U.S. Securities and Exchange Commission
                             Washington, D.C. 20549

                                   Form 10-QSB

                                   (Mark One)

[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934

                  For the fiscal period ended January 31, 2007

[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

       For the transition period from __________________ to ______________

                         Commission file number: 1-14219

                      Transnational Financial Network, Inc
-------------------------------------------------------------------------------
        (Exact name of small business issuer as specified in its charter)

 California                                                     94-2964195
-------------------------------------------------------------------------------
(State or other jurisdiction                  (IRS Employer Identification No.)
of incorporation or organization)

401 Taraval Street, San Francisco, CA                           94116
-------------------------------------------------------------------------------
 (Address of principal executive offices)                     (Zip Code)

                                 (415) 242-7800
                         -------------------------------
                         (Registrant's telephone number)


Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act. Yes __ No X
                                         ---


                      APPLICABLE ONLY TO CORPORATE ISSUERS

 State the number of shares outstanding of each of the issuer's classes of
                  common equity as of March 16, 2007 10,248,005



<PAGE>




                      TRANSNATIONAL FINANCIAL NETWORK, INC.
                                January 31, 2007
                                    UNAUDITED





                                TABLE OF CONTENTS

PART I.    FINANCIAL INFORMATION

                                                                           Page
Item 1. Financial Statements
        Condensed Balance Sheet as of January 31, 2007 (Unaudited)    F-2 - F-3
        Condensed Statements of Operations for the three
              and nine months ended January 31, 2007 and 2006 (Unaudited)   F-4
        Condensed Statements of Cash Flow for the
              nine months ended January 31, 2007 and 2006 (Unaudited)       F-5
        Notes to the Condensed Financial Statements                  F-6 - F-14

Item 2   Management's Discussion and Analysis of Financial
           Condition and Results of Operations                     MD-1 - MD-19

Item 3.  Controls and Procedures                                      O-1 - O-2

Part II. OTHER INFORMATION

Item 4. Submission of Matters to a Vote of Security Holders                 O-2

Item 6.  Exhibits and Reports on Form 8-K                                   O-3

Signatures                                                                  O-3




                                      F -1
<PAGE>




PART I. FINANCIAL INFORMATION

ITEM 1.
FINANCIAL STATEMENTS

                      TRANSNATIONAL FINANCIAL NETWORK, INC.
                            CONDENSED BALANCE SHEETS
                             As of January 31, 2007

                                   (Unaudited)
<TABLE>
<CAPTION>




                                                                                                 January 31, 2007
                                                                                                 ----------------
                                                                                                 (Unaudited)

ASSETS
Current Assets:

<S>                                                                                              <C>
Cash and Cash Equivalents                                                                        $     902,992
Restricted Cash                                                                                        250,000
Short-term Mortgage Related Receivables                                                                791,819
Mortgage Loans Held for Sale (Less: Loan Loss Reserve of $436,240)                                   2,076,361
Prepaid Expenses                                                                                       336,562
Fair Value of Financial Instruments                                                                     12,669
                                                                                                        ------

  Total Current Assets                                                                               4,370,403
                                                                                                     ---------

Fixed Assets:
Furniture & Fixtures                                                                                   997,018
Leasehold Improvements                                                                                  98,234
  Accumulated Depreciation                                                                          (1,034,911)
                                                                                                     ----------

  Total Fixed Assets                                                                                    60,341
                                                                                                        ------

Other Assets:
Investment in RML                                                                                    1,196,052
Goodwill                                                                                               522,309
Other Assets                                                                                           236,910
                                                                                                       -------

  Total Other Assets                                                                                 1,955,271
                                                                                                     ---------


TOTAL ASSETS                                                                                     $   6,386,015
                                                                                                     =========
</TABLE>











              See accompanying notes to these financial statements.

                                      F-2

<PAGE>



                      TRANSNATIONAL FINANCIAL NETWORK, INC.
                            CONDENSED BALANCE SHEETS
                             As of January 31, 2007

                                   (Unaudited)







                           LIABILITIES AND STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>

                                                                                                 January 31, 2007
                                                                                                 (Unaudited)

CURRENT LIABILITIES:

<S>                                                                                              <C>
Accounts Payable and Other Liabilities                                                           $     341,465
Accrued Interest                                                                                       107,447
Other Payables                                                                                           3,225
Warehouse Payable                                                                                    1,356,361
Fair Value of Financial Instruments                                                                     23,672
Short-term Portion of Loans Payable                                                                    192,889
Short-term Portion of Subordinated Debt                                                              1,000,000
                                                                                                   -----------

  Total Current Liabilities                                                                          3,025,059
                                                                                                     ---------



Long-Term Liabilities

Loans Payable                                                                                          125,000
Subordinated Debt                                                                                    2,987,700
                                                                                                   -----------


  Total Long-Term Liabilities                                                                        3,112,700
                                                                                                     ---------

STOCKHOLDERS' EQUITY:

Preferred Stock, no par value: 2,000,000 shares
   authorized; no shares issued or outstanding                                                               -
Common Stock, no par value: 20,000,000 shares
   authorized; 10,248,005 shares issued and outstanding
   at January 31, 2007.                                                                             15,883,802
Accumulated Deficit                                                                                (15,635,546)
                                                                                                   ------------

Total Stockholders' Equity                                                                             248,256
                                                                                                       -------



TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                                       $   6,386,015
                                                                                                   ===========
</TABLE>



              See accompanying notes to these financial statements.

                                       F-3
<PAGE>


                      TRANSNATIONAL FINANCIAL NETWORK, INC.
                       CONDENSED STATEMENTS OF OPERATIONS
                 For the Periods Ended January 31, 2007 and 2006

                                   (Unaudited)
<TABLE>
<CAPTION>

                                             Three Months Ending January 31           Nine Months Ending January 31
                                             ------------------------------           -----------------------------
                                                 2007         2006    % Chg.             2007         2006    % Chg.
                                                 ----         ----    -----              ----         ----    ------
Revenue:
<S>                                       <C>           <C>          <C>          <C>          <C>            <C>
Net Gain on Sale of Loans                 $   885,092   $1,356,477   - 34.8       $ 2,911,097  $ 4,642,097    -37.3
Production Income                             930,445    1,152,488   - 19.3         3,505,827    4,119,655    -14.9
Other Income                                    4,601        5,216   - 11.8            16,984      186,219    -90.9
                                                -----        -----                     ------      -------

Total Revenue                               1,820,138    2,514,181   - 27.6         6,433,908    8,947,971    -28.1

Direct Expenses:
Commissions & Production Incentives           730,050      802,939   -  9.1         2,460,726    2,383,566      3.2
Production Expenses                           244,971      285,663   - 14.2           843,860      685,664     23.1
Loan Loss Expense                             501,117            -                  1,128,844                     -
                                              -------                               ---------                     -
Total Direct Expenses                       1,476,138    1,088,602     35.6         4,433,430    3,069,230     44.4

Interest Income (Expenses):
Interest Income from Loans in Warehouse       436,983      301,356     45.0           924,542    1,129,443    -18.1
Interest Expense on Loans in Warehouse       (409,616)    (324,367)    26.3          (915,072)  (1,039,343)   -12.0
Warehouse Transaction Fees                    (35,353)     (22,606)    56.4           (89,762)     (99,781)   -10.0
                                              --------     --------                   --------    ---------

Net Warehouse Interest Income (expense)        (7,986)     (45,617)  - 82.5           (80,292)      (9,681)      nm

