Table of Contents

United States

SECURITIES AND
EXCHANGE COMMISSION 

Washington, D.C. 20549FORM 10-K

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

               
                 For the fiscal year ended December 31, 2006 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 if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act.

                    
     Yes [ ] No [X]

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d)
of the Act.
              
           Yes [ ] No [X]

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 a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See
definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.

               
(Check one):  Large accelerated filer [ ]   Accelerated filer [ ]   Non-accelerated filer [X]

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

              
           Yes [ ] No [X]

On June 30, 2006 the aggregate market value of the
voting and non-voting common equity held by non-affiliates of the
registrant was approximately
$2,718,480 based on the closing sales price of common stock on the OTC
Bulletin Board of the National Association of Securities Dealers.

             As of March 30, 2007, there were 15,000,000
shares of common stock outstanding
($0.001 par value).

DOCUMENTS INCORPORATED
BY REFERENCE

None.

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Table of Contents

TMSF HOLDINGS, INC. 
2006 FORM 10-K
ANNUAL REPORT TABLE OF CONTENTS

|        |  | PART I                                                                         |    
|------- |  | ------------------------------------------------------------------------------ | ---
|ITEM 1  |  | BUSINESS                                                                       | 1  
|ITEM 1A |  | RISK FACTORS                                                                   | 17 
|ITEM 1B |  | UNRESOLVED STAFF COMMENTS                                                      | 37 
|ITEM 2  |  | PROPERTIES                                                                     | 37 
|ITEM 3  |  | LEGAL PROCEEDINGS                                                              | 37 
|ITEM 4  |  | SUBMISSION OF MATTERS
     TO A VOTE OF SECURITY HOLDERS                       | 37 
|        |  | PART II                                                                        |    
|ITEM 5  |  | MARKET FOR REGISTRANT'S COMMON
     EQUITY AND RELATED STOCKHOLDER MATTERS     |    
|        |  | AND ISSUER PURCHASES OF EQUITY SECURITIES                                      | 38 
|ITEM 6  |  | SELECTED FINANCIAL DATA                                                        | 40 
|ITEM 7  |  | MANAGEMENT'S
     DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION               |    
|        |  | AND RESULTS OF OPERATIONS                                                      | 41 
|ITEM 7A |  | QUANTITATIVE AND
     QUALITATIVE  DISCLOSURE ABOUT MARKET RISK                | 58 
|ITEM 8  |  | FINANCIAL STATEMENTS
     AND SUPPLEMENTARY DATA                               | 59 
|ITEM 9  |  | CHANGES IN AND DISAGREEMENTS
     WITH ACCOUNTANTS                            
|        |  | ON ACCOUNTING AND FINANCIAL
     DISCLOSURE                                    | 59 
|ITEM 9A |  | CONTROLS AND PROCEDURES                                                        | 59 
|ITEM 9B |  | OTHER INFORMATION                                                              | 61 
|        |  | PART III                                                                       |    
|ITEM 10 |  | DIRECTORS, EXECUTIVE
      OFFICERS, AND CORPORATE GOVERNANCE                  | 61 
|ITEM 11 |  | EXECUTIVE COMPENSATION                                                         | 63 
|ITEM 12 |  | SECURITY OWNERSHIP OF
      CERTAIN BENEFICIAL OWNERS AND MANAGEMENT           |    
|        |  | AND RELATED STOCK HOLDER MATTERS                                               | 69 
|ITEM 13 |  | CERTAIN RELATIONSHIPS
     AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE | 71 
|ITEM 14 |  | PRINCIPAL ACCOUNTANT
     FEES AND SERVICES                                    | 72 
|        |  | PART IV                                                                        |    
|ITEM 15 |  | EXHIBITS, FINANCIAL
     STATEMENT SCHEDULES                                   | 73 
|        |  | SIGNATURES                                                                     | 74 
|        |  | CONSOLIDATED FINANCIAL STATEMENTS                                              | F-1

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# 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, 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 Item 1A.
Risk Factors and Item 7. 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.

# 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 subsidiaries, The Mortgage Store
Financial, Inc., a California corporation incorporated in 1992 (The Mortgage
Store)and CPV Limited, Inc., a California corporation incorporated in August 2003. 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, we operated as Little Creek Inc. and did not have any significant operational activity.
In September 2005, we initiated a process to convert our business into a Real Estate Investment Trust (REIT).  On August 4, 2006 our
board of directors unanimously decided to terminate the plan to reorganize our business operations to allow us to qualify and elect
to be taxed as a REIT effective August 3, 2006. The Board determined that because of unfavorable market conditions, we will not be
able to satisfy the conditions precedent to the consummation of the reorganization.
Our Internet website address is www.tmsfholdings.com. 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.

# 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.

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# Financing, Revenues, and
Interest Rate Management

Our
business model relies 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
result 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.

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 from the loans sold to non-affiliated
buyers are 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 approximately 6,000 approved
brokers of which approximately 1,500 actively conducted businesses with us during the year
ended December 31, 2006. For the year ended December 31, 2006 and December 31, 2005, we originated approximately $2,049.7 million and
$1,738.7 million of mortgage loans, respectively, of which approximately 94.4% and 88.9%,
respectively, were generated through our wholesale channel and approximately 5.6% and
11.1%, respectively, were generated through our retail channel. Our business and
profitability are sensitive to movements in interest rates. The level of total origination
activity in the mortgage industry at large, which includes both conforming and
non-conforming mortgage loans have decreased as higher interest rates make home buying
more costly for consumers and refinancing of existing mortgages less attractive to current
borrowers, and nationally, a general slowdown for new home sales; we expect this trend to
continue for the foreseeable future. Our current business model contemplates growth, even
in an environment with declining originated volume for the industry, by capturing
additional market share. We expect that 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
expanding the geographical footprint of our sales organization into new territories, and,
to continue to expand our sales efforts in our current markets. We intend to expand our
sales presence in mid-America and on the east coast, as well as other western markets we
do not currently service.

The
mortgage industry is highly competitive. As a result, we are not able to originate loans
at rates higher than market rates. 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.

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# 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 98.9% of our total loan production during
the year ended December 31, 2006. 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. 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. Additionally, as a result of less favorable
economic conditions and an increase in the number of borrower defaults and fraudulently
obtained loans, we have tightened our mortgage loan lending and purchase requirements
and the process we undergo to document loans.

We
expect to continue to use warehouse facilities to provide short-term financing for our
mortgage loan originations.

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 6,000
approved brokers out of which approximately 1,500 actively conduct business with us. For
the year ended December 31, 2006, we originated approximately $2,049.7 million
of mortgage loans, of which approximately $1,934.7 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. 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 the 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 loan-to-value (LTV) ratios of over 100%. 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 an attempt 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 periods of two, three, five, and seven years that
subsequently convert to adjustable rate mortgages.

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We
believe that through such varied product mix, we can sustain production through different
phases of economic cycles, which affect one category of loans more than others. We further
believe that such a strategy will also enhance our relationship with existing brokers who
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 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 on whom we rely to establish personal relationships with
mortgage brokers in their respective territories.

To strengthen our retail division, we have introduced a commission structure
to reward 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.

# Origination Channels

1. Wholesale Channel

Our
wholesale channel originates conforming and non-conforming residential
mortgage loans through relationships with various mortgage bankers and mortgage brokers.
Our wholesale channel currently has over 6,000 approved brokers of which approximately
1,500 actively conduct business with us. We provide a variety of mortgage products to our
brokers, which allows 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 of 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
pre-approval or denial 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 reviews the pre-funding conditions and the quality
control team conducts 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.

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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 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 on whom we rely to establish personal relationships with
mortgage brokers in their respective territories. Brokers must meet various requirements
and complete a 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.

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, completion of a 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.

# 2. Retail Channel

Our retail channel has 23 loan officers that operate from our headquarters in Los Angeles,
California and 4 branch offices in 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 strengthen our retail channel, we have introduced a commission structure to
reward 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 lower credit scores 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 programs allow 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.

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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 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. The LTV percentage is calculated by using the first-lien loan
principal balance as the numerator and the lower of the
homes sales price or 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.

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.

Our loans are underwritten both manually by qualified personnel and through an Automated
Underwriting System (AUS). Our AUS is 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 applications 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.

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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.

# Income Documentation

1. Alt-A Loan
Documentation Programs

We
offer a variety of income documentation options with our Alt-A programs, including:
Full Documentation, Stated Income Documentation/Verified Assets, Stated Income
Documentation/Stated Assets, No Income Documentation/Verified Assets (also known as No
Ratio), 12 Months Bank Statements, and 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 the most recent 12 months  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.

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Table of Contents

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 the applicants ability to
repay the loan, review the type and use of the property being financed, and review the
appraised value of the property. 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.

2. Subprime Documentation
Programs

Aggregated,
our subprime programs represent less than 0.5% of our production for the year ended
December 31, 2006. Our subprime underwriting guidelines include three levels of
applicant documentation requirements, referred to as the Full Documentation,
Stated Income Documentation and 12 Months Bank Statements 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 Statements 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 the applicants ability to repay the loan,
review the type and use of the property being financed, and review the appraised value of the
property. The typical terms for subprime programs are 2, 3 and 30 year 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 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.

3. Documentation
Applicable to All Loans

Our
underwriting guidelines require that our mortgage loans be underwritten in standardized
procedure that 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 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.

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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+ (660 3-4 units)
    
    95% / 620+; 100% / 681+Stated Income/Verified Assets
    
    100% / 620+ (660 3-4 units)
    
    95% / 660+Stated Income/Stated Assets
    
    100% / 720+ (1-2 units)
    
    N/A12 Months Bank Statements
    
    100% / 620+ (660 3-4 units)
    
    not allowed Investment/2nd homeNo Income/Verified Assets
    
    100% / 660+
    
    95% / 660+No Documentation
    
    N/A
    
    N/AMortgage 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)(4)
    
    $1M combined
    
    $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/660+Stated Income/Verified Assets
    
    95%/500K/620+
    
    90%/500K/680+Stated Income/Stated Assets
    
    95%/500K/620+
    
    90%/500K/680+12 Months Bank Statements
    
    N/A
    
    N/ANo Income/Verified Assets
    
    95%/500K/660+
    
    90%/500K/680+No Documentation
    
    90%/500K/660+
    
    80%/650K/620+Mortgage History(2)
    
    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.                                                                                          

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Table of Contents

Subprime Risk Categories

Under
our underwriting guidelines for subprime loans we have established six principal risk
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 obligations of a mortgage loan, and therefore, are subject 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)
    
    90%(2)
    
    85%
    
    85%
    
    75%
    
    
    65%Stated Income
    
    90% / $400,000
    
    80%
    
    75%
    
    70%
    
    not allowed
    
    
    not allowed12 Month Bank
Statements
    
    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 we may offer
or to comply with requirements of the buyers of our loans.

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# 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, 2006, we had 26 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. During the majority of 2006 we assigned
all original appraisals for review to a nationally recognized independent appraisal review
company, which performed either a desk or a field review of the subject property
depending on the size of the mortgage loan, to confirm that the collateral securing the note is
adequate prior to funding. In October of 2006 we began utilizing an insured automated
valuation model which protects us against certain types of appraisal fraud.

In
addition to the quality control personnel assigned to our integrated loan processing
teams, we have a separate group of quality control personnel conducting post-funding
audits on each loan. The post-funding audit 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 and all required documents have been
received. The audit also verifies that each document required by the underwriter 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

As
of December 31, 2006, we had three warehouse facilities with two financial institutions
with aggregate commitments of $504 million. This included an early purchase facility
with Washington Mutual which had a maximum commitment of $300 million and a
repurchase agreement with Lehman Brothers which had a maximum commitment amount of $200
million. The cost of borrowing on these lines is a variable rate equal to 1 month LIBOR
plus a margin between 1.0% and 1.375%. 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 Item 7. Managements Discussion and Analysis of Financial
Condition and Results of Operations.

# 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, Indy Mac, Lehman
Brothers Bank, Morgan Stanley, RFC, and Washington Mutual, among others. We sold $2,005.3 million of loans during 2006 as compared to $1,740.7 million of
loans during 2005 and $863.7 million during 2004. Loan sales are made on a regular basis
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 76.1% of our total loan income for 2006, as
compared to 74.8% and 78.2% of our total loan income for 2005 and 2004, respectively. We
maximize our cash gain on sale of 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.

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As of December 31, 2006, we had outstanding requests to
repurchase loans with an aggregate principal balance, plus accrued interest, of $50.5
million, for which we have loss reserves of $15.2 million. As of December 31, 2005,
we had requests to repurchase loans with an aggregate principal balance, plus accrued
interest, of $10.1 million, with associated reserves of $1.2 million. The increase in the
reserve is the result of higher repurchase demands, which resulted primarily from the
significant increase in overall loan originations during 2006 versus 2005 and closer
scrutiny of various breaches in representations and warranties by various investors who
purchased our loans during 2006.

In
some cases where the investors request us to repurchase loans due to early payment defaults,
we agree mutually with the investor to change the pricing for the purchased loan in lieu
of repurchase. Thereafter, we would not have any
obligation to repurchase the same loan for payment default. In other cases we provide
indemnification against losses to the investor in lieu of repurchase. We provide for such losses
when the loans are sold with limited recourse.

# Loan 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,
2006, we serviced approximately $303.2 million in mortgage loans on an interim basis, with
a staff of 7 people, as compared with $301.4 million with a staff of 8 people at December
31, 2005.

# Interest Rate Management

Our
profits depend, in part, on the difference, or spread, between the effective
rates of interest received by us on the loans we originate and the interest rates payable
by us under our warehouse facilities. The spread can be adversely affected because of
interest rate increases during the period from the date the loans are originated until the
sale 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, which may include forward sales of
mortgage loans, 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.

# Our Operating and
Financial Policies

The
following is a discussion of our policies with respect to distributions,
investments, financing, lending, and certain other activities. 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.

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Investment Policies

We
do not 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 and warehouse financing
lines.

We
may acquire other investments that include mortgage-backed securities, 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.

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

We
will engage primarily in the business of originating, purchasing and selling first-lien
and second-lien conforming and non-conforming residential mortgage loans. 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. The interest rate and maximum
loan amount are determined based upon our underwriting guidelines.

# Leverage Policy

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 may conduct certain hedging activities intended to protect our mortgage loan
portfolio and related debt against the effects of major interest rate changes. 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 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 or other derivative instruments. We may also use other hedging
instruments including mortgage derivative securities.

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.

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# Financing Policies

We
do not have a policy limiting the amount 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.

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 Item 7.
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 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.

# Competition

We
face intense competition in the business of originating and selling conforming and
non-conforming mortgage loans. Our competitors in the industry include 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 future gain on sales of loans. 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.

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As
the number of mortgage refinance opportunities diminish, the mortgage industry may
experience a consolidation that may reduce the number of 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 cut their profit margins to maintain current production
levels. Changes of this nature could negatively impact our business.

We
depend primarily on correspondents, independent mortgage bankers and brokers for the
acquisition and origination of mortgages. 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
disclosures to the consumer.

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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 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.

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 denies 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, 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. Currently there are various proposed 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, 2006 we had 342 salaried employees and 101 commission-based employees. None
of our employees are subject to a collective bargaining agreement. We believe that our
relations with our employees are satisfactory.

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ITEM 1A. RISK FACTORS

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.

# Risks Related to Our
Business

We may not be able to obtain the
cash required to execute 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 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 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 operations and ability to generate income.

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. 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, 2006, the aggregate amount of funds available to wet fund
loans under the warehouse facilities was approximately $146.0 million.

As
of December 31, 2006, 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.

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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 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.

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.

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Any significant margin calls under
our financing facilities would adversely affect our liquidity and may adversely affect our
financial results.

During
periods of disruption in the financial markets, the mortgage industry may experience
substantial turmoil as a result of a lack of liquidity in the secondary markets. At such
times, investors may be unwilling to purchase loans due to various reasons including, but not limited to,
market uncertainty and narrowing spreads compared to treasury rates.

As
a result, during these periods, many mortgage originators, including us, may be unable to
access the secondary markets on favorable terms. This may result in some companies
declaring bankruptcy. Some companies, like us, may be required to sell loans on a whole
loan basis to repay short-term borrowings. However, the large amount of mortgages
available for sale on a whole loan basis may create an oversupply and affect the pricing
offered for these mortgages, which in turn may reduce the value of the collateral
underlying the financing facilities. Therefore, many providers of financing facilities may
initiate margin calls. Margin calls may result when our lenders evaluate the market value
of the collateral securing our financing facilities and require us to provide them with
additional equity or collateral to secure our borrowings.

Our
financing facilities are short-term borrowings and in the event of a market disruption,
many traditional providers of financing facilities may be unwilling to provide facilities
on favorable terms, or at all. Our current financing facilities continue to be short-term
borrowings and we expect this to continue. If we cannot renew or replace maturing
facilities, we may have to sell, on a whole loan basis, the mortgages securing these
facilities, which, depending upon market conditions may result in substantial discount in
proceeds we receive on sale.

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

Historically,
The Mortgage Store has 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 any future securitizations. Our operations are subject to risks associated with inadequate or
untimely servicing. Poor performance by servicing or servicing department 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.

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

We
transfer and intend to transfer mortgages acquired and originated by us to third
parties in exchange for cash. The purchaser 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.

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In
the ordinary course of our business, we are subject to claims made against us by borrowers
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.

There
has been an increase in production of our loan product which is characterized as
interest only and option-ARM loans. There have been recent announcements by
federal regulators concerning interest-only loan programs, option-ARM loan programs and
other ARM loans with deeply discounted initial rates and/or negative amortization
features. 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 option
payment ARMs. Already one rating agency (Standard & Poors) has required
greater credit enhancements for securitization pools that are backed by
option-ARMs. These changes could make the product less available as financing options
and hence this could have a material affect on the value of such products.

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 origination activity may
result in fewer loans that meet the criteria for purchase 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 due to a higher level of
defaults or foreclosures or higher loss rates on our mortgages should there be a period of economic slowdown.

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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.

We
do not set limitations on the percentage of our long-term mortgage origination for
properties located in any one area (whether by state, zip code or other geographic
measure). Concentration in any one area increases our exposure to the economic and natural
hazard risks associated with that area. 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, 2006, 2005, and 2004 approximately 72.5%, 64.2%, and 71.4% 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.

Furthermore,
certain areas, such as California, may suffer a greater amount of natural hazards. If
borrowers are not insured for natural disasters, which are typically not covered by
standard hazard insurance policies, then they may not be able to repair the property or
may stop paying their mortgages if the property is damaged. This would cause increased
foreclosures and decrease our ability to recover losses on properties affected by such
disasters. This would have a material adverse effect on our results of operations or
financial condition.

