |  |                                 |        |  |         |                        |       |        |  |   |         |  |            |  |       |  
|Salaries and wages                              |  |                                 | 18,978 |  |         |                        | 24.0  | %      |  |   | 10,702  |  |            |  | 20.6  | %
|Occupancy                                       |  |                                 | 961    |  |         |                        | 1.2   | %      |  |   | 413     |  |            |  | 0.8   | %
|General and administrative                      |  |                                 | 5,912  |  |         |                        | 7.5   | %      |  |   | 3,807   |  |            |  | 7.3   | %
|                                                |  |                                 |        |  |         |                        |       |        |  |   |         | 
|Total operating expenses                        |  |                                 | 25,851 |  |         |                        | 32.7  | %      |  |   | 14,922  |  |            |  | 28.7  | %
|Income from operations                          |  |                                 | 15,616 |  |         |                        | 19.7  | %      |  |   | 14,340  |  |            |  | 27.6  | %
|Total other income (loss)                       |  |                                 | (86)   |  |         |                        | (0.1) | %      |  |   | 32      |  |            |  | 0.1   | %
|Income (loss) before tax                        |  |                                 | 15,530 |  |         |                        | 19.6  | %      |  |   | 14,372  |  |            |  | 27.6  | %
|Provision for (benefit from) income tax         |  |                                 | 6,328  |  |         |                        | 8.0   | %      |  |   | 5,737   |  |            |  | 11.0  | %
|                                                |  |                                 |        |  |         |                        |       |        |  |   |         | 
|Net Income                                      |  | $                               | 9,202  |  |         |                        | 11.6  | %      |  | $ | 8,635   |  |            |  | 16.6  | %
|                                                |  |                                 |        |  |         |                        |       |        |  |   |         | 

# Loan income

Total
revenue. Total revenue increased 52.3% to $79.2 million for the year ended December
31, 2005 from $52.0 million for the year ended December 31, 2004. This increase was due
primarily to increases in income from sales of loans and mortgage interest income.

Income
from sales of loans. Income from sales of loans for the year ended December 31, 2005
increased 44.2% to $61.2 million from $42.4 million for the same period in 2004 due
primarily to higher volume of loan sales. Total loan sales increased 101.6% to $1.7
billion for the year ended December 31, 2005 compared to $863.6 million for the same
period in 2004. This increase was due primarily to increased loan originations during the
year ended December 31, 2005 compared to the same period in 2004 offset in part by lower
premiums earned on sales of loans. The weighted average premium for loan sales for year ended
December 31, 2005 was 2.69% compared to 3.41% for the same period in 2004. The lower
weighted average premium we received from sales of loans in the year ended December 31,
2005 primarily reflects the rise of short term interest rates and the narrowing of the
spread between short and long term rates.

- 72 -

---

Table of Contents

Mortgage
interest income. Mortgage interest income increased 99.5% to $17.4 million for the
year ended December 31, 2005 from $8.7 million for the same period in 2004. The increase
in interest income was due primarily to an increase in the volume of loans originated in
2005 compared to 2004 as well as higher coupon rates and a longer average holding period.

Commission
fee income. We earn commission fees on loans that we broker out to other lenders. The
mortgage origination fees earned by us for retail loans that our loan officers originate
are recognized at the time of sale of those mortgage loans and are included in the income
from sale of loans. Commission fee income for the year ended December 31, 2005 was $0.6
million compared to $0.8 million for the same period in 2004.

Escrow
fee income. We discontinued our escrow division in March 2004. Income from escrow and
other fees for the year ended December 31, 2004 was $0.09 million. There was no comparable
income for the same period in 2005.

# Cost of loan originations

Total
Cost of Loan Originations and Sale of Mortgages. Total cost of originations and loan
sales increased 65.9% to $37.7 million for the year December 31, 2005 from $22.7 million
for year ended December 31, 2004. The increase was primarily due to increased loan
originations. Total cost of originations and loan sales as a percentage of total revenue
also increased to 47.6% for the year ended December 31, 2005 compared to 43.7% for the
same period ended December 31, 2004. This increase was primarily due to increased
warehouse interest expense and recognition of commission expenses related to loans
originated through the early purchase facility.

Commission
Expense. Commission expense for mortgage loans sold during year ended December 31,
2005 increased 35.9% to $20.0 million from $14.8 million in the year ended December 31,
2004. This increase was primarily due to an increased volume of loan originations.
Commission expense, which is primarily a pricing rebate paid by us and an origination fee
deducted from the borrowers funds at origination, is recognized at the time of sale
to correspond with the recognition of income from the sale of the same loan. The
commissions paid for loans which are held for sale are included in the value of loans held
for sale as a prepaid commission on our balance sheet. Commission expense for the year
ended December 31, 2005 as a percentage of revenue decreased to 25.4% compared to 28.4%
for the same period in 2004, primarily as a result of increased use of the early purchase
facility for loan originations where commission expense is recognized at the time of
origination corresponding to the initial sale of the note.

Warehouse
interest expense. Interest expense for the year ended December 31, 2005 increased
148.6% to $14.3 million from $5.7 million for the same period in 2004. The increase in
interest expense was primarily due to the increase in our volume of borrowing and higher
interest rates. The weighted average number of days we held loans before sale during the
year ended December 31, 2005 and 2004 was 57 and 51 days respectively.

Reserve
for impairment of loans. At December 31, 2005, there were 45 loans with an aggregate
principal balance of $10.1 million that we had been requested to repurchase as a result of
early payment defaults compared to 28 loans with an aggregate principal balance of
$4.3 million for the year ended December 31, 2004. During the year
ended December 31, 2005 we made provisions of $1.0 million for losses for impairment of
loans we were obligated to repurchase, compared to $0.5 million for the same period in
2004. In addition, there were 6 loans with an aggregate principal balance of $0.6 million
where the buyer had notified us of alleged deficiencies in documentation or underwriting
procedures. We may be required to repurchase these loans if we are unable to cure the
alleged deficiencies. As of December 31, 2005, no loss reserve has been made for these
loans.

Other
closing expenses. Other closing expenses related to the closing of loans, including credit
check expenses, appraisal and appraisal review fees and other closing expenses, increased
41.7% to $2.4 million for the year ended December 31, 2005 from 1.7 million for the
same period in 2004. This increase primarily reflects the additional costs related to the
increased volume of loan originations offset by improved pricing for services used in loan
originations.

- 73 -

---

Table of Contents

# Operating expenses

Total
expenses. Total operating expenses increased 73.3% to $25.9 million for the year ended
December 31, 2005 compared to $15.0 million for the year ended December 31, 2004. The
increase was primarily the result of higher salaries, wages, and benefits expense, and
increases in other variable operating expenses associated with growth in mortgage loan
volume and in the number of employees.

Salaries
and wages. Salaries and wages increased 77.3% to $19.0 million for the year ended
December 31, 2005 from $10.7 million for the year ended December 31, 2004. The increase was
due primarily to growth in the number of our employees, as well as higher commission and
bonus expenses related to higher loan production.

Occupancy.
          Occupancy expense increased 132.7% to $1.0 million for the year ended December
          31, 2005 from $0.4 million for the year ended December 31, 2004. The increase
          resulted primarily from increased office space due to expansion and a larger
          number of employees. In November 2005 the Company moved to a new larger office
          space in Los Angeles.

General
and administrative. During the 12 months ended December 31, 2005 we incurred $0.7 million
in legal and accounting fees associated with the preparation and filing of our information
statement/prospectus on Form S-4 with the SEC. General and administrative expenses increased 55.6% to $5.9
million for the year ended December 31, 2005 from $3.8 million for the year ended December
31, 2004. This increase was due primarily to an increase in mortgage loan origination
volume, increased marketing expenses, and an increase in the number of employees.

Loss
from real estate owned. While we sell all of our loans for a cash price with servicing
rights released, under terms of our agreements with various purchasers we make certain
representations and warranties to the purchaser which we are obligated to satisfy or
correct even after completion of the sale transaction. For example we agree to repurchase
loans where borrowers default on their payments within 90 days from the date of transfer of
servicing. At December 31, 2005 there were two properties classified as REO, and a $34,000
reserve was made for losses.

Provision
for income tax. Provision for income tax increased to $6.3 million for the year ended
December 31, 2005 from $5.7 million for the year ended December 31, 2004. This increase
was primarily a result of the increase in our income before taxes of $15.7 million for the
year ended December 31, 2005 from $14.4 million for the year ended December 31, 2004.

- 74 -

---

Table of Contents

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

|                                                |  |                                 |        |  |         |                        |       |        |  |   |         |  |            |  |       |  
|----------------------------------------------- |  | ------------------------------- | ------ |  | ------- | ---------------------- | ----- | ------ |  | - | ------- |  | ---------- |  | ----- | -
|                                                |  | For the Year Ended December 31, |       
|                                                |  | 2004                            |        |  | 2003    |                       
|                                                |  |                                 |        |  |         | Percentage             |       |        |  |   |         |  | Percentage | 
|                                                |  |                                 |        |  |         | of Total               |       |        |  |   |         |  | of Total   | 
|                                                |  | Amount                          |        |  | Revenue |                        |       | Amount |  |   | Revenue | 
|                                                |  |                                 |        |  |         | (dollars in thousands) |       |        |  |   |        
|Loan Income:                                    |  |                                 |        |  |         |                        |       |        |  |   |         |  |            |  |       |  
|Income from sales of loans                      |  | $                               | 42,421 |  |         |                        | 81.6  | %      |  | $ | 22,507  |  |            |  | 83.3  | %
|Mortgage interest income                        |  |                                 | 8,711  |  |         |                        | 16.8  | %      |  |   | 4,182   |  |            |  | 15.5  | %
|Commission fee income                           |  |                                 | 777    |  |         |                        | 1.5   | %      |  |   | 77      |  |            |  | 0.2   | %
|Escrow fee income                               |  |                                 | 85     |  |         |                        | 0.2   | %      |  |   | 269     |  |            |  | 1.0   | %
|                                                |  |                                 |        |  |         |                        |       |        |  |   |         | 
|Total Revenue                                   |  |                                 | 51,994 |  |         |                        | 100.0 | %      |  |   | 27,035  |  |            |  | 100.0 | %
|Cost of loan origination and sale of mortgages: |  |                                 |        |  |         |                        |       |        |  |   |         |  |            |  |       |  
|Commission expense                              |  |                                 | 14,770 |  |         |                        | 28.4  | %      |  |   | 9,467   |  |            |  | 35.0  | %
|Warehouse interest expense                      |  |                                 | 5,739  |  |         |                        | 11.0  | %      |  |   | 3,206   |  |            |  | 11.8  | %
|Reserve for impairment of loans                 |  |                                 | 531    |  |         |                        | 1.0   | %      |  |   | -       |  |            |  | 0.0   | %
|Other closing expenses                          |  |                                 | 1,692  |  |         |                        | 3.3   | %      |  |   | 1,583   |  |            |  | 5.9   | %
|                                                |  |                                 |        |  |         |                        |       |        |  |   |         | 
|Total cost of originations and loan sales       |  |                                 | 22,732 |  |         |                        | 43.7  | %      |  |   | 14,256  |  |            |  | 52.7  | %
|Gross profit                                    |  |                                 | 29,262 |  |         |                        | 56.3  | %      |  |   | 12,779  |  |            |  | 47.3  | %
|Operating expenses:                             |  |                                 |        |  |         |                        |       |        |  |   |         |  |            |  |       |  
|Salaries and wages                              |  |                                 | 10,702 |  |         |                        | 20.6  | %      |  |   | 6,285   |  |            |  | 23.3  | %
|Occupancy                                       |  |                                 | 413    |  |         |                        | 0.8   | %      |  |   | 607     |  |            |  | 2.2   | %
|General and administrative                      |  |                                 | 3,807  |  |         |                        | 7.3   | %      |  |   | 2,412   |  |            |  | 8.9   | %
|                                                |  |                                 |        |  |         |                        |       |        |  |   |         | 
|Total operating expenses                        |  |                                 | 14,922 |  |         |                        | 28.7  | %      |  |   | 9,304   |  |            |  | 34.4  | %
|Income from operations                          |  |                                 | 14,340 |  |         |                        | 27.6  | %      |  |   | 3,475   |  |            |  | 12.9  | %
|Other income (losses)                           |  |                                 | 32     |  |         |                        | 0.1   | %      |  |   | 10      |  |            |  | 0.0   | %
|                                                |  |                                 |        |  |         |                        |       |        |  |   |         | 
|Income (loss) before tax                        |  |                                 | 14,372 |  |         |                        | 27.6  | %      |  |   | 3,485   |  |            |  | 12.9  | %
|Provision for (benefit from) income tax         |  |                                 | 5,737  |  |         |                        | 11.0  | %      |  |   | 1,312   |  |            |  | 4.9   | %
|                                                |  |                                 |        |  |         |                        |       |        |  |   |         | 
|Net Income                                      |  | $                               | 8,635  |  |         |                        | 16.6  | %      |  | $ | 2,173   |  |            |  | 8.1   | %
|                                                |  |                                 |        |  |         |                        |       |        |  |   |         | 

# Loan income

Total
revenue. Total revenue increased 92.3% to $52.0 million for year ended December 31,
2004 from $27.0 million for the year ended December 31, 2003. This increase was due
primarily to increases in income from sales of loans and mortgage interest income.

Income
from sales of loans. Income from sales of loans for the year ended December 31, 2004
increased 88.5% to $42.4 million from $22.5 million for the same period in 2003 due
primarily to higher margins and volume of loan sales. Total loan sales increased 30.1% to
$863.6 million for the year ended December 31, 2004 compared to $663.6 million for the
same period in 2003. This increase was due to increased loan originations during the year
ended December 31, 2004 compared to the same period in 2003. The weighted average premium
for loan sales for the year ended December 31, 2004 was 3.5% compared to 2.3% for the
comparable period in 2003. The higher weighted average premium we received from sales of
loans in the year ended December 31, 2004 primarily reflects the shift in our mortgage
product origination with larger volume of Alt-A type programs.