Interest Expense - Subordinated Debt         (101,198)     (83,367)    21.4          (285,961)    (257,529)    11.0
                                             ---------     --------                 ----------   ----------
Net Interest Income (Expense)                (109,184)    (128,984)  - 15.4          (366,253)    (267,210)    37.1

Gross Profit on Mortgage Activities           234,816    1,296,595   - 81.9         1,634,225    5,611,531    -70.9

Indirect Expenses:
Salaries & Benefits                           800,916      962,026   - 16.7         2,632,924    3,778,954    -30.3
General & Administrative                      670,490      686,646   -  2.4         2,130,087    1,793,771     18.7
Occupancy                                     178,307      174,332      2.3           548,749      524,475      4.6
Depreciation & Amortization                    22,785       20,595     10.6            68,354       56,711     20.5
                                               ------       ------                     ------       ------

Total Indirect Expenses                     1,672,498    1,843,599   -  9.3         5,380,114    6,153,911    -12.6

Operating Loss                             (1,437,682)    (547,004)   162.8       $(3,745,889) $  (542,380)      nm

Other Interest Income (Expense)                21,732       33,332   - 34.8            67,550       76,354    -11.5
Other Income (Expense)                        (55,000)           -       nm           (55,000)           -       nm
Change in RML Investment                       48,614            -       nm            46,305            -
Change in Fair Value of
          Financial Instrument                (28,024)      25,106       nm           (16,162)      67,531       nm
                                               -------      ------                    --------      ------
Total Other Income (Expense)                  (12,678)      58,438   -121.7            42,693      143,885    -70.3

Provision for Taxes                               800            -                        800            -
                                                  ---                                     ---

Net Loss After Taxes                      $(1,451,160)    (488,566)   197.0        (3,703,996)    (398,495)      nm
                                          ============    =========                ===========    =========

Basic net loss per share                      $(0.14)      $(0.07)                    $(0.36)      $(0.06)
Fully diluted loss per share                  $(0.14)      $(0.07)                    $(0.36)      $(0.06)

Weighted-average shares outstanding
Basic                                      10,248,005    6,791,360                 10,248,005    6,791,360
Diluted                                    10,248,005    6,791,360                 10,248,005    6,795,238
</TABLE>





              See accompanying notes to these financial statements.

                                       F-4
<PAGE>


                      TRANSNATIONAL FINANCIAL NETWORK, INC.
                       CONDENSED STATEMENTS OF CASH FLOWS
               For the Nine Months Ended January 31, 2007 and 2006
                                   (Unaudited)
<TABLE>
<CAPTION>

                                                                         2007                      2006
                                                                  ------------------         -----------------

Cash flows from operating activities:
<S>                                                               <C>                        <C>
Net Income (loss)                                                 $       (3,703,996)        $        (398,495)
Adjustments to reconcile net income (loss) to net cash
   Used in operating activities:
     Depreciation and Amortization                                            68,354                    56,711
     Changes in Restricted Cash Requirements                                (125,000)                   (5,000)
     Change in Fair Value of Financial Instruments                            16,162                   (67,531)
Net effect of changes in assets and liabilities:
     Other Assets                                                            (49,765)                  (10,199)
     Prepaid Expenses                                                       (198,041)                        -
     Accrued Interest Payable                                                 66,175                   (14,229)
     Accounts Payable and Other Liabilities                                  (98,435)                 (347,129)
     Loans Payable                                                           278,015                         -
     Acquisition Cost                                                        (62,375)                        -
Net effect of changes in mortgage lending activities:
     Short-term Mortgage Related Receivable                                   13,603                    50,581
     Mortgage Loans Originated for Sale                                 (267,531,635)             (310,560,628)
     Proceeds from Sales of Mortgage Loans                               267,852,576               311,186,757
                                                                     ---------------           ---------------

Net cash (used) provided by operating activities:                         (3,474,362)                  (88,764)
                                                                     ----------------          ---------------

Cash flows from investing activities:
Purchases of Property and Equipment                                          (10,997)                  (71,007)
Maturity of Certificate of Deposit                                           900,000
Investment in RML                                                         (1,196,052)                        -
                                                                          -----------
Net cash (used) by investing activities:                                    (307,049)                  (71,007)
                                                                            ---------                  -------

Cash flows from financing activities:

Common Stock Issued                                                        2,419,652                         -
Issuance of Subordinated Debt                                                300,000                         -
Repayment on Subordinated Debt                                               (50,000)
Due Diligence Fee                                                            (97,888)
Stock Options Exercised                                                        3,000                         -
                                                                   ------------------          ---------------

Net cash provided by financing activities:                                 2,574,764                         -
                                                                     ---------------           ---------------
Net (decrease) increase in unrestricted
     cash and cash equivalents                                            (1,206,647)                 (159,771)

Unrestricted cash and cash equivalents, beginning of period                2,109,639                 3,058,140
                                                                     ---------------           ---------------

Unrestricted cash and cash equivalents, end of period             $          902,992         $       2,898,369
                                                                     ===============           ===============


Interest paid                                                     $        1,096,196         $       1,248,916
Income taxes paid                                                 $              800         $              -0-
</TABLE>



              See accompanying notes to these financial statements.

                                       F-5
<PAGE>



Note 1 - Description of Operations and Summary of Significant Accounting
Policies

The accompanying financial statements of Transnational Financial Network, Inc.
(the "Company") as of and for the nine month periods ended January 31, 2007 and
2006 are unaudited and have been prepared pursuant to the rules and regulations
of the Securities and Exchange Commission. Certain information and financial
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States of America
have been condensed or omitted pursuant to such rules and regulations.
Accordingly, these unaudited condensed financial statements should be read in
conjunction with the audited financial statements included in the Company's Form
10-KSB for the year ended April 30, 2006, in addition to our Form 8-K, filed
March 12, 2007, relating to non-reliance on previous financial statements as
well as Note 10 - Restatements. These unaudited statements include all
adjustments, consisting only of normal recurring accruals, which are, in the
opinion of management, considered necessary for a fair presentation of financial
position and results of operations. The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect
certain reported amounts and disclosures. Accordingly, actual results could
differ from those estimates. The results of operations of the Company for the
nine months ended January 31, 2007 and 2006 are not necessarily indicative of
the results to be expected for the full year. The Company operates in one
business segment - mortgage banking.

Note 2 - Summary of Significant Accounting Policies

Use of Estimates - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make certain estimates and assumptions, including the
depreciable lives of assets, the fair value of goodwill and financial
derivatives, and the realizable portion of deferred tax assets, that affect the
reported amounts of assets and liabilities and disclosure of contingent
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.

Statement of Cash Flows - For purposes of the statement of cash flows, the
Company considers cash equivalents to be short-term, highly liquid investments
used in its cash management activities and generally having a remaining maturity
of three months or less from the date of purchase.

Income Taxes - The Company uses the asset and liability method in accounting for
deferred income taxes. Deferred tax assets and liabilities are calculated by
applying applicable tax laws to the differences between the financial statement
base and the tax base of assets and liabilities. The effect on deferred taxes of
a change in tax rates is recognized in income in the period that includes the
enactment date.

Stock-Based Compensation - The Company follows SFAS 123R and SFAS 148 in
accounting for its employee stock options. The disclosure provisions of
Statement of Financial Accounting Standards SFAS 148 have been incorporated into
these financial statements and accompanying footnotes.

The following table illustrates the effect on net loss that would have resulted
if the Company had applied the fair value recognition provisions of Financial
Accounting Standard No. 123, Accounting for Stock-Based Compensation, as amended
by SFAS 148, Accounting for Stock-Based Compensation - Transition and
Disclosure, to stock-based employee compensation:


              See accompanying notes to these financial statements.