The residential mortgage
origination business is a cyclical industry and it has recently been 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 few 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.

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

We
face intense competition from finance, investment banking companies, banking companies,
mortgage Real Estate Investment Trusts (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. Many 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 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 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 preemption, it will not require additional credit enhancement by
federally chartered institutions when they issue securities backed by mortgages from a state with
predatory lending laws. As a non-federally chartered 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 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
chartered institutions legal and competitive advantages.

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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 and 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, 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 existing retail and wholesale structure and information systems
to compete effectively. Our inability to continue enhancing our existing internet
capabilities, or to adapt to other technological changes in the industry, could
significantly harm our business, financial condition, liquidity, and results of
operations.

Competition
in the industry can take many forms, including interest rates and costs 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;
- 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;
- lowering the value of our mortgage loans
held for sale;
- increasing our costs of originating,
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 2006 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.

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A reduction in the demand for our
loan products may adversely affect our operations.

The
availability of sufficient mortgages meeting our criteria is dependent in part upon the
size and level of activity in the residential real estate lending market and, in
particular, the demand for residential mortgages, which is affected by:

- interest rates;
- national economic conditions;
- residential property values; and
- regulatory and tax developments

If our mortgage originations decline,
we may have:

- decreased economies of scale;
- higher origination costs per loan;
- reduced fee income; and
- smaller gains on the sale of mortgages.

As
a result of less favorable economic conditions and an increase in the number of borrower
defaults and fraudulently obtained loans, we have tightened our mortgage loan lending and
purchase requirements and the processes we undergo to document loans. There may be fewer
borrowers and loans that qualify under these revised standards, and we may face increased
competition from lenders and loan purchasers with less rigorous standards. As a result,
our loan originations may decline. A decline in our loan originations would decrease the
volume of assets available to us for sale, which could adversely affect our results of
operations and financial condition.

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, 2006 and December 31, 2005, we had 342 and 235 salaried
employees respectively, and 101 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;
- satisfactorily perform our servicing obligations;
or
- incorporate effectively the components of
any businesses that we may acquire in our effort to achieve growth.

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

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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 execute our business strategy.

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

A
significant majority of our originations of mortgage loans come from independent brokers.
For the year ended December 31, 2006, approximately 1,500 brokers, from a list of
over 6,000 approved brokers, submitted loans to us; no 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.

We
are currently integrating our I-Serve automated system for the purpose of origination and
processing of loan files. Any substantial interruptions in this system or our inability to
adjust it for our future use may adversely effect our operations.

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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
these 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.

Our mortgage products
may expose us to greater credit risks.

We are an originator of primarily Alt-A mortgages, and to a lesser extent, subprime mortgages. These are
non-conforming mortgages that generally do not qualify for purchase by government-sponsored agencies such as
Fannie Mae and Freddie Mac. Our operations may be negatively affected due to these mortgages. Credit risks
associated with these mortgages may be greater than those associated with conforming mortgages. The interest
rates on these mortgages are often higher than those charged for conforming loans in order 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. By doing this, we assume the potential risk of
increased delinquency rates and/or credit losses as well as interest rate risk. Additionally, the combination of
different underwriting criteria and higher rates of interest leads to greater risk, including higher prepayment
rates and higher delinquency rates and/or credit losses. We also have interest only and option-ARM loan programs
that allow a borrower to pay only the stated interest or less than the stated interest, respectively,
attributable to their loan for a set period of time. If there is a decline in real estate values borrowers may
default on these types of loans since they have not reduced their principal balances, which, therefore, could
exceed the value of their property. In addition, a reduction in property values would also cause an increase in
the LTV ratio for that loan which could have the effect of reducing the value of that loan.

There has been an increase in the production of our loan products which are characterized as interest only and
option-ARM loans. There have been recent announcements by Federal regulators concerning interest-only loan
programs, option-ARM loan programs and other ARM loans with deeply discounted initial rates and/or negative
amortization features. 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 option payment ARMs. One rating agency (Standard &Poors) has
required greater credit enhancements for securitization pools that are backed by option-ARMs. These changes could
make the product less available as financing options and hence this could have a material affect on the value of
such products.

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.

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Many
of the mortgage loans we make are underwritten under limited or no
documentation program, which generally place 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
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.

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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.

Interest rate fluctuations may
adversely affect our operating results and the market values of our mortgage loans held for
sale.

Our
operations, as a mortgage loan originator may be adversely affected by rising 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 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. 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
originate or purchase mortgages at a fixed price through the issuance of individual or other interest
rate-locks and the time we sell 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 have not been properly hedged. As a
result, we may record a smaller gain, or even a loss, upon the sale of those mortgage
loans.

Increases
in interest rates might cause the fair market value of our mortgage loans 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 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.

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.

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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.

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 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.

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.

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# Market risk

We carry interest-sensitive assets on our balance sheet that are financed by
interest-sensitive liabilities. Since the interval for re-pricing of the assets and liabilities is not matched,
we are subject to interest-rate risk. A sudden, sustained increase or decrease in interest rates would affect our
net interest income, as well as the fair value of our mortgage loans held for sale. Additionally, there has been
an increase in production of loan products which we characterize as interest-only, option-ARM,
and subprime loans. There is increasing public policy debate over loans with interest-only features that require no
amortization of principal for a protracted period, loans with potential negative amortization features, such as
option payment ARMs, and loans with lower credit scores, such as subprime. There is a risk that this debate will
lead to the enactment of laws which limit our ability to continue producing these loan products at our present
levels, or which augment the risks of legal liability that we face in connection with such loan products.
Further, one rating agency has required greater credit enhancements for securitization pools that are backed by
option-ARMs. Actions such as this by rating agencies can impact the profitability of originating or dealing in
these loan products.

# 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 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, 2006, approximately 44.4% by
loan amount of our loan originations were 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 and sell loans, which would significantly harm our revenues, results of operations,
financial condition, business prospects and our ability to make distributions.

# Second mortgages expose
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 CLTV
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.

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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.

We
now have a policy of not making loans to directors, officers or stockholders beneficially
owning 3% or more of our outstanding stock that do not fall within the
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 SEC 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.

If we fail to maintain effective
systems of internal control over financial reporting and disclosure controls and
procedures, we may not be able to accurately report our financial results or prevent
fraud, which could cause current and potential shareholders to lose confidence in our
financial reporting, adversely affect the trading price of our securities or harm our
operating results.

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Effective
internal control over financial reporting and disclosure controls and procedures are
necessary for us to provide reliable financial reports and effectively prevent fraud and
operate successfully as a public company. Any failure to develop or maintain effective
internal control over financial reporting and disclosure controls and procedures could
harm our reputation or operating results, or cause us to fail to meet our reporting
obligations. We cannot be certain that our efforts to improve our internal control over
financial reporting and disclosure controls and procedures will be successful or that we
will be able to maintain adequate controls over our financial processes and reporting in
the future. Any failure to develop or maintain effective controls or difficulties
encountered in their implementation or other effective improvement of our internal control
over financial reporting and disclosure controls and procedures could harm our operating
results, or cause us to fail to meet our reporting obligations. If we are unable to
adequately establish our internal control over financial reporting, our external auditors
will not be able to issue an unqualified opinion on the effectiveness of our internal
control over financial reporting. Due to the reported material weakness in
managements assessment of our internal control over financial reporting and the
conclusion that our internal control over financial reporting is not effective as of
December 31, 2005, our external auditors issued an adverse opinion on the
effectiveness of our internal control over financial reporting. In the past, we have
reported, and may discover in the future, material weaknesses in our internal control over
financial reporting.

Ineffective
internal control over financial reporting and disclosure controls and procedures could
cause investors to lose confidence in our reported financial information, which could have
a negative effect on the trading price of our securities or affect our ability to access
the capital markets and could result in regulatory proceedings against us by, among
others, the SEC. In addition, a material weakness in internal control over financial
reporting, which may lead to deficiencies in the preparation of financial statements,
could lead to litigation claims against us. The defense of any such claims may cause the
diversion of managements attention and resources, and we may be required to pay
damages if any such claims or proceedings are not resolved in our favor. Any litigation,
even if resolved in our favor, could cause us to incur significant legal and other
expenses. Such events could harm our business, affect our ability to raise capital and
adversely affect the trading price of our securities.

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%
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 Mr. Eshaghian could result
in a material adverse effect on our business.

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

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# Regulatory Risks

Violation of various Federal,
state and local laws may result in losses on our loans.

Applicable
state and local laws generally regulate interest rates and other charges, require certain
disclosure, and require licensing of the mortgage broker, lender and purchaser. In
addition, other state and local laws, public policy and general principles of equity
relating to the protection of consumers, unfair and deceptive practices and debt
collection practices may apply to the origination, servicing and collection of our loans.
Mortgage loans are also subject to Federal laws, including:

- the Federal Truth-in-Lending Act and Regulation Z promulgated there under, which require certain disclosures to the
         borrowers regarding the terms of the loans;
- the Equal Credit Opportunity Act and Regulation B promulgated there under, which prohibit discrimination on the basis of
         age, race, color, sex, religion, marital status, national origin, receipt of public assistance or the exercise of any right
         under the Consumer Credit Protection Act, in the extension of credit;
- the Fair Housing Act, which prohibits discrimination in housing on the basis of race, color, national origin, religion, sex,
         familial status, or handicap, in housing-related transactions;
- the Fair Credit Reporting Act, which regulates the use and reporting of information related to the borrower's credit
         experience;
- the Fair and Accurate Credit Transaction Act, which regulates credit reporting and use of credit information in making
         unsolicited offers of credit;
- the Gramm-Leach-Bliley Act, which imposes requirements on all lenders with respect to their collection and use of nonpublic
         financial information and requires them to maintain the security of that information;
- the Real Estate Settlement Procedures Act, which requires that consumers receive disclosures at various times and outlaws
         kickbacks that increase the cost of settlement services;
- the Home Mortgage Disclosure Act, which requires
the reporting of public loan data;
- the Telephone Consumer Protection Act and the Can Spam Act, which regulate commercial solicitations via telephone, fax, and
         the internet;
- the Depository Institutions Deregulation
and Monetary Control Act of 1980, which preempts certain state usury laws; and
- the Alternative Mortgage Transaction Parity Act of 1982, which preempts certain state lending laws that regulate
         alternative mortgage transactions.

Violations
of certain provisions of these Federal and state laws may limit our ability to collect all
or part of the principal or interest on the loans and in addition could subject us to
damages and could result in the mortgagors rescinding the loans whether held by us or
subsequent holders of the loans. In addition, such violations may cause us to be in
default under our credit and repurchase facilities and could result in the loss of
licenses held by us.

Similarly,
it is possible borrowers may assert that the loan forms we use or acquire, including forms
for interest-only and option-ARM loans for which there is little
standardization or uniformity, fail to properly describe the transactions they intended,
or that our forms fail to comply with applicable consumer protection statutes or other
Federal and state laws. This could result in liability for violations of certain
provisions of Federal and state consumer protection laws and our inability to sell the
loans and our obligation to repurchase the loans or indemnify the purchasers.

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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 legislation targeted at predatory lending
could have the unintended consequence of raising the cost or otherwise reducing the
availability of mortgage credit for those potential borrowers with less than prime-quality
credit histories, thereby resulting in a reduction of otherwise legitimate Alt-A or
subprime lending opportunities. Similarly, 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. For example, 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. 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.

Some
states and local governments and the Federal government have enacted, or may enact, laws
or regulations that prohibit inclusion of some provisions in mortgage loans that have
mortgage rates or origination costs in excess of prescribed levels, and require that
borrowers be given certain disclosures prior to the consummation of such mortgage loans.
Our failure to comply with these laws could subject us to monetary penalties and could
result in the borrowers rescinding the mortgage loans, whether held by us or subsequent
holders. Lawsuits have been brought in various states making claims against assignees of
these loans for violations of state law. 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 lenders to
risks of litigation and regulatory sanction no matter how carefully loans are underwritten
and impact the way loans are 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, securitization trusts that hold our
loans and other assignees, regardless of whether such assignee knew of or participated in
the violation.

Furthermore,
various Federal and state laws impose significant privacy or customer information security
obligations which may subject us to additional costs and legal risks and we cannot assure
you that we will not be subject to lawsuits or compliance actions under such requirements.
Similarly various state and Federal laws have been enacted to restrict unsolicited
advertising using telephones, facsimile machines and electronic means of transmission.
These laws and regulations could have a material adverse impact on our business by
substantially increasing the costs of compliance or by subjecting us to lawsuits or
compliance actions.

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In addition to changes to legal requirements contained in statutes, regulations, case law, and other sources of
law, changes in the investigation or enforcement policies of federal and state regulatory agencies could impact
the activities in which we may engage, how the activities may be carried out, and the profitability of those
activities. For example, various state and federal agencies have initiated regulatory enforcement proceedings
against mortgage companies for engaging in business practices that were not specifically or clearly proscribed by
law, but which in the judgment of the regulatory agencies were unfair or deceptive to consumers. Federal and
state regulatory agencies might also determine in the future that certain of our business practices not presently
proscribed by any law and not the subject of previous enforcement actions are unfair or deceptive to consumers.
If this happens, it could impact the activities in which we may engage, how we carry out those activities, and
our profitability. We might also be required to pay fines, make reimbursements, and make other payments to third
parties for past business practices. Additionally, if an administrative enforcement proceeding were to result in
us having to discontinue or alter certain business practices, then we might be placed at a competitive
disadvantage vis-à-vis competitors who are not required to make comparable changes to their business practices.
This competitive disadvantage could be most acute if the business practices that we are required to discontinue
or change are not clearly proscribed by any federal or state law of general applicability.

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

The
mortgage brokers and correspondents from which we obtain mortgages have parallel and
separate legal obligations to which they are subject. While these laws may not explicitly
hold the originating lenders or an acquirer of the loan responsible for the legal
violations of mortgage bankers and brokers, Federal and state agencies have increasingly
sought to impose such liability. Previously, for example, the United States Federal Trade
Commission (FTC) entered into a settlement agreement with a mortgage lender
where the FTC characterized a broker that had placed all of its loan production with a
single lender as the agent of the lender; the FTC imposed a fine on the 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, various state attorneys general, and other state officials have sought to hold
subprime mortgage lenders responsible for the pricing practices of their mortgage bankers
and 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 banker 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 bankers, brokers or correspondents.

Regulation AB may create
additional liabilities, costs and restrictions for our business.

On
December 15, 2004, the SEC approved the final
regulations covering the registration, disclosure, communications, and reporting
requirements for asset-backed securities (Regulation AB), which became
effective January 1, 2006. The new rules contain several new disclosure requirements,
including requirements to provide historical financial data with respect to either prior
securitized pools of the same asset class or prior originations and information with
respect to the background, experience and roles of the various transaction parties,
including those involved in the origination, sale or servicing of the loans in the
securitized pool. Moreover, annual assessments of compliance with enhanced servicing
criteria by servicers and attestation reports from an independent registered public
accounting firm must be obtained with respect to securitized pools of our mortgage loans.

As a result of the implementation of Regulation AB, our loan sale
agreements with third parties may require us to provide certain information with respect
to ourselves and historical information with respect to the performance of our mortgage
loans to such purchasers. Our failure to provide this information with respect to any of
our mortgage loan products may result in a breach of a contractual obligation for which we
provide an indemnification. In addition, if we are not able to provide such information,
the number of potential purchasers of our mortgage loans may be limited or the transaction
sizes of sales of our mortgage loans may be limited, each of which may have an adverse
effect on the price we receive for our mortgage loans.

Regulation
AB 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.

The Federal banking agencies
final guidance on nontraditional mortgage products may affect our ability to originate,
buy or sell certain nontraditional mortgage loans.

On
October 4, 2006, 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 issued their
final Interagency Guidance on Nontraditional Mortgage Product Risks (the
Guidance). Nontraditional mortgage products are those which allow borrowers to
defer payment of principal and sometimes interest. They include what are commonly referred
to as option-ARM loans and interest-only loans. While we are not subject to
regulation by these agencies or to the Guidance, it is possible the Guidance may have an
adverse effect on our ability to buy or sell certain loans covered by the Guidance.
However, some states regulatory agencies have and are adopting the guidance thereby making
it applicable to us in certain circumstances. Further, this may also make it applicable to
entities that sell loans to us or purchase loans from us. As a result, the Guidance may
also negatively affect our loan origination volume and loan sales. It is also possible
that the Guidance, or certain provisions within it, may be adopted as laws or used as
guidance by Federal, state or local agencies and that those laws or guidance may be
applied to us.

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The
Guidance addresses the portfolio risks and consumer protection issues that the Federal
agencies believe investors and lenders face when making or investing in nontraditional
mortgage loans. As a matter of portfolio risk management, the Guidance warns applicable
financial institutions that loan terms should be analyzed to ensure a manageable risk
level, utilizing sound underwriting standards including an evaluation of factors that may
compound the risk, such as reduced documentation programs and the use of second lien
mortgages. The analysis of repayment ability should avoid over-reliance on credit
scores as a substitute for income verification in the underwriting process and
should include an analysis of the borrowers ability to make the payment when it
increases to include amortization of the loan.

As
a matter of consumer protection, financial institutions subject to the Guidance, when
promoting or describing nontraditional mortgage products, are directed to ensure that they
provide consumers with marketing materials and at application with information that is
designed to help them make informed decisions when selecting and using these products.
Lenders subject to the Guidance are instructed that the information they are to provide
should apprise consumers of the risk that the monthly payment amounts could increase in
the future, and explain the possibility of negative amortization.

While
not directly applicable to us in all cases, the Guidance may affect our ability to make,
buy or sell the nontraditional loans covered by the Guidance. Further, the Guidance is
instructive of the regulatory climate concerning those loans and has been and may be
adopted in whole or part by other agencies that regulate us. The Guidance reports that the
Conference of State Bank Supervisors (CSBS) and the State Financial Regulators
Roundtable (SFRR) are committed to preparing a model guidance document for
state regulators of non-depository institutions such as us, which would be similar
in nature and scope to the Guidance.

If
we are required (either by a regulatory agency or by third-party originators or investors)
to make changes to our business practices to comply with the Guidance, it might affect the
business activities in which we may engage and the profitability of those activities. Our
business could be adversely affected if, as a result of the Guidance, investors from which
we purchase loans, or to whom we sell loans, change their business practices and policies
relative to nontraditional mortgage products. For example, if entities from which we
purchase loans are required to change their origination guidelines thereby affecting the
volume, diversity, and quality of loans available for purchase by us, or if purchasers of
mortgage loans are required to make changes to the purchasing policies, then our loan
volume, ability to sell mortgage loans and profitability, could be adversely affected.