- 75 -

---

Table of Contents

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

Commission
fee income. To a lesser extent, we earn commission fees on loans that we broker out to
other lenders. The mortgage origination fees earned by us for retail loans are recognized
at the time of sale of those mortgage loans and are included in the income from sale of
loans. Commission fee income increased to $0.8 million for year ended December 31, 2004
from $0.1 million in 2003.

Escrow
fee income. We discontinued our escrow operations in 2004. Income from escrow and
other fees was $0.1 million for the year ended December 31, 2004 down from $0.3 million
for the same period in 2003.

# Cost of loan
originations and sales of mortgages

Total
Cost of Loan Origination and Sale of Mortgages. Total cost of originations and loan
sales increased 59.5% to $22.7 million for the year ended December 31, 2004 from $14.3
million for the year ended December 31, 2003. The increase was primarily due to increased
loan originations. Total cost of originations and loan sales as a percentage of total
revenue decreased to 44.0% for the year ended December 31, 2004 from 52.7% for the same
period ended in 2003. This decrease was primarily due to spreading our fixed
costs of origination over a greater origination volume.

Commission
Expense. Commission expenses for mortgage loans sold during year ended December 31,
2004 increased 56.0% to $14.8 million from $9.5 million in the year ended December 31,
2003. This increase was due primarily to an increased volume of origination. Commission
expense, which is primarily the pricing rebate we pay and origination fee deducted from
borrowers funds at origination, are recognized at the time of sale to correspond
with the recognition of income from the sale of the same loan. The commissions paid for
loans which are held for sale are included in the value of loans held for sale on our
balance sheet. As of December 31, 2004, we had paid $1.5 million in commissions for loans
held for sale.

Warehouse
interest expense. Warehouse interest expense represents the interest incurred on all
financing associated with use of our warehouse facilities during the time our loans are on
the line prior to their sale. Interest expense increased 79.0% to $5.7 million for the
year ended December 31, 2004 from $3.2 million for the same period in 2003. The increase
in interest expense was due primarily to the increase in our volume of borrowings offset
partially by lower cost of financing. Our daily average warehouse borrowing increased
76.0% from $63.8 million in 2003 to $112.3 million in 2004. The weighted average number of
days we held loans before sale was 48 and 37 days respectively. The interest rate for our
warehouse financing is a variable rate equal 1 month LIBOR plus a margin ranging between
2.3% and 2.8%.

Reserve
for impairment of loans. As of December 31, 2004, we had requests to repurchase an
aggregate of $4.3 million in loans previously sold due primarily to early payment
defaults, while we had no such outstanding requests to repurchase loans from purchasers of
our closed loans at December 31, 2003. For the year ended December 31, 2004 we had made
provisions for losses from repurchase obligations in the amount of $0.5 million. We had no
provision for impairment of mortgage loans during the year ended December 31, 2003.

Other
closing expenses. Other closing expenses related to closing of loans, including credit
check expenses, appraisal and appraisal review fees and closing expenses, increased 6.9%
to $1.7 million for the year ended December 31, 2004 from $1.6 million for the comparable
period in 2003. This increase reflects the additional cost related to increased volume of
loan origination offset by improved pricing for services used in loan origination.

- 76 -

---

Table of Contents

# Operating expenses

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

Salaries
and wages. Salaries and wages increased 70.3% to $10.7 million for the year ended
December 31, 2004 from $6.3 million for the year ended December 31, 2003. The increase was
due primarily to growth in the number of our employees, as well as higher commission and
bonus expenses related to loan production. The total number of employees at December 31,
2004 was 255, including 83 commission based employees compared to 206 at December 31, 2003
which included 136 commission based employees.

Occupancy.
          Occupancy expense decreased 32.0% to $0.4 million for the year ended December
          31, 2004 from $0.6 million for the year ended December 31, 2003. The decrease
          resulted from a reduction in number of loan officers in our main office. The
          occupancy expense in 2003 also included cost of leasehold improvements for
          office space which we occupied on a month-to-month basis and discontinued to use
          when we reduced our retail sale operation after the rise in mortgage rates and
          lower refinancing activity in the later part of 2003.

General
and administrative. General and administrative expenses increased 57.8% to $3.8
million for the year ended December 31, 2004 from $2.4 million for the year ended December
31, 2003. This increase was due primarily to an increase in mortgage loan origination
volume, increased marketing expenses, and an increase in the number of employees.

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

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

Provision
for income tax. Provision for income tax increased to $5.7 million for the year ended
December 31, 2004 from $1.3 million for year ended December 31, 2003. This increase
was primarily a result of the increase in our income before taxes to $14.4 million for the
year ended December 31, 2004 from $3.5 million for the year ended December 31, 2003.

---

Table of Contents

# Liquidity and capital
resources

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

|                                          |         | Year Ended December 31, |      
|----------------------------------------- | ------- | ----------------------- | -----
|
|
|Loans originated for sale                 | 1,738.7 | 1,030.4                 | 628.4
|Proceeds from sales                       | 1,767.5 | 886.3                   | 674.8
|                                          |         |                         |      
|Net cash provided by (used in) operations | 58.0    | (66.7)                  | 40.8 

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

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

In
the past, we have financed our operations through increased warehouse borrowing,
additional capitalization, and cash income generated from our operations. In the future,
realization of our new business strategy will depend on our ability to secure sufficient
warehouse facilities to fund larger volumes of loans and our ability to execute
securitization transactions and other forms of financing to finance our mortgage
investment portfolio on a long-term basis. To fund the increased loan volume necessary to
establish a securitization program, we expect our future liquidity needs to exceed our
historical warehouse facility capacity. Currently, we have an aggregate borrowing capacity
under our warehouse facilities of $504 million, and we believe that we need to increase
that borrowing capacity, either under those facilities or through the addition of new
facilities, to an aggregate of $2 billion. The extent of this borrowing in turn depends on
our net worth and requires certain restricted cash deposits to be maintained with the
lender. In addition to cash earnings generated from our operations, we intend to increase
our cash and net worth through offerings of our equity or debt securities.

We
establish target levels of liquidity and capital based on a number of factors including
our loan production volume, the condition of the loan sales market for our loans,
availability under our warehouse and repurchase facilities and our current balance sheet.
We intend to continue to concentrate on maintaining our targeted liquidity levels and,
following the reorganization include an evaluation of the market price for our
securitizations. We anticipate that we will use our cash over the next 12 months to
acquire mortgage loans primarily from The Mortgage Store in connection with our efforts to
grow our on-balance sheet loan portfolio of REIT qualifying assets. Subject to the various
uncertainties described above, and assuming that we will be able to execute our liquidity
strategy successfully, we anticipate that the proceeds from offerings of our equity or
debt securities, funds available from our warehouse facilities and cash flow from
operations will be sufficient to fund our operations for the foreseeable future. However,
there can be no assurance that we will be able to achieve these goals and operate on a
cash flow-neutral or cash flow-positive basis.

- 78 -

---

Table of Contents

Warehouse and Repurchase Facilities

As
of December 31, 2005, we had three warehouse facilities with two financial institutions.
After funding the loans, we typically sell our mortgage loans within 30 to 60 days of
origination and pay off the warehouse facilities with the sale proceeds. During the twelve
months ended December 31, 2005, we discontinued our warehouse facility with Impac
Warehouse Lending Group. In June 2005 we established a new warehouse facility with a
financial institution, which was subsequently discontinued in December 2005. One of our
warehouse facilities is structured as a repurchase agreement, where the financial
institution will provide the funds for origination of loans and will hold (warehouse) the
collateral until we repurchase the loans to sell them to a buyer. Under the terms of such
agreement, the buyer of the loan (take-out investor)would send the proceeds directly to the warehouse lender,
where the principal borrowing plus accrued interest and fees are deducted before the
balance is forwarded to us.

One
of our warehouse facilities is a committed line, meaning the financial institution, or
lender, is obligated to fund up to the committed amount, subject to our meeting financial
and other covenants. Some of our warehouse facilities are discretionary, meaning the
lender may fund the loans at its discretion. All of our current warehouse facilities also
contain a sub-limit for wet funding, which is the funding of loans for which
the collateral custodian has not yet received all of the related loan documents.
Additionally, our current warehouse facilities contain sub-limits for particular product
types, collateral types, delinquency, aging, and other limitations. Our warehouse
facilities are secured by the loans we originate. Although all of our warehouse facilities
mature in the next twelve months, we expect to renew and extend the maturity of our
warehouse facilities in the ordinary course of business. To complete the reorganization,
The Mortgage Store will need to obtain consents from the warehouse lenders to the
reorganization and those warehouse facilities may also need to be amended as to financial
covenants, commitment amount, and other terms. Additionally, we will either need to enter
into our own warehouse facilities or become a co-borrower on The Mortgage Store warehouse
facilities to purchase and fund loans from The Mortgage Store. We cannot assure you that
we will be able to obtain the consents and amendments we need to the existing warehouse
facilities or to obtain new warehouse facilities at the REIT level. Our warehouse
facilities bear interest at a spread over one month LIBOR, which was 4.39% as of December
31, 2005. The following is a summary by lender as of December 31, 2005.

|                               | CommittedAmount | UncommittedAmount | TotalFacilityAmount | MaximumPortion
     Availablefor WetFunding | OutstandingPrincipal
    Balance(3) | ExpirationDate
|------------------------------ | --------------- | ----------------- | ------------------- | ------------------------------------------- | ----------------------------------- | --------------
|
|
|Lehman Brothers Bank, FSB      | 100,000         | 0                 | 100,000             | 20,000                                      | 58,444                              | April 10, 2006
|Washington Mutual Bank, FA (1) | 4,000           | 0                 | 4,000               | 3,500                                       | 942                                 | May 6, 2006   
|Washington Mutual Bank, FA (2) | 400,000         | 0                 | 400,000             | 87,500                                      | 147,020                             | May 6, 2006   
|                               |                 |                   |                     |                                             |                                     |               
|Total                          | $504,000        | $0                | $504,000            | $111,000                                    | $206,406                            |               

_________________

(1)       Warehousing Credit and Security Agreement
         (2)       Early Purchase Facility
         (3)       As of December 31, 2005

- 79 -

---

Table of Contents

Lehman
Brothers Repurchase Facility. We have a repurchase facility with Lehman Brothers Bank,
FSB. As of December 31, 2005, the repurchase facility had a maximum commitment of
$100 million. This facility has a one year term. This facility has a cost of
borrowing equal to the one-month LIBOR rate plus a spread between 1.0% and 2.5%. As of
December 31, 2005, we had an outstanding balance of $58.4 million on this facility.
In April 2006, the facility has been increased to $200 million with a new expiration date
of April 2007.

Washington
Mutual Warehouse Facility. We have a $4 million revolving credit facility with
Washington Mutual. In August 2005, this facility was reduced from $10 million to $4
million. The cost of borrowing under this agreement is equal to one-month LIBOR plus a
spread between 1.5% and 2.75% based on type of loan and period of time for which the loan
is subject to the facility. As of December 31, 2005, we had an outstanding balance of $0.9
million on this facility.

Washington
Mutual Early Purchase Facility. We have an early purchase facility with Washington
Mutual pursuant to which certain qualifying loans are acquired by Washington Mutual
immediately upon origination. Under terms of this purchase agreement we retain the right
to service the mortgage loans. As a condition of the acquisition of a mortgage loan by
Washington Mutual, we assign to Washington Mutual the related commitment by a
takeout buyer to purchase the mortgage loan on a servicing released basis at a
specified future date within 90 days of origination. Under this facility, the acquisition
price for a mortgage loan is the lesser of 98% of the related takeout buyers
purchase price or the original principal balance of the loan. If loans purchased under
this facility are not sold to the take-out investor within 90 days they become
Aged and are subject to revaluation of the acquisition price. After an
additional 90 days the loans become defective and the Company is required to repurchase
them. Loan financings under this facility meet the criteria under FASB Statement No. 140
for the transfer of financial assets and therefore are accounted for as sales.
Accordingly, the loans are not reflected on our balance sheet. Upon receipt of funds from
a takeout buyer, Washington Mutual releases its interest in the related loan and transfers
excess funds related to the servicing right to us. Loans for which a commitment from a
takeout buyer is not obtained within 90 days are transferred to our other warehouse
facility with Washington Mutual described above. As of December 31, 2005, this early
purchase facility had a maximum revolving purchase commitment of $400 million. As of
December 31, 2005, we had utilized $147.0 million of this facilitys maximum
concentration. The mortgage interest income from loans originated through this facility
from the time of funding to the date of their sale to a takeout buyer was not material to
the financial statements as of December 31, 2005 and therefore no asset or non-cash
revenue has been recognized.

Our
warehouse facilities contain customary covenants including minimum liquidity,
profitability and net worth requirements, and limitations on other indebtedness. If we
fail to comply with any of these covenants or otherwise default under a facility, the
lender has the right to terminate the facility and require immediate repayment that may
require sale of the collateral at less than optimal terms. As of December 31, 2005 we were
in compliance with the covenants of our warehouse facilities.

Each
warehouse facility provides the lender with the right to reevaluate the loan collateral
that secures our 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.

Our
warehouse facilities are currently obligations of The Mortgage Store. We are currently
negotiating amendments to the agreements governing our warehouse facilities and expect to
enter into such amendments as soon as practicable following the closing of the
reorganization. We may not be able to negotiate such amendments in a manner sufficient to
successfully execute our business plan. Our inability to access the capital markets could
have a negative impact on our growth of taxable income and also our ability to pay
dividends. As part of the amendments, we expect to remove TMSF Holdings and add us as a
co-borrower under some of the warehouse facilities. As a result, we will become jointly
and severally liable for the obligations under the warehouse facilities with The Mortgage
Store. We and The Mortgage Store are both expected to have the right to borrow the unused
portion of the maximum facility amounts and the full amounts of any sub-limits. The assets
of The Mortgage Store and us respectively, may secure the borrowings of both The Mortgage
Store and us. We expect that financial and other covenants will be added for the
consolidated entities. A default by either The Mortgage Store or us may also be deemed a
default of the other. In those facilities where TMSF Holdings does not become a
co-borrower with The Mortgage Store, we may guarantee the obligations of The Mortgage
Store under such warehouse facilities.