                                       F-6
<PAGE>


<TABLE>
<CAPTION>


                                   Three-Months Ended              Nine-Months Ended
                                   ------------------              -----------------
                                 January 31   January 31          January 31    January 31
                                   2007         2006                2007          2006
                                   ----         ----                ----          ----

Net income (loss):
<S>                             <C>             <C>             <C>              <C>
As reported                     (1,451,160)     (488,566)       (3,703,996)      (398,495)

Deduct:  fair value amount               0             0                 0              0
                                         -             -                 -              -
Pro forma                       (1,451,160)     (488,566)       (3,703,996)      (398,495)

Basic (loss) per common share:
As reported                           (0.14)       (0.07)             (0.36)        (0.06)
Deduct:  fair value amount            (0.00)        0.00               0.00          0.00
                                       -----        ----               ----          ----
Pro forma                             (0.14)       (0.07)             (0.36)        (0.06)

Diluted (loss) per common share:
As reported                           (0.14)       (0.07)             (0.36)        (0.06)
Deduct:  fair value amount            (0.00)        0.00               0.00          0.00
                                       -----        ----               ----         -----
Pro forma                             (0.14)       (0.07)             (0.36)        (0.06)
</TABLE>


There were no options granted during the quarter ended January 31, 2007. As
mentioned in Note 6 below, the Board of Directors on March 10, 2005, elected to
accelerate the vesting of all outstanding options as of that date. All
outstanding options were fully vested as of April 30, 2005.

Reclassification - With the reexamination of the application of SFAS 133 and
related pronouncements to our operations, we have made the following changes to
the form of our presentation:

     -         On the Balance Sheet, we show both the asset and liability
               amounts related to SFAS 133 calculations with respect to
               mortgage-related derivatives. In the past we netted these two
               figures against one another and showed only the net amount.

     -         On the Income Statement, we have moved back to the presentation
               form we used prior to 4/30/05. I.e., we now report a separate
               category of Other Income (Expense) below the Operating Income
               line wherein we report both non-warehouse interest income and
               SFAS 133 - related income (expense).

Note 3 - Financing Facilities

As of January 31, 2007, the Company had a maximum mortgage loan financing
capacity of $78 million through three master sale agreements, or warehouse lines
of credit. Under these arrangements, the lending financial institutions purchase
a 100% loan participation interest in each loan upon the Company obtaining a
firm forward sale delivery commitment from investors and upon the financial
institutions' approval of the loan based on their underwriting criteria. The
Company recognizes income from loans transferred under these lines as a gain on
sale immediately upon the purchase and funding of the loans by the financial
institutions.

In connection with these agreements, the Company may be required to repurchase
certain loans that, subsequent to acquisition by the financial institutions,
fail to meet certain representations and warranties set forth in the agreements
at the date of the sale. During the nine month period ended January 31, 2007 the
Company had 39loans subject to any purchase agreements. During the nine month
period ended January 31, 2006 the Company was required to repurchase three loans
in the total amount of $395,500. All of the loans were refinanced by the
borrowers and the Company recovered its entire principal, as well as the direct
and carrying costs associated with these loans. Loan interest charges incurred
in connection with the purchase of loans are estimated and recognized as a
reduction in sales proceeds immediately upon the loan being transferred. Loan
interest expense is calculated based on the number of days the loan remains with
the financial institution, until it is ultimately resold to a third party

              See accompanying notes to these financial statements.

                                      F-7
<PAGE>

investor. During the intervening period the Company sub-services the loans on
behalf of the financial institutions.

The first master sale agreement provides a credit facility of $10 million as of
January 31, 2007. Under this arrangement, an additional bulge capacity of $3
million is available if needed, bringing the total capacity under this
arrangement to $13 million. The Company has not used this interim bulge capacity
to date. Interest on the $10 million portion of the line is at the Prime Rate or
3.99%, whichever is higher. Prime was 8.25% at January 31, 2007. Interest on the
remaining $3 million of the line is 0.05% higher than that charged on the $10
million portion. The rate paid by the Company on this line as of January 31,
2007 was 8.25%. The Company is required to maintain a non-interest bearing cash
collateral deposit with this lender of $100,000, which has been included as
restricted cash in the balance sheet. Additionally, the company arranged to have
$900,000 of its restricted funds to be held in an interest-bearing twelve-month
restricted certificate of deposit with the warehouse lender. This deposit
matured in November of 2006 and due to the reduced warehouse line from $15
million to $10 million the deposit was no longer required by the lender. The
second master sale agreement provides a credit facility of $40 million as of
January 31, 2007. Interest on the facility is at 1 month LIBOR plus a margin
ranging from 1.875% to 2.50%. The rate paid by the Company on this line as of
January 31, 2007 was between 7.19% and 7.82%. The Company is required to
maintain a non-interest bearing cash collateral deposit with this lender of
$25,000, which has been included as restricted cash in the balance sheet.

Third warehouse line is with Texas Capital Bank for $25 million, the Company is
charged LIBOR plus 1.75%, the Company has pledged cash in the amount of
$125,000, which is reflected in the balance sheet as restricted. Texas Capital
Bank and associated parties has, as of this filing date, received 1,708,645
shares of the Company's common stock associated with an acquisition by the
Company. See Note 14 Related Parties, also.

These three master sale agreements are each for a one-year period and are
typically renewed annually. However, the agreements give each party the right to
terminate the agreement upon 30 days' written notice.

These financing facilities have various customary covenants including minimum
liquidity, profitability and net worth requirements, and limitations on other
indebtedness. If we fail to comply with any of these covenants or otherwise
default, the lender has the right to terminate the facility and require
immediate repayment that may require sale of the collateral at less than optimal
terms. As of January 31, 2007 the Company was not in compliance with its net
income or net worth financial covenants.

The CEO and the President of the Company have both personally guaranteed the
above financing facilities.

Note 4 - Goodwill

Goodwill is attributable to the purchase of the Company's Campbell branch
(formerly LRS, Inc.) in 1999.

Note 5 - Subordinated Debt

As of January 31, 2007, the Company had a total of $3,987,700 of subordinated
debentures outstanding, of which $1,000,000 is represented as the short-term
portion in our balance sheet as of January 31, 2007. In January 2005, we
received $2,687,700 of convertible subordinated debt that is due on January 12,
2015, bears interest at 10% and is convertible into common shares at $1.00 per
share. The remaining $1,000,000 of subordinated debt bears interest at 10% and
15%, and has maturities ranging from March 31, 2007 to October 1, 2007.

Subordinated debt interest expense of $101,198 and $83,367 was incurred in the
three month periods ended January 31, 2007 and 2006, respectively.

On May 18, 2006, the Company agreed to modify the terms of its outstanding 8.5%
Convertible Subordinated Notes Due 2015. The interest rate was raised to 10%. In
return, the Company received permission to raise up to $5 million of equity on
whatever terms the Board of Directors deems appropriate without triggering the
conversion price reset feature of the Notes.


              See accompanying notes to these financial statements.

                                       F-8
<PAGE>


Note 6 - Stock Option Programs and Warrants to Purchase Common Stock

On March 10, 2005, the Board of Directors of the Company accelerated the vesting
of all outstanding options, such that on that date, all outstanding options are
fully vested. The Company accelerated the vesting of the options principally to
avoid the administrative complexities of required disclosures associated with
SFAS 123-R. The Board of Directors continues to evaluate the situation with
respect to future option issuance. The acceleration of options resulted in the
immediate vesting of options to purchase 228,989 shares of the Company's common
stock. Using the intrinsic value method for valuing these accelerated employee
options, compensation expense of $2,010 was recognized in the year ended April
30, 2005. Using the fair value method for valuing these accelerated independent
contractors' options, an additional $4,402 in expense was recognized in the year
ended April 30, 2005.