There
has been an increase in production of loan products which we characterize as
interest-only and option-ARM loans. There is increasing public
policy debate over loans with interest-only features that require no amortization of
principal for a protracted period and loans with potential negative amortization features,
such as option payment ARMs. There is a risk that this debate will lead to the
enactment of laws which limit our ability to continue producing these loan products at our
present levels, or which augment the risks of legal liability that we face in connection
with such loan products. Further, one rating agency has required greater credit
enhancements for securitization pools that are backed by option-ARMs. Actions such as
this by rating agencies can impact the profitability of originating or dealing in these
loan products.

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

In
addition to changes to legal requirements contained in statutes, regulations, case law,
and other sources of law, changes in the investigation or enforcement policies of Federal
and state regulatory agencies could impact the activities in which we may engage, how the
activities may be carried out, and the profitability of those activities. For example,
state and Federal agencies have initiated regulatory enforcement proceedings against
mortgage companies for engaging in business practices that were not specifically or
clearly proscribed by law, but which in the judgment of the regulatory agencies were
unfair or deceptive to consumers. For example, state attorneys general and other state
officials representing various states entered into a Settlement Agreement with a large
subprime mortgage company. The subject company agreed to pay a substantial amount in
restitution to consumers and reimbursement to the states. The subject company also agreed
to make changes to certain business practices, including the companys underwriting
criteria and pricing policies. Many of the practices and policies are not specifically
prohibited by any Federal or state laws but were alleged to be deceptive or unfair to
consumers. The terms of this Settlement Agreement do not apply directly to us; however,
Federal and state regulatory agencies and private parties might nevertheless expect
mortgage companies including us, to make our business practices consistent with the
provisions of the Agreement. If this happens, it could impact the activities in which we
may engage, how we carry out those activities, our acquisition practices and our
profitability. We might also be required to pay fines, make reimbursements, and make other
payments to third parties for our business practices. Additionally, if an administrative
enforcement proceeding were to result in us having to discontinue or alter certain
business practices, then we might be placed at a competitive disadvantage vis-à-vis
competitors who are not required to make comparable changes to their business practices.

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# Risks of Ownership of
Our Common Stock

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

Although
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, and thereby be subject to additional
sale and trading regulations that may make it more difficult to sell.

Our common stock is currently considered to be a penny stock because it does not qualify
for one of the exemptions from the definition of penny stock under Section
3a51-1 of the Securities Exchange Act for 1934, as amended (the Exchange Act).
Our common stock may be a penny stock if it meets one or more of the following
conditions (i) the stock trades at a price less than $5.00 per share; (ii) it is NOT
traded on a recognized national exchange; (iii) it is NOT quoted on the NASDAQ
Stock Market, or even if so, has a price less than $5.00 per share; or (iv) is issued by a
company that has been in business less than three years with net tangible assets less than
$5 million.

The principal result or effect of being designated a penny stock is that securities broker-dealers participating in sales of our common stock
will be subject to the penny stock regulations set forth in Rules 15g-2
through 15g-9 promulgated under the Exchange Act. For example, Rule 15g-2 requires
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 at least two business days before effecting any transaction in a
penny stock for the investors account. 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
and time consuming for holders of 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 1,664,125 shares of our common stock subject to options that are
immediately exercisable and an additional 305,875 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.

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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:

- issuance of new equity securities pursuant to a
future offering;
- actual or anticipated variations in our
quarterly operating results or distributions;
- changes in our cash flows 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.

# ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

# ITEM 2. PROPERTIES

Our
headquartersoffice is located in Los Angeles, California, with
a sub-lease expiring May 31, 2007. The current monthly rental under the sub-lease is
approximately $51,000. We are currently exploring alternative space for our
headquartersoffice.

# 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

No matters were submitted to our security holders to be voted on during the
fourth quarter of 2006.

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PART II

# ITEM 5. MARKET FOR
REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES

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.
The following table sets forth the high and low bid prices for our common stock for the periods noted, as reported by the National
Daily Quotation Service and the Over-The-Counter Bulletin Board. Quotations reflect inter-dealer prices, without retail mark-up,
markdown or commission and may not represent actual transactions. 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.

The following table sets forth the high and low bid prices for our common stock for the periods
noted, as reported by the National Daily Quotation Service and the Over-the-Counter Bulletin Board
Quotations reflect inter-dealer prices, without retail mark-up, markdown or commission and may not
represent actual transactions.

|                             | High     | Low     
|---------------------------- | -------- | --------
|Year ended December 31, 2005 |          |         
|First Quarter                | $   3.30 | $   2.75
|Second Quarter               | $   3.21 | $   2.85
|Third Quarter                | $   3.10 | $   2.80
|Fourth Quarter               | $   2.95 | $   2.64
|Year ended December 31, 2006 |          |         
|First Quarter                | $   3.25 | $   2.70
|Second Quarter               | $   3.00 | $   1.10
|Third Quarter                | $   1.40 | $   1.05
|Fourth Quarter               | $   1.35 | $   1.07

Holders

As
of March 22, 2007, there were 85 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 names.

Dividend Policy

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.
The decision whether to pay cash dividends on our common stock will be made by our board of directors, in their discretion, and will
depend on our financial condition, operating results, capital requirements and other factors that the board of directors considers
significant.

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# Equity Compensation Plan
Information

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

# Stockholder Return Performance Presentation

Set forth below is a performance graph comparing the cumulative total stockholder return on our common stock, and the S&P 500
Stock Index beginning December 31, 2003 and ending on December 31, 2006. The graph assumes $1,000 invested on December  31, 2003 in our common
stock, and the S&P 500 Stock Index. The stock price performance shown on the graph is not necessarily indicative of future price
performance.



|              | 12/23/2003 | 12/31/2004 | 12/31/2005 | 12/31/2006
|------------- | ---------- | ---------- | ---------- | ----------
|              |            |            |            |           
|TMSF Holdings | $1,000     | $4,333     | $4,667     | $1,967    
|S & P 500     | $1,000     | $1,090     | $1,123     | $1,276    

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# ITEM 6. SELECTED
FINANCIAL DATA

The following tables set forth our Companys selected consolidated financial data as of and for each of the years in the five-year
period ended December 31, 2006 and should be read in conjunction with our audited consolidated financial statements and notes thereto
included under Part II, Item 8 of this annual report. All figures
except number of shares and earnings per share are in $000.

|                                                               | Years Ended December 31,
|-------------------------------------------------------------- | ------------------------
|                                                               | 2006                    
|Loan income                                                    |                         
|Income from sales of mortgage loans                            | $60,014                 
|Mortgage interest income                                       | 18,067                  
|Commission fee income                                          | 751                     
|Escrow service fees                                            | -                       
|Total loan income                                              | 78,832                  
|                                                               |                         
|Cost of loan origination and sales of 
         mortgage loans |                         
|Commissions                                                    | 16,667                  
|Warehouse interest expense                                     | 16,912                  
|Other closing expenses                                         | 2,617                   
|Provision for impairment of mortgage loans                     | 21,757                  
|Total cost of loan originations and                            |                         
|sales of mortgage loans                                        | 57,953                  
|                                                               |                         
|Gross profit                                                   | 20,879                  
|                                                               |                         
|Operating expenses                                             |                         
|Salaries                                                       | 22,965                  
|Occupancy                                                      | 844                     
|General and administrative                                     | 6,512                   
|Total operating expenses                                       | 30,321                  
|                                                               |                         
|Income (loss) from operations                                  | (9,442)                 
|                                                               |                         
|Other income (expense)                                         | 437                     
|                                                               |                         
|Income (loss) before provision for (benefit from)              |                         
|income taxes                                                   | (9,005)                 
|                                                               |                         
|Provision for (benefit from) income taxes                      | (3,615)                 
|                                                               |                         
|Net income (loss)                                              | $  (5,390)              
|Less preferred stock dividends                                 | -                       
|Net income (loss) available to common stockholders             | $  (5,390)              
|                                                               |                         
|Basic weighted average common                                  |                         
|shares outstanding                                             | 15,000,000              
|Basic earnings (loss) per share                                | $ (0.36)                
|Diluted weighted-average common                                |                         
|shares outstanding                                             | 15,000,000              
|Diluted earnings (loss) per share                              | $ (0.36)                

|                                         | As of December 31,
|---------------------------------------- | ------------------
|Balance sheet data:                      | 2006              
|Cash and cash equivalents                | $ 14,969          
|Restricted cash                          | 298               
|Mortgage loans held for sale             | 93,593            
|Reserve for impairment of mortgage loans | (15,176)          
|Other assets                             | 72,095            
|Total assets                             | 165,779           
|Total liabilities                        | 147,493           
|Total stockholders equity               | 18,286            

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

The
following discussion should be read in conjunction with our 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 Item 1A 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.

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# Financing, Revenues, and
Interest Rate Management

Our
business model relies 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
result in a competitive operating margin. Our primary components of revenue have been
gains from the sales 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.

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 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 from the loans sold to non-affiliated
buyers are 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 approximately 6,000 approved
brokers of which approximately 1,500 actively conducted business with us during the year
ended December 31, 2006. For the year ended December 31, 2006 and December 31, 2005, we originated approximately $2,049.7 million and
$1,738.7 million of mortgage loans, respectively, of which approximately 94.4% and 88.9%,
respectively, were generated through our wholesale channel and approximately 5.6% and
11.1%, respectively were generated through our retail channel. Our business and
profitability are sensitive to movements in interest rates. The level of total origination
activity in the mortgage industry at large, which includes both conforming and
non-conforming mortgage loans has decreased as higher interest rates make home buying more
costly for consumers and refinancing of existing mortgages less attractive to current
borrowers, and, a general slowdown nationally for new home sales; we expect this trend to
continue for the foreseeable future. Our current business model contemplates growth, even
in an environment with declining originated volume for the industry, by capturing
additional market share. We 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
expanding the geographical footprint of our sales organization into new territories, and,
to continue to expand our sales efforts in our current markets. We intend to expand our
sales presence in mid-America and on the east coast, as well as other western markets we
do not currently service.

The
mortgage industry is highly competitive. As a result, we are not able to originate loans
at rates higher than the market rates. 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.

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# Revenue Model

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

Income from the sales of mortgage loans. We expect to continue to sell our mortgage loans through loan sales.

The components of income from the sales of mortgage loans 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.

Income from the sales of mortgage loans 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 for loan repurchases.

Mortgage interest income. Our primary interest-earning assets are the mortgage loans that we have originated and are held for sale. We earn
interest from the time we originate the mortgage loan until we sell the mortgage loan in the secondary
market.

Expenses. Our primary components of expenses are expected to be interest expense on our
warehouse facilities and other debt issued, general and administrative expenses and payroll and related expenses arising from our origination
business. As our loan production increases, 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. 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.

# 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. Under our existing
loan sale strategy, our income is generated primarily by:

- the sale of loans at a premium 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.

Our
management intends to continuously evaluate our business strategy, taking into
consideration trends in actual cash flow performance, industry and economic developments,
as well as other relevant factors.

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# Termination of plan to
reorganize as a REIT

In September 2005, we initiated a process to convert our business into a
real estate investment trust, or REIT. On August 4, 2006 our board of directors unanimously decided to terminate the plan to
reorganize our business operations to allow us to qualify and elect to be taxed as
REIT effective August 3, 2006. The Board determined that,
because of unfavorable market conditions, we will not be able to satisfy the conditions
precedent to the consummation of the reorganization.

# Critical
Accounting Policies

We established various accounting policies that apply accounting principles generally
accepted in the United States of America in the preparation of our 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 operations. 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 mortgage loans;
- Provision for impairment of mortgage loans;
- Mortgage loans held for sale;
- Real estate owned;
- 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, 2006 was $7.9 million.

Income
from sales of mortgage loans. To date our income from sales of mortgage loans has consisted
primarily of cash gains 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. 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.

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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 investor 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 investors price and the acquisition price by Washington
Mutual at the time that it releases its interest to the takeout investor. 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.

Provision
for impairment of mortgage loans. 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
certain non-performing losses on loans held for sale, and loans sold that we are obligated to repurchase, and allowance for
real estate owned are recorded in an amount sufficient to maintain adequate coverage for probable
losses on such loans. As of December 31, 2006, the reserve for certain non-performing loans
losses on loans held for sale, which includes previously repurchased loans, and loans sold which we are obligated
to repurchase, and the reserve for losses on real estate owned were $15.2 million and
$2.0 million, 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 the frequency of repurchased demands increases, 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.

Mortgage 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 past due or earlier if the collection of interest appears doubtful.

Our
estimate of the fair value of our mortgage 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.

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. When the company forecloses on a subordinated deed
of trust, the senior borrowing is recorded as mortgage loans payable until such time
the property is disposed of and the senior mortgage loan is paid off. 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.

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Stock-based
compensation. In  December  2004,  the FASB  revised  Statement  of  Financial  Accounting  Standards  No. 123 (FAS  123R),
Share-Based  Payment, which  establishes  accounting for share-based  awards exchanged for employee  services and
requires  companies  to expense the  estimated  fair value of these  awards  over the  requisite  employee  service
period. On April 14, 2005, the SEC  adopted a new rule amending the effective
dates for FAS 123R. In accordance  with the new rule, the  accounting  provisions of FAS 123R are effective for the
Company beginning in the quarter ended March 31, 2006.

# Financial Highlights For
2006

Net
loss. For year ended December, 31, 2006 we had a loss before benefit from income
taxes of approximately $(9.0) million. The net loss
after benefit from income tax was approximately $(5.4) million, or approximately $(0.36) per
basic and diluted common share.

Loan
originations. For the year ended December 31, 2006 we funded approximately $2,049.7
million of mortgage loans compared to approximately $1,738.7 million in 2005. Purchase
money mortgages accounted for approximately 55.6% of our originations during the year
ended December 31, 2006 compared to approximately 66.6% in 2005. Our wholesale channel,
which originates loans through independent mortgage brokers, accounted for approximately
94.4% of our origination during the year ended December 31, 2006 compared to approximately
88.9% in 2005.

During the year ended December 31, 2006 and 2005 we originated mortgage loans in 42 and 43
states, respectively. Loans originated in California constituted approximately 72.5% and
64.2%, respectively, of our total mortgage loan originations during those periods. Our
loan originations in California increased approximately 33.1% for the year ended December
31, 2006 compared to 51.7% for the year ended December 31, 2005.

Income from sales of mortgage loans. For the
year ended December 31, 2006 we sold approximately $2,005.3 million in loans compared to
approximately $1,740.7 million for the year ended December 31, 2005. Income from sales of
mortgage loans was approximately $60.0 million during the year ended December 31, 2006 compared
to approximately $53.5 million for the year ended December 31, 2005. The weighted average
premium collected from sales of loans during the year ended December 31, 2006 was approximately
2.65% compared to approximately 2.69% for the year ended December 31, 2005. During the year ended December 31, 2006 the rebate
or yield spread premium paid to the loan originators was approximately 0.78% compared to
approximately 0.75% for the year ended December 31, 2005.

Cash
and cash equivalents  Our cash and cash equivalents at December 31, 2006
was approximately $15.0 million compared to approximately $10.2 million at December
31, 2005.

Warehouse
lines of credit  As of December 31, 2006, 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 commitment amount of $300 million. At December
31, 2006 the cost of borrowing on these warehouse facilities was a variable rate equal to
one-month LIBOR plus a margin ranging between approximately 1.0% and approximately 1.375%.

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# Results of Operations

Results
of operations for the year ended December 31, 2006 compared to the year ended December
31, 2005

|                                                      |  |                                 |         |  |             |                        |        |        |  |   |             |  |            |  |       |  
|----------------------------------------------------- |  | ------------------------------- | ------- |  | ----------- | ---------------------- | ------ | ------ |  | - | ----------- |  | ---------- |  | ----- | -
|                                                      |  | For the Year Ended December 31, |        
|                                                      |  | 2006                            |         |  | 2005        |                       
|                                                      |  |                                 |         |  |             | Percentage             |        |        |  |   |             |  | Percentage | 
|                                                      |  |                                 |         |  |             | of Total               |        |        |  |   |             |  | of Total   | 
|                                                      |  | Amount                          |         |  | Loan Income |                        |        | Amount |  |   | Loan Income | 
|                                                      |  |                                 |         |  |             | (dollars in thousands) |        |        |  |   |            
|Loan income                                           |  |                                 |         |  |             |                        |        |        |  |   |             |  |            |  |       |  
|Income from sales of mortgage loans                   |  | $                               | 60,014  |  |             |                        | 76.1   | %      |  | $ | 53,451      |  |            |  | 74.8  | %
|Mortgage interest income                              |  |                                 | 18,067  |  |             |                        | 22.9   | %      |  |   | 17,380      |  |            |  | 24.3  | %
|Commission fee income                                 |  |                                 | 751     |  |             |                        | 1.0    | %      |  |   | 640         |  |            |  | 0.9   | %
|                                                      |  |                                 |         |  |             |                        |        |        |  |   |             | 
|Total loan income                                     |  |                                 | 78,832  |  |             |                        | 100.0  | %      |  |   | 71,471      |  |            |  | 100.0 | %
|Cost of loan origination and sales of mortgage loans  |  |                                 |         |  |             |                        |        |        |  |   |             |  |            |  |       |  
|Commissions                                           |  |                                 | 16,667  |  |             |                        | 21.1   | %      |  |   | 12,368      |  |            |  | 17.3  | %
|Warehouse interest expense                            |  |                                 | 16,912  |  |             |                        | 21.5   | %      |  |   | 14,270      |  |            |  | 20.0  | %
|Provision for impairment of mortgage loans            |  |                                 | 21,757  |  |             |                        | 27.6   | %      |  |   | 967         |  |            |  | 1.3   | %
|Other closing expenses                                |  |                                 | 2,617   |  |             |                        | 3.3    | %      |  |   | 2,398       |  |            |  | 3.4   | %
|                                                      |  |                                 |         |  |             |                        |        |        |  |   |             | 
|Total cost of origination and sales of mortgage loans |  |                                 | 57,953  |  |             |                        | 73.5   | %      |  |   | 30,003      |  |            |  | 42.0  | %
|Gross profit                                          |  |                                 | 20,879  |  |             |                        | 26.5   | %      |  |   | 41,468      |  |            |  | 58.0  | %
|Operating expenses                                    |  |                                 |         |  |             |                        |        |        |  |   |             |  |            |  |       |  
|Salaries                                              |  |                                 | 22,965  |  |             |                        | 29.1   | %      |  |   | 18,978      |  |            |  | 26.6  | %
|Occupancy                                             |  |                                 | 844     |  |             |                        | 1.1    | %      |  |   | 1,035       |  |            |  | 1.4   | %
|General and administrative                            |  |                                 | 6,512   |  |             |                        | 8.3    | %      |  |   | 5,838       |  |            |  | 8.2   | %
|                                                      |  |                                 |         |  |             |                        |        |        |  |   |             | 
|Total operating expenses                              |  |                                 | 30,321  |  |             |                        | 38.5   | %      |  |   | 25,851      |  |            |  | 36.2  | %
|Income (loss) from operations                         |  |                                 | (9,442) |  |             |                        | (12.0) | %      |  |   | 15,616      |  |            |  | 21.8  | %
|Total other income (expense)                          |  |                                 | 437     |  |             |                        | 0.6    | %      |  |   | (86)        |  |            |  | (0.1) | %
|Income (loss) before (benefit from) income taxes      |  |                                 | (9,005) |  |             |                        | (11.4) | %      |  |   | 15,530      |  |            |  | 21.7  | %
|Provision for (benefit from) income taxes             |  |                                 | (3,615) |  |             |                        | (4.6)  | %      |  |   | 6,328       |  |            |  | 8.8   | %
|                                                      |  |                                 |         |  |             |                        |        |        |  |   |             | 
|Net income (loss)                                     |  | $                               | (5,390) |  |             |                        | (6.8)  | %      |  | $ | 9,202       |  |            |  | 12.9  | %
|                                                      |  |                                 |         |  |             |                        |        |        |  |   |             | 

# Loan income

Total loan income. Total loan income increased 10.3% to $78.8 million for the year
ended December 31, 2006 from $71.5 million for the year ended December 31, 2005. This
increase was due primarily to increases in income from sales of mortgage loans and mortgage
interest income.