- 80 -

---

Table of Contents

Additional Equity Requirement

We
cannot qualify as an REIT and will not make the REIT election unless we can (A) acquire
sufficient REIT qualifying assets, which include interests in real property, interests in
mortgages on real property and mortgage-backed securities that represent ownership
interests in pools of mortgage loans, such that the value of our taxable REIT subsidiaries
constitutes no more than 20% of our total assets and (B) satisfy the condition that not
more than 50% of the value of our outstanding stock may be owned, directly or indirectly,
by five or fewer individuals (as defined in the Internal Revenue Code to include certain
entities) during the last half of a taxable year. After the reorganization, Raymond
Eshaghian, Aaron Yashouafar, Solyman Yashouafar, and H. Joseph Nourmand are expected to
beneficially own approximately 62.1%, 13.4%, 11.9%, and 7.3%, respectively, and,
collectively, are expected to beneficially own approximately 92.3% of the value of
our outstanding stock, calculated in accordance with the applicable REIT ownership rules.
As such, we will need to raise sufficient capital to acquire REIT qualifying assets and
dilute the ownership of our principal stockholders to qualify as an REIT.

Furthermore,
to grow our on-balance sheet loan portfolio of REIT qualifying assets, we will need to
increase our mortgage loan production. We will need to finance this increased mortgage
loan production by increasing our borrowing capacity under our warehouse facilities. These
warehouse facilities, however, contain covenants that require that we maintain a ratio of
our debt (including borrowings under these warehouse facilities) to equity not in excess
of certain thresholds. Therefore, to increase our warehouse borrowings we will need to
raise additional capital.

Our
current plan is to raise the additional capital in one or more offerings of equity
securities or a combination of equity and debt securities registered, or exempt from
registration, under the Securities Act of 1933, as amended, or the Securities Act. We
would expect to raise this capital within a timeframe that would allow us to qualify to be
taxed as a REIT commencing with the tax year in which we complete the reorganization. We
currently expect that the reorganization will be completed in 2006, which means
that we would need to complete the offerings during 2006 with sufficient time
before year-end to deploy the capital in a manner consistent with the proposed REIT
election.

In
addition, in order to increase the mortgage loan production of The Mortgage Store, and due
to the uncertainty of the timing of the reorganization, we, TMSF Holdings or The Mortgage
Store may seek to raise capital before the consummation of the reorganization through the
offering of securities exempt from registration under the Securities Act. Any such
securities may be convertible or exchangeable into securities of TMSF REIT upon
consummation of the reorganization. Accordingly, our capitalization could change between
the date of this information statement/prospectus and the date of the completion of our
reorganization as a result of our financing activities.

While
our Board of Directors has not yet determined the amount of capital to be raised in any such offerings,
the factors our board will consider include the amounts needed to meet expanding mortgage
loan production requirements, the REIT assets tests, ownership tests and distribution
requirements and working capital requirements. Our Board of Directors currently believes
that the minimum amount of capital we need to raise, whether before or after the
reorganization, is approximately $80 million.

If
the capital raise is a private offering of our capital stock or securities convertible
into our capital stock, we expect that the investors will require that such shares be
registered under the Securities Act for resale, requiring the filing of a registration
statement with the Securities and Exchange Commission to register the resale of those
shares within 30 to 120 days after the closing of any private offering. This registration
statement, of which this information statement/prospectus forms a part, is not an offer of
any securities other than those being issued in connection with TMSF REITs
acquisition of The Mortgage Store, and does not constitute an offer of sale of any
securities in such private offering.

- 81 -

---

Table of Contents

# Off-Balance Sheet
Arrangements

In July
2004, we entered into an early purchase facility with Washington Mutual where qualifying
loans are purchased by Washington Mutual immediately upon funding, provided that we retain
the right to service and resell the loans to a takeout buyer for a period of 90 days. Loan
originations under provisions of this facility are recognized as sales of loans and are
not reflected on our balance sheet. For loans that we originate through this facility, we
recognize the origination fee and other lender fees at the time of funding and all
corresponding commissions and fees to be paid are recognized immediately. If a loan is not
purchased by a takeout buyer within 90 days of the sale under the early purchase facility,
we are required to repurchase those loans and the loans are put back on our balance sheet.
As of December 31, 2005, loans with an aggregate principal balance of $147.0 million were
subject to this off-balance sheet arrangement. Based on historical experience, total
mortgage loans repurchased pursuant to a breach of this takeout buyer requirement would
not have a material impact to our statements of operation, and therefore have not been
accrued for as a liability on our consolidated balance sheets. If we were to breach the
takeout buyer requirement and did not have sufficient funds to repurchase the related
loans under this facility, that breach might trigger cross-defaults in our other warehouse
facilities and have a material adverse effect on our business. In addition, if loan
originations under provisions of this facility are not recognized as sales of loans and
are required to be reflected on our balance sheet, we may breach financial covenants
triggering defaults under our warehouse facilities which may have a material adverse
effect on our business. Moreover, failure to obtain sales treatment under this facility
may require us to restate our prior financial statements which may have a material adverse
effect on our business.

# Contractual Obligations
and Commitments

The
following tables summarize our contractual obligations under our financing arrangements by
payment due date and commitments by expiration dates as of December 31, 2005.

|                                           | Payments Due by Period
(dollars in thousands)
|------------------------------------------ | ---------------------------------------------
|
|Warehouse facility - line of credit        | $      942                                   
|Warehouse facility - repurchase agreements | 58,443                                       
|Operating leases                           | 1,073                                        
|Total contractual obligations              | $60,458                                      

Commitments and
Contingencies

We
are a party to financial instruments with off-balance-sheet risk in the normal course of
business to meet the financing needs of our borrowers. These financial instruments
primarily represent commitments to originate and sell loans. These instruments involve, to
varying degrees, elements of interest rate risk and credit risk in excess of the amount
recognized on our consolidated balance sheet. We believe the credit risk is mitigated by
our evaluation of the creditworthiness of potential borrowers on a case-by-case basis.
Currently we do not hedge the interest rate risk on our commitments to originate loans.

In
the ordinary course of business, we provide representations and warranties to purchasers
of the mortgage loans we originate. Under certain circumstances, we could become liable to
repurchase loans if there has been a breach of the representations and warranties.
Additionally, in some cases we may refund the premium paid by the buyers if a loan is
prepaid in full within a certain amount of time from the date of sale (generally within
six months). We record a reserve for potential repurchases and premium refunds, which is
charged to gain on sale of loans. The reserve represents our estimate of the total losses
we expect to occur and is considered by management to be adequate based upon the
evaluation of the potential exposure related to the loan sale agreements over the life of
the associated loans sold.

- 82 -

---

Table of Contents

We
record every repurchase demand as an obligation to repurchase. Many demands, however. are
subsequently withdrawn or rescinded by the buyers once the deficiencies are cured.
Typically a repurchase demand arising from early payment default that is resolved either
by re-pricing the loan, where the buyer receives a discount and keeps the note without
further recourse, or by indemnifying the buyers against future losses. Once a loan is
re-priced or the demand is rescinded we reduce our obligation accordingly. When we can not
reach an agreement on re-pricing or we believe that we could mitigate losses more
efficiently, we may repurchase the loan and hold it until its disposition. In certain
cases, we may agree with the buyer that their servicer continues the foreclosure process
of seriously delinquent loans and we reimburse the buyer for their actual loss after sales
of the property. We take loss reserves for loans that we are required to repurchase or are
holding on our balance sheet:

The
following table summarizes the outstanding obligations to repurchase loans and loss
reserves at respective dates.

|                                                           | Obligations to Repurchase
Loans
|---------------------------------------------------------- | -------------------------------
|
|
|
|Obligation to repurchase                                   | 10,071                         
|                                                           |                                
|Loss reserve for mortgage loans
         to be repurchased | 955                            

Commitments
to originate and sell loans generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Also, external market forces impact the
probability of commitments being exercised; therefore, total commitments outstanding do
not necessarily represent future cash requirements.

# Inflation

Virtually
all of our assets and liabilities are financial in nature. As a result, interest rates and
other factors influence our performance far more than does inflation. Interest rates
normally increase during periods of high inflation (or in periods when the Federal Reserve
Bank attempts to prevent inflation) and decrease during periods of low inflation. Our
financial statements are prepared in accordance with GAAP and our distributions are
determined by our Board of Directors based primarily on our net earnings as calculated for
tax purposes; in each case, our activities and balance sheet are measured with reference
to historical cost or fair market value without considering inflation.

- 83 -

---

Table of Contents

# Newly Issued Accounting
Pronouncements

In
March 2005, the FASB issued FASB Interpretation, FIN, No. 47, Accounting for
Conditional Asset Retirement Obligations. FIN No. 47 clarifies that the term
conditional asset retirement obligation as used in FASB Statement No. 143, Accounting
for Asset Retirement Obligations, refers to a legal obligation to perform an asset
retirement activity in which the timing and (or) method of settlement are conditional on a
future event that may or may not be within the control of the entity. The obligation to
perform the asset retirement activity is unconditional even though uncertainty exists
about the timing and (or) method of settlement. Uncertainty about the timing or method of
settlement of a conditional asset retirement obligation should be factored into the
measurement of the liability when sufficient information exists. This interpretation also
clarifies when an entity would have sufficient information to reasonably estimate the fair
value of an asset retirement obligation. FIN No. 47 is effective no later than the end of
fiscal years ending after December 15, 2005 (December 31, 2005 for calendar-year
companies). Retrospective application of interim financial information is permitted but is
not required. Management does not expect adoption of FIN No. 47 to have a material impact
on our financial statements.

In
April 2005, the Securities and Exchange Commission amended the compliance dates to allow
companies to implement SFAS No. 123(R) at the beginning of their next fiscal year, instead
of the next reporting period that begins after June 15, 2005, or December 31, 2005 for
small business issuers. As a result, we must adopt SFAS No. 123(R) by the first quarter of
2006.

In
May 2005, the FASB issued Statement of Accounting Standards (SFAS) No. 154, Accounting
Changes and Error Corrections an amendment to Accounting Principles Bulletin (APB)
Opinion No. 20, Accounting Changes, and SFAS No. 3, Reporting Accounting Changes
in Interim Financial Statements though SFAS No. 154 carries forward the guidance in
APB No. 20 and SFAS No. 3 with respect to accounting for changes in estimates, changes in
reporting entity, and the correction of errors. SFAS No. 154 establishes new standards on
accounting for changes in accounting principles, whereby all such changes must be
accounted for by retrospective application to the financial statements of prior periods
unless it is impracticable to do so. SFAS No. 154 is effective for accounting changes and
error corrections made in fiscal years beginning after December 15, 2005, with early
adoption permitted for changes and corrections made in years beginning after May 2005.

- 84 -

---

Table of Contents

# QUANTITATIVE AND
QUALITATIVE MARKET RISK DISCLOSURE

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

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

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

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

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

- 85 -

---

Table of Contents

# Interest Rate Simulation
Sensitivity Analysis

Changes
in market interest rates may affect our gain (loss) from sales of mortgage loans held for
sale and the fair value of our mortgage-related securities and related derivatives when we
begin to securitize our mortgage loans. As of December, 2005 we held $83.1 million in
loans that had not been committed for sale at the time. Increases in interest rate would
adversely affect revenue we will realize from uncommitted loans. Likewise, any decrease in
interest rates would have a positive impact on our gain from sales of the same amount of
uncommitted loans.

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

|Change in Interest rate (bps)                                                   | -100     | -50      | 0  | 50        | 100      
|------------------------------------------------------------------------------- | -------- | -------- | -- | --------- | ---------
|                                                                                |          |          |    |           |          
|Change in Revenue from Sale of
        Uncommitted Loans (dollars in thousands) | $2,077.5 | $1,038.7 | $0 | $-1,038.7 | $-2,077.5

In
each time period, the increases in value in the falling rate scenarios associated with the
retained interests can be explained by the changes in assumptions. The decrease in
interest rates widens the excess spread that is due to these securities. The increase in
prepayments associated with this decline in rates significantly increases the cash flows
from prepayment charges. This is especially pronounced due to the current relatively low
age of the outstanding loan collateral backing these retained interests. Additionally,
these falling rate scenarios assume decreases in borrower default rates and the credit
losses absorbed by these securities. As these securities and the associated collateral
season over time, these impacts may change significantly.

It
is important to note that the impact of changing interest rates on fair value can change
significantly when interest rates change beyond 100 basis points from current levels and
as these securities and the associated loans season. Therefore, the volatility in the fair
value of our assets could increase significantly when interest rates change beyond 100
basis points or as time passes. In addition, other factors impact the fair value of our
interest rate-sensitive investments and hedging instruments, such as the shape of the
yield curve, market expectations as to future interest rate changes and other market
conditions. Accordingly, in the event of changes in actual interest rates, the changes in
the fair value of our assets would likely differ from that shown above, and such
differences might be material and adverse to our stockholders.

Interest Rate Risk Management

To
the extent consistent with maintaining our REIT status, we will seek to manage our
interest rate risk exposure to protect our portfolio of mortgage loans and related debt
against the effects of major interest rate changes. We will generally seek to manage our
interest rate risk by:

- attempting to structure our borrowing agreements to have a range of different maturities, terms, amortizations and interest
                  rate adjustment periods;
- using swaps, caps, floors and other derivative instruments to adjust the interest rate sensitivity of our mortgage-backed
                  securities and our borrowings; and
- actively managing, on an aggregate basis, the interest rate indices, interest rate adjustment periods, and gross reset
                  margins of our mortgage-backed securities and the interest rate indices and
adjustment periods of our borrowings.