Information about stock options outstanding as of January 31, 2007 is summarized
as follows:
<TABLE>
<CAPTION>


                                                                       Weighted                           Weighted
                                                                        Average                            Average
                                                       Average         Exercise                           Exercise
                  Range of                            Remaining        Price of                           Price of
                  Exercise           Options         Contractual        Options           Options          Options
                   Prices          Outstanding      Life in Years     Outstanding       Exercisable      Exercisable
                   ------          -----------      -------------     -----------       -----------      -----------

<S>             <C>                  <C>                <C>              <C>              <C>               <C>
                $0.22 - $1.00        401,188            6.04             $0.73            401,188           $0.73
                $1.01 - $2.45        134,218            7.23             $1.24            134,218           $1.24
                    $7.50            258,000            3.53             $7.50            258,000           $7.50
                                     -------                                              -------
                                     793,406            6.15             $3.02            793,406           $3.02
                                     =======                                              =======
</TABLE>


As of January 31, 2007, the Company had options outstanding under the programs
described herein.

The Company has two stock option plans: the 1998 Stock Compensation Plan ("1998
Plan") for employees and the 2000 Stock Incentive Plan ("2000 Plan") for
directors, officers and other employees which replaced the 1998 Plan in February
2000.

Options issued and outstanding from the 1998 Plan will continue to be honored,
but no additional options may be issued under the 1998 Plan. As of January 31,
2007, there were a total of 18,000 share options outstanding under the 1998
Plan, all with an exercise price of $7.50 per option, which expire in June 2009.

In March 1999, four Directors of the Company were granted 240,000 non-qualifying
options to purchase common stock at an exercise price of $7.50 per share. The
options were vested on the grant date and expire ten years from the date of
issuance. Of the total grant, 180,000 options may be exercised only in the event
of a change in control as defined in the option agreement. There are no
forfeiture provisions associated with the options granted, accordingly, the
option granted to three of the four directors who subsequently resigned remain
outstanding until they are exercised or expire.

Under the 2000 Plan, a total of 750,000 shares were initially reserved. The
share reserve increases by 4% of total common shares outstanding each year,
beginning on January 1, 2001. The maximum annual increase in the share reserve
is limited to 400,000 shares.


 See accompanying notes to these financial statements.

                                      F-9
<PAGE>


Accordingly, the following table is a roll forward of the share reserve limit
through January 31, 2007:

                                                              Number of Options

  Initially Reserved                                                  750,000
  January 1, 2001                                                     171,172
  January 1, 2002                                                     205,503
  January 1, 2003                                                     270,407
  January 1, 2004                                                     272,640
  January 1, 2005                                                     271,654
  January 1, 2006                                                     271,654
  January 1, 2007                                                     400,000
                                                                    ---------
  Reserve amount at January 31, 2007                                2,613,030

The table below summarizes aggregate activity for all options programs for the
nine-month period ended January 31, 2007:
<TABLE>
<CAPTION>

                                                                                  All Programs
                                                                     ---------------------------------------
                                                                                                 Weighted
                                                                                                  Average
                                                                         Stock                   Exercise
                                                                        Options                    Price
                                                                     -------------               ---------

<S>                                                                    <C>                         <C>
Outstanding at April 30, 2006                                          1,193,546                   $2.30
Grants and Adjustments                                                    15,000                    1.00
Forfeitures and Expirations                                             (415,140)                   1.28
                                                                       ---------                    ----
           Outstanding at January 31, 2007                               793,406                   $3.02
                                                                       =========                    ====
</TABLE>

<TABLE>
<CAPTION>



                                                                           Stock                 Exercise
                                                                        Warrants                   Price

<S>                                                                    <C>                         <C>
Outstanding at April 30, 2006                                             45,000                   $1.32
Grants and Adjustments                                                 1,650,000                   $0.70
                                                                       ---------                   -----
Expirations                                                               40,000                   $0.55
                                                                          ------                   -----
Outstanding at January 31, 2007                                        1,655,000                   $0.72
                                                                       =========                   =====
</TABLE>



The warrants outstanding as of January 31, 2007 had expiration dates in June,
2009 (1,650,000) and November, 2008 (5,000).


              See accompanying notes to these financial statements.

                                      F-10
<PAGE>


Note 7 - Basic and Diluted Net Loss Per Share

Basic net loss per share is based on net loss divided by the weighted-average
common shares outstanding. Diluted net loss is computed based on the
weighted-average number of common shares outstanding adjusted for potentially
dilutive securities, which include stock options, warrants and contingently
convertible subordinated debt. The computations of basic and diluted net loss
per share are as follows:
<TABLE>
<CAPTION>

                                                         Three Months Ended                  Nine Months Ended
                                                         ------------------                  -----------------
                                                      January 31      January 31         January 31       January 31
                                                          2007           2006                2007           2006
                                                          ----           ----                ----           ----

<S>                                                  <C>              <C>               <C>              <C>
Net Income (Loss)                                    $(1,451,160)     $ (488,566)       $(3,703,996)     $ (398,495)
Weighted average of shares outstanding                10,248,005       6,791,360         10,248,005       6,791,360
Basic net loss per share                                 $(0.14)         $(0.07)            $(0.36)         $(0.06)
Effect of dilutive options                                                                        -               -
Diluted weighted average of shares outstanding        10,248,005       6,791,360         10,248,005       6,795,110
Diluted net loss per share                               $(0.14)         $(0.07)            $(0.36)       $ (0.06)
</TABLE>


As of January 31, 2007 and 2006, potential dilutive securities of 5,136,106 and
4,230,866 respectively, have not been included in the calculation of diluted net
income per share because their effects are anti-dilutive.

Note 8 - Fair Value of Financial Instruments

A summary of the total contract value of the Company's exposure to off-balance
sheet credit risk as of January 31, 2007, including financial instruments whose
contract amount represents credit risk only is as follows:
                                                         January 31, 2007

Commitments to extend credit                             $     23,594,229
Mandatory forward delivery commitments                          1,500,000

Commitments to extend credit are contractual agreements entered into with
customers to fund mortgage loans, which remain valid as long as there is no
violation of any condition established in the contract. These commitments
generally have fixed expiration dates or other termination clauses. Since many
of the commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements.

The Company is exposed to credit risk on its mandatory forward delivery
commitments when the Company's position in these instruments becomes positive
(i.e. "in-the-money") and the Company is a net creditor to the counter party to
the agreement. If the Company cannot deliver the agreed-upon loans into the
commitment by the expiration date, the Company is subject to a financial penalty
("pair-off fee").

Note 9 - Common Stock Issuance

On May 18, 2006, the Company agreed to sell up to 2.5 million shares at $0.70
each to Pegasus Funds, LLC, a Dallas-based investment fund, as well as to issue
a warrant to purchase up to 1.65 million shares at $0.70 each. Said warrant will
have a 3 year term, and the number of shares to which it will apply will be
pro-rated based upon the portion of the contracted for 2.5 million shares that
are sold.

Subsequently, on June 30, 2006, the Company and Pegasus amended the underlying
agreement to increase the number of shares to be sold to a maximum of 3.0
million, and to pay to Pegasus an 8% cash due diligence fee, based upon the
gross dollar amount of funds raised on the Company's behalf.