Income
from sales of mortgage loans. Income from sales of mortgage loans for the year ended
December 31, 2006 increased 12.3% to $60.0 million from $53.5 million for the year ended
December 31, 2005 due primarily to a higher volume of loan sales. Total loan sales
increased 15.2% to $2,005.3 million for the year ended December 31, 2006 compared to
$1,740.7 million for the year ended December 31, 2005. This increase was due primarily to a
17.9% increase in loan originations from $1,738.7 million during the year ended December 31, 2005
to $2,049.7 million during the year ended December 31, 2006. The weighted average premium for loan sales for the year ended
December 31, 2006 was 2.65% compared to 2.69% for the year ended December 31, 2005. The
lower weighted average premium we received from sales of loans in the year ended December
31, 2006 primarily reflects the rise of short term interest rates and the narrowing of the
spread between short and long term rates.

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Mortgage
interest income. Mortgage interest income increased 4.0% to $18.1 million for the year
ended December 31, 2006 from $17.4 million for the year ended December 31, 2005. The
increase in interest income was due primarily to an increase in loan originations in
2006 compared to 2005, as well as higher coupon rates.

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 mortgage loans. Commission fee income for the year ended December 31, 2006 was $0.8
million compared to $0.6 million for the same period in 2005.

# Cost of loan originations

Total
cost of loan originations and sales of mortgage loans. Total cost of loan originations
and sales mortgage loans increased 93.2% to $58.0 million for the year December 31, 2006
from $30.0 million for year ended December 31, 2005. The increase was primarily due to
increased loan originations and increased provision for losses on impaired loans. Total cost of originations and sales as a percentage of total
loan income increased to 73.5% for the year ended December 31, 2006 compared to 42.0% for
the year ended December 31, 2005. This increase was primarily due to an increase in the
provision for impairment of mortgage loans and an increase in commission expense due to the 17.9%
increase in loan originations.

Commissions. Commissions for the year ended December 31,
2006 increased 34.7% to $16.7 million from $12.4 million in the year ended December 31,
2005. This increase was primarily due to an increase in loan originations. Commissions
, which are primarily a pricing rebate paid by us 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 as
a prepaid commission on our balance sheet. Commissions for the year ended December
31, 2006 as a percentage of loan income increased to 21.1% compared to 17.3% for the year
ended December 31, 2005.

Warehouse
interest expense. Warehouse interest expense for the year ended December 31, 2006 increased
18.5% to $16.9 million from $14.3 million for the year ended December 31, 2005. 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, 2006 and 2005 was 55 and 57 days, respectively.

Provision
for impairment of mortgage loans. At December 31, 2006, there were 267 loans with an
aggregate principal balance, plus accrued interest, of $50.5 million that we had been requested to
repurchase by our investors compared to 45 loans with an aggregate principal balance, plus
accrued interest, of $10.1 million at December 31, 2005. During the year ended December
31, 2006 we recorded provisions of $21.8 million for losses on impaired loans we were
obligated to repurchase, compared to $1.0 million for the year ended December 31, 2005.
The increase mainly resulted from the tightened secondary mortgage market
in the fourth quarter of 2006 and the first quarter of 2007. As of December 31, 2006, there
were no loans where the buyer notified us of alleged deficiencies in documentation or
underwriting procedures.

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The secondary mortgage market tightened in the fourth quarter of 2006 and
the first quarter of 2007. The mortgage banking industry as a whole experienced reduced
pricing on the sales of their portfolios and increased scrutiny of compliance to the
various normal and customary representations and warranties mortgage originators give the
investment community in these agreements. As a result of certain breaches to the purchase
agreements, investors requested the Company repurchase certain loans. The Company in many
cases is given the option to indemnify the investor for any losses they may realize on the
loans found to be subject to a repurchase request versus actually repurchasing the loan.

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 9.1% to $2.6 million for the year ended December 31, 2006 from $2.4 million for
the year ended in December 31, 2005. This increase primarily reflects the additional costs
related to the increase in loan originations.

# Operating expenses

Total operating expenses. Total operating expenses increased 17.3% to $30.3 million for the year ended
December 31, 2006 compared to $25.9 million for the year ended December 31, 2005. 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
originations and in the number of employees.

Salaries. Salaries increased 21.0% to $23.0 million for the year ended
December 31, 2006 from $19.0 million for the year ended December 31, 2005. 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 decreased 18.4% to $0.8 million for the year ended December
          31, 2006 from $1.0 million for the year ended December 31, 2005. The decrease
          resulted primarily from the lower cost of our current headquarters' office space
          compared to the location used during the prior year.

General
and administrative. General and administrative expenses increased 11.5% to $6.5
million for the year ended December 31, 2006 from $5.8 million for the year ended December
31, 2005. This increase was due primarily to an increase in loan originations, increased
marketing expenses, an increase in the number of employees.

Provision
for (benefit from) income taxes. Provision for income taxes changed to a benefit from
income taxes of $3.6 million for the year ended
December 31, 2006 from a provision for income taxes of $6.3 million for the year ended December 31, 2005. This decrease
was a result of the loss before taxes of $(9.0) million for the year ended
December 31, 2006 compared to income before taxes of $15.5 million for the year ended December 31, 2005.

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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                          |        |  | Loan Income |                        |       | Amount |  |   | Loan Income | 
|                                                           |  |                                 |        |  |             | (dollars in thousands) |       |        |  |   |            
|Loan income                                                |  |                                 |        |  |             |                        |       |        |  |   |             |  |            |  |       |  
|Income from sales of mortgage loans                        |  | $                               | 53,451 |  |             |                        | 74.8  | %      |  | $ | 34,007      |  |            |  | 78.0  | %
|Mortgage interest income                                   |  |                                 | 17,380 |  |             |                        | 24.3  | %      |  |   | 8,711       |  |            |  | 20.0  | %
|Commission fee income                                      |  |                                 | 640    |  |             |                        | 0.9   | %      |  |   | 777         |  |            |  | 1.8   | %
|Escrow service fees                                        |  |                                 | -      |  |             |                        | 0.0   | %      |  |   | 85          |  |            |  | 0.2   | %
|                                                           |  |                                 |        |  |             |                        |       |        |  |   |             | 
|Total loan income                                          |  |                                 | 71,471 |  |             |                        | 100.0 | %      |  |   | 43,580      |  |            |  | 100.0 | %
|Cost of loan origination and sales of mortgage loans       |  |                                 |        |  |             |                        |       |        |  |   |             |  |            |  |       |  
|Commissions                                                |  |                                 | 12,368 |  |             |                        | 17.3  | %      |  |   | 6,356       |  |            |  | 14.6  | %
|Warehouse interest expense                                 |  |                                 | 14,270 |  |             |                        | 20.0  | %      |  |   | 5,739       |  |            |  | 13.2  | %
|Provision for impairment of mortgage loans                 |  |                                 | 967    |  |             |                        | 1.3   | %      |  |   | 531         |  |            |  | 1.2   | %
|Other closing expenses                                     |  |                                 | 2,398  |  |             |                        | 3.4   | %      |  |   | 1,692       |  |            |  | 3.9   | %
|                                                           |  |                                 |        |  |             |                        |       |        |  |   |             | 
|Total cost of loan
origination and sales of mortgage loans |  |                                 | 30,003 |  |             |                        | 42.0  | %      |  |   | 14,318      |  |            |  | 32.9  | %
|Gross profit                                               |  |                                 | 41,468 |  |             |                        | 58.0  | %      |  |   | 29,262      |  |            |  | 67.1  | %
|Operating expenses                                         |  |                                 |        |  |             |                        |       |        |  |   |             |  |            |  |       |  
|Salaries                                                   |  |                                 | 18,978 |  |             |                        | 26.6  | %      |  |   | 10,702      |  |            |  | 24.6  | %
|Occupancy                                                  |  |                                 | 1,035  |  |             |                        | 1.4   | %      |  |   | 413         |  |            |  | 0.9   | %
|General and administrative                                 |  |                                 | 5,838  |  |             |                        | 8.2   | %      |  |   | 3,807       |  |            |  | 8.7   | %
|                                                           |  |                                 |        |  |             |                        |       |        |  |   |             | 
|Total operating expenses                                   |  |                                 | 25,851 |  |             |                        | 36.2  | %      |  |   | 14,922      |  |            |  | 34.2  | %
|Income from operations                                     |  |                                 | 15,616 |  |             |                        | 21.8  | %      |  |   | 14,340      |  |            |  | 32.9  | %
|Total other income (expense)                               |  |                                 | (86)   |  |             |                        | (0.1) | %      |  |   | 32          |  |            |  | 0.1   | %
|                                                           |  |                                 |        |  |             |                        |       |        |  |   |             | 
|Income before provision for income taxes                   |  |                                 | 15,530 |  |             |                        | 21.7  | %      |  |   | 14,372      |  |            |  | 33.0  | %
|Provision for income taxes                                 |  |                                 | 6,328  |  |             |                        | 8.8   | %      |  |   | 5,737       |  |            |  | 13.2  | %
|                                                           |  |                                 |        |  |             |                        |       |        |  |   |             | 
|Net income                                                 |  | $                               | 9,202  |  |             |                        | 12.9  | %      |  | $ | 8,635       |  |            |  | 19.8  | %
|                                                           |  |                                 |        |  |             |                        |       |        |  |   |             | 

# Loan income

Total
loan income. Total loan income increased 64.0% to $71.5 million for the year ended
December 31, 2005 from $43.6 million for the year ended December 31, 2004. This increase
was due primarily to an increase of 68.7% in loan production during 2005 resulting in an
increase in sales of mortgage loans and mortgage interest income.

Income
from sales of mortgage loans. Income from sales of mortgage loans for the year ended
December 31, 2005 increased 57.2% to $53.5 million from $34.0 million for the year ended
December 31, 2004 due primarily increased loan sales. Total loan sales increased 101.6% to
$1,740.7 million for the year ended December 31, 2005 compared to $863.6 million for the
year ended December 31, 2004. This increase was due primarily to increased loan
originations during the year ended December 31, 2005 compared to the year ended December
31, 2004, and offset in part by lower premiums earned on sales of loans. The weighted
average premium for loan sales for the year ended December 31, 2005 was 2.69% compared to
3.41% for the year ended December 31, 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.

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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 year ended December 31, 2004. The
increase in interest income was due primarily to an increase in loans originations 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 year ended December 31, 2004.

Escrow
service fees. We discontinued our escrow division in March 2004. Income from escrow
and other fees for the year ended December 31, 2004 was $0.08 million.

# Cost of loan originations

Total
cost of loan originations and sales of mortgage loans. Total cost of origination and
sales of mortgage loans increased 109.5% to $30.0 million for the year December 31, 2005 from $14.3 million
for year ended December 31, 2004. The increase was primarily due to increased loan
originations. Total cost of origination and loan sales as a percentage of total loan income
also increased to 42.0% for the year ended December 31, 2005 compared to 32.9% for the
year 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.

Commissions. Commissions for the year ended December 31,
2005 increased 94.6% to $12.4 million from $6.4 million in the year ended December 31,
2004. This increase was primarily due to an increased volume of loan originations.
Commissions, which are primarily a pricing rebate paid by us 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 as a prepaid commission on our balance sheet. Commissions for the year
ended December 31, 2005 as a percentage of loan income increased to 17.3% compared to 14.6%
for the year ended December 31, 2004, primarily as a result of the increased use of the early
purchase facility for loan originations where commissions are recognized at the time
of origination.

Warehouse
interest expense. Warehouse interest expense for the year ended December 31, 2005 increased
148.6% to $14.3 million from $5.7 million for the year ended December 31, 2004. The increase in
interest expense was primarily due to the increase in borrowings, longer holding period,
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.

Provision
for impairment of mortgage 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 by our
investors compared to 28 loans with an aggregate principal balance of $4.3 million at
December 31, 2004. During the year ended December 31, 2005 we recorded provisions of $1.0
million for losses on impaired mortgage loans we were obligated to repurchase, compared to
$0.5 million for the year ended December 31, 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 41.6% to $2.4 million for the year ended December 31, 2005 from $1.7 million for
the year ended December 31, 2004. This increase primarily reflects the additional costs
related to increased loan originations, offset by improved pricing for services used in
loan originations.

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# Operating expenses

Total operating expenses. Total operating expenses increased 73.2% to $25.9 million for the year ended
December 31, 2005 compared to $14.9 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
originations and in the number of employees.

Salaries. Salaries 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 150.6% 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.  General and administrative
expenses increased 53.4% to $5.8 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 originations, increased marketing expenses, an
increase in the number of employees, and an increase in legal and
accounting fees associated with the preparation and filing of our information statement/prospectus
on Form S-4 with the SEC.

Provision
for income taxes. Provision for income taxes 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 a result of the increase in our income before taxes of $15.5 million for the year
ended December 31, 2005 from $14.4 million for the year ended December 31, 2004.

# Liquidity and capital
resources

As
a mortgage banking company, our primary cash requirements include the funding of mortgage
loan originations, origination costs such as commissions
and broker premiums, interest expense on and repayment of principal on warehouse
facilities, operational expenses, and tax payments. We fund these cash requirements with
cash received from borrowings under warehouse facilities and subordinated notes payable, loan sales, mortgage interest
collections on loans held for sale, points and fees collected from the origination of
loans, and 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                 | $(2,049.7) | $(1,738.7)              | $(1,030.4)
|Proceeds from sales                       | 2,005.3    | 1,767.5                 | 886.3     
|Other                                     | 27.3       | 29.3                    | 77.4      
|                                          |            |                         |           
|Net cash provided by (used in) operations | $(17.1)    | $58.1                   | $(66.7)   

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We
use warehouse facilities to finance a significant portion of our loan originations on a
short-term basis. It is our intention to maximize our 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 and to maintain strong relationships with a diverse
group of loan purchasers. 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,
our business strategy will continue to depend on our ability to secure sufficient
warehouse facilities to fund larger volumes of loans. Currently, we have an aggregate
borrowing capacity under our warehouse facilities of $504 million. 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 may increase our cash and net worth through offerings of our equity or debt
securities or other borrowings.

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.

Warehouse and Repurchase
Facilities

As
of December 31, 2006, 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. 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 (takeout investor) will 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 replace or renew and extend the maturity of
our warehouse facilities in the ordinary course of business. 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. Our warehouse facilities bear interest
at a spread over one month LIBOR, which was 5.32% as of December 31, 2006. The following
is a summary by lender as of December 31, 2006.

|                                   | CommittedAmount | UncommittedAmount | TotalFacilityAmount | MaximumPortion
     Availablefor WetFunding | OutstandingPrincipal
    Balance(3) | ExpirationDate
|---------------------------------- | --------------- | ----------------- | ------------------- | ------------------------------------------- | ----------------------------------- | --------------
|
|
|Lehman Brothers Bank, FSB
     (5) | $200,000        | $0                | $200,000            | $40,000                                     | $85,209                             | April 10, 2007
|Washington Mutual Bank, FA
(1)     | 4,000           | 0                 | 4,000               | 1,000                                       | 0                                   | August 1, 2007
|Washington Mutual Bank, FA
(2)(4)  | 300,000         | 0                 | 300,000             | 105,000                                     | 159,454                             | August 1, 2007
|                                   |                 |                   |                     |                                             |                                     |               
|Total                              | $504,000        | $0                | $504,000            | $146,000                                    | $244,663                            |               

_________________

(1) Warehousing Credit and Security Agreement
         (2) Early Purchase Facility
         (3) As of December 31, 2006
         (4) Outstanding balance is off balance sheet
         (5) This facility expired and was not renewed. It has been replaced by a credit facility
            with Terwin Mortgage Warehouse Trust II on April 17, 2007.

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Lehman
Brothers Repurchase Facility. As of December 31, 2006, we had a repurchase facility with Lehman Brothers Bank,
FSB with a maximum commitment of
$200 million. This facility had a one year term and a cost of
borrowing equal to the one-month LIBOR rate plus a spread between 1.0% and 1.375%. As of
December 31, 2006, we had an outstanding balance of $85.2 million on this facility.
On April 10, 2007, the lender granted the Company an extension to April 17, 2007, at which time
the facility expired and was not renewed. It has been replaced by a credit facility with
Terwin Mortgage Warehouse Trust II on April 17, 2007.

Washington
Mutual Warehouse Facility. We have a $4 million revolving credit facility with
Washington Mutual. The cost of borrowing under this agreement is equal to one-month LIBOR
plus a spread between 1.0% and 1.25% based on type of loan and period of time for which
the loan is subject to the facility. As of December 31, 2006, there was no outstanding
balance.

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 investor 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 investors
purchase price or the original principal balance of the loan. If loans purchased under
this facility are not sold to the takeout 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 rights 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, 2006, this early
purchase facility had a maximum revolving purchase commitment of $300 million. As of
December 31, 2006, we had utilized $159.5 million of this facilitys maximum
commitment. The mortgage interest income from loans originated through this facility from
the time of funding to the date of their sale to a takeout investor was not material to the
financial statements as of December 31, 2006 and therefore no asset or non-cash revenue
has been recognized.

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 and we are currently
negotiating amendments to the agreements governing our warehouse facilities and expect to
enter into such amendments as soon as practicable. 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.