- 86 -

---

Table of Contents

# Inflation

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

# ITEM 8.FINANCIAL
STATEMENTS

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

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

None

# ITEM 9A. CONTROLS AND
PROCEDURES

Disclosure Controls and Procedures

Disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of
1934, as amended (the Exchange Act) are controls and other procedures that are designed to provide reasonable
assurance that the information that we are required to disclose in the reports that we file or submit under the
Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SECs rules
and forms, and that such information is accumulated and communicated to our management, including our Chief
Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required
disclosure.

In connection with the preparation of this Annual Report, our management, with the participation of our
Chief Executive Officer and our Chief Financial Officer, carried out an evaluation of the effectiveness of the
design and operation of our disclosure controls and procedures as of December 31, 2005.

In light of the material weaknesses described below, we performed additional analyses and other
procedures to ensure that our consolidated financial statements included in this Annual Report were prepared in
accordance with GAAP.  These measures included, among other things, expansion of our year-end closing procedures,
including the consolidation process, and dedication of significant internal resources and external consultants to
scrutinize account analyses and reconciliations at a detailed level. As a result of these and other expanded
procedures, we concluded that the consolidated financial statements included in this Annual Report present
fairly, in all material respects, our financial position, results of operations and cash flows for the periods
presented in conformity with GAAP.

Our management, under the supervision of our Chief Executive Officer and Chief Financial Officer, is
responsible for establishing and maintaining adequate internal control over financial reporting.  Internal
control over financial reporting is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with
GAAP. Internal control over financial reporting includes policies and procedures that (i) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the Company,(ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts
and expenditures of the Company are being made only in accordance with authorizations of management and directors
of the Company, and (iii) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the Companys assets that could have a material effect on the
financial statements.

- 87 -

---

Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that the degree of compliance with
existing policies or procedures may deteriorate.  Further, because of changes in conditions, effectiveness of
internal controls over financial reporting may vary over time.

A material weakness is a control deficiency, or combination of control deficiencies (within the meaning of PCAOB
Auditing Standard No. 2), that results in there being more than a remote likelihood that a material misstatement
of the annual or interim financial statements will not be prevented or detected on a timely basis by employees in
the normal course of their assigned functions. Management has identified the following material weaknesses in our
internal control over financial reporting as of December 31, 2005:

The Company did not maintain an effective control environment and specifically, elements of the Companys finance
     organization were not structured with sufficient resources to ensure the consistent execution of their responsibility
     to provide independent and pro-active leadership in the areas of monitoring of controls, disclosure reviews and
     financial reporting.

The Company did not maintain effective controls over the financial reporting process due to an insufficient
     complement of personnel with an appropriate level of accounting knowledge, experience and training in the application
     of generally accepted accounting principles (GAAP) commensurate with its financial reporting requirements and the
     complexity of the Companys operations and transactions. Additionally, the Company did not maintain effective
     controls to ensure there is adequate monitoring and oversight of the work performed by accounting and financial
     reporting personnel to ensure the accuracy and completeness of the consolidated financial statements in accordance
     with GAAP.

The Company did not maintain effective controls to ensure there is adequate analysis, documentation, reconciliation,
     and review of accounting records and supporting data.

These control deficiencies resulted in audit adjustments in the Companys 2005 annual consolidated financial statements.


             In response to the identified material weaknesses, our management, with oversight from our Audit
Committee, has dedicated significant resources and engaged external consultants to support management in its
efforts to improve our control environment.  We intend to further expand our internal accounting and compliance
capabilities by attracting additional talent and enhancing training in critical areas.  These ongoing efforts are
focused on implementing process changes to strengthen our internal control and monitoring activities.Changes in Internal Control over Financial Reporting

             There were no changes in our internal control over financial reporting during the year ended December
31, 2005, that materially affected, or are reasonably likely to affect, our internal control over financial
reporting.

- 88 -

---

Table of Contents

# PART III

# ITEM 10. DIRECTORS AND
EXECUTIVE OFFICERS OF THE REGISTRANT

# Code of Ethics

We
have adopted a code of business conduct and ethics within the meaning of Item 406(b) of
Regulation S-B. This code of ethics applies to our directors, executive officers and
employees, including our CEO, CFO and Controller. This code of ethics is publicly
available in the corporate governance section of the investor relations page of our
website located at www.TMSFHOLDINGS.COM and in print upon request to the Secretary at TMSF
Holdings, Inc., 707 Wilshire Blvd., 26th Floor, Los Angeles, California 90017.
If we make amendments to the code of ethics or grant any waiver that the SEC requires us
to disclose, we will disclose the nature of such amendment or waiver on our website.

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

|Name                | Age |  | Position                                                     
|------------------- | --- |  | -------------------------------------------------------------
|Raymond Eshaghian   | 36  |  | Chairman of the Board, Chief Executive Officer, President and
|                    |     |  | Secretary                                                    
|Masoud Najand       | 52  |  | Chief Financial Officer                                      
|H. Wayne Snavely(1) | 64  |  | Director                                                     
|M. Aaron Yashouafar | 44  |  | Director                                                     
|David Sklar(1)      | 53  |  | Director                                                     

_________________

(1)   Member of the
Audit and Compensation Committees

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

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

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

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

David A. Sklar. Mr. Sklar was invited to join the Board of Directors of TMSF
Holdingss by unanimous resolution of the Board of Directors and has been serving on
our Board of Directors since November, 2005. In December, 2001, Mr. Sklar founded and has
since been managing director of S-G Advisors Residential Mortgage Solution LLC and ALCA
Investment, LLC. From February, 1999 until May, 2001, Mr. Sklar was Executive Vice
President and Chief Financial Officer of Escrow.com. In addition, prior to 1999,
Mr. Sklar was Executive Vice President and Chief Financial Officer of Aames Financial
Corporation and prior to that, he has served as the Chief Financial Officer of Imperial
Bank Corp. Mr. Sklar is a Certified Public Accountant and graduated with a B.A. from UCLA
in 1975.

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

- 89 -

---

Table of Contents

# Audit Committee
Financial Expert

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

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

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

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

# ITEM 11. EXECUTIVE
COMPENSATION

The
following table sets forth information concerning the annual and long-term compensation
earned by the Companys Chief Executive Officer and each of the other executive
officers whose annual salary and bonus during 2002, 2003, 2004, and 2005 exceeded $100,000
(the Named Executive Officers).

Summary Compensation Table

|                            | Annual Compensation | Long-Term Compensation
|--------------------------- | ------------------- | ----------------------
|Name and Principal Position | Year                | Salary($)             
|                            |                     |                       
|Raymond Eshaghian           | 2005                | 750,000               
|Chairman of the Board,      | 2004                | 450,000               
|Executive Officer,          | 2003                | 250,000               
|President and Secretary     | 2002                | 250,000               
|                            |                     |                       
|Masoud Najand               | 2005                | 144,000               
|Chief Financial Officer     | 2004                | 128,000               
|                            | 2003                | 104,000               
|                            | 2002                | 96,000                

_________________

|(1) |  | Mr. Eshaghian has served as the Chairman of the Board, Chief Executive Officer,
          President and Secretary of the Company since October 2002 when The Mortgage
          Store Financial, Inc. (The Mortgage Store) became a wholly-owned
          subsidiary of the Company and the Company changed its name from Little Creek,
          Inc. to TMSF Holdings, Inc. (the Reorganization). Prior to the
          completion of the Reorganization, Mr. Eshaghian served as President of The
          Mortgage Store. See Certain Relationships and Related Transactions 
          The Mortgage Store. Mr. Eshaghians compensation is reported in the
          table with respect to his positions at both the Company and The Mortgage Store
          for the years ended December 31, 2005, 2004, 2003 and 2002.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Mr. Najand has served as the Chief Financial Officer of the Company since
          October 2002 when the Reorganization was completed. Prior to the completion of
          the Reorganization, Mr. Najand served as Controller of The Mortgage Store, which
          he joined in January 2001. Mr. Najands compensation is reported in the
          table with respect to his positions at both the Company and The Mortgage Store
          for the years ended December 31, 2005, 2004, 2003 and 2002.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Represents car allowance.
|--- |  | -------------------------

|(4) |  | Represents life insurance.
|--- |  | --------------------------

- 90 -

---

Table of Contents

# Compensation of Directors

The
Company did not pay its non-employee directors any annual compensation for their services
or for attendance at Board or committee meetings. However, the Company paid H. Wayne
Snavely consulting fees of $40,000, $40,000, and $40,000 in the years 2005, 2004, and 2003
respectively. Officers of the Company who are members of the Board of Directors are not
paid any directors fees.

# Stock Option Plan

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

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

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

             On April 15, 2005 and May 6, 2005, under the Companys employee stock option and with approval of the Board of Directors,
certain employees were granted 340,500 options to purchase the Companys stock at an exercise price range of
$2.00 - $2.35 per share, vested over a period of five years, commencing April 2005 and expiring in 2015.

             On September 7, 2005, under the Companys employee stock option plan and with approval of the Board
of Directors, a company executive was granted 300,000 options to purchase the Companys stock at an exercise
price range of $3.50 per share, vested over a period of five years, commencing September 2005 and expiring in
2015. These options were cancelled on November 30, 2005.

             In November 2005, under the Companys employee stock option plan and with the approval of the Board
of Directors, two employees were granted 10,000 options each to purchase the Companys stock at an exercise
price rang of $2.80 per share, vested over a period of five years, commencing November 1, 2005 and expiring
in 2015.

- 91 -

---

Table of Contents

# ITEM 12.SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The
following table sets forth certain information known to the Company with respect to
beneficial ownership of the Companys common stock as of April 14, 2006 by
(i) each person known to the Company to beneficially own more than five percent of
the Companys common stock, (ii) each director, (iii) the Companys
executive officers, and (iv) all directors and executive officers as a group.

The
percentage ownership of TMSF Holdings is calculated based on 15,000,000 shares of TMSF
Holdings common stock outstanding as of April 14, 2006. The SEC has defined
beneficial ownership of a security to mean the possession, directly or
indirectly, of voting power and/or investment powers. A stockholder is also deemed to be,
as of any date, the beneficial owners of all securities that such stockholder has the
right to acquire within 60 days after that date through (a) the exercise of any option,
warrant or right, (b) the conversion of a security, (c) the power to revoke a trust,
discretionary account or similar arrangement, or (d) the automatic termination of a trust,
discretionary account or similar arrangement and such shares are added to the 15,000,000
shares of common stock when calculating such stockholders beneficial ownership
percentage. The address of each of such persons listed below is c/o: TMSF Holdings, Inc.,
707 Wilshire Boulevard, 26th Floor, Los Angeles, California 90017. Our
capitalization could change between the date of this information statement/prospectus and
the date of the completion of our reorganization as a result of our financing activities.

|                                                  | TMSF Holdings Common Stock
|------------------------------------------------- | --------------------------
|
|Officers and Directors                            |                           
|Raymond Eshaghian                                 | 9,617,450(1)              
|M. Aaron Yashouafar                               | 2,037,150(2)              
|H. Wayne Snavely                                  | 750,000(3)                
|Masoud Najand                                     | --                        
|All directors and officers as a group (5 persons) | 12,373,350                
|5% Beneficial Owners                              |                           
|Solayman Yashouafar(4)                            | 1,790,000                 

_________________

(1) 
          Includes 500,000 shares of common stock underlying options that are exercisable
          currently or within 60 day of April 14, 2006. (2)  Includes 210,000
          shares of common stock underlying options that are exercisable currently or
          within 60 day of April 14, 2006. (3)  Includes 750,000 shares of common
          stock underlying options that are exercisable currently or within 60 day of
          April 14, 2006. 

          (4)  Mr. Yashouafars address is 660 S. Figueroa Street
          24th Floor, Los Angeles, CA 90017.

As
of April 4, 2006, Raymond Eshaghian beneficially owned approximately 62% of the voting
power of the Companys common stock. By virtue of this stock ownership, Raymond
Eshaghian may be deemed to be a control person of the Company within the
meaning of the rules and regulations promulgated under the Securities Act of 1933, as
amended (the Securities Act).

- 92 -

---

Table of Contents

# Securities Authorized
for Issuance Under Equity Compensation Plans

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

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

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

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

             On April 15, 2005 and May 6, 2005, under the Companys employee stock option and with approval of the Board of Directors,
certain employees were granted 340,500 options to purchase the Companys stock at an exercise price range of
$2.00 - $2.35 per share, vested over a period of five years, commencing April 2005 and expiring in 2015.

             On September 7, 2005, under the Companys employee stock option plan and with approval of the Board
of Directors, a company executive was granted 300,000 options to purchase the Companys stock at an exercise
price range of $3.50 per share, vested over a period of five years, commencing September 2005 and expiring in
2015. These options were cancelled on November 30, 2005.

             In November 2005, under the Companys employee stock option plan and with the approval of the Board
of Directors, two employees were granted 10,000 options each to purchase the Companys stock at an exercise
price rang of $2.80 per share, vested over a period of five years, commencing November 1, 2005 and expiring
in 2015.

- 93 -

---

Table of Contents

# ITEM 13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS

# The Mortgage Store

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

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

# Related Party
Transactions

During
the years ended December 31, 2005 and 2004, the Company paid $532,000 and $403,600
respectively, for consulting expenses to companies owned by shareholders. The Company also
paid $360,000 and $397,500 respectively, for consulting expenses to a relative of a
shareholder during the years ended December 31, 2005 and 2004. Furthermore, during the
years ended December 31, 2005 and 2004 the Company paid consulting expenses of $40,000 and
$40,000 respectively, to a director. This consulting agreement terminated in November
2005.

Mortgage Loans for Employees

             During the course of its business the Company provides mortgage loans to its employees and related parties at
prevailing market rates. During the years ended December 31, 2005, 2004, and 2003 the company funded $4,976,225,
$1,470,600, and $470,700 in mortgage loans for officers or executive employees of the company, and $5,437,475,
$5,699,900, and $1,398,000 respectively for persons related to officers. These loans were subsequently sold at the secondary
market at comparable margins.