As of January 31, 2007, under the agreement with Pegasus, the Company had issued
1,748,000 shares of the 3.0 million shares contracted for, with a gross amount
of funds received by the Company of $1,223,600.

              See accompanying notes to these financial statements.

                                      F-11

<PAGE>

As part of the Purchase Agreement signed on October 16, 2006 relating to the
acquisition of the Residential Mortgage Lending division of Texas Capital Bank
(see Note 11 - Acquisition), the Company issued 1,708,645 shares to Texas
Capital Bank and six individuals in October 2006. The Company has determined
that the fair market value of these shares was $1,196,052, or $0.70 per share.
The Company expects that the remaining 1,291,355 shares that are to be issued
under this Purchase Agreement will be issued into escrow against the earn-out
portions of the Agreement by the end of its current fiscal year. These shares
will be valued at the same price as the shares already issued.



Note 10 - Restatements

In reviewing the "Subsequent Event" loan loss assessment in the Company's last
financial filing, management determined that it had not treated the potential
for incurring losses on loans sold to investors properly. After reviewing the
entire history of loans identified as "problem loans" by investors in the
current fiscal year, management determined that its second quarter results
improperly omitted two indemnifications for loan losses and also failed to
provide for a reserve against loan losses or indemnifications against problem
loans already identified. Management found no indication that earlier periods
were affected by this omission.

The company has filed a Form 8-K relating to non-reliance on previous financial
statements and will be amending its second quarter filing. The restatements are
reflected in the Loan Loss Expense line item in the Statement of Operations,
along with Balance Sheet liability entries under Loans Payable (both short and
long term) as of and for the nine months ended January 31, 2007 contained
herein.

Of the Loan Loss Expense shown for the restated October 31, 2006 period,
$414,227 represents indemnifications the company committed to in the quarter,
$175,000 represents a reserve taken against future indemnifications or loan
losses, and $36,000 and $38,500 for the three and six months ended October 31,
2006, respectively, represents the previously reported Early Payoff Expense.

The restatements are as follows:
<TABLE>
<CAPTION>



                                    Second Quarter ended October 31, 2006          Six Months ended October 31, 2006
                                    -------------------------------------          ---------------------------------
                                 As Reported          Restated     % Chg.    As Reported          Restated     % Chg.
                                 -----------          --------     ------    -----------          --------     ------
<S>                                <C>             <C>            <C>         <C>               <C>            <C>
Loan Loss Expense                  $  36,000       $   625,227       nm       $    38,500       $   627,727       nm
Other Int. Income (Expense)        $  22,938       $    22,885      .23%      $    45,874       $    45,821      .12%
                                     -------           -------                    -------           -------
Net Loss                           $(915,260)      $(1,504,540)   64.4%       $(1,663,555)      $(2,252,782)   35.4%
                                    =========       ==========                  =========        ==========
Net Loss per Share                 $  (0.09)       $    (0.15)    66.7%       $    (0.16)       $    (0.22)    37.5%
</TABLE>


<TABLE>
<CAPTION>

Balance Sheet Items at October 31, 2006        As Reported     Restated         % Chg
---------------------------------------        -----------     --------         -----
<S>                                           <C>               <C>                <C>
Short-term portion of  Loans Payable          $     17,327      $    263,726       nm
Loans Payable (Long-Term)                     $          0      $    162,500       nm
                                                         -           -------
Accumulated Deficit                           $(13,595,105)     $(14,184,385)       4.3%
                                              =============      =============
</TABLE>



             See accompanying notes to these financial statements.

                                      F-12

<PAGE>





Note 11 - Acquisition

On October 16, 2006, the Company entered into an agreement to acquire
substantially all the assets of the mortgage lending division of Texas Capital
Bank subject to certain liabilities. For purposes herein, this operation is
referred to as either the "Residential Mortgage Lending" division or "RML." The
effective date of the acquisition was September 30, 2006. According to the terms
of the agreement, the Company is responsible for the net financial results of
RML from October 1, 2006 until final consummation of the acquisition.

As filed in our 8-K, the essential terms of the agreement have the company
ultimately issuing up to 3,000,000 common shares for the acquisition of RML,
1,708,645 of which were issued in October, 2006. The balance of the shares are
subject to certain earn-out provisions. The Company has determined that the fair
market value of these shares issued was $1,196,052, or $0.70 per share. The
remaining shares will be valued at the same price when they are issued.

However, in order for the Company to obtain control of RML the Company needs to
secure regulatory approval to operate in numerous states, as well as secure
shareholder approval prior to being able to issue the full amount of shares, the
outcome of which is not guaranteed. During the period between entry into the
agreement and final transfer of control of RML, the Company is only eligible to
receive the net income or is responsible to pay to Texas Capital Bank the net
loss based on monthly results. Accordingly, the Company is not consolidating the
results of RML. Rather, it is treating the RML operating results as an
unconsolidated investment, showing the net gain or loss on a single line item
("Unconsolidated Operation Investment") in the Statement of Operations.



Note 12 - Loan Losses and Indemnifications

As discussed in Note 10 - Restatement, in the current fiscal year, the Company
has experienced an upsurge of Problem Loans that have and will continue to have
a material effect on the Company's finances. The following table shows the
effects on the key line items:

<TABLE>
<CAPTION>


                                       Loan Loss
                                       Expense                Comment

<S>                                      <C>                  <C>
Quarter Ended 10/31/06                   $627,727             Includes $414,227 of indemnifications, $175,000
                                                              of reserves taken and $38,500 of Early Payoff
                                                              loan loss expense.

Quarter Ended 1/31/07                    $501,117             Includes $375,000 added to reserves, $118,617 of
                                                              payments made on loan loss indemnifications and $7,500
                                                              of Early Payoff loan loss expense.  In addition, $150,000
                                                              of loan loss expense payments were made in the quarter,
                                                              but taken against Loan Loss Reserves.
</TABLE>





             See accompanying notes to these financial statements.

                                      F-13
<PAGE>


Note 13 - Subsequent Events

Subsequent to January 31, 2007, the following events occurred:

o    The Company is negotiating with one of its investors regarding a group of
     12 loans to six individuals that have been identified by the investor as
     Problem Loans. These loans total $3.52 million in outstanding balances. The
     Company expects to settle with the investor for a specific amount that the
     Company will agree to pay in order to be released from its repurchase
     obligations. These negotiations are underway at this writing and not yet
     completed.


o    The Company is negotiating with another of its investors, although the
     precise number of problem loans is not yet identified as of this writing.

While management has made a provision, based on its assessment of the potential
loss, and accrued an amount in the Loan Loss Reserves, there can be no assurance
that the provision will ultimately prove to be adequate.



Note 14 - Related Party Transactions

The following address transactions between the Company and related parties that
are different from that last disclosed in its Form 10-KSB filing for the year
ended April 30, 2006:

          o    The Company was renting an apartment/condominium for $850 per
               month in the Phoenix area for its executives to use in their
               business travels to Phoenix. One of the Company's principal
               officers' name is on the deed to the condominium. The Company
               terminated this rental arrangement in January, 2007.

          o    In October, 2006, the Company made a first and second mortgage
               loan to a senior officer of the company on his principal
               residence. Both of these loans were made by the Company in the
               ordinary course of its business. Both of these loans have been
               sold to third party investors as of this filing date.

          o    The Company employs as a loan officer the son of the founders of
               the Company, the Chief Executive Officer and its President. This
               person is not an officer of the Company and has no executive
               responsibility or authority.

          o    The Company has employed one of its directors to perform legal
               services on behalf of the Company. During the current fiscal
               year, this director has billed the Company and been paid a total
               of $50,375 as of February 28, 2007.

          o    The Company has a warehouse line with Texas Capital Bank for $25
               million, wherein the Company is charged LIBOR plus 1.75%, the
               Company has pledged cash in the amount of $125,000, which is
               reflected in the balance sheet as restricted. Texas Capital Bank
               and associated parties has, as of this filing date, received
               1,708,645 shares of the Company's common stock.