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# 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 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 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, 2006, loans with an aggregate warehouse liability of $159.5 million were
subject to this off-balance sheet arrangement. Based on historical experience, total
mortgage loans repurchased pursuant to a breach of this takeout investor 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 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.

# Contractual Obligations
and Commercial Commitments

The
following table summarizes our contractual obligations under our financing arrangements by
payment due date and commitments by expiration dates as of December 31, 2006.

|                                           | Payments Due by Period
(dollars in thousands)
|------------------------------------------ | ---------------------------------------------
|
|Warehouse facility - line of credit        | $ 85,209                                     
|Warehouse facility - repurchase agreements | 159,454                                      
|Subordinate note                           | 3,000                                        
|Operating leases                           | 416                                          
|Total contractual obligations              | $248,079                                     

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 sheets. 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 purchasers 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.

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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 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 record a provision for losses on 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 the respective dates.

|                                              | Obligations to Repurchase
Loans
|--------------------------------------------- | -------------------------------
|
|
|
|Obligations to repurchase
     mortgage loans | $50,510                        
|                                              |                                
|Reserve for impairment of  mortgage loans     | $15,176                        

# 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 financial position and
results of operations are measured with reference to historical cost or fair market value
without considering inflation.

# Newly Issued Accounting
Pronouncements

In February 2006, the FASB issued SFAS No. 155,
Accounting for Certain Hybrid Financial Instruments which amends SFAS
No. 133, Accounting for Derivatives Instruments and Hedging Activities and SFAS No. 140,
Accounting for Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities. SFAS No. 155 amends SFAS NO. 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 principle cash flows. SFAS No. 155 also amends SFAS No. 140 to allow
qualifying special-purpose entities to hold a passive derivative financial instrument
pertaining to beneficial interests that are themselves derivative instruments. Management
does not expect adoption of SFAS No. 155 to have a material impact on the Company's
consolidated financial statements.

In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of
Financial Assets, which provides an
approach to simplify efforts to obtain hedge-like (offset) accounting. SFAS No. 156 amends
FASB Statement No. 140, with respect to the accounting for separately
recognized servicing assets and servicing liabilities. SFAS No. 156 (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) at initial adoption, permits 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.
SFAS No. 156 also describes the
manner in which it should be initially applied. We are currently evaluating the accounting and disclosure requirements of SFAS No.
156 in order to determine the impact that this guidance will have on our results of operations or financial condition when we adopt
SFAS No. 156 at the beginning of our fiscal year 2007.

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In June 2006, the FASB issued FASB Interpretation No. (FIN 48),
Accounting for
Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109. FIN 48 clarifies the accounting for uncertainty in income
taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. FIN 48 requires that we recognize in the financial statements the
impact of the tax position if that position will more likely than not be sustained on audit, based on the technical merits of the
position. FIN 48 also provides guidance related to derecognition, classification, interest and penalties, accounting in interim
periods and disclosure. If there are changes in net assets as a result of application of FIN 48, these will be accounted for as an
adjustment to retained earnings. We are currently evaluating the accounting and disclosure requirements of FIN 48 in order to
determine the impact that this guidance will have on our results of operations or financial condition when we adopt FIN 48 at the
beginning of our fiscal year 2007.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements which defines fair value, establishes a framework
for measuring fair value, and expands disclosures about fair value measurements. SFAS No. 157 does not require any new fair value
measurements, but rather eliminates inconsistencies in guidance found in various prior accounting pronouncements. We are currently
evaluating the accounting and disclosure requirements that this guidance will have on our results of operations or financial
condition when we adopt SFAS No. 157 at the beginning of our fiscal year 2008.

In September 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined
Benefit Pension and Other Post retirement Plan - an amendment of FASB Statements No. 87, 88, 106
and 132(R). SFAS No. 158 requires an employer to recognize the overfunded or underfunded status of a defined benefit
postretirement plan as an asset or liability in its statement of financial position and recognize changes in the
funded status in the year in which the changes occur. SFAS No. 158 is effective for fiscal years ending after
December 15, 2006. The Company believes that the adoption of SFAS No. 158 will not have a material impact on the
Companys financial position, results of operations or cash flows.

In September 2006, the SEC issued SAB No. 108, Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial Statements (SAB 108). SAB 108 requires that registrants
quantify errors using both a balance sheet and income statement approach and evaluate whether either approach
results in a misstated amount that, when all relevant quantitative and qualitative factors are considered, is
material. SAB 108 did not have a material impact on the Companys consolidated financial statements.

In February 2007, the FASB issued Statement of Financial Accounting Standard No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities" ("SFAS 159"). SFAS 159 permits entities to choose to measure many
financial instruments and certain other items at fair value. Unrealized gains and losses on items for which the
fair value option has been elected are reported in earnings. SFAS 159 is effective for fiscal
years beginning after November 15, 2007. The Company is currently evaluating the impact of implementing SFAS 159 on our
consolidated financial statements.

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# ITEM 7A. 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.

The
objective of interest rate risk management is to control the effects 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) of loans held for sale due to changes in the current market
rate of interest.

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.

# Interest Rate Simulation
Sensitivity Analysis

Changes
in market interest rates may affect our gain (loss) from sales of mortgage loans. At December 31, 2006 we held $36.9 million in loans that had not been committed for
sale. Increases in interest rate would adversely affect revenue to be realized from
uncommitted loans. Likewise, any decrease in interest rates would have a positive impact
on the 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 the sales of mortgage loans.

|Change in interest rate (bps)                                                       | (100)  | (50)   | 50       | 100     
|----------------------------------------------------------------------------------- | ------ | ------ | -------- | --------
|                                                                                    |        |        |          |         
|Change in
     income from sales of
        uncommitted loans (dollars in millions) | $0.456 | $0.213 | $(0.218) | $(1.044)

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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 AND SUPPLEMENTARY DATA

The information required by this Item 8 is incorporated by reference to TMSF Holdings, Inc.'s
consolidated financial
statements and report of independent registered public accounting firm 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, 2006.

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.

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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 Public Company Accounting Oversight Board 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 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 significant changes in our internal control over financial reporting during the year ended December 31, 2006,
that addressed the material weaknesses identified in the audit of the consolidated financial statement as of and for the year ended
December 31, 2005.

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ITEM 9B. OTHER

None

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE

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

|Name                 | Age |  | Position                                                     
|-------------------- | --- |  | -------------------------------------------------------------
|Raymond Eshaghian    | 37  |  | Chairman of the Board, Chief Executive Officer, President and
|                     |     |  | Secretary                                                    
|Daniel M. Rood       | 53  |  | Chief Financial Officer                                      
|H. Wayne Snavely
(1) | 65  |  | Director                                                     
|M. Aaron Yashouafar  | 45  |  | Director                                                     
|David Sklar
(1)      | 54  |  | 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.

Daniel Rood has served as the Company's Chief Financial Officer since May 2006. From January 2006
to May 2006, Mr. Rood served as Senior Vice President of The Mortgage Store Financial, Inc.. Mr. Rood was CEO of Security Pacific Finance from February 2003
to January 2006. From October 1996 to February 2003 Mr. Rood served as Senior Vice President of
Imperial Credit Industries.

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. Mr. Yashouafar graduated from
          California State University at Northridge in 1982 with a degree in Business
          Administration.

David A. Sklar. Mr. Sklar has served 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.

The Company is not required to maintain audit, compensation or nominating committees under the applicable rules
of the Over-the-Counter Bulletin Board. However, the Company currently has an audit and compensation committee.

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Audit Committee

The Audit Committee, established by the Board of Directors on November 1, 2002, reviews the scope of
auditing activities performed by the Companys independent auditors. The purpose of the Audit Committee is to
recommend engagement of the Companys independent auditors, to approve the services performed by such auditors,
to consult with such auditors and review with them the results of their examination, to review and approve any
material accounting policy changes affecting the Companys operating results and to review the Companys control
procedures and personnel. The Audit Committee does not presently have a written charter. The Audit Committee is
currently comprised of H. Wayne Snavely and David A Sklar. As an issuer whose common stock is quoted on the OTC
Bulletin Board, the Company is not required to satisfy the listing standards of the New York Stock Exchange, the
American Stock Exchange or NASDAQ, including the requirements regarding independence of audit committee members.
The committee met twice in 2006.

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-K. Mr. 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.

Compensation Committee

The Compensation Committee was established by the Board of Directors on November 1, 2002. The purpose of
the Compensation Committee is to review and approve the compensation benefits and severance arrangements for the
Companys officers and other employees, administer the Company's stock option and stock purchase plans and make
recommendations to the Board of Directors regarding such matters. The Compensation Committee is currently
comprised of H. Wayne Snavely and David A Sklar. The Compensation Committee met twice during 2006. The executive
compensation for 2006 was discussed with and approved by the Compensation Committee. See Certain Relationships
and Related Transactions.

# 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-K. Mr. 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.

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

Section
16(a) of 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 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 year ended December 31, 2006, 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.

Code of Ethics

We have adopted a code of business conduct and ethics within the meaning of Item 406(b) of Regulation S-K. This code of
ethics applies to our directors, executive officers and employees, including our
chief executive officer, chief financial officer, 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.

# ITEM 11. EXECUTIVE
COMPENSATION

Compensation Policies and
Philosophy

The compensation committee administers the policies governing our executive compensation program. All issues
pertaining to executive compensation are reviewed by the compensation committee and recommendations are made to
the Board of Directors for their approval. Compensation agreements established for executive officers base
incentives on the company achieving long and short term goals that in the opinion of the committee create greater
shareholder value.

It is important that compensation be competitive in the marketplace and provide incentives for management
to deliver superior results for our shareholders.

Compensation in 2006

Each executive officers compensation is comprised of two principal components: base salary and incentive
compensation.

Consistent with company policy and in accordance with his employment agreement an incentive bonus was paid
to Mr. Rood and Mr. Najand.

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Compensation of Our Chief Executive
Officer In 2006

Mr. Eshaghian, as Chairman, Chief Executive Officer and Secretary, significantly and directly influenced
the companys performance in 2006. The compensation committee has reviewed all components of Mr. Eshaghians
compensation, including base salary, bonus, and benefits. In 2006, Mr. Eshaghian received a base salary of
$750,000. Mr. Eshaghian was awarded other annual compensation in the aggregate amount of $86,198. The committee
believes that Mr. Eshaghians compensation is consistent with the terms of his employment agreement and was well
deserved based upon the performance of the company in 2006.

The following table sets forth information concerning the compensation for the three years ended December 31, 2006, 2005, and
2004 of the principal executive officer, principal financial officer, in addition to our three most highly compensated officers whose
annual compensation exceeded $100,000, and up to two additional individuals for whom disclosure would have been required but for the
fact that the individual was not serving as an executive officer of the registrant at the end of the last fiscal year.

|                            | Summary Compensation Table
|--------------------------- | --------------------------
|Name and Principal Position | Year                      
|                            |                           
|Raymond Eshaghian           | 2006                      
|Chairman of the Board,      | 2005                      
|Chief Executive Officer,    | 2004                      
|President and Secretary     |                           
|                            |                           
|Daniel Rood                 | 2006                      
|Chief Financial Officer     | 2005                      
|                            | 2004                      
|                            |                           
|Masoud Najand
     (2)      | 2006                      
|Former Chief Financial      | 2005                      
|Officer                     | 2004                      

_________________

|(1) 
          Represents car allowance and life insurance.
          (2) Mr. Najand was our Chief Financial Officer until May 2006.
          (3) Figure includes 5% forfeiture. Assumptions are disclosed in Note 2 Stock-Based Compensation
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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# 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. Officers of the Company who are members
of the Board of Directors are not paid any directors fees. Following are consulting
fees paid to directors for the years 2006, 2005, and 2004.

|                    | Director Compensation
|------------------- | ---------------------
|Name                | Year                 
|                    |                      
|H. Wayne Snavely    | 2006                 
|                    | 2005                 
|                    | 2004                 
|                    |                      
|David Sklar         | 2006                 
|                    | 2005                 
|                    | 2004                 
|                    |                      
|M. Aaron Yashouafar | 2006                 
|                    | 2005                 
|                    | 2004                 

Policy of Deductibility of Compensation

Section 162(m) was added to the Internal Revenue Code as part of the Omnibus Budget Reconciliation Act of
1993. Section 162(m) limits the deduction for compensation paid to the Chief Executive Officer and the other
Named Executive Officers to the extent that compensation of a particular executive exceeds $1.0 million, unless
such compensation was based upon performance goals determined by a compensation committee consisting solely of
two or more outside directors, the material terms of which are approved by a majority vote of the stockholders
prior to the payment of such remuneration. The incentive compensation under the current employment agreements
with each of Messrs. Eshaghian, Rood, and Najand are structured with the intent to meet the compensation deduction
under Section 162(m).

The compensation committee intends to review our compensation programs to determine the deductibility of the
future compensation paid or awarded pursuant thereto and will seek guidance with respect to changes to our
existing compensation program that will enable the Company to continue to attract and retain key individuals
while optimizing the deductibility to the Company of amounts paid as compensation. However, this policy does not
rule out the possibility that compensation may be approved that may not qualify for the compensation deduction
if, in light if all applicable circumstances, it would be in the best interests of the company for such
compensation to be paid.

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Conclusion

The compensation committee believes that the Companys overall executive compensation program will be
successful in providing competitive compensation appropriate to attract and retain highly qualified executives
and also to encourage superior performance from the executive group, which will create added stockholder value.
The committee will continue to evaluate and administer the Companys executive compensation program in a manner
that we believe will compensate management for performance and in the best interest of our
stockholders.

COMPENSATION COMMITTEE:

H. Wayne Snavely (Director)
David A. Sklar (Director)

Compensation Committee Interlocks and Insider Participation

During 2006, our compensation committee consisted of Messrs. Snavely and Sklar. No member of the
compensation committee was, during the fiscal year, an officer or employee of the Company, nor was any member of
the compensation committee formerly an officer of the Company.

# Stock Option Plan

|Equity Compensation
     Plan Information                     
|--------------------------------------------------------------
|
|                                                              
|Equity compensation
     plans approved bysecurity holders    
|                                                              
|Equity compensation
     plans not approved bysecurity holders
|Total                                                         

_________________

|(1) 
          Figure includes 75,000 shares that are issued outside the Equity Compensation
          Plan of the Company.
|---------------------------------------------------------------------------------------------------------------------------

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OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END

|                           | OPTION AWARDS | STOCK AWARDS
|-------------------------- | ------------- | ------------
|
|                           |               |             
|Raymond Eshaghian
     (1) | 500,000       | --          
|Daniel Rood
     (2)       | --            | 110,000     
|Masoud Najand
     (3)     | 20,000        | 80,000      

_________________

|(1) 
          Stock Options vested in full on 6/25/2004.
          (2) Stock Options vest at the rate of 20% per year, with vesting date of
          2/15/07, 2/15/08, 2/15/09, 2/15/10, and 2/15/11.
          (3) Stock Options vest at the rate of 20% per year, with vesting date of
          5/6/06, 5/6/07, 5/6/08, 5/6/09, and 5/6/10.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

On June 10, 2003, Mr. H. Wayne Snavely was
awarded 750,000 options to
purchase the Company's 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 vested immediately.

On
August 23, 2004 under the Companys employee stock option plan and with approval of
the Board of Directors 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 vested immediately.

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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 were 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 360,500 options to
purchase the Companys stock at exercise prices ranging from $2.00  $2.35 per
share, vesting over a period of five years, commencing April 2005 and expiring in April 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 of $3.50 per share, vesting over a period of
five years, commencing September 2005 and expiring in September 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, four employees were granted 10,000 options each to purchase the
Companys stock at an exercise price of $2.80 per share, vesting over a period of
five years, commencing November 2005 and expiring in November 2015.

On
January 16, 2006, the Company approved the issuance of stock options to an employee of The
Mortgage Store Financial, Inc. The agreement granted the employee options to purchase
15,000 shares of common stock at an exercise price of $3.10 per share, vesting over a
period of five years, commencing January 2006, and expiring in January 2016. The
fair value of the options was estimated at $41,980 using the Black-Scholes option-pricing
model, and the following assumptions: a risk-free interest rate of 4.34%, expected
volatility of 98%, and a dividend yield of 0%.

On
February 15, 2006, the Company approved the issuance of stock options to an executive of The
Mortgage Store Financial, Inc. The agreement granted the employee options to purchase
110,000 shares of common stock at an exercise price of $2.71 per share, vesting over a
period of five years, commencing February 2006, and expiring in February 2016. The
fair value of the options was estimated at $269,526 using the Black-Scholes option-pricing
model, and the following assumptions: a risk-free interest rate of 4.61%, expected
volatility of 98%, and a dividend yield of 0%.

On
May 18, 2006, the Company approved the re-issuance of stock options to its investor relations
firm. The agreement granted the firm options to purchase 30,000 shares of common stock at
an exercise price of $1.40 per share. The options vested immediately and expire on May 2007.
The fair value of the options was estimated at $16,500 using the Black-Scholes
option-pricing model, and the following assumptions: a risk-free interest rate of 4.96%,
expected volatility of 99%, and a dividend yield of 0%.

On
September 5, 2006, the Company approved the issuance of stock options to an employee of The
Mortgage Store Financial, Inc. The agreement granted the employee options to purchase
5,000 shares of common stock at an exercise price of $1.25 per share, vesting over a
period of five years, commencing September 2006, and expiring in September 2016. The
fair value of the options was estimated at $5,250 using the Black-Scholes option-pricing
model, and the following assumptions: a risk-free interest rate of 4.78%, expected
volatility of 80%, and a dividend yield of 0%.

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Employment Contracts

On May 12, 2006, the Company entered into an employment agreement with Mr. Rood which sets forth the terms of his at
will employment by the Company. Mr. Rood will receive a base salary at an annual rate of $175,200 and will be
eligible to participate in any annual bonus program established by the Companys Compensation Committee. Mr. Rood
was also granted options on February 15, 2006, to purchase an aggregate of 110,000 shares of the Company's common
stock under the Companys 2003 Stock Option Plan and standard form of option agreement at an exercise price of
$2.71. The options have a term of ten years and vest over a five-year period.

Mr. Raymond Eshaghian currently does not have an employment contract and his compensation is determined by the
Companys performance and the Companys compensation committee periodically.

# ITEM 12. SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCK HOLDER MATTERS

The
following table sets forth certain information known to the Company with respect to
beneficial ownership of the Companys common stock as of May 1, 2007 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 16,628,800 shares of TMSF
Holdings common stock outstanding (15,000,000) plus options exercisable within 60 days of May 1,
2007 (1,628,800). 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 issued and outstanding 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.

|                                                  | TMSF Holdings Common Stock
|------------------------------------------------- | --------------------------
|
|Officers and Directors                            |                           
|Raymond Eshaghian
     (1)                        | 9,617,450                 
|M. Aaron Yashouafar
     (2)                      | 2,037,150                 
|H. Wayne Snavely
     (3)                         | 750,000                   
|Daniel Rood
     (5)                              | 22,000                    
|David Sklar                                       | -                         
|All directors and officers as a group (5 persons) | 12,426,600                
|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 May 1, 2007. (2)  Includes 210,000
          shares of common stock underlying options that are exercisable currently or
          within 60 day of May 1, 2007. (3)  Includes 750,000 shares of common
          stock underlying options that are exercisable currently or within 60 day of
          May 1, 2007. 