# Lease Agreement

In
October 2002, the Company began leasing its corporate offices from Milbank Real Estate
Services, Inc., a commercial real estate investment and management company that is owned
in part by Massoud Yashouafar, who is a member of the Companys Board of Director and
10% stockholder. The Company paid approximately $779,200 to Milbank Real Estate Services
for the lease of its corporate offices during the year ending December 31, 2005. The
lease expired in November 2005 and the Company moved to a new location, which is
sub-leased until May 31, 2007 with an option to renew. The present lease agreement
provides for future payment of approximately $865,900.

# Private Placement

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

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

# Registration of Shares

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

- 94 -

---

Table of Contents

# ITEM 14. PRINCIPAL
ACCOUNTANT FEES AND SERVICES

During
the fiscal years ended December 31, 2005, 2004, and 2003 the Company retained Singer
Lewak Greenbaum & Goldstein, LLP as independent auditors and paid the following fees
for services rendered:

|                               | For the year Ended December 31,
|------------------------------ | -------------------------------
|                               | 2005                           
|Audit Fees                     | 116,000                        
|Audit-related Fees (1)         | 166,000                        
|Tax Fees (2)                   | 12,500                         
|All other fees                 | --                             
|                               |                                
|Total audit and non-audit fees | 294,500                        

________________

(1) Review of Registration Statement
 for SB-2 filing and S-4 Information Statement/Prospectus.
(2)   Preparation of tax return

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

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

- 95 -

---

Table of Contents

# PART IV

# ITEM 15. EXHIBITS, LIST
AND REPORTS ON FORM 8-K

|Exhibit Number | Description of Exhibit                                                                                                                                                                                                                                                                                                                            
|-------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|               |                                                                                                                                                                                                                                                                                                                                                   
|2              | Plan of Reorganization and Stock Exchange Agreement (incorporated by reference to
                   Exhibit 2 of the Registrant's Current Report on Form 8-K filed with the Securities
                   and Exchange Commission on November 20, 2002).                                                                                         
|               |                                                                                                                                                                                                                                                                                                                                                   
|3.1            | Certificate of Incorporation of the Registrant (incorporated by reference to
                   Exhibit 3.1 of the Registrant's Current Report on Form 8-K filed with the
                   Securities and Exchange Commission on November 20, 2002).                                                                                            
|               |                                                                                                                                                                                                                                                                                                                                                   
|3.2            | Certificate of Amendment of Certificate of Incorporation of the Registrant
                  (incorporated by reference to Exhibit 3.3 of the Registrant's Current Report on
                  Form 8-K filed with the Securities and Exchange Commission on November 20, 2002).                                                                  
|               |                                                                                                                                                                                                                                                                                                                                                   
|3.3            | Bylaws of the Registrant (incorporated by reference to Exhibit 3.4 of the
                   Registrant's Current Report on Form 8-K/A filed with the Securities and Exchange
                   Commission on December 6, 2002).                                                                                                                 
|               |                                                                                                                                                                                                                                                                                                                                                   
|4.1            | Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.1 of the
                   Registrant's Annual Report on Form 10-K for the period ending December 31, 2002).                                                                                                                                                           
|               |                                                                                                                                                                                                                                                                                                                                                   
|4.2            | Registration Rights Agreement dated November 29, 2002 among the Registrant and
                   certain stockholders (incorporated by reference to Exhibit 4.2 of the Registrant's
                   Annual Report on Form 10-K for the period ending December 31, 2002).                                                                      
|               |                                                                                                                                                                                                                                                                                                                                                   
|4.2(a)         | List of Registrant's stockholders who entered into Registration Rights Agreement
                   referenced in Exhibit 4.2 with the Registrant (incorporated by reference to
                   Exhibit 4.2(a) of the Registrant's Annual Report on Form 10-K for the period ending
                   December 31, 2002).                     
|               |                                                                                                                                                                                                                                                                                                                                                   
|4.3            | Registration Rights Agreement dated December 6, 2002 between the Registrant and
                   Raymond Eshaghian (incorporated by reference to Exhibit 4.3 of the Registrant's
                   Annual Report on Form 10-K for the period ending December 31, 2002).                                                                        
|               |                                                                                                                                                                                                                                                                                                                                                   
|10.1           | 2003 Stock Option, Deferred Stock and Restricted Stock Option Plan (incorporated by
                   reference to Exhibit 10.1 of the Registrant's Annual Report on Form 10-K for the
                   period ending December 31, 2002).                                                                                                      
|               |                                                                                                                                                                                                                                                                                                                                                   
|10.2           | Lease Agreement dated August 31, 2002 between The Mortgage Store Financial, Inc., a subsidiary of
                   the Registrant, and Roosevelt Building (incorporated by reference to Exhibit 10.2
                   of the Registrant's Annual Report on Form 10-K for the period ending December 31,
                   2002).             
|               |                                                                                                                                                                                                                                                                                                                                                   
|10.3           | Consulting Services Agreement dated October 23, 2001 between The Mortgage Store Financial, Inc., a
                   subsidiary of the Registrant, and H. Wayne Snavely (incorporated by reference to
                   Exhibit 10.3 of the Registrant's Annual Report on Form 10-K for the period ending
                   December 31, 2002).
|               |                                                                                                                                                                                                                                                                                                                                                   
|21.1           | Subsidiaries of Registrant (incorporated by reference to Exhibit 21.1 of the
                   Registrant's Annual Report on Form 10-K for the period ending December 31, 2002).                                                                                                                                                                 
|               |                                                                                                                                                                                                                                                                                                                                                   
|23             | Consent of Singer Lewak Greenbaum & Goldstein LLP.                                                                                                                                                                                                                                                                                                
|               |                                                                                                                                                                                                                                                                                                                                                   
|24             | Power of Attorney                                                                                                                                                                                                                                                                                                                                 
|               |                                                                                                                                                                                                                                                                                                                                                   
|31.1           | Certification of Chief Executive Officer pursuant to Securities Exchange Act Rule
     13a - 14(a).                                                                                                                                                                                                                                               
|               |                                                                                                                                                                                                                                                                                                                                                   
|31.2           | Certification of Chief Financial Officer pursuant to Securities and Exchange Act
     Rule 13a - 14(a).                                                                                                                                                                                                                                           
|               |                                                                                                                                                                                                                                                                                                                                                   
|32.1           | Certification Pursuant to U.S.C. 1350, as adopted pursuant to Section 906 of the
     Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                 

(b) Reports
on Form 8-K    None.

- 96 -

---

Table of Contents

SIGNATURES

Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Los Angeles, State of California, on the 17th day of April, 2006.

| | TMSF HOLDINGS, INC.by /S/ RAYMOND ESHAGHIAN
     Raymond EshaghianChairman of the Board
| | ---------------------------------------------------------------------------------------

- 97 -

---

Table of Contents

# POWER OF ATTORNEY

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

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

|Signature                                      | Title                                                                  | Date          
|---------------------------------------------- | ---------------------------------------------------------------------- | --------------
|/S/ RAYMOND ESHAGHIANRaymond Eshaghian         | Chairman of the Board, Chief Executive Officer, Secretary and Director | April 17, 2006
|/S/ MASOUD NAJAND
     Masoud Najand           | Chief Financial Officer                                                | April 17, 2006
|/S/ M.AARON YASHOUAFAR
     M.Aaron Yashouafar | Director                                                               | April 17, 2006
|/S/ H.WAYNE SNAVELYH.Wayne Snavely             | Director                                                               | April 17, 2006
|/S/ DAVID SKLARDavid Sklar                     | Director                                                               | April 17, 2006

- 97 -

---

Table of Contents

TMSF HOLDINGS, INC.
AND SUBSIDIARIES

INDEX TO CONSOLIDATED
FINANCIAL STATEMENTS

|                                                        | Page      
|------------------------------------------------------- | ----------
|REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM | F-2       
|CONSOLIDATED FINANCIAL STATEMENTS                      
|Consolidated Balance Sheets                             | F-3       
|Consolidated Statements of Income                       | F-4       
|Consolidated Statements of Stockholders' Equity         | F-5       
|Consolidated Statements of Cash Flows                   | F-6       
|Notes to Consolidated Financial Statements              | F-7 - F-20
|                                                        |           

- F-1 -

---

Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors
TMSF Holdings, Inc. and subsidiaries
Los Angeles, CA
We have audited the consolidated balance sheets of TMSF Holdings, Inc. and subsidiaries as of December 31, 2005 and
2004, and the related consolidated statements of income, stockholders equity and cash flows for each of the three years in the
period ended December 31, 2005. These financial statements are the responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial
position of TMSF Holdings, Inc. and subsidiaries as of December 31, 2005 and 2004, and the results of their operations and their cash
flows for each of the three  years in the period ended December 31, 2005 in conformity with U.S. generally accepted accounting principles.


/S/SINGER LEWAK GREENBAUM
& GOLDSTEIN LLP
SINGER LEWAK GREENBAUM
& GOLDSTEIN LLP 
Los Angeles, CaliforniaApril 7, 2006

- F-2 -

---

Table of Contents

TMSF HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS



December 31, 2005 and 2004

|ASSETS                                                                
|----------------------------------------------------------------------
|
|Current assets                                                        
|Cash and cash equivalents                                             
|Mortgage loans held for sale, net of $234,000                         
|and $43,690 respectively, loss reserve                                
|Mortgage loans to be repurchased, net of                              
|$955,000 and $475,238 respectively, loss reserve                      
|Prepaid expenses                                                      
|Warehouse receivables                                                 
|Other receivables and employee advances                               
|Income tax receivable                                                 
|Deferred tax asset - current                                          
|Total current assets                                                  
|                                                                      
|Restricted cash                                                       
|Real estate owned, net of $34,000 and $0 respectively,   loss reserves
|Property and equipment, net of $648,753 and $342,704                  
|respectively, accumulated depreciation                                
|Deposits and other assets                                             
|Total assets                                                          

|LIABILITIES AND STOCKHOLDERS EQUITY      
|------------------------------------------
|Current liabilities                       
|Warehouse line of credit                  
|Obligation to repurchase mortgage loans   
|Accounts and other payables               
|Accrued expenses                          
|Accrued income taxes                      
|Total current liabilities                 
|Deferred tax liability - non current      
|                                          
|Total liabilitites                        
|                                          
|                                          
|Stockholders equity                      
|Preferred stock, $0.001 par value         
|100,000 shares authorized,                
|no shares issued and outstanding          
|Common stock, $0.001 par value            
|30,000,000 shares authorized,             
|15,000,000 shares issued and outstanding  
|Additional paid-in capital                
|Retained earnings                         
|                                          
|Total Stockholders Equity                
|                                          
|Total Liabilities and stockholders equity

The accompanying notes are an integral
part of these financial statements

- F-3 -

---

Table of Contents

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

|                                                      | 2005        | 2004        | 2003       
|----------------------------------------------------- | ----------- | ----------- | -----------
|Loan income                                           |             |             |            
|Income from sale of mortgage loans                    | $61,157,423 | $42,421,553 | $22,507,254
|Mortgage interest income                              | 17,379,358  | 8,710,726   | 4,182,439  
|Commission fee income                                 | 640,329     | 777,215     | 77,439     
|Escrow service fees                                   | -           | 84,617      | 267,796    
|                                                      |             |             |            
|Total loan income                                     | 79,177,110  | 51,994,111  | 27,034,928 
|                                                      |             |             |            
|Costs of loan origination and sale of mortgages       |             |             |            
|Commissions                                           | 20,074,819  | 14,769,742  | 9,467,442  
|Warehouse interest expense                            | 14,269,587  | 5,739,287   | 3,206,080  
|Appraisals                                            | 1,684,227   | 969,554     | 486,595    
|Credit reports                                        | 186,981     | 145,174     | 164,023    
|Warehouse fees                                        | 369,951     | 260,863     | 207,483    
|Provision for impairment of mortgage                  | 967,222     | 531,020     | -          
|Other costs                                           | 156,684     | 316,693     | 724,234    
|                                                      |             |             |            
|Total costs of loan origination and sale of mortgages | 37,709,471  | 22,732,333  | 14,255,857 
|                                                      |             |             |            
|Gross profit                                          | 41,467,639  | 29,261,778  | 12,779,071 
|                                                      |             |             |            
|Operating expenses                                    |             |             |            
|Salaries                                              | 18,978,104  | 10,702,181  | 6,284,576  
|General and administrative                            | 5,911,661   | 3,807,143   | 2,607,891  
|Occupancy                                             | 961,520     | 412,860     | 411,516    
|Total operating expenses                              | 25,851,285  | 14,922,184  | 9,303,983  
|                                                      |             |             |            
|Income from operations                                | 15,616,354  | 14,339,594  | 3,475,088  
|                                                      |             |             |            
|Other income (expense)                                |             |             |            
|Interest income (expense)                             | 125,273     | 17,772      | 11,909     
|Other income (expense)                                | (20,106)    | 14,999      | 2,215      
|Income (loss) on disposal of assets                   | (191,419)   | (463)       | (4,109)    
|Total other income (expense)                          | (86,252)    | 32,308      | 10,015     
|                                                      |             |             |            
|Income before provision for income taxes              | 15,530,102  | 14,371,902  | 3,485,103  
|                                                      |             |             |            
|Provision for income taxes                            | 6,328,310   | 5,736,644   | 1,312,000  
|                                                      |             |             |            
|Net income                                            | 9,201,792   | 8,635,258   | 2,173,103  
|                                                      |             |             |            
|Basic earnings per share                              | 0.61        | 0.58        | 0.15       
|                                                      |             |             |            
|Diluted earnings per share                            | 0.57        | 0.56        | 0.15       
|                                                      |             |             |            
|Basic weighted-average common                         |             |             |            
|shares outstanding                                    | 15,000,000  | 15,000,000  | 14,984,309 
|                                                      |             |             |            
|Diluted weighted-average                              |             |             |            
|common shares outstanding                             | 16,131,127  | 15,298,198  | 14,984,309 

The accompanying notes are an integral
part of these financial statements.