             See accompanying notes to these financial statements.

                                      F-14
<PAGE>

ITEM 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

The following discussion and analysis should be read in conjunction with the
condensed financial statements and the notes thereto included as Item 1 of this
Report. The discussion of results and trends does not necessarily imply that
these results and trends will continue.

The Management's Discussion and Analysis of Financial Condition and Results of
Operations and other sections of the Form 10-QSB contain forward-looking
information. The forward-looking information involves risks and uncertainties
that are based on current expectations, estimates, and projections about the
Company's business, management's beliefs and assumptions made by management.
Words such as "expects", "anticipates", "intends", "plans", "believes", "seeks",
"estimates", and variations of such words and similar expressions are intended
to identify such forward-looking information. Therefore, actual outcomes and
results may differ materially from what is expressed or forecasted in such
forward-looking information due to numerous factors, including, but not limited
to, availability of financing for operations, successful performance of internal
operations, impact of competition and other risks detailed below, as well as
those discussed elsewhere from time to time in the Company's Securities and
Exchange Commission filings and reports. In addition, general economic and
market conditions and growth rates could affect such statements.

QUARTER AND NINE MONTHS ENDED JANUARY 31, 2007 COMPARED TO QUARTER AND NINE
MONTHS ENDED JANUARY 31, 2006

For the recently ended quarter, year-over-year revenues decreased 28%, gross
profits decreased 82% and the net income worsened from a loss of approximately
$489,000 to loss of approximately $1,451,00.

The following table shows the Company's wholesale and retail production trends
by fiscal quarter for the last nine fiscal quarters:

                                     TABLE 1
                               ORIGINATION VOLUMES
                                  ($ millions)
<TABLE>
<CAPTION>

Quarter Ended           1-31-07*   10/31/06*   7/31/06   4/30/06    1-31-06  10-31-05  7-31-05  4-30-05   1-31-05
-------------           --------   ---------   -------   -------    -------  --------  -------  -------   -------

<S>                        <C>        <C>      <C>        <C>        <C>        <C>       <C>       <C>       <C>
Wholesale                  $ 97       $ 77     $ 94       $ 82       $ 81       $100      $130      $ 84      $ 91
Retail                       46         55       52         45         47         69        79        71        72
                             --         --       --         --         --         --        --        --        --
Total                      $143       $132     $146       $125       $128       $169      $209      $155      $163
                           ====        ===     ====       ====       ====       ====      ====      ====      ====
</TABLE>


* For comparison purposes, excludes $87M of wholesale and $48M of retail
production generated by RML for quarter ended January 2007, and $28M of
wholesale and $14M of retail production generated by RML for the October 2006
quarter

REVENUE ANALYSIS

In the third quarter, the most significant factors leading to the 28% revenue
decline in the quarter were as follows:

1.       Notwithstanding a 20% increase in our Wholesale loan originations, our
         Gain on Sale of Loans decreased 35%, principally due to a major change
         in our loan mix. $39 million of correspondent loans were included in
         the $97 million of Wholesale originations in the recently ended
         quarter, a sharp contrast from none a year ago. Correspondent loans
         carry a sharply lower Gain on Sale margin than do loans originated
         within our own organization.

2.       The secondary market for less traditional, and higher risk, types of
         loans, including second liens, has gotten substantially more
         circumspect in recent months. In the past, these loans carried a higher
         gain on sale margin than more traditional A or Alt-A loans with low
         loan-to-value ratios did. As a result, we are originating substantially
         fewer, proportionately, of these types of loans than previously

                                     MD - 1
<PAGE>


3.       As a result of the foregoing, our Net Gain on Sale of Loans margin
         declined from 169 basis points in the quarter a year ago to 91 basis
         points in the recently ended quarter.

4.       Furthermore, we are experiencing pricing pressures on the origination
         side of the mortgage markets. As with any commodity market, when demand
         declines, pricing pressures come to the fore, and this is most
         assuredly happening in the current mortgage markets.

The year-over-year factors contributing to the 28% decline in total revenues are
essentially the same as for the third quarter. Specifically,

1.       The Net Gain on Sale of Loans declined 37% in the first nine months for
         the reasons described above;

2.       The Net Gain on Sale margin in the nine months declined from 149 basis
         point a year ago to 109 basis points this year, largely due to the all
         the same factors described as affecting the third quarter.

With the tightening of standards by the secondary market investors, we are also
seeing the effects on our own underwriting and loan mix. Until recent quarters,
our Alt-Funding business, as well described in our previous reports, had been
increasing as a proportion of our total wholesale loan originations. This was a
material factor in both the decline in the FICO score of our average borrower,
as well as the increasing loan-to-value ratios (LTVs) of our loans.

The changes in the mortgage lending environment described above are manifested
in several ways. For example, in the last year, we have seen a gradual increase
in the average FICO scores of our borrowers. In the quarter a year ago, 77% of
our borrowers had a FICO score of 650 or higher, and this has gradually
increased to 80% in the quarter recently ended.

This is shown below in Table 2, a condensation of Table 15 in the MD&A Appendix.

                                     TABLE 2
                                    CONDENSED
                        WHOLESALE FICO SCORE DISTRIBUTION
<TABLE>
<CAPTION>

                  Quarter Ended          1/31/07     10/31/06     7/31/06     4/30/06      1/31/06
                  -------------          -------     --------     -------     -------      -------

<S>               <C>                    <C>          <C>         <C>         <C>          <C>
                  Above 700               50.5%        47.5%       49.1%       40.1%        45.5%
                  650-699                 29.7         29.9        29.4        36.0         31.3
                  600-649                 15.4         14.3        15.9        18.5         17.2
                  550-599                  1.2          4.7         3.5         4.8          4.8
                  Below 550                0.8          0.0         1.6         0.3          0.6
                  Not available            2.4          3.6         0.5         0.3          0.6
                                                        ---         ---         ---          ---
                  Total                  100.0%       100.0%      100.0%      100.0%       100.0%
</TABLE>



At the same time, the Loan-to-Value (LTV) ratio of our loans has increased
materially over the two years. For example, the percentage (by dollar value) of
our first lien loans with less than 80% LTVs decreased from 96.5% in the like
quarter a year ago to 82.4% in the recently ended quarter. We believe this is
attributable primarily to overall increasing leverage of the average consumer in
the United States.

As addressed earlier, our Net Gain on Sale of Loans Margin contracted materially
in the quarter just ended when compared to the like quarter a year ago. This is
attributable to three factors: a sharp increase year-over-year in the proportion
of loans we originate on a correspondent basis (much lower margins), pricing
pressures in the origination markets for mortgages, and a shift in the mix of
our business from the Alt-A minus type of loans originated by our Alt Funding
group back to our more standard Alt-A loans.


                                     MD - 2
<PAGE>


Industry conditions have become increasingly unsettled in recent months, with
investors more frequently and more rapidly changing the guidelines for loans, as
well as types of loans they are willing to purchase. One of the consequences of
this is that we run the risk of having open loan commitments (to borrowers) in
our pipeline that cannot be sold to the investors with whom we had locked the
loan. To the extent that this occurs and we are forced to find other buyers for
such loans we will likely receive a lower gain on sale margin for such loans.