          (4)  Mr. Yashouafars address is 660 S. Figueroa Street
          24th Floor, Los Angeles, CA 90017. 
(5) Includes 110,000 shares of common stock underlying options, 28,417 of which are
          exercisable currently within 60 days of May 1, 2007.

As
of May 1, 2007, Raymond Eshaghian beneficially owned approximately 60.8% 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.

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# Securities Authorized
for Issuance Under Equity Compensation Plans

On June 10, 2003, Mr. H. Wayne Snavely was awarded 750,000 options to purchase the Company's
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 vested immediately.

On
August 23, 2004 under the Companys employee stock option plan and with approval of
the Board of Directors 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 vested 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 were 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 360,500 options to
purchase the Companys stock at exercise prices ranging from $2.00  $2.35 per
share, vesting over a period of five years, commencing April 2005 and expiring in May 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 of $3.50 per share, vesting 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, four employees were granted 10,000 options each to purchase the
Companys stock at an exercise price of $2.80 per share, vesting over a period of
five years, commencing November 2005 and expiring in November 2015.

In
January 2006, the Company approved the issuance of stock options to an employee of The
Mortgage Store Financial, Inc. The agreement granted the employee options to purchase
15,000 shares of common stock at an exercise price of $3.10 per share, vesting over a
period of five years, commencing January 16, 2006, and expiring on January 16, 2016. The
fair value of the options was estimated at $41,980 using the Black-Scholes option-pricing
model, and the following assumptions: a risk-free interest rate of 4.34%, expected
volatility of 98%, and a dividend yield of 0%.

In
February 2006, the Company approved the issuance of stock options to an executive of The
Mortgage Store Financial, Inc. The agreement granted the employee options to purchase
110,000 shares of common stock at an exercise price of $2.71 per share, vesting over a
period of five years, commencing February 15, 2006, and expiring on February 15, 2016. The
fair value of the options was estimated at $269,526 using the Black-Scholes option-pricing
model, and the following assumptions: a risk-free interest rate of 4.61%, expected
volatility of 98%, and a dividend yield of 0%.

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In
May 2006, the Company approved the re-issuance of stock options to its investor relations
firm. The agreement granted the firm options to purchase 30,000 shares of common stock at
an exercise price of $1.40 per share, vested immediately, and expiring on May 18, 2007.
The fair value of the options was estimated at $16,500 using the Black-Scholes
option-pricing model, and the following assumptions: a risk-free interest rate of 4.96%,
expected volatility of 99%, and a dividend yield of 0%.

In
September 2006, the Company approved the issuance of stock options to an employee of The
Mortgage Store Financial, Inc. The agreement granted the employee options to purchase
5,000 shares of common stock at an exercise price of $1.25 per share, vesting over a
period of five years, commencing September 5, 2006, and expiring on September 3, 2016. The
fair value of the options was estimated at $5,250 using the Black-Scholes option-pricing
model, and the following assumptions: a risk-free interest rate of 4.78%, expected
volatility of 80%, and a dividend yield of 0%.

# ITEM 13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

# 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 60.8% 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, 2006, 2005, and 2004, the Company paid $262,500, $532,000 and
$403,600 respectively, for consulting expenses to companies owned by shareholders. The Company also
paid $210,000, $360,000, and $397,500 respectively, for consulting expenses to a relative of a
shareholder during the years ended December 31, 2006, 2005, and 2004. Furthermore, during the
years ended December 31, 2006, 2005, and 2004, the Company paid consulting expenses of $55,000,
$40,000, and $40,000 respectively, to two directors. This consulting agreement terminated in July 2006.

# 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, 2006,
2005, and 2004 the Company funded $230,000, $4,976,225, and $1,470,600 in mortgage loans
for officers or executive employees, and $2,337,105, $5,437,475, and
$5,699,900 respectively for persons related to officers. These loans were subsequently
sold in the secondary market at comparable market 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 M. Aaron 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 payments of approximately $255,000.

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# 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.

M. Aaron
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.

# ITEM 14. PRINCIPAL
ACCOUNTANT FEES AND SERVICES

During the fiscal years ended December 31, 2006, 2005, and 2004 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,
|------------------------------ | -------------------------------
|                               | 2006                           
|Audit fees                     | $335,897                       
|Audit-related fees
     (1)    | 14,953                         
|Tax fees                       | --                             
|All other fees                 | --                             
|                               |                                
|Total audit and non-audit fees | $350,850                       

________________

(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 2006 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.

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# ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

|Exhibit Number | Description of Exhibit                                                                                                                                                                                                                                                                                                                            
|-------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|               |                                                                                                                                                                                                                                                                                                                                                   
|2.1            | 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).
|               |                                                                                                                                                                                                                                                                                                                                                   
|10.4           | Employment Agreement dated May 12, 2006 between The Mortgage Store Financial, Inc., a
                   subsidiary of the Registrant, and Daniel M. Rood (incorporated by reference to
                   Exhibit 10.4 of the Registrant's 8-K Filing on Form 8-K on May 16, 2006).                                                              
|               |                                                                                                                                                                                                                                                                                                                                                   
|14.1           | Code of Ethics.                                                                                                                                                                                                                                                                                                                                   
|               |                                                                                                                                                                                                                                                                                                                                                   
|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.                                                                                                                                                                                                                                                                                                
|               |                                                                                                                                                                                                                                                                                                                                                   
|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.                                                                                                                                                                                                                                 

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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 2nd day of May, 2007.

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

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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 | May 2, 2007
|/S/ DANIEL M. ROOD
     Daniel M. Rood         | Chief Financial Officer                                                | May 2, 2007
|/S/ M.AARON YASHOUAFAR
     M.Aaron Yashouafar | Director                                                               | May 2, 2007
|/S/ H.WAYNE SNAVELYH.Wayne Snavely             | Director                                                               | May 2, 2007
|/S/ DAVID SKLARDavid Sklar                     | Director                                                               | May 2, 2007

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TMSF HOLDINGS, INC.
AND SUBSIDIARIES

INDEX TO CONSOLIDATED
FINANCIAL STATEMENTS

|                                                        | Page      
|------------------------------------------------------- | ----------
|REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM | F-1       
|CONSOLIDATED FINANCIAL STATEMENTS                      
|Consolidated Balance Sheets                             | F-2       
|Consolidated Statements of Income                       | F-3       
|Consolidated Statements of Stockholders' Equity         | F-4       
|Consolidated Statements of Cash Flows                   | F-5       
|Notes to Consolidated Financial Statements              | F-6 - F-22
|                                                        |           

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors
TMSF Holdings, Inc.
Los Angeles, California
We have audited the consolidated balance sheets of TMSF Holdings, Inc. and its subsidiaries
(collectively the Company) as of December 31, 2006 and
2005, and the related consolidated statements of income, stockholders equity and cash flows for each of the three years in the
period ended December 31, 2006. 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 provide 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 its subsidiaries as of December 31, 2006 and 2005, and the results of its operations and its cash
flows for each of the three  years in the period ended December 31, 2006, in conformity with U.S. generally accepted accounting principles.


/S/SINGER LEWAK GREENBAUM
& GOLDSTEIN LLP
SINGER LEWAK GREENBAUM
& GOLDSTEIN LLP 
Los Angeles, CaliforniaMay 1, 2007

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TMSF HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS



December 31, 2006 and 2005

|ASSETS                                                
|------------------------------------------------------
|
|Current assets                                        
|Cash and cash equivalents                             
|Mortgage loans held for sale                          
|Mortgage loans to be repurchased                      
|Reserve for impairment of mortgage loans              
|Prepaid expenses                                      
|Warehouse receivables                                 
|Other receivables and employee advances               
|(net of $208,125 and $0, respectively,                
|of allowance for bad debts)                           
|Real estate owned (net of $1,966,637 and              
|$34,000, respectively, of loss reserves)              
|Income tax receivable                                 
|Deferred tax asset - current                          
|Total current assets                                  
|                                                      
|Restricted cash                                       
|Property and equipment (net of $1,156,315 and $648,753
|respectively, of accumulated depreciation)            
|Deferred tax asset - non-current                      
|Deposits and other assets                             
|Total assets                                          

|LIABILITIES AND STOCKHOLDERS EQUITY      
|------------------------------------------
|Current liabilities                       
|Warehouse lines of credit                 
|Obligations to repurchase mortgage loans  
|Accounts and other payables               
|Accrued expenses                          
|Subordinated note payable                 
|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 consolidated financial statements

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Table of Contents

TMSF HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31, 2006, 2005, and 2004

|                                                               | 2006         | 2005        | 2004       
|-------------------------------------------------------------- | ------------ | ----------- | -----------
|Loan income                                                    |              |             |            
|Income from sales of mortgage loans                            | $60,013,948  | $53,451,419 | $34,007,602
|Mortgage interest income                                       | 18,067,378   | 17,379,358  | 8,710,726  
|Commission fee income                                          | 750,932      | 640,329     | 777,215    
|Escrow service fees                                            | -            | -           | 84,617     
|                                                               |              |             |            
|Total loan income                                              | 78,832,258   | 71,471,106  | 43,580,160 
|                                                               |              |             |            
|Costs of loan origination and sales of mortgage loans          |              |             |            
|Commissions                                                    | 16,666,963   | 12,368,815  | 6,355,791  
|Warehouse interest expense                                     | 16,912,093   | 14,269,587  | 5,739,287  
|Appraisals                                                     | 1,991,663    | 1,684,227   | 969,554    
|Credit reports                                                 | 220,826      | 186,981     | 145,174    
|Warehouse fees                                                 | 293,613      | 369,951     | 260,863    
|Provision for impairment of mortgage loans                     | 21,756,897   | 967,222     | 531,020    
|Other costs                                                    | 110,801      | 156,684     | 316,693    
|                                                               |              |             |            
|Total costs of loan origination and sales of mortgage loans    | 57,952,856   | 30,003,467  | 14,318,382 
|                                                               |              |             |            
|Gross profit                                                   | 20,879,402   | 41,467,639  | 29,261,778 
|                                                               |              |             |            
|Operating expenses                                             |              |             |            
|Salaries                                                       | 22,964,585   | 18,978,105  | 10,702,181 
|Occupancy                                                      | 844,218      | 1,034,882   | 412,860    
|General and administrative                                     | 6,511,865    | 5,838,300   | 3,807,143  
|                                                               |              |             |            
|Total operating expenses                                       | 30,320,668   | 25,851,285  | 14,922,184 
|                                                               |              |             |            
|Income (loss) from operations                                  | (9,441,266)  | 15,616,354  | 14,339,594 
|                                                               |              |             |            
|Other income (expense)                                         |              |             |            
|Interest income                                                | 233,745      | 125,273     | 17,772     
|Other income (expense)                                         | 202,802      | (20,106)    | 14,999     
|Loss on disposal of assets                                     | -            | (191,419)   | (463)      
|                                                               |              |             |            
|Total other income (expense)                                   | 436,547      | (86,252)    | 32,308     
|                                                               |              |             |            
|Income (loss) before provision for (benefit from) income taxes | (9,004,719)  | 15,530,103  | 14,371,902 
|                                                               |              |             |            
|Provision for (benefit from) income taxes                      | (3,615,293)  | 6,328,310   | 5,736,644  
|                                                               |              |             |            
|Net income (loss)                                              | $(5,389,426) | $9,201,793  | $8,635,258 
|                                                               |              |             |            
|Basic earnings (loss) per share                                | $(0.36)      | $0.61       | $0.58      
|                                                               |              |             |            
|Diluted earnings (loss) per share                              | $(0.36)      | $0.57       | $0.56      
|                                                               |              |             |            
|Basic weighted-average common                                  |              |             |            
|shares outstanding                                             | 15,000,000   | 15,000,000  | 15,000,000 
|                                                               |              |             |            
|Diluted weighted-average                                       |              |             |            
|common shares outstanding                                      | 15,000,000   | 16,131,127  | 15,298,198 

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

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TMSF HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
December 31, 2006

|                     | Preferred Stock | Common Stock | Additional |        |       
|-------------------- | --------------- | ------------ | ---------- | ------ | ------
|
|                     | Shares          | Amount       | Shares     | Amount | Shares
|Balance, December    |                 |              |            |        |       
|31, 2003             |                 | $--          |            | $--    |       
|Options granted      |                 |              |            |        |       
|Net income for 2004  |                 |              |            |        |       
|Balance, December    |                 |              |            |        |       
|31, 2004             |                 | --           |            | --     |       
|Net income for 2005  |                 |              |            |        |       
|Balance, December    |                 |              |            |        |       
|31, 2005             |                 | --           |            | --     |       
|Stock option         |                 |              |            |        |       
|compensation expense |                 | --           |            | --     |       
|Options granted      |                 |              |            |        |       
|consulting           |                 | --           |            | --     |       
|Net loss for 2006    |                 |              |            |        |       
|Balance, December    |                 |              |            |        |       
|31, 2006             |                 | $--          |            | $--    |       

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

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TMSF HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 2006, 2005, and 2004

|                                                       | 2006            | 2005           | 2004                   
|------------------------------------------------------ | --------------- | -------------- | -----------------------
|Cash flows from operating
     activities              |                 |                |                        
|Net income (loss)                                      | $   (5,389,426) | $   9,201,793  | $      8,635,258       
|Adjustments to reconcile net income to net cash        |                 |                |                        
|provided by (used in) operating activities             |                 |                |                        
|Depreciation and amortization                          | 507,562         | 379,239        | 176,133                
|Provision for impairment of,                           |                 |                |                        
|mortgage loans                                         | 15,919,502      | 747,762        | 518,928                
|Share based compensation expense                       | 147,220         | -              | -                      
|Options granted for consulting activities              | 16,500          | -              | 35,500                 
|Bad debts expense                                      | 208,125         | -              | -                      
|Loss on sale of assets                                 | -               | 200,883        | -                      
|(Increase) decrease in                                 |                 |                |                        
|Mortgage loans held for sale                           | (27,899,317)    | 55,422,124     | (75,695,975)           
|Mortgage loans to be repurchased                       | (40,438,950)    | (5,752,927)    | (4,318,283)            
|Prepaid expenses                                       | (305,492)       | (190,310)      | (51,737)               
|Income tax receivable                                  | 361,345         | (525,036)      | -                      
|Other receivables and employee advances, net           | 56,473          | (399,294)      | (32,690)               
|Warehouse receivables                                  | 1,366           | (3,476,797)    | (3,112,677)            
|Deposits and other assets                              | 85,522          | (254,671)      | 87,504                 
|Deferred tax asset - current                           | (6,924,281)     | (530,640)      | (439,701)              
|Deferred tax asset - non current                       | (35,623)        | -              | -                      
|Increase (decrease) in                                 |                 |                |                        
|Accounts and other payables                            | 5,332,086       | (2,191,587)    | 4,043,810              
|Obligation to repurchase mortgage loans                | 40,438,950      | 5,752,927      | 4,318,283              
|Escrow funds payable                                   | -               | -              | (54,308)               
|Accrued expenses                                       | 751,373         | 70,223         | 287,742                
|Accrued income taxes                                   | --              | (259,063)      | (936,832)              
|Deferred tax liability - current                       | -               | -              | (271,000)              
|Deferred tax liability - non current                   | (4,269)         | (98,440)       | 102,709                
|                                                       |                 |                |                        
|Net cash provided by (used in) operating activities    | (17,171,334)    | 58,096,186     | (66,707,336)           
|                                                       |                 |                |                        
|Cash flows from investing activities                   |                 |                |                        
|                                                       |                 |                |                        
|Decrease (increase) in restricted cash                 | 115,762         | 942,878        | (866,956)              
|Net proceeds from real estate owned                    | (6,474,700)     | (459,299)      | 558,998                
|Purchase of property and equipment                     | (571,794)       | (728,701)      | (459,570)              
|                                                       |                 |                |                        
|Net cash provided by (used in) in investing activities | (6,930,732)     | (245,122)      | (767,528)              
|                                                       |                 |                |                        
|Cash flows from financing activities                   |                 |                |                        
|Warehouse lines of credit, net                         | 25,823,973      | (56,169,046)   | 73,196,907             
|Proceeds from subordinated                             |                 |                |                        
|note payable                                           | 3,000,000       | -              | -                      
|                                                       |                 |                |                        
|Net cash provided by (used in) financing activities    | 28,823,973      | (56,169,046)   | 73,196,907             
|                                                       |                 |                |                        
|Net increase (decrease) in cash and cash equivalents   | $    4,721,907  | $   1,682,018  | $     5,722,043        
|                                                       |                 |                |                        
|Cash and cash equivalents, beginning of year           | 10,247,233      | 8,565,215      | 2,843,172              
|                                                       |                 |                |                        
|Cash and cash equivalents, end of year                 | $  14,969,140   | $   10,247,233 | $      8,565,215       
|                                                       |                 |                |                        
|Supplemental disclosures of cash flow information      |                 |                |                        
|                                                       |                 |                |                        
|Interest paid                                          | $
 16,674,912   | $
 14,095,262  | $
            4,793,506
|                                                       |                 |                |                        
|Income taxes paid                                      | $    4,471,585  | $    7,733,208 | $         7,295,000    

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

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# NOTE 1 
ORGANIZATION AND LINE OF BUSINESS

General

TMSF
Holdings, Inc. and subsidiaries (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 39 other states. The Company 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 non-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 was to become the new holding company of The Mortgage Store Financial, Inc.
upon completion of the Companys plan of reorganization.

On
August 4, 2006 the Companys Board of Directors unanimously decided to terminate the
plan to reorganize its business operations to allow it to qualify and elect to be taxed as
a real estate investment trust, effective August 3, 2006. The Board determined
that because of unfavorable market conditions, the Company would not be able to satisfy the
conditions precedent to the consummation of the reorganization.

# NOTE 2  SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The
accompanying consolidated financial statements of the Company reflect all material adjustments, which management considers
necessary for a fair statement of the Companys consolidated financial position, results of
operations, and cash flows for the years presented.

These
consolidated financial statements have been prepared in accordance with the rules and
regulations of the 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., and CPV Limited, Inc. All
significant inter-company accounts and transactions have been 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 loans are 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 the reporting period for loans which are held for sale.