- F-4 -

---

Table of Contents

TMSF HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
December 31, 2005

|                    | Preferred Stock |        |        | Additional |        |       
|------------------- | --------------- | ------ | ------ | ---------- | ------ | ------
|
|                    | Shares          | Amount | Shares | Amount     | Shares | Amount
|Balance, December   |                 |        |        |            |        |       
|31, 2002            | --              | --     | --     | --         | --     | --    
|Issuance of common  |                 |        |        |            |        |       
|stock upon exercise |                 |        |        |            |        |       
|of warrants         |                 |        |        |            |        |       
|Net Income          |                 |        |        |            |        |       
|Balance, December   |                 |        |        |            |        |       
|31, 2003            |                 | $--    |        | $--        |        | $--   
|Option Granted      |                 |        |        |            |        |       
|Net Income          |                 |        |        |            |        |       
|Balance, December   |                 |        |        |            |        |       
|31, 2004            |                 | $--    |        | $--        |        | $--   
|Net Income for 2005 |                 |        |        |            |        |       
|Balance, December   |                 |        |        |            |        |       
|31, 2005            |                 | $--    |        | $--        |        | $--   

The accompanying notes are an integral
part of these financial statements.

- F-5 -

---

Table of Contents

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

|                                                       | 2005              | 2004                   | 2003                 
|------------------------------------------------------ | ----------------- | ---------------------- | ---------------------
|Cash flows from operating activities                  
|Net income                                             | $   9,201,792     | $   8,635,258          | $      2,173,103     
|Adjustments to reconcile net income to net cash       
|provided by (used in) operating activities             |                   |                        |                      
|Depreciation and amortization                          | 379,239           | 176,133                | 105,191              
|Provision for losses from EFL,                         |                   |                        |                      
|loans to be repurchased, and REO                       | 747,762           | 518,928                | 4,109                
|Options granted for consulting activities              | -                 | 35,500                 | -                    
|Loss on disposal of fixed assets                       | 200,884           | -                      | -                    
|(Increase) decrease in                                 |                   |                        |                      
|Mortgage loans held for sale (net)                     | 55,422,124        | (75,695,975)           | 37,683,320           
|Mortgage loans to be repurchased                       | (5,752,927)       | (4,318,283)            | -                    
|Prepaid expenses                                       | (190,310)         | (51,737)               | 176,570              
|Income tax receivable                                  | (525,036)         | -                      | 159,000              
|Other receivables and employee advances                | (399,294)         | (32,690)               | (11,140)             
|Warehouse receivables                                  | (3,476,797)       | (3,112,677)            | -                    
|Deposits and other assets                              | (254,671)         | 87,504                 | 56,496               
|Deferred tax asset                                     | (530,640)         | (439,701)              | -                    
|Increase (decrease) in                                 |                   |                        |                      
|Accounts and other payables                            | (2,191,587)       | 4,043,810              | (556,986)            
|Obligation to repurchase mortgage loans                | 5,752,927         | 4,318,283              | -                    
|Escrow funds payable                                   | -                 | (54,308)               | -                    
|Accrued expenses                                       | 70,223            | 287,742                | 5,146                
|Income tax payable                                     | (259,063)         | (936,832)              | 1,195,895            
|Deferred tax liability - current                       | -                 | (271,000)              | (229,000)            
|Deferred tax liability - non current                   | (98,440)          | 102,709                | -                    
|                                                       |                   |                        |                      
|Net cash provided by (used in) operating activities    | 58,096,186        | (66,707,336)           | 40,761,704           
|                                                       |                   |                        |                      
|Cash flows from investing activities                   |                   |                        |                      
|                                                       |                   |                        |                      
|(Increase) decrease in restricted cash                 | 942,878           | (866,956)              | 1,031,527            
|Proceeds from real estate owned                        | (459,299)         | 558,998                | (558,998)            
|Purchase of property and equipment                     | (728,701)         | (459,570)              | (227,628)            
|                                                       |                   |                        |                      
|Net cash provided by (used in) in investing activities | (245,122)         | (767,528)              | 244,901              
|                                                       |                   |                        |                      
|Cash flows from financing activities                   |                   |                        |                      
|Warehouse lines of credit                              | (56,169,046)      | 73,196,907             | (38,904,097)         
|Proceeds from convertible, subordinated                |                   |                        |                      
|note payable - related party                           | -                 | -                      | 2,000,000            
|Payments on convertible, subordinated                  |                   |                        |                      
|note payable - related party                           | -                 | -                      | (2,000,000)          
|Issuance of common stock                               | -                 | -                      | 8,182                
|                                                       |                   |                        |                      
|Net cash provided by (used in) financing activities    | (56,169,046)      | 73,196,907             | (38,895,915)         
|                                                       |                   |                        |                      
|                                                       |                   |                        |                      
|Net increase (decrease) in cash and cash equivalents   | $    1,682,018    | $   5,722,043          | $     2,110,690      
|                                                       |                   |                        |                      
|Cash and cash equivalents, beginning of year           | 8,565,215         | 2,843,172              | 732,482              
|                                                       |                   |                        |                      
|Cash and cash equivalents, end of year                 | $  10,247,233     | $   8,565,215          | $      2,843,172     
|                                                       |                   |                        |                      
|Supplemental disclosures of cash flow information      |                   |                        |                      
|                                                       |                   |                        |                      
|Interest paid                                          | $        
 13,111 | $       
            - | $
            182,065
|                                                       |                   |                        |                      
|Income taxes paid                                      | $    7,733,208    | $    7,295,000         | $         185,000    

The accompanying notes are an integral part of these financial statements.

- F-6 -

---

Table of Contents

TMSF HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005

NOTE 1 
ORGANIZATION AND LINE OF BUSINESS

General
TMSF
Holdings, Inc. (the Company) is a financial holding company that previously
operated as Little Creek, Inc. in November 2002. The Company acquired The Mortgage Store
Financial, Inc. and changed its name to TMSF Holdings, Inc. Prior to the acquisition of
The Mortgage Store Financial, Inc., Little Creek, Inc. did not have any significant
operational activity. The Mortgage Store Financial, Inc. was incorporated on August 25,
1992. The Company (as defined in Note 2) is licensed by the California Department of
Corporations and respective agencies in 35 other states. It is principally engaged in the
origination and purchase of residential mortgage loans. Generally, such loans are
subsequently sold to financial institutions or to other entities that sell such loans to
investors as a part of secured investment packages. The Company has obtained approval from
the Department of Housing and Urban Development to act as a supervised mortgagee.

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

In September 2005, the Company formed a new subsidiary, TMSF REIT, Inc. The purpose of this subsidiary is to
become the new holding company of The Mortgage Store Financial, Inc. Upon the completion of the reorganization,
TMSF REIT, Inc. will, if it qualifies, make an election to be taxed as a REIT for federal income tax purposes.
TMSF REIT, Inc. has conducted no business to date other than that incident to facilitating the reorganization.

Share Exchange,
Redemption of Stock, and Consulting Agreement
On
July 15, 2005, the Company and its shareholders reached a resolution to reduce the number
of authorized preferred and common stock. Under the resolution, the shareholders agreed to
reduce the number of authorized preferred stock from 10 million authorized shares to 100
thousand shares. In addition, the shareholders agreed to reduce the number of authorized
common stock from 100 million authorized shares to 30 million authorized shares.

# NOTE 2  SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The
accompanying consolidated financial statements of TMSF Holdings, Inc. (the
Company) reflect all material adjustments which management considers necessary
for a fair statement of the Companys financial position, results of operations, and
cash flows for the years then ended.

These
consolidated financial statements have been prepared in accordance with the rules and
regulations of the Securities and Exchange Commission (SEC).

Principles of
Consolidation

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

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

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

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

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

- F-7 -

---

Table of Contents

# NOTE 2  SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (continued)

Real Estate Owned

Real
estate owned by the Company is recorded at the repurchase price less fees and commissions
paid to the broker on the purchase. Real estate owned is recorded at the aggregate lower
of cost or market, less an estimated allowance for losses on changes in the market value
of the property.

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

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

Advertising Costs

The
Company expenses advertising costs as incurred. Advertising costs for the years ended
December 31, 2005 and 2004 were $83,899 and $36,381 respectively.

Income Taxes

Deferred
income taxes are recognized for the tax consequences in future years of differences
between the tax basis of assets and liabilities and their financial reporting amounts at each
period end, based on enacted tax laws and statutory tax rates applicable to the periods in
which the differences are expected to affect taxable income. At December 31, 2005 and
December 31, 2004, the net deferred tax liability is a result of the use of differing
depreciation methods between financial and tax reporting purposes. Valuation allowances
are established, when necessary, to reduce deferred tax assets to the amount expected to
be realized. The provision for income taxes represents the tax payable for the period, if
any, and the change during the period in deferred tax assets and liabilities.

Earnings Per Share

The
Company follows Statement of Financial Accounting Standards No. 128, Earnings per
Share (SFAS 128), and related interpretations for reporting Earnings
per Share. SFAS 128 requires dual presentation of Basic Earnings per Share (Basic
EPS) and Diluted Earnings per Share (Diluted EPS). Basic EPS excludes
dilution and is computed by dividing net income by the weighted average number of common
shares outstanding during the reported period. Diluted EPS reflects the potential dilution that could
occur if stock options were exercised using the treasury stock method. 
In
accordance with SFAS 128, basic earnings per share is calculated based on the weighted
average number of shares of common stock outstanding during the reporting period. Diluted
earnings per share is calculated giving effect to all potentially dilutive common shares,
assuming such shares were outstanding during the reporting period. 
As of December 31, 2005, 2004, and 2003 the Company had potential common stock as follows:

|                                                                                              | 2005       | 2004       | 2003      
|--------------------------------------------------------------------------------------------- | ---------- | ---------- | ----------
|                                                                                              |            |            |           
|Weighted average number of common shares
        outstanding used in computation of basic EPS | 15,000,000 | 15,000,000 | 14,984,309
|                                                                                              |            |            |           
|Dilutive effect of outstanding stock options                                                  | 1,131,127  | 298,198    | -         
|                                                                                              |            |            |           
|Weighted average number of common and potential                                               |            |            |           
|shares outstanding used in computation                                                        |            |            |           
|of diluted EPS                                                                                | 16,131,127 | 15,298,198 | 14,984,309

- F-8 -

---

Table of Contents

# NOTE 2  SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (continued)

Stock-Based
Compensation 
SFAS
No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148,
Accounting for Stock-Based Compensation-Transition and Disclosure, defines a
fair value based method of accounting for stock-based compensation. However, SFAS No. 123
allows an entity to continue to measure compensation cost related to stock and stock
options issued to employees using the intrinsic method of accounting prescribed by
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock
Issued to Employees. Entities electing to remain with the accounting method of APB
Opinion No. 25 must make pro forma disclosures of net income and earnings per share as if
the fair value method of accounting defined in SFAS No. 123 had been applied. The Company
has elected to account for its stock-based compensation to employees under APB Opinion No.
25 using the intrinsic value method. Accordingly, no compensation expense has been
recognized. 
Stock
option activity was as follows for the years ended December 31, 2003, 2004, and 2005:

|                                 | Shares Subject
to Option | Weighted Average 
           Exercise Price
|-------------------------------- | ------------------------ | -------------------------------------------
|Balance at December 31, 2002     | -                        | -                                          
|Options granted                  | 750,000                  | 1.00                                       
|Options exercised                | -                        | -                                          
|Options cancelled                | -                        | -                                          
|Balance at December 31, 2003     | 750,000                  | 1.00                                       
|Options granted                  | 792,000                  | 0.95                                       
|Options exercised                | -                        | -                                          
|Options cancelled                | -                        | -                                          
|Balance at December 31, 2004     | 1,542,000                | 0.98                                       
|Options granted                  | 660,500                  | 2.76                                       
|Options exercised                | -                        | -                                          
|Options cancelled                | (317,500)                | 3.42                                       
|Balance at December 31, 2005     | 1,885,000                | $1.19                                      
|Exercisable at December 31, 2005 | 1,585,733                | $1.01                                      

The
following table summarizes the status of the Companys stock options outstanding and
exercisable as of December 31, 2005:

|Range of Exercise Prices | OutstandingOptions | OptionsExercisable
|------------------------ | ------------------ | ------------------
|$0.85-$2.80              | 1,885,000          | 1,585,733         

The foregoing impact of option value was
determined using a modified Black-Scholes methodology and the following assumptions:

|Risk-Free
Interest Rate | Weighted Avg.
Expected Life | Expected
Volatility | Expected
Dividend Yield | Fair Valueat Grant Date
|----------------------- | --------------------------- | ------------------- | ----------------------- | -----------------------
|2.12%-4.58%             | 0.3-9.8 years               | 50%-120%            | 0.00%                   | $0.23-$2.60            

- F-9 -

---

Table of Contents

# NOTE 2  SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (continued)

The
Company has adopted only the disclosure provisions of SFAS No. 123. Accordingly, no
compensation cost other than that required to be recognized by APB 25 for the difference
between the fair value of the Companys common stock at the grant date and the
exercise price of the options has been recognized. Had compensation cost for the
Companys stock option plan been determined based on the fair value at the grant date
for awards consistent with the provisions of SFAS No. 123, the Companys net income
and basic and diluted income per share for the year ended December 31, 2005, 2004, and 2003
would have been decreased to the pro forma amounts indicated below:

|                                               | December 31, 
|---------------------------------------------- | -------------
|                                               | 2005         
|Net income as reported                         | $   9,201,792
|Add stock based employee compensation          |              
|expense included in net income, net of tax     | --           
|Deduct total stock based employee compensation |              
|determined under fair value                    |              
|method for all awards, net of tax              | (99,367)     
|Pro forma                                      | $  9,102,425 
|                                               |              
|Earnings per common share                      |              
|Basic - as reported                            | $        0.61
|Basic - Pro forma                              | $        0.61
|Diluted - as reported                          | $        0.57
|Diluted - pro forma                            | $        0.57

- F-10 -

---

Table of Contents

# NOTE 2  SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (continued)

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

Reclassifications

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

Concentration of
Credit Risk 
At
December 31. 2005 and 2004, the Company maintained cash balances with banks totaling
$12,266,680 and $11,141,680 respectively, in excess of federally insured amounts of
$100,000 per bank.