                                     TABLE 3
                          WHOLESALE GAIN ON SALE MARGIN
                                 (Basis Points)
<TABLE>
<CAPTION>

Quarter Ended          1/31/07   10/31/06   7/31/06    4-30-06   1-31-06   10-31-05    7-31-05   4-30-05    1-31-05
-------------          -------   --------   -------    -------   -------   --------    -------   -------    -------

<S>                        <C>      <C>        <C>       <C>        <C>       <C>        <C>       <C>        <C>
Gain on Sale               91       109        127       136        169       139        147       163        119
</TABLE>


As we have observed in the past, the magnitude and time of our receipt of
Forward Commitment Payout Fees can have a material impact on our reported Gain
on Sale margin. During the recently ended quarter, the impact was meaningful,
although it had not been for the prior three quarters.

                                     TABLE 4
                     FORWARD COMMITMENT PAYOUT FEES RECEIVED
                                ($ in thousands)
<TABLE>
<CAPTION>

Quarter Ended          1/31/07   10/31/06   7/31/06    4/30/06   1/31/06   10-31-05    7-31-05   4-30-05    1-31-05
-------------          -------   --------   -------    -------   -------   --------    -------   -------    -------

<S>                      <C>        <C>        <C>       <C>       <C>        <C>      <C>         <C>      <C>
Fees Received            $119       $-0-       $-0-      $-0-      $125       $87      $ 125       $98      $ 105
</TABLE>


GROSS PROFIT ANALYSIS

Gross profits for the quarter just ended decreased by 82%, materially worse than
our 28% revenue decline. The principal reasons are as follows:

1.       Our Loan Loss expense increased to $501,000 in the quarter, an increase
         from zero in the quarter a year ago.

2.       Our Direct Operating expenses decreased only 10%, a contrast to our 28%
         revenue decline. This reflects the increased compensation required to
         keep our production personnel.

The Gross Profis for the nine months recently ended were affected by these same
factors, in roughly the same proportions.

                                     TABLE 5
                           GROSS PROFIT MARGIN TRENDS
<TABLE>
<CAPTION>

Quarter Ended            1/31/07   10/31/06*  7/31/06    4-30-06    1-31-06   10-31-05    7-31-05   4-30-05    1-31-05
-------------            -------   ---------  -------    -------    -------   --------    -------   -------    -------

<S>                        <C>       <C>        <C>       <C>        <C>       <C>        <C>       <C>        <C>
Gross Profit Margin        12.9%     11.0%      46.5%     48.9%      51.6%     59.4%      60.8%     57.6%      61.7%
</TABLE>

 * - Restated

As shown above, our Gross Profit Margin peaked two years ago, and has declined
steadily since. In a nutshell, here is why:

1.       In the last two quarters, we have experienced substantial loan loss
         expenses (approximately $501,000 in the quarter just ended and
         approximately $1,129,000 in the nine months just ended). In the absence
         of these expenses, our Gross Margin for the quarter and nine months
         just ended would have been 40.4% and 42.9%, respectively, still on a
         downtrend for nearly the last two years.

2.       Our wholesale mortgage originations have declined materially, thus
         severely limiting our ability to capture Forward Commitment Payout Fees
         for completion of forward loan commitments.

                                     MD - 3
<PAGE>

3.       Pricing pressures in the mortgage markets have increased in direct
         proportion to the downward pressures on industry origination volumes.

4.       Our financing costs have increased disproportionately more than
         mortgage rates have increased, thus causing a material swing in our Net
         Interest Income/Expense to the expense side of the ledger from the
         income side.

5.       Reflecting competitive pressures in the marketplace for people, we have
         been unable to lower our direct production and operational expenses.



INDIRECT EXPENSE ANALYSIS

Our Indirect Expenses decreased 9% on a year-over-year basis during the recently
ended quarter, while decreasing 13% year-over-year for the first nine months.

Since Indirect Expenses are relatively fixed over short-to-intermediate periods
of time, by definition, pressures on our ability to originate mortgage loans
will also result in pressure on our operating profitability.

The major driver of our increasing Indirect Expenses in the last year-and-a-half
was our attempt to increase our production capabilities. We opened new offices
in Overland Park, Kansas and San Ramon, California, as well as expanded our
office in Scottsdale, Arizona. Neither the Overland Park nor the San Ramon
office are currently operational or originating loans. Since these efforts to
increase volume did not bring the desired results, it is taking us longer to
unwind the expense commitments than it did to ramp them up.

As shown in Table 6 below, we began cutting our operational expenses in the
quarter ended October 31, 2006. We expect to show a greater reduction of
Indirect Expenses as we move through the rest of the current year.



                                     TABLE 6
                         INDIRECT EXPENSE AND COMPONENTS
                                ($ in thousands)
<TABLE>
<CAPTION>

Quarter Ended            1/31/07   10/31/06    7/31/06   4-30-06   1-31-06   10-31-05    7-31-05    4-30-05    1-31-05
-------------            -------   --------    -------   -------   -------   --------    -------    -------    -------

<S>                     <C>        <C>         <C>        <C>       <C>        <C>       <C>        <C>        <C>
Total Indirect Exp.     $1,672     $1,778      $1,930     $1,851    $1,844     $1,936    $1,898     $1,823     $1,661
Percent of Rev.           91.9%      84.6%       76.8%      83.2%     73.3%      65.2%     55.6%      65.0%      75.6%

Selected Components:
    Salaries and Ben.   $  801     $  868      $  964     $  938    $  962     $1,222    $1,119     $1,086     $  949
    Percent of Rev.       44.0%      41.3%       38.4%      42.2%     38.3%      41.2%     32.8%      38.8%      43.2%

    Gen. and Admin.     $  670     $  700      $  759     $  712    $  687     $  521    $  586     $  515     $  520
    Percent of Rev.       36.8%      33.3%       30.2%      32.0%     27.3%      17.5%     17.2%      18.3%      23.7%
</TABLE>




                                     MD - 4
<PAGE>


LIQUIDITY AND CAPITAL RESOURCES

Our unrestricted and restricted cash position plus liquid investments as of
January 31, 2007, decreased by $486,800 from what it was at the end of our last
fiscal quarter, October 31, 2006. Management and the Company's board of
directors believe this is a more appropriate figure to examine than unrestricted
cash alone. The restricted cash is cash held on deposit with the Company's
warehouse lenders and represent a management decision and strategy. We can
negotiate for lower deposit requirements, but at the expense of other variables
associated with the lending facility, including, but not limited to, nominal
interest rate, per transaction fees, and loan haircuts. For example, in
renegotiating some of the conditions of our various warehouse borrowing
facilities during the first quarter of this fiscal year, we lowered our
restricted cash position from $1,025,000 to $125,000. The Company agreed to
invest the negotiated $900,000 into an interest-bearing twelve month restricted
certificate of deposit with the warehouse lender The certificate of deposit has
subsequently matured in the current quarter and is no longer required to be
restricted.

Hence, the total of unrestricted and restricted cash plus short-term (cash-like)
investments is what we measure in evaluating our overall liquidity.

The principal changes to our aggregate cash and investments positions during the
quarter are shown in Table 7, "Simplified Sources/(Uses) of Cash," below. The
FASB-compliant statement of cash flows is included with the other financial
statements in Item 1 of this filing.

The short-form table below is how management and the Company's board of
directors monitor the Company's changes in cash and investments position.