Cash and Cash Equivalents

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

- F-6 -

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Table of Contents

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

Mortgage Loans Held for
Sale

Mortgage
loans held for sale are recorded at the aggregate of lower of cost or market. All mortgage loans are collateralized
by residential property.

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 fees and costs in the
accompanying consolidated balance sheet.

Mortgage Loans to be Repurchased

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.

As
of December 31, 2006, the Company was obligated to repurchase 267 loans with an aggregate
balance of $50.5 million and in 2007 has received additional repurchase requests of $59.8 million
relating to loans originated in 2006. As of December 31, 2006 and 2005, the Company recorded reserves
for impaired mortgage loans of $15.2 million and $1.2 respectively.

The secondary mortgage market tightened in the fourth quarter of 2006 and
the first quarter of 2007. The mortgage banking industry as a whole experienced reduced
pricing on the sales of their portfolios and increased scrutiny of compliance to the
various normal and customary representations and warranties mortgage originators give the
investment community in these agreements. As a result of certain breaches to the purchase
agreements, investors requested the Company repurchase certain loans. The Company in many
cases is given the option to indemnify the investor for any losses they may realize on the
loans found to be subject to a repurchase request versus actually repurchasing the loan.

Reserve for
Impairment of Mortgage Loans

The Company calculates loss allowances for impaired mortgage loans based on historic data
related to frequency and severity of losses, which are reviewed and updated quarterly to reflect
actual loss performance  and other market data. The Company uses a rate of
repurchase demands received on loans sold with limited recourse. The severity of loss is estimated
based on actual historical losses.

Losses incurred in settlements of repurchase demands and losses resulting from the disposition
on repurchased mortgage loans are charged-off against the loss reserve.

Real Estate Owned

Real
estate owned is foreclosed real property held for sale, and recorded at the aggregate lower of cost or fair value, less
estimated costs to sell. These values are periodically reviewed and written-down if necessary.
Costs of holding real estate and related gains and losses on disposition are credited
or charged to operations as incurred.

- F-7 -

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Table of Contents

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

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, warehouse lines of credit, and subordinated borrowings in the form of note
payables. The book values 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, 2006, 2005, and 2004 were $134,175, $83,899, and $36,381 respectively.

Income Taxes

The Company filed a consolidated Federal income tax return and a combined state return in
California. Separate returns are filed in other jurisdictions as required. Deferred
income taxes are recognized for the tax consequences in future years of differences
between the tax basis of assets and liabilities and their carrying value on the financial
statements 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.
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 SFAS No. 128, Earnings per
Share and related interpretations for reporting earnings
per share. SFAS No. 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 reporting period. Diluted EPS reflects the potential dilution
that could occur if stock options were exercised using the treasury stock method.

As of December 31, 2006, 2005, and 2004 the Company had potential common stock as
follows:

|                               | December 31, 
|------------------------------ | -------------
|
|
|Net income (loss), weighted    |              
|average shares oustanding      |              
|and basic EPS                  | $ (5,389,426)
|Effect of dilutive securities: |              
|Dilutive stock options         | -            
|Net income (loss), weighted    |              
|average shares outstanding     |              
|and diluted EPS                | $ (5,389,426)

- F-8 -

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Table of Contents

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

Stock-Based Compensation

Information under FAS 123R for Periods Subsequent to January 1, 2006

At January 1, 2006,  the  Company  had one  stock-based  employee  compensation  plan.
Prior to January 1, 2006,  the Company
accounted for those plans under the recognition and  measurement  provisions of APB Opinion No. 25,
 "Accounting for Stock Issued to
Employees", and related interpretations, as permitted by FASB Statement No. 123, "Accounting for Stock-Based Compensation".

In December 2004, the FASB revised SFAS No. 123R,
"Share-Based  Payment," which establishes  accounting for share-based awards exchanged for employee services and requires
companies to expense the estimated fair value of these awards over the requisite  employee
service period.  On April 14, 2005, the SEC adopted a new rule amending the effective dates
for SFAS No. 123R. In accordance with the new rule, the
accounting provisions of SFAS No. 123R are effective for the Company beginning in the quarter
ended March 31, 2006.

Under SFAS No. 123R, share-based  compensation cost is measured at the grant date, based on the estimated fair value of the award, and
is  recognized  as expense  over the  employee's  requisite  service  period.  The Company  has no awards  with  market or  performance
conditions.  The Company adopted the provisions of SFAS 123R on January 1, 2006, the first day of
the Companys fiscal year 2006,  using a modified  prospective  application,  which provides for certain changes to the method for valuing
share-based  compensation.  Under the modified prospective  application,  prior periods are not revised for comparative  purposes.  The
valuation  provisions  of FAS 123R  apply to new awards and to awards  that are  outstanding  on the  effective  date and  subsequently
modified or  cancelled.  Estimated  compensation  expense for awards  outstanding  at the effective  date will be  recognized  over the
remaining  service period using the  compensation  cost  calculated  for pro forma  disclosure
purposes  under SFAS No.123, "Accounting for Stock-Based Compensation."

In November  2005,  the FASB issued FSP FAS 123R-3,  "Transition  Election  Related to Accounting  for Tax Effects of Share-Based
Payment Awards" ("FSP 123R-3"). FSP 123R-3  provides an optional  alternative  method that  establishes a computational  component to
arrive at the beginning  balance of the accumulated  paid-in capital pool related to employee  compensation and a simplified  method to
determine the subsequent  impact of the accumulated  paid-in  capital pool employee  awards that are fully vested and outstanding  upon
the adoption of SFAS No.123R. The Company is currently evaluating this transition method.

Effective  January 1, 2006,  the Company  adopted SFAS 123R,  and selected the  Black-Scholes  option  pricing  model as the most
appropriate  model for determining the estimated fair value for stock-based  awards.  The use of the  Black-Scholes  model requires the
use of extensive actual employee exercise behavior data and the use of a number of complex assumptions  including expected  volatility,
risk-free interest rate, forfeitures, and expected dividends. The assumptions used to value options granted are as follows:

|                         | December 31, 2006
|------------------------ | -----------------
|Risk-free interest rate  | 4.3% - 5.0%      
|Expected term (in years) | 1 - 10           
|Expected dividend yield  | 0.0%             
|Expected volatility      | 80.0% - 120.0%   

The
risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of
grant. Expected volatility is based on the annualized weekly historical volatility of our
stock price commensurate with the expected life of the option. For the year ended December
31, 2006, the expected term of the option is based on the vesting terms of the option and
a contractual life of ten years using the simplified method calculation as defined by
Staff Accounting Bulletin 107. Our analysis of stock price volatility and option lives
involves managements best estimates at the time of determination. SFAS 123R also
requires that the Company recognize compensation expense for the portion of options or stock
units that are expected to vest. Therefore, an estimated forfeiture rate that is
derived from historical employee termination behavior. If the actual number of forfeitures
differs from those estimated by management, additional adjustments to compensation expense
may be required in future periods. The Company elected to adopt modified prospective
application method and accordingly financial statement amounts from prior periods
presented in this form have not been restated.

- F-9 -

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Table of Contents

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

The
following table summarizes the impact of the adoption of SFAS 123(R) on stock-based
compensation costs for employees in our consolidated statement of income for the year
ended December 31, 2006 using the Black-Scholes model:

|                                                               | December 31, 2006
|-------------------------------------------------------------- | -----------------
|Employee stock-based compensation in:                          |                  
|Cost of sales                                                  | $          -     
|Sales and marketing expense                                    | -                
|General and administrative                                     | 147,220          
|Total employee stock-based compensation in 
operating expenses | 147,220          
|Total employee stock-based compensation                        | 147,220          

Pro Forma Information
under SFAS No. 123 for Periods Prior to January 1, 2006.

Prior to January 1, 2006, the
Company measured compensation expense for its stock-based employee compensation plans
using the intrinsic value method and provides pro forma disclosures of net loss and basic
and diluted net loss per share as if the fair value-based method had been applied in
measuring compensation expense. The Company applied SFAS No.123, Accounting for
Stock-Based Compensation and APB No. 25 and related
Interpretations in accounting for its employee stock-based compensation plan. The fair
value of each option grant was estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted average assumptions:

|                         | 2005           | 2004 
|------------------------ | -------------- | -----
|Risk-free interest rate  | 2.1% - 4.6%    | 3.6% 
|Expected term (in years) | 0.3 - 9.8      | 5.0  
|Dividend yield           | 0.0%           | 0.0% 
|Expected volatility      | 50.0% - 120.0% | 50.4%

- F-10 -

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Table of Contents

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

No
compensation cost was recognized for employee stock option grants during 2005 and 2004 based upon
the intrinsic value method, as the options were granted at
exercise prices equal to fair market value on the date of grant. Had compensation cost for
the Companys employee stock-based compensation plan been determined based on the
fair value at the grant dates the disclosure requirements of SFAS No. 148,
which amends the disclosure requirements of SFAS No. 123, would have been as follows:

|                                                      | 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 net income available to common stockholders | $  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

Estimates

The
preparation of these consolidated 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 consolidated financial statements and the reported
amounts of income and expenses during the reporting periods. 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.

Major Customers

During
the years ended December 31, 2006, 2005, and 2004, the Company sold 27%, 25%, and 10%; 69%, 8%,
and 6%, and 59%, 11%, and 11%, respectively, of its mortgage loans to three institutional
investors.

Impact of Recently Issued
Accounting Statements

In February 2006, the FASB issued SFAS No.155,
Accounting for Certain Hybrid Financial Instruments which amends SFAS
No. 133, Accounting for Derivatives Instruments and Hedging Activities and SFAS No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities. SFAS No. 155 amends SFAS No. 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 principle cash flows. SFAS No. 155 also amends SFAS No. 140 to allow qualifying special-purpose entities to
hold a passive derivative financial instrument pertaining to beneficial interests that are themselves derivative instruments.
Management does not expect adoption of SFAS No. 155 to have a material impact on the Companys
consolidated financial statements.

- F-11 -

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Table of Contents

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

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 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. We are currently evaluating the accounting and disclosure requirements of SFAS No.
156 in order to determine the impact that this guidance will have on our results of operations or financial condition when we adopt
SFAS No. 156 at the beginning of our fiscal year 2007.

In June 2006, FASB issued FASB Interpretation No. (FIN) 48,
Accounting for
Uncertainty in Income Taxes, an interpretation of FASB No. 109. FIN 48 clarifies the accounting for uncertainty in income
taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. FIN 48 requires that we recognize in the financial statements the
impact of the tax position if that position will more likely than not be sustained on audit, based on the technical merits of the
position. FIN 48 also provides guidance related to derecognition, classification, interest and penalties, accounting in interim
periods and disclosure. If there are changes in net assets as a result of application of FIN 48, these will be accounted for as an
adjustment to retained earnings. We are currently evaluating the accounting and disclosure requirements of FIN 48 in order to
determine the impact that this guidance will have on our results of operations or financial condition when we adopt FIN 48 at the
beginning of our fiscal year 2007.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements which defines fair value, establishes a framework
for measuring fair value, and expands disclosures about fair value measurements. SFAS No. 157 does not require any new fair value
measurements, but rather eliminates inconsistencies in guidance found in various prior accounting pronouncements. We are currently
evaluating the accounting and disclosure requirements that this guidance will have on our results of operations or financial
condition when we adopt SFAS No. 157 at the beginning of our fiscal year 2008.

In September 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined
Benefit Pension and Other Postretirement Plan - an amendment of FASB Statement No. 87, 88, 106
and 132(R). SFAS No. 158 requires an employer to recognize the overfunded or underfunded status of a defined benefit
postretirement plan as an asset or liability in its statement of financial position and recognize changes in the
funded status in the year in which the changes occur. SFAS No. 158 is effective for fiscal years ending after
December 15, 2006. The Company believes that the adoption of SFAS No. 158 will not have a material impact on the
Companys financial position, results of operations or cash flows.

In September 2006, the SEC issued SAB No. 108, Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial Statements (SAB 108). SAB 108 requires that registrants
quantify errors using both a balance sheet and income statement approach and evaluate whether either approach
results in a misstated amount that, when all relevant quantitative and qualitative factors are considered, is
material. SAB 108 did not have a material impact on the Companys consolidated financial statements.

In February 2007, the FASB issued Statement of Financial Accounting Standard No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities (SFAS 159). SFAS 159 permits entities to choose to measure many
financial instruments and certain other items at fair value. Unrealized gains and losses on items for which the
fair value option has been elected are reported in earnings. SFAS 159 is effective for fiscal years beginning
after November 15, 2007. The Company is currently evaluating the impact of implementing SFAS 159 on our
consolidated financial statements.

- F-12 -

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Table of Contents

# NOTE 3 
CONCENTRATION OF CREDIT RISK

Uninsured cash

The Company maintains cash and cash equivalents at several financial institutions. From time to time, the
balances for these accounts exceed the Federal Deposit Insurance Corporations (FDIC) insured amount.

At
December 31, 2006 and 2005, the Company maintained cash balances with banks totaling
$16,391,133 and $12,266,680 respectively, in excess of federally insured amounts of
$100,000 per bank.

Loans originated

The Company sells its mortgages within a short period after origination and does not maintain any servicing portfolio. The
pricing that the Company receives for the sale of its mortgage loans reflects the characteristics of products such as loan program type,
borrowers credit score, and region. The related risks associated with the Companys
mortgage loans held for sale are limited to fluctuations in interest rates which affect those mortgages that are not committed in a purchase transaction at any
given time.

The following  table sets forth  information  concerning the Companys
mortgage loan  production by borrower  credit score for the years
ended December 31, 2006, 2005, and 2004.

|        | For the Year Ended December 31,
|------- | -------------------------------
|
|
|
|> 709   | $  677,397                     
|680-709 | 478,447                        
|660-679 | 375,643                        
|640-659 | 314,164                        
|620-639 | 180,278                        
|600-619 | 15,045                         
|580-599 | 6,313                          
|550-579 | 1,592                          
|520-549 | 586                            
|500-519 | 231                            
| 500   | 0                              
|        |                                
|        | $2,049,696                     

_________________

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

- F-13 -

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Table of Contents

The following table sets forth the percentage of all loans originated or purchased by
region for the years ended December 31,
2006, 2005, and 2004.

For the Years Ended December 312006
    
    
    2005
    
    
    2004(dollars in thousands)Percentage of
    
    
    
    
    
    
    Percentage of
    
    
    
    
    
    
    Percentage ofAmount
    
    
    Originations
    (1)
    
    
    Amount
    
    
    Originations
    (1)
    
    
    Amount
    
    
    Originations
    (1)California
    
    
    $1,485,746
    
    
    
    72.5%
    
    
    
    $1,116,519
    
    
    
    64.2%
    
    
    $
    735,838
    
    
    
    71.4%South
    (2)
    
    
    218,982
    
    
    
    10.7%
    
    
    
    272,457
    
    
    
    15.7%
    
    
    
    103,763
    
    
    
    10.1%Mid Atlantic
    (3)
    
    
    62,225
    
    
    
    3.0%
    
    
    
    90,123
    
    
    
    5.2%
    
    
    
    29,180
    
    
    
    2.8%Midwest
    (4)
    
    
    46,388
    
    
    
    2.3%
    
    
    
    33,660
    
    
    
    1.9%
    
    
    
    36,098
    
    
    
    3.5%West
    (5)
    
    
    141,425
    
    
    
    6.9%
    
    
    
    113,412
    
    
    
    6.5%
    
    
    
    61,945
    
    
    
    6.1%Southwest
    (6)
    
    
    74,375
    
    
    
    3.6%
    
    
    
    98,640
    
    
    
    5.7%
    
    
    
    50,457
    
    
    
    4.9%New England
    (7)
    
    
    20,555
    
    
    
    1.0%
    
    
    
    13,842
    
    
    
    0.8%
    
    
    
    13,143
    
    
    
    1.2%Total.
    
    
    $2,049,696
    
    
    
    100.0%
    
    
    
    $1,738,653
    
    
    
    100.0%
    
    
    $
    1,030,424
    
    
    
    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.

The following table sets forth selected information about the Companys total loan
production and purchases for the years ended
December 31, 2006, 2005, and 2004.

|                                              | For the years ended December 31,
|--------------------------------------------- | --------------------------------
|
|
|Total Alt-A Loans                             | $2,027,961                      
|Other Non-conforming loans                    | 5,386                           
|Subprime (1)                                  | 9,800                           
|Total Non-Conforming (Alt-A, Other, Subprime) | 2,043,147                       
|                                              |                                 
|Conforming loans                              | 6,549                           
|Total production                              | $2,049,696                      

_________________

(1) Subprime loans are, generally, loans made to borrowers with a weighted average credit
score of 620 or less or have had more than one delinquent mortgage payment during the
preceding 12 months.

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Table of Contents

# NOTE 4 LOSS RESERVE

The Company calculates the provision for losses from impaired loans based on its volume of origination, historic rate of default and
expected severity of loss. The Company provides for losses on real estate owned (REO) based on
the estimated sales prices of each property (from full appraisals of broker price opinions)
less estimated selling expenses. Provision for losses from impaired loans and REO are charged to
cost of sales in the Company's statement of income. The following table summarizes the changes to our reserves during the year
ended December 31, 2006, 2005, and 2004

|                            | Reserve for Impaired
     Mortgage Loans | Reserve for REO           | Total Reserve            
|--------------------------- | ---------------------------------------- | ------------------------- | -------------------------
|Balance - December 31, 2003 | $    
                 --                | $
                     -- | $
                     --
|Provision for losses        | 531,020                                  | --                        | 531,020                  
|Charge-offs against reserve | (12,092)                                 | --                        | (12,092)                 
|Balance - December 31, 2004 | 518,928                                  | --                        | 518,928                  
|Provision for losses        | 883,222                                  | 84,000                    | 967,222                  
|Charge-offs against reserve | (213,150)                                | (50,000)                  | (263,150)                
|Balance - December 31, 2005 | 1,189,000                                | 34,000                    | 1,223,000                
|Provision for losses        | 18,972,797                               | 2,784,100                 | 21,756,897               
|Charge-offs against reserve | (4,985,931)                              | (851,463)                 | (5,837,394)              
|Balance - December 31, 2006 | $ 15,175,866                             | $ 1,966,637               | $ 17,142,503             

# NOTE 5  RESTRICTED
CASH

The
Company maintains restricted cash deposits in financial institutions. The Company does not have direct
access to these funds. Such cash balances at December 31, 2006 and 2005 aggregated to
$297,530 and $ 413,292 respectively.