Major Customers
During
the years ended December 31, 2005, 2004, and 2003 the Company sold 69%, 8%, 6%, 59%, 11%, 11%,
and 44%, 23%, and 13% respectively, of its mortgage loans to three institutional investors .

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

Impact of Recently
Issued Accounting Statements
In
March 2005, the FASB issued FASB Interpretation (FIN) No. 47, Accounting
for Conditional Asset Retirement Obligations. FIN No. 47 clarifies that the term
conditional asset retirement obligation as used in FASB Statement No. 143,
Accounting for Asset Retirement Obligations, refers to a legal obligation to
perform an asset retirement activity in which the timing and (or) method of settlement are
conditional on a future event that may or may not be within the control of the entity. The
obligation to perform the asset retirement activity is unconditional even though
uncertainty exists about the timing and (or) method of settlement. Uncertainty about the
timing and/or method of settlement of a conditional asset retirement obligation should be
factored into the measurement of the liability when sufficient information exists. This
interpretation also clarifies when an entity would have sufficient information to
reasonably estimate the fair value of an asset retirement obligation. FIN No. 47 is
effective no later than the end of fiscal years ending after December 15, 2005 (December
31, 2005 for calendar-year companies). Retrospective application of interim financial
information is permitted but is not required. Management does not expect adoption of FIN
No. 47 to have a material impact on the Companys financial statements. 
In
April 2005, the Securities and Exchange Commission amended the compliance dates to allow
companies to implement SFAS No. 123(R) at the beginning of their next fiscal year, instead
of the next reporting period, that begins after June 15, 2005, or December 15, 2005 for
small business issuers. As a result, SFAS No. 123(R) will be adopted by the Company by the
first quarter of 2006. 
In
May 2005, the FASB issued Statement of Accounting Standards (SFAS) No. 154,
Accounting Changes and Error Corrections an amendment to Accounting Principles
Bulletin (APB) Opinion No. 20, Accounting Changes, and SFAS No. 3,
Reporting Accounting Changes in Interim Financial Statements though SFAS No.
154 carries forward the guidance in APB No. 20 and SFAS No. 3 with respect to accounting
for changes in estimates, changes in reporting entity, and the correction of errors. SFAS
No. 154 establishes new standards on accounting for changes in accounting principles,
whereby all such changes must be accounted for by retrospective application to the
financial statements of prior periods unless it is impracticable to do so. SFAS No. 154 is
effective for accounting changes and error corrections made in fiscal years beginning
after December 15, 2005, with early adoption permitted for changes and corrections made in
years beginning after May 2005.

- F-11 -

---

Table of Contents

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

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

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

     In December 2004, the FASB issued SFAS No. 123(R), Share-Based Payment. SFAS 123(R) amends SFAS No. 123,
Accounting for Stock-Based Compensation, and APB Opinion 25, Accounting for Stock Issued to Employees.  SFAS
No. 123(R) requires that the cost of share-based payment transactions (including those with employees and
non-employees) be recognized in the financial statements. SFAS No. 123(R) applies to all share-based payment
transactions in which an entity acquires goods or services by issuing (or offering to issue) its shares, share
options, or other equity instruments (except for those held by an ESOP) or by incurring liabilities (1) in
amounts based (even in part) on the price of the entitys shares or other equity instruments, or (2) that require
(or may require) settlement by the issuance of an entitys shares or other equity instruments. This statement is
effective (1) for public companies qualifying as SEC small business issuers, as of the first interim period or
fiscal year beginning after December 15, 2005, or (2) for all other public companies, as of the first interim
period or fiscal year beginning after June 15, 2005, or (3) for all nonpublic entities, as of the first fiscal
year beginning after December 15, 2005. Management is currently assessing the effect of SFAS No. 123(R) on the
Companys financial statements.

     In May 2005, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 154, Accounting Changes and Error Corrections. SFAS No. 154 replaces Accounting
Principles Board (APB) Opinion No. 20, Accounting Changes and SFAS No. 3, Reporting Accounting Changes in
Interim Financial Statements, and changes the requirements for the accounting for and reporting of a change in
accounting principle. This Statement applies to all voluntary changes in accounting principle. It also applies to
changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include
specific transition provisions. When a pronouncement includes specific transition provision, those provisions
should be followed.

- F-12 -

---

Table of Contents

Opinion 20 previously required that most voluntary changes in accounting principle be recognized by
including in net income of the period of the change the cumulative effect of changing to the new accounting
principle. This Statement requires retrospective application to prior periods financial statements of changes in
accounting principle, unless it is impracticable to determine either the period-specific effects or the
cumulative effect of the change. When it is impracticable to determine the period-specific effects of an
accounting change on one or more individual prior periods presented, this Statement requires that the new
accounting principle be applied to the balances of assets and liabilities as of the beginning of the earliest
period for which retrospective application is practicable and that a corresponding adjustment be made to the
opening balance of retained earnings (or other appropriate components of equity or net assets in the statement of
financial position) for that period rather than being reported in an income statement. When it is impracticable
to determine the cumulative effect of applying a change in accounting principle to all prior periods, this
Statement requires that the new accounting principle be applied as if it were adopted prospectively from the
earliest date practicable.

     The correction of an error in previously issued financial statements is not an accounting change. However,
the reporting of an error correction involves adjustments to previously issued financial statements similar to
those generally applicable to reporting an accounting change retrospectively. Therefore, the reporting of a
correction of an error by restating previously issued financial statements is also addressed by this Statement.

In February 2006 the Financial Accounting Standards Board issued Statement of Financial Accounting Standards
(SFAS) 155 Accounting for Certain Hybrid Financial Instruments. SFAS 155 amends SFAS 133 to narrow the scope
exception for interest-only and principal-only strips on debt instruments to include only such strips
representing rights to receive a specified portion of the contractual interest or principal cash flows. SFAS 155
also amends SFAS 140 to allow qualifying special-purpose entities to hold a passive derivative financial
instrument pertaining to beneficial interests that itself is a derivative financial instrument. Generally, FASB
Statement of Financial Accounting Standards SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, requires that a derivative embedded in a host contract that does not meet the definition of a
derivative be accounted for separately (referred to as bifurcation) under certain conditions. That general
rule notwithstanding, SFAS No. 133 (prior to amendments made to it by SFAS No. 155) provides a broad exception for
interest-only and principal-only strips initially resulting from the separation of rights to receive contractual
cash flows of a financial instrument that itself does not contain an embedded derivative that would have been
accounted for separately. SFAS 155 amends SFAS 133 to restrict the scope exception to strips that represent
rights to receive only a portion of the contractual interest cash flows or of the contractual principal cash
flows of a specific debt instrument. Prior to amendments made by SFAS 155 , SFAS 140 , Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities, permitted a qualifying special-purpose
entity (SPE) to hold only passive derivative financial instruments pertaining to beneficial interests (other than
another derivative financial instrument) issued or sold to parties other than the transferor. SFAS 155 amends
SFAS 140 to allow a qualifying SPE to hold a derivative instrument pertaining to beneficial interests that itself
is a derivative financial instrument. Management does not expect adoption of SFAS No. 155 to have a material
impact on the Companys financial statements.

     In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets (SFAS NO.
156), which provides an approach to simplify efforts to obtain hedge-like (offset) accounting. This Statement
amends FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities, with respect to the accounting for separately recognized servicing assets and servicing
liabilities. The Statement (1) requires an entity to recognize a servicing asset or servicing liability each time
it undertakes an obligation to service a financial asset by entering into a servicing contract in certain
situations; (2) requires that a separately recognized servicing asset or servicing liability be initially
measured at fair value, if practicable;  (3) permits an entity to choose either the amortization method or the
fair value method for subsequent measurement for each class of separately recognized servicing assets or
servicing liabilities; (4) permits at initial adoption a one-time reclassification of available-for-sale
securities to trading securities by an entity with recognized servicing rights, provided the securities
reclassified offset the entitys exposure to changes in the fair value of the servicing assets or liabilities;
and (5) requires separate presentation of servicing assets and servicing liabilities subsequently measured at
fair value in the balance sheet and additional disclosures for all separately recognized servicing assets and
servicing liabilities. SFAS No. 156 is effective for all separately recognized servicing assets and liabilities
as of the beginning of an entitys fiscal year that begins after September 15, 2006, with earlier adoption
permitted in certain circumstances. The Statement also describes the manner in which it should be initially
applied. The Company does not believe that SFAS No. 156 will have a material impact on its financial position,
results of operations or cash flows. Management is currently assessing the effect of SFAS No. 156 on the
Companys financial statements.

- F-13 -

---

Table of Contents

# NOTE 3  RESTRICTED
CASH

The
Company maintains restricted cash deposits in financial institutions. These restrictions
relate to the warehouse lines of credit, whereby the Company must maintain a reserve for
funding in excess of the warehouses advance limit. The Company does not have direct
access to these funds. Such cash balances for the years ended December 31, 2005 and 2004
aggregated to $413,292 and $1,356,170, respectively.

# NOTE 4  PROPERTY
AND EQUIPMENT

Property
and equipment for the years ended December 31, 2005 and 2004 consisted of the following:

|                                  | 2005              | 2004      
|--------------------------------- | ----------------- | ----------
|Furniture and fixtures            | $               - | $  130,323
|Office equipment                  | 356,921           | 154,674   
|Computer equipment                | 1,092,976         | 668,500   
|Leasehold improvements            | 14,702            | 56,476    
|                                  | 1,464,599         | 1,009,973 
|Less accumulated depreciation and |                   |           
|amortization                      | 648,753           | 342,704   
|                                  |                   |           
|Total                             | $815,846          | $667,269  

Depreciation
and amortization expense was $ 379,239,  $ 176,132, and $ 105,191 for the years ended December 31, 2005,
2004, and 2003 respectively.

# NOTE 5  WAREHOUSE
LINES OF CREDIT

During
2005, the Company maintained a warehouse line of credit with a financial institution in
the amount of $100,000,000. The line of credit was subsequently terminated in August, 2005, and
replaced by a new line of credit with a separate financial institution established June 2005 with a
maximum purchase amount of $100,000,000. This line has since been terminated as of December
2005.


During February 2004, the Company secured a warehouse line of credit with another financial
institution. The credit facility is structured as a repurchase agreement where the
financial institution may, at its sole discretion, purchase mortgage loans from the
Company. In April 2005, the Company renegotiated the terms of this agreement, and the maximum purchase amount on this credit line was increased from $30,000,000 to
$75,000,000. In September 2005, this facility was further increased to $100,000,000.
Under the terms of this warehouse agreement, interest accrues at LIBOR plus a pricing spread between 1.00% and 1.375% per annum, which
is dependent on the specific investor type and the mortgage loan category. This facility
has a one year term and is renewable with the consent of both parties.

- F-14 -

---

Table of Contents

In
addition, the Company must maintain a balance in a separate restricted cash account as a
pledge for amounts funded by the warehouse lender. The Company shall ensure that at all
times the balance in the cash account is no less than the greater of (a) $100,000 and (b)
the aggregate of all cash amounts allocated for all mortgage loans originated on this line
of credit. At December 31, 2005, the pledged amounts aggregated to $ 413,292.

As of February 28, 2006, this agreement has been amended to increase the aging period for loans to be carried
through this facility from 90 days to 180 days.  The interest rate on these aged loans was also changed to one
month LIBOR plus a 5% margin.


In
March 2004, the Company secured a third committed warehouse line of credit with a financial
institution in the amount of $10,000,000. The unpaid amount of each advance outstanding bears interest from the date of
such advance until paid in full at a rate of interest equal to the lesser of the maximum
rate allowed by law and a floating rate of interest equal to 1 month LIBOR plus a margin
between 1.50% and 2.75% per annum, dependent on the type of loan funded. The warehouse
line of credit contains financial and non-financial covenants of which management believes
the Company was in compliance with as of December 31, 2005. This facility was subsequently
reduced to $4,000,000 in August 2005.

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

As
of December 31, 2005, this Early Purchase facility has a maximum purchase concentration of
$400 million at any time. Upon purchase of loans by a Takeout investor the unused facility
up to maximum concentration may be re-used by the Company to originate new loans. This
Early Purchase agreement meets all criteria listed under FAS140 for the purpose of
defining transfer of financial assets. As of December 31, 2005, $147,020,010
of the concentration limit was utilized. Management believes that for loans originated
through this facility, the value of servicing rights for the short period prior to their
sale to takeout investors were not material to the financial statements at December 31,
2005 and no corresponding asset has been recorded. In addition, this Early Purchase
Facility has certain financial and non-financial covenants, one of which the Company must
maintain a minimum tangible net-worth of $15 million. At December 31, 2005, Management
believes the Company was in compliance with such covenants.

- F-15 -

---

Table of Contents

# NOTE 6 
COMMITMENTS AND CONTINGENCIES

Mortgage Loan
Purchase Agreements 
The
Company maintains mortgage loan purchase agreements with various mortgage bankers. The
Company is obligated to perform certain procedures in accordance with these agreements.
The agreements provide for conditions, whereby the Company may be required to repurchase
mortgage loans for various reasons, among which are either:

     (a) 
           a mortgage loan is originated in violation of the mortgage bankers
          requirements,
 (b)  the Company breaches any term of the agreements, and 
(c)  an early payment default occurs from a mortgage originated by the Company.
          
During
the year ended December 31, 2005, the Company repurchased four loans that were
collateralized by four properties with an aggregate balance of $1,147,312. However, two of
the loans were sold in June and July and the corresponding reserve was reversed. As of
December 31, 2005 the amount recorded as real estate owned was $425,299 net of loss
reserves of $34,000.