                                     MD - 5
<PAGE>




                                     TABLE 7
                        SIMPLIFIED SOURCES/(USES) OF CASH
<TABLE>
<CAPTION>

                                                                               Change from Prior Period End
                                                                 Quarter           Quarter           Quarter          Quarter
Sources (Uses)                                                   1-31-07         *10-31-06           7-31-06          4-30-06
---------------                                                  ------------------------------------------------------------


Operating Cash Flows
Income Statement Related Cash Flows
<S>                                                         <C>              <C>               <C>              <C>
Net Income (Loss)                                           $(1,451,160)     $(1,504,540)      $  (748,295)     $(1,555,317)
Add back non-cash charges/(income)
Depreciation & Amortization                                      22,785           22,785            22,785           23,599
Impairment of Goodwill                                                0                0                 0          797,855
Fair Value of Financial Derivatives changes                      28,025          (22,151)           10,288           21,141
Income Taxes Payable                                                                                     0              864
Change in Restricted Cash                                      (125,000)
Provision for Early Payoff Penalties, and Loan Losses
   net of payments                                              232,500          206,750             2,500                0
Actual Early Payoff Penalties paid                                    0           (9,631)           (7,529)          (4,599)
                                                             ----------           -------           -------          -------
Operational Cash Flows from the Income Statement             (1,292,850)      (1,306,787)         (720,251)        (716,457)
Balance Sheet Related Cash Flows
Mortgages Held for Sale                                         204,241          125,200          (241,000)          54,380
Short-term Mortgage Receivables                                (331,887)         203,556           (50,156)        (211,854)
Prepaid Expenses                                                (96,628)         (99,936)           (1,477)         (33,240)
Other Assets                                                    (97,500)         (17,376)            2,734           (5,500)
Loan Loss Indemnifications Payable                              (91,010)         408,899                 -                -
Accounts Payable and Other Accrued Liabilities                   86,161            2,375          (120,797)          99,960
                                                                 ------            -----          ---------          ------
Operational Cash Flow from the Balance Sheet                   (326,623)         622,718          (410,696)         (96,254)

Total Cash Flow Generated/(Used) in Operations               (1,619,473)        (684,069)       (1,130,947)        (812,711)

Financing Activity Cash Flows
Repayment on Insurance Financing                                (17,327)         (18,647)           (3,900)               -
Issuance of Sub Debt                                            300,000                -                 -                -
Repayments on Sub Debt                                          (50,000)
Deposits received for Common Stock                                    -                -           900,000                -
Issuance of Common Stock                                              -        1,519,652                 -                -
Due Diligence Fee                                                     -          (97,888)                -                -
Stock Options Exercised                                               -                -             3,000                -
Capital Lease Obligations change                                      -                -                 -           39,874
                                                                                                         -           ------

Total Cash Flow from Financings Activities                      232,673        1,403,117           899,100           39,874

Investing Activity Cash Flows
Purchase of Property and Equipment                                    -           (2,037)      $    (8,959)     $   (15,893)
Maturity of Certificate of Deposit                              900,000                -                 -                -
Investment in RML                                                     -       (1,196,052)                -                -
Total Cash Flow from Investing Activities                       900,000       (1,198,089)      $    (8,959)     $   (15,893)

Net Change to Aggregate Cash                                $  (486,800)     $  (479,041)      $  (240,806)     $  (788,730)
</TABLE>


* - Restated
                                     MD - 6
<PAGE>

In summary form, this table says the following regarding the changes in the
Company's aggregate cash resources in the recently ended quarter:

1.       The Company's operations led the decline in our cash balances, although
         not as much as the Net Losses shown. An important reason for the
         difference is that we added a net of $232,500 to our reserves for loan
         losses and related indemnifications.

2.       The Company decreased its Mortgages Held for Sale by approximately
         $204,000 in the recently ended quarter, principally reflecting the
         decline in our internally generated loan volumes

3.       The Company increased its Short-Term Mortgage-Related Receivables by
         approximately $332,000. This largely reflects the loan servicing
         receivables associated with the mortgage loans we have made, but not
         yet sold to third party investors.

4.       The Company received $300,000 of cash from the issuance of additional
         subordinated debt.

5.       The Company had a $900,000 certificate of deposit mature.



SUMMARY OF FINANCING FACILITIES

The capital resources utilized by the Company to fund its mortgage lending
activities are primarily provided by warehouse lenders that fund the mortgage
loans through Master Sales Agreements ("warehouse facilities"). The size of the
Company's warehouse facilities is based on the Company's net worth and cash
resources. As of January 31, 2007, the Company had a total of three financing
facilities for a maximum financing capacity of up to $78 million.

The funding facilities have various financial and operational covenants with
which the Company must comply, including the requirement that the Company
maintain cash deposits with certain lenders as compensating balances.
Collectively, these facilities currently require compensating cash balances of
$250,000.

More detailed data on these facilities is presented in Note 3 to the Financial
Statements presented in Item 1.

Our overall funding strategy is to use committed facilities, summarized as of
Janaury 31, 2007:

                                     TABLE 8
                          LOAN FACILITIES AND BALANCES
<TABLE>
<CAPTION>

                             Committed        Outstanding     Required        Interest Rate
Type of Facility             Facility           Balance     Cash Deposit    January 31, 2007        Maturity
----------------           -------------    --------------  ------------    ----------------        --------

<S>                            <C>           <C>              <C>               <C>                 <C>
Master sales agreement         $13,000,000   $ 13,827,170     $100,000          8.25%(1)            Annual or 30 days notice
Master sales agreement          40,000,000      6,546,403       25,000          7.07 - 7.82%(2)     Annual or 30 days notice
Master sales agreement          25,000,000      1,356,000      125,000          7.07%               Annual or 30 days notice
Totals                         $78,000,000   $ 21,729,573     $250,000
                               ===========   =============    ========
</TABLE>



(1)  For the first $10 million of this facility, the contractual interest rate
     facility was 3.99% or Prime, whichever is greater. The rate for the next $3
     million is 0.05% greater than the rate for the first $10 million.

(2)  The contractual interest rate on this facility is one month LIBOR plus a
     margin ranging from 1.875% to 2.50%.



                                     MD - 7
<PAGE>


FUTURE NON-OPERATIONAL CASH REQUIREMENTS

The Company has certain non-operational requirements for cash in the future. The
material requirements are those for repayment of the subordinated debt issued in
recent years to bolster our capital position. The schedule of maturities for
these is as follows:

                                     TABLE 9
                   NON-OPERATIONAL CASH REPAYMENT REQUIREMENTS

        March 31, 2007                                     $  800,000
        May 31, 2007                                       $  200,000
        January 1, 2010                                    $  300,000
        January 12, 2015                                   $2,687,700

OFF BALANCE SHEET RISKS

The Company is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit in the form of
loans, and mandatory forward delivery commitments. These instruments involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amounts recognized in the balance sheet. The mandatory forward delivery
commitments also involve the risk of nonperformance on the part of the Company.
The Company manages these risks by entering into these agreements with major,
well-known financial institutions. The contract amounts of those instruments
reflect the extent of involvement the Company has in particular classes of
financial instruments.

The notional value of financial instruments, whose contract amounts represent
credit and risk at the indicated dates, are as follows:

                                    TABLE 10
                     NOTIONAL VALUE OF FINANCIAL INSTRUMENTS

                                                        January 31, 2007
Commitments to extend credit                            23,594,229
Mandatory forward delivery commitments                   1,500,000

                                     MD - 8
<PAGE>


                                  MD&A APPENDIX

               UPDATED GENERAL AND OPERATIONAL COMPANY INFORMATION

GENERAL

Transnational Financial Network, Inc. ("TFN" or the "Company") is a wholesale
and retail mortgage banker which originates, funds