# NOTE 6 
REAL ESTATE OWNED

As of December 31, 2006, the Company had recorded as real estate owned, 18 properties with a book value of $5.0
million net of loss reserves of $2.0 million. The Company had recorded as real estate owned, two properties with
a book value of $0.4 million net of loss reserves of $0.03 million during the same period in fiscal 2005. Senior
mortgages payable to third parties related to these properties aggregated to $3.4 million and $0.0 million,
respectively, during the years ended December 31, 2006 and 2005, and were included in accounts and other payables
on the consolidated balance sheet.  The Company lists or plans to list these properties as held for sale and
expects to dispose of the properties within one year.

# NOTE 7  PROPERTY
AND EQUIPMENT

Property
and equipment as of December 31, 2006 and 2005 consisted of the following:

|                                  | 2006       | 2005           
|--------------------------------- | ---------- | ---------------
|Furniture and fixtures            | $    7,531 | $             -
|Office equipment                  | 357,949    | 356,921        
|Computer equipment                | 1,522,355  | 1,092,976      
|Leasehold improvements            | 148,558    | 14,702         
|                                  | 2,036,393  | 1,464,599      
|Less accumulated depreciation and |            |                
|amortization                      | 1,156,315  | 648,753        
|                                  |            |                
|Total                             | $880,078   | $815,846       

Depreciation
and amortization expense was $507,562, $379,239, and $176,133 for the years ended December
31, 2006, 2005, and 2004, respectively.

- F-15 -

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Table of Contents

# NOTE 8  WAREHOUSE
LINES OF CREDIT

During
February 2004, the Company secured a warehouse line of credit with Lehman Brothers Bank
with a maximum purchase amount of $30 million. The credit facility is structured as a
repurchase agreement whereby the financial institution may, at its sole discretion,
purchase mortgage loans from the Company. During April 2005 and September 2005, the
maximum purchase amount was increased to $75 million and $100 million, respectively. In
April 2006, this facility was further increased to $200 million. 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.

In
addition, under the warehouse facility 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, 2006, the pledged
amounts aggregated to $297,530 .

As
of February 28, 2006, this agreement was amended to increase the aging period for loans to
be carried through this facility from 90 to 180 days. The interest rate on these aged
loans was also changed to one month LIBOR plus a 5% margin. Furthermore, subject to
certain restrictions up to 10% of this facility may be used to carry any other loan
originated by the Company through other financing facilities which is aged beyond the
permissible aging period (Aged Loans), or which the Company had sold to an investor and
has been requested to repurchase (Breach Loans). The Company will be required to make
additional pay-downs periodically for Aged and Breach Loans retained on this sub-section
of the facility.

This  facility
had a one year term and was  renewable  with the  consent of both  parties.  The  facility
expired on April 10, 2007 and the parties  agreed to an extension to April 17, 2007.  On April 17, 2007,  all loans
secured  under the facility were moved to a new  warehouse  facility with another lender.

In
March 2004, the Company secured a committed warehouse line of credit with Washington Mutual Bank
in the amount of $10 million. 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 1.75% and 2.50% 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, 2006. This facility was subsequently reduced to $4 million in August 2005.
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, 2006,
except for the minimum tangible net worth covenant, for which a waiver has been received.

In
July 2004 The Company entered into an Early Purchase Agreement with Washington Mutual Bank
whereby certain qualifying loans are acquired by the institution immediately
upon origination. Under terms of this agreement the Company retains the right to
service the notes. As a condition of acquisition of loans by the financial institution,
the Company assigns commitments by takeout investors to
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, 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 releases its interest in the loan and transfers
excess funds pertaining to the servicing rights 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.

- F-16 -

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Table of Contents

# NOTE 8  WAREHOUSE
LINES OF CREDIT (Continued)

As
of December 31, 2006, this Early Purchase facility had a maximum purchase commitment of
$300 million at any time. Upon purchase of loans by takeout investors, the unused
facility up to the maximum commitment may be re-used by the Company to originate new loans.
This Early Purchase Agreement meets all criteria listed under SFAS No. 140 for the purpose of
defining transfer of financial assets. As of December 31, 2006, $163.6 million
of the commitment 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 was not material to the financial statements as of December 31,
2006 and no corresponding asset or liability has been recorded. In addition, this Early Purchase
Facility has certain financial and non-financial covenants, of which  management  believes the
Company was in compliance  with as of December 31, 2006,  except for the minimum tangible net
worth covenant, for which a waiver has been received.

# NOTE 9 
SUBORDINATED NOTE PAYABLE

In
December 2006, the Company issued a Subordinated Note Payable to Genesis Financial Services
Fund, LLC in the principal sum of $10 million. At December 31, 2006
the Company had drawn down $3 million of the total. The note is due
and payable on December 28, 2011. The simple interest rate on the note is prime rate
plus a margin of 7% and is payable monthly. The note is redeemable subject to certain
fees and carries certain financial and non-financial covenants of which management believes the
Company was in compliance as of December 31, 2006, except for the minimum tangible net worth
covenant, for which a waiver has been received, and the annual net income covenant, for which
the lender has provided forbearance through June 30, 2007. As such, the note is classified
as a current liability.

# NOTE 10 
COMMITMENTS AND CONTINGENCIES

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 with 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, we paid $52,396 as of December 31,
2006. The Company currently received a request for payment of interest and penalty for
a sum of $32,129 for previous sums negotiated. However, the Company believes that this amount
is erroneous and is currently negotiating the correct apportionment amount with the
City which may result in the waiver of the mentioned sum or the payment of the full amount.

- F-17 -

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Table of Contents

# NOTE 10 
COMMITMENTS AND CONTINGENCIES (Continued)

Operating Leases

The
Company had leased its previous office facilities from a shareholder, which expired in
November 2005 (see Note 13  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 on 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, 2006 are
$254,695.

Future
minimum lease payments under all of its operating leases, including the above and separate
equipment leases, at December 31, 2006 were as follows:

|Year EndingDecember 31,      | OperatingLease
|---------------------------- | --------------
|2007                         | $324,789      
|2008                         | 54,524        
|2009                         | 35,592        
|2010                         | 1,318         
|                             |               
|Total minimum lease payments | $416,223      

Legal Proceedings

From
time to time, the Company is party to various legal proceedings incidental to its
business. In the opinion of management, none of these items, individually or in the
aggregate, would have a significant effect on the financial position, result of
operations, cash flows, or liquidity of the Company.

# NOTE 11  INCOME
TAXES

The
following table presents the current tax provision for (benefit from) Federal and state income taxes for
the year ended December 31, 2006, 2005, and 2004 at an effective tax rate of 40.0%:

|                                         | 2006         | 2005       | 2004      
|---------------------------------------- | ------------ | ---------- | ----------
|Current                                  |              |            |           
|Federal                                  | $2,717,025   | $5,554,394 | $5,045,686
|State                                    | 785,028      | 1,410,760  | 1,343,094 
|                                         |              |            |           
|                                         | 3,502,053    | 6,965,154  | 6,388,780 
|Deferred                                 |              |            |           
|Federal                                  | (5,339,440)  | (539,125)  | (583,304) 
|State                                    | (1,625,830)  | (97,719)   | (68,832)  
|Other                                    | (152,076)    | -          | -         
|                                         |              |            |           
|                                         | (7,117,346)  | (636,844)  | (652,136) 
|                                         |              |            |           
|Provision for (benefit from)income taxes | $(3,615,293) | $6,328,310 | $5,736,644

- F-18 -

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Table of Contents

# NOTE 11  INCOME
TAXES (Continued)

At December 31, 2006 and 2005 components of net deferred tax assets  (liabilities) in the
accompanying consolidated balance sheets include
         the following amounts:

|Deferred tax asset (liability)                                        | 2006       | 2005      
|--------------------------------------------------------------------- | ---------- | ----------
|Current                                                               |            |           
|Prepaid Expenses                                                      | $(36,909)  | $(128,713)
|Accounts payable and accrued expenses                                 | 122,086    | 487,858   
|Change from cash to accrual                                           | 15,895     | (6,244)   
|State income taxes                                                    | 209,658    | 502,782   
|Reserves for impairment of mortgage loans, REO, and trade receivables | 7,583,892  | 114,658   
|                                                                      | 7,894,622  | 970,341   
|Non-current                                                           |            |           
|Depreciation                                                          | 35,623     | (4,269)   
|Net deferred tax asset                                                | $7,930,245 | $966,072  

Income
tax expense (benefit) 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, 2006, 2005, and 2004:

|                                                     | 2006         | 2005   | 2004      
|---------------------------------------------------- | ------------ | ------ | ----------
|
|                                                     |              |        |           
|Federal tax on pretax income at
     statutory rates | $(3,061,605) | 34.0%  | $5,441,598
|State tax, net of Federal benefit                    | (565,190)    | 6.3%   | 850,593   
|Other                                                | 11,502       | (0.1)% | 36,119    
|                                                     |              |        |           
|Total                                                | $(3,615,293) | 40.2%  | $6,328,310

# NOTE 12  STOCK
OPTIONS

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 prices ranging from $2.00, $2.35 per share, vesting over a period
of five years, commencing April 2006 and expiring in May 2015.  The options are
granted pursuant to the Companys one employee compensation plan, the 2003 Employee 
Stock Option Plan (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%.

On
January 16, 2006, the Company approved the issuance of stock options to an employee of The
Mortgage Store Financial, Inc. The agreement granted the employee options to purchase
15,000 shares of common stock at an exercise price of $3.10 per share, vesting over a
period of five years, commencing January 16, 2006, and expiring in January 16, 2016.
The fair value of the options was estimated at $41,980 using the Black-Scholes
option-pricing model, and the following assumptions: a risk-free interest rate of 4.34%,
expected volatility of 98%, and a dividend yield of 0%.

- F-19 -

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Table of Contents

# NOTE 12  STOCK
OPTIONS (Continued)

On
February 15, 2006, the Company had approved the issuance of stock options to an executive of
The Mortgage Store Financial, Inc. The agreement granted the employee options to purchase
110,000 shares of common stock at an exercise price of $2.71 per share, vesting over a
period of five years, commencing February 15, 2006, and expiring in February 13, 2016.
The fair value of the options was estimated at $269,526 using the Black-Scholes
option-pricing model, and the following assumptions: a risk-free interest rate of 4.61%,
expected volatility of 98%, and a dividend yield of 0%.

On
May 18, 2006, the Company had approved the re-issuance of stock options to its investor
relations firm. The agreement granted the firm options to purchase 30,000 shares of common
stock at an exercise price of $1.40 per share, vested immediately, and expiring in May
2007. The fair value of the options was estimated at $16,500 using the
Black-Scholes option-pricing model, and the following assumptions: a risk-free interest
rate of 4.96%, expected volatility of 99%, and a dividend yield of 0%.

On
September 5, 2006, the Company had approved the issuance of stock options to an employee of
The Mortgage Store Financial, Inc. The agreement granted the employee options to purchase
5,000 shares of common stock at an exercise price of $1.25 per share, vesting over a
period of five years, commencing September 2006, and expiring in September 2016.
The fair value of the options was estimated at $5,250 using the Black-Scholes
option-pricing model, and the following assumptions: a risk-free interest rate of 4.78%,
expected volatility of 80%, and a dividend yield of 0%.

A
summary of option activity under the Plan as of December 31, 2006 and 2005 is presented
below:

|Options                          | Shares    | WeightedAverageExercisePrice | AverageContractualTermRemaining | AggregateIntrinsicValue
|-------------------------------- | --------- | ---------------------------- | ------------------------------- | -----------------------
|                                 |           |                              |                                 |                        
|Balance at December 31, 2004     | 1,542,000 | 0.98                         |                                 |                        
|Options granted                  | 700,500   | 2.74                         |                                 |                        
|Options exercised                | -         | -                            |                                 |                        
|Options cancelled                | (357,500) | 3.30                         |                                 |                        
|Balance at December 31, 2005     | 1,885,000 | 1.19                         |                                 |                        
|Options granted                  | 160,000   | 2.46                         |                                 |                        
|Options exercised                | -         | -                            |                                 |                        
|Options cancelled                | (45,000)  | 2.09                         |                                 |                        
|Options expired                  | (30,000)  | 1.25                         |                                 |                        
|Balance at December 31, 2006     | 1,970,000 | $1.27                        |                                 |                        
|Exercisable at December 31, 2006 | 1,664,125 | $1.07                        | 0.38 - 9.13                     | 1,453,180              

|Compensation cost on non-vested options        | $559,629   
|---------------------------------------------- | -----------
|Weighted average period for non-vested options | 8.32 - 9.13

The
weighted average grant date fair values of options granted during the year ended December
31, 2006 were $2.46 per share. There were 1,664,125 options exerciseable at
December 31, 2006.

- F-20 -

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Table of Contents

# NOTE 13  RELATED
PARTY TRANSACTIONS

Consulting Expenses

During the years ended December 31,
2006, 2005, and 2004, the Company paid $262,500, $532,000, and $403,600 respectively, for consulting
expenses to companies owned by shareholders. This consulting agreement terminated in July 2006. The Company also paid $210,000,
$360,000, and $397,500 respectively, for consulting expenses to a relative of a shareholder during the
year ended December 31, 2006, 2005, and 2004. Furthermore, during the years ended December 31,
2006, 2005, and 2004, the Company incurred consulting expenses of $55,000, $40,000, and
$40,000 respectively, to two directors.

Rent and Lease Expenses

The
Company had leased its previous office facilities from a shareholder, which expired in
November 2005. The Company presently occupies a new facility under a sublease
agreement with an outside party (see Note 10  Commitments and Contingencies). Rent
paid to the shareholder during the year ended December 31, 2006, 2005, and 2004 amounted to $0,
$779,200, and $346,138 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, 2006, 2005, and 2004 were $64,952, $71,941, and $61,908 respectively.

Mortgage Loans for
Employees

During
the normal course of its business the Company may provide mortgage loans to its employees
and related parties at prevailing market rates. During the years ended December 31, 2006,
2005, and 2004, the Company funded $230,000, $4,976,225, and $1,470,600 in mortgage loans for officers or
executive employees of the Company, and $2,337,105, $5,437,475, and $5,699,900 respectively, for
persons related to officers. All loans were subsequently sold in the secondary market at
comparable market margins.

At December 31, 2006 the Company did not hold any  mortgage loans made to its directors, officers,
or executive level employees. At December 31, 2005 the Company had $1,871,700 of mortgage
loans made to officers and other related parties, which were subsequently purchased by
various investors.

# NOTE 14 
SUBSEQUENT EVENTS

On February 14, 2007, the Company announced an agreement to acquire the wholesale operations of Central
Pacific Mortgage (CPM). The agreement anticipated a March 1, 2007 closing at which time the Company would
create a new division and retain the CPM employees within that division. The agreement specifically stated that
the Company would not assume any pre-closing loan repurchase obligations of CPM. Due primarily to an adverse
change in current market conditions, the Company and CPM agreed to terminate the agreement on March 5, 2007.

The Companys warehouse line of credit with Lehman Brothers Bank expired on April 17, 2007 and was not
renewed (see Note 8 - Warehouse Lines of Credit).  Prior to its expiration, the Company had approximately $19.7
million drawn on the line.  On the date the facility expired, all loans securing the outstanding balance were
moved to a new facility with another lender and the balance was reduced to $0.

On April 17, 2007, the Company established a $25 million repurchase line with Terwin Mortgage Warehouse
Trust II.  The initial draw under the facility resulted from the expiration of the Lehman Brothers Bank line.
This new facility bears interest at LIBOR plus margins ranging from 2.25% to 3.25%, based on the underlying
credit quality of the mortgage and the length of time the loan is on the line.  The facility is renewable
annually with the consent of both parties.

- F-21 -

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Table of Contents

# NOTE 15  SELECTED
QUARTERLY FINANCIAL DATA-UNAUDITED

The
following table is a summary of the unaudited quarterly financial information for the
years ended December 31, 2006 and 2005.

First
    
    
    Second
    
    
    Third
    
    
    Fourth
    
    
    TotalYear Ended December 31, 2006
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    Year(In thousands, except per share data)Total loan income
    
    $
    13,576
    
    
    $
    21,475
    
    
    $
    23,841
    
    
    $
    19,940
    
    
    $
    78,832Gross profit (loss)
    
    
    6,697
    
    
    
    11,262
    
    
    
    10,394
    
    
    
    (7,474)
    
    
    
    20,879Operating expenses
    
    
    6,722
    
    
    
    8,225
    
    
    
    8,063
    
    
    
    7,311
    
    
    
    30,321Operating income (loss)
    
    
    (25)
    
    
    
    3,037
    
    
    
    2,331
    
    
    
    (14,785)
    
    
    
    (9,442)Other income
    
    
    50
    
    
    
    68
    
    
    
    67
    
    
    
    252
    
    
    
    437Pre-tax income (loss)
    
    
    25
    
    
    
    3,105
    
    
    
    2,398
    
    
    
    (14,533)
    
    
    
    (9,005)Provision for (benefit from) income tax
    
    
    17
    
    
    
    1,283
    
    
    
    1,004
    
    
    
    (5,919)
    
    
    
    (3,615)Net income (loss)
    
    $
    8
    
    
    $
    1,822
    
    
    $
    1,394
    
    
    $
    (8,614)
    
    
    $
    (5,390)Net income (loss) per common share diluted
    
    $
    0.00
    
    
    $
    0.12
    
    
    $
    0.09
    
    
    $
    (0.57)
    
    
    $
    (0.36)


First
    
    
    Second
    
    
    Third
    
    
    Fourth
    
    
    TotalYear Ended December 31, 2005
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    Year(In thousands, except per share data)Total loan income
    
    $
    16,931
    
    
    $
    18,839
    
    
    $
    20,309
    
    
    $
    15,392
    
    
    $
    71,471Gross profit
    
    
    10,457
    
    
    
    11,534
    
    
    
    12,426
    
    
    
    7,051
    
    
    
    41,468Operating expenses
    
    
    5,521
    
    
    
    6,501
    
    
    
    7,201
    
    
    
    6,628
    
    
    
    25,851Operating income
    
    
    4,936
    
    
    
    5,032
    
    
    
    5,225
    
    
    
    422
    
    
    
    15,616Other income (expense)
    
    
    7
    
    
    
    -
    
    
    
    92
    
    
    
    ( 185
    )
    
    
    (86
    )Pre-tax income
    
    
    4,943
    
    
    
    5,032
    
    
    
    5,317
    
    
    
    237
    
    
    
    15,530Provision for income tax
    
    
    1,973
    
    
    
    2,011
    
    
    
    2,134
    
    
    
    210
    
    
    
    6,328Net income (loss)
    
    $
    2,970
    
    
    $
    3,021
    
    
    $
    3,184
    
    
    $
    27
    
    
    $
    9,202Net income per common share diluted
    
    $
    0.18
    
    
    $
    0.19
    
    
    $
    0.20
    
    
    $
    0.00
    
    
    $
    0.57


- F-22 -