As
of December 31, 2005, the Company was obligated to repurchase 45 loans with an aggregate
balance of $10,071,210. The Company recorded a reserve of $955,000 on the loans to be
repurchased for the estimated impairment in market value.


In addition, we were notified by the purchaser of certain notes that six loan
files with an aggregate value of $614,707 allegedly had deficiencies in
documentation and/or underwriting procedures. We may have to repurchase these loans if we
are unable to cure the alleged deficiencies. As of December 31, 2005 these loans have not
been recorded on the balance sheet, and no loss reserve has been taken.

LA Business Tax 
The
Company was informed in January 2004 that the City of Los Angeles (City) had
assessed an additional $136,550 in business tax for the years 2001 through 2003. The
Company contested this assessment on the grounds that the City of Los Angeles assessment
is 1) based on the Companys entire revenue including fees collected by the Company
on behalf of third parties, such as commissions and escrow impounds; and 2) based on the
Companys nationwide revenue and not only on revenue generated from transactions that
occurred within the City of Los Angeles. 
The
Company retained legal counsel as consultants and an administrative hearing was held on
May 11, 2004. Subsequently, in August 2004 the Company provided additional information to
examiners in regards to items in dispute. In April 2005 the City conducted a review
audit and requested further information which was provided to them.

Subsequently,
the City has agreed to exclude third party fees from gross receipts, and in principal to
allow apportionment outside the City of Los Angeles. However, the apportionment process has not
been finalized at this date. In order to stop the continued assessment of interest prior to finalization of the apportionment process, the
Company paid, subsequent to year end, the Citys revised computation of the business tax due.  This payment for
$52,396 has been accrued as a liability on the books as of December 31, 2005.

Operating Leases 
The
Company had leased its previous office facilities from a shareholder, which expired in
November 2005 (see Note 9  Related Party Transactions). In September 2005, the
Company entered into a sublease agreement for its new corporate and administrative offices
at a new location in Los Angeles, California, with lease payments commencing in December
1, 2005. The lease includes the usage of all furniture, fixtures, and equipment already existing in the leased
premises. The lease will expire on May 31, 2007. Future minimum lease payments under this
new non-cancelable operating lease as of December 31, 2005 is $865,963.

Future
minimum lease payments under all of its operating leases, including the above and separate
equipment leases, at December 31, 2005 were as follows:



|Year EndingDecember 31,      | OperatingLease
|---------------------------- | --------------
|2006                         | $680,292      
|2007                         | 316,131       
|2008                         | 44,852        
|2009                         | 31,543        
|                             |               
|Total minimum lease payments | $1,072,818    

- F-16 -

---

Table of Contents

# NOTE 7 - INCOME TAXES

The following  table  presents the current and deferred tax  provision for federal and state income taxes for the years ended  December 31,
         2005, 2004, and 2003 at an effective tax rate of 40.21%:

|                           | 2005       | 2004       | 2003      
|-------------------------- | ---------- | ---------- | ----------
|Current                    |            |            |           
|Federal                    | $5,554,394 | $5,045,686 | $1,204,000
|State                      | 1,410,760  | 1,343,094  | 339,000   
|                           |            |            |           
|                           | 6,965,154  | 6,388,780  | 1,543,000 
|Deferred                   |            |            |           
|Federal                    | (539,125)  | (583,304)  | (203,000) 
|State                      | (97,719)   | (68,832)   | (28,000)  
|                           |            |            |           
|                           | (636,844)  | (652,136)  | (231,000) 
|                           |            |            |           
|Provision for income taxes | $6,328,310 | $5,736,644 | $1,312,000

At December 31, 2005 and 2004 components of net deferred tax assets  (liabilities) in the accompanying  balance sheets include
         the following amounts:

|Deferred tax asset liability                     | 2005       | 2004      
|------------------------------------------------ | ---------- | ----------
|Current                                          |            |           
|Prepaid Expenses                                 | $(128,713) | $(250,786)
|Accounts payable, accrued expenses, and reserves | 602,516    | 241,961   
|Change from cash to accrual                      | (6,244)    | (31,264)  
|State taxes                                      | 502,782    | 479,790   
|Non-current                                      |            |           
|Depreciation                                     | (4,269)    | (102,710) 
|Net deferred tax asset (liability)               | $966,072   | $336,991  

Income
tax expense differs from the amounts computed by applying the United States federal income
tax rate of 34% to income taxes as a result of the following for the years ended December
31, 2005, 2004, and 2003:

|                                                     | 2005       | 2004       | 2003      
|---------------------------------------------------- | ---------- | ---------- | ----------
|                                                     |            |            |           
|Federal tax on pretax income at
     statutory rates | $5,441,598 | $4,886,447 | $1,185,000
|State tax, net of federal benefit                    | 850,593    | 840,225    | 205,000   
|Other                                                | 36,119     | 9,972      | (78,000)  
|                                                     |            |            |           
|Total                                                | $6,328,310 | $5,736,644 | $1,312,000

- F-17 -

---

Table of Contents

# NOTE 8  STOCK
OPTIONS

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

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

On April
15, 2005, and May 6, 2005, the Board of Directors of the Company resolved to grant to certain
employees of The Mortgage Store Financial, Inc., a total of 340,500 options
to purchase shares of the Companys stock at an exercise price
range of $2.00  $2.35 per share, vesting over a period of five years,
commencing April 2006, and expiring in April 2015.  The options are granted pursuant to the
Companys 2003 Employee Stock Option Plan and are subject to the vesting
provisions provided for in the Plan. The fair value of the options was estimated at
$682,654 using the Black-Scholes option-pricing model and the following assumptions: a
risk-free interest rate of 4.26% to 4.28%, expected volatility of 120%, and a dividend
yield of 0%.

In
September 7, 2005, the Company had approved the issuance of stock options to an executive
of The Mortgage Store Financial, Inc. The agreement granted the officer options to
purchase 300,000 shares of common stock at an exercise price of $3.50 per share, vesting
over a period of five years, commencing in September 2006, and expiring in September 2015.
The fair value of the options was estimated at $889,906 using the Black-Scholes
option-pricing model, and the following assumptions: a risk-free interest rate of 4.15%,
expected volatility of 124%, and a dividend yield of 0%. As of December 31, 2005, these
stock options have been cancelled as the officer is no longer with the Company.

In
November 2005, the Company had approved the issuance of stock options to two employees of
The Mortgage Store Financial, Inc. The agreement granted the employees options to purchase
10,000 shares each for a total of 20,000 shares of common stock at an exercise price of
$2.80 per share, vesting over a period of five years, commencing November 1, 2005, and
expiring on October 31, 2015. The fair value of the options was estimated at $51,976 using
the Black-Scholes option-pricing model, and the following assumptions: a risk-free
interest rate of 4.58%, expected volatility of 107%, and a dividend yield of 0%.

- F-18 -

---

Table of Contents

# NOTE 9  RELATED
PARTY TRANSACTIONS

Consulting Expenses 
During
the years ended December 31, 2005, 2004, and 2003 the Company paid $532,000, $403,600,
and $0 respectively, for consulting expenses to companies owned by shareholders. The Company also
paid $360,000, $397,500, and $0 respectively, for consulting expenses to a relative of a
shareholder during the years ended December 31, 2005, 2004, and 2003. Furthermore, during the
years ended December 31, 2005, 2004, and 2003 the Company paid consulting expenses of $40,000,
$40,000, and $40,000 respectively, to a director. This consulting agreement terminated in November
2005.

Rent and Lease
Expenses 
The
Company had leased its previous office facilities from a shareholder, which expired in
November 2005. The Company presently operates in a new facility under a new sublease
agreement with an outside party (see Note 6  Commitments and Contingencies. Rent
paid to the shareholder during the years ended December 31, 2005, 2004, and 2003 amounted to
$779,211, $346,138, and $311,076 respectively. In addition, the Company pays for certain vehicle
operating expenses on behalf of certain officers. Lease payments made for these officers
for the years ended December 31, 2005, 2004, and 2003 were $71,941, $61,908, and $33,826 respectively.

Commercial Loan 
In
the regular course of business, the Company sometimes provides mortgage loan financing to
its officers and related parties at prevailing market terms. During the year ended
December 31, 2005, a commercial loan for a real estate purchase, provided by the Company
was transacted on behalf of a 5% shareholder, in the amount of $500,000 (secured by real
property, and a personal guarantee). This note was subsequently sold, similar to the
standard fashion in which any other commercial loan would be treated.

In
April 2005, the Company provided a loan for the purchase of a multi-unit residential
property to its primary shareholder. Upon review by the Companys counsel, it was
advised that this loan may potentially constitute a control deficiency as defined by
Auditing Standard No. 2 under SOX, and administered by the Public Accounting Oversight
Board. As such, the loan was immediately repaid, and funds were returned to the company
two days after initial funding of the loan.

Mortgage Loans for Employees

During the course of its business the Company provides mortgage loans to its employees and related parties at
prevailing market rates. During the years ended December 31, 2005, 2004, and 2003 the company funded $4,976,225,
$1,470,600, and $470,700 in mortgage loans for officers or executive employees of the company, and $5,437,475,
$5,699,900, and $1,398,000 respectively for persons related to officers. These loans were subsequently sold at the secondary
market at comparable margins.

# NOTE 10 
STOCKHOLDERS EQUITY

During the year ended December 31, 2004, the Company entered into an agreement with an investor relations firm
under which it will grant options to purchase 30,000 shares of common stock. The options are exercisable at $1.25
per share, vest five months after the date of the agreement and expire in May 2006. The value of the options was
not material.
On August 23, 2004, the Company granted H. Joseph Nourmand options to purchase 52,000 shares of Companys common
stock. The exercise price of these options are $0.85. The options vest immediately and expire on August 23, 2014.
The fair value of the options are estimated at $28,600.

# NOTE 11 
SUBSEQUENT EVENTS

In
August 2005, the Company entered into an agreement with a software provider, to purchase
mortgage industry specific operating software for loan origination and automatic
underwriting systems. Total costs of licensing, implementation and customization were
valued at approximately $600,000. During the year ended December 31, 2005, the Company
paid $416,000 to this vendor. Subsequently, this agreement was cancelled and the
transaction costs were removed from the financial statements as of December 31, 2005.

On
January 18, 2006, the Company had approved the issuance of stock options to an executive
and another employee of The Mortgage Store Financial, Inc. The agreement granted the
executive and other employee options to purchase 110,000 shares and 15,000 shares of
common stock, respectively, at an exercise price of $3.10 per share, vesting over a period
of five years, commencing in January 2006, and expiring on January 18, 2016. The fair
value of the options was estimated at $313,500 and $42,750, respectively, using the
Black-Scholes option-pricing model, and the following assumptions: a risk-free interest
rate of 4.34%, expected volatility of 104%, and a dividend yield of 0%.

- F-19 -

---

Table of Contents

# NOTE 12 
SELECTED QUARTERLY FINANCIAL DATA-UNAUDITED

The following table is a summary of the unaudited quarterly financial information for the years ended
December 31, 2005 and 2004.

First
    
    
    Second
    
    
    Third
    
    
    Fourth
    
    
    TotalYear Ended December 31, 2005
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    Year(In thousands, except per share data)Net sales
    
    $
    19,154
    
    
    $
    22,129
    
    
    $
    21,358
    
    
    $
    16,536
    
    
    $
    79,177Gross profit
    
    
    10,457
    
    
    
    11,534
    
    
    
    12,426
    
    
    
    7,051
    
    
    
    41,468Operating expenses
    
    
    5,520
    
    
    
    6,502
    
    
    
    7,201
    
    
    
    6,628
    
    
    
    25,851Operating income (loss)
    
    
    4,937
    
    
    
    5,032
    
    
    
    5,225
    
    
    
    422
    
    
    
    15,616Other income (expense)
    
    
    7
    
    
    
    -
    
    
    
    92
    
    
    
    ( 185
    )
    
    
    (86
    )Pre-tax income
    
    
    4,944
    
    
    
    5,032
    
    
    
    5,317
    
    
    
    237
    
    
    
    15,530Provision for income tax
    
    
    1,973
    
    
    
    2,011
    
    
    
    2,134
    
    
    
    210
    
    
    
    6,328Net income (loss)
    
    $
    2,971
    
    
    $
    3,021
    
    
    $
    3,183
    
    
    $
    27
    
    
    $
    9,202Net income per common share diluted
    
    $
    0.19
    
    
    $
    0.19
    
    
    $
    0.20
    
    
    $
    0.00
    
    
    $
    0.57


First
    
    
    Second
    
    
    Third
    
    
    Fourth
    
    
    TotalYear Ended December 31, 2004
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    Year(In thousands, except per share data)Net sales
    
    $
    7,405
    
    
    $
    10,964
    
    
    $
    16,341
    
    
    $
    17,284
    
    
    $
    51,994Gross profit
    
    
    4,223
    
    
    
    6,520
    
    
    
    9,016
    
    
    
    9,503
    
    
    
    29,262Operating expenses
    
    
    2,488
    
    
    
    3,188
    
    
    
    3,923
    
    
    
    5,323
    
    
    
    14,922Operating income (loss)
    
    
    1,735
    
    
    
    3,332
    
    
    
    5,093
    
    
    
    4,180
    
    
    
    14,340Other income (expense)
    
    
    95
    
    
    
    3
    
    
    
    75
    
    
    
    ( 141
    )
    
    
    32Pre-tax income
    
    
    1,830
    
    
    
    3,335
    
    
    
    5,168
    
    
    
    4,039
    
    
    
    14,372Provision for income tax
    
    
    782
    
    
    
    1,124
    
    
    
    2,221
    
    
    
    1,610
    
    
    
    5,737Net income (loss)
    
    $
    1,048
    
    
    $
    2,211
    
    
    $
    2,947
    
    
    $
    2,429
    
    
    $
    8,635Net income per common share diluted
    
    $
    0.07
    
    
    $
    0.15
    
    
    $
    0.19
    
    
    $
    0.15
    
    
    $
    0.56


- F-20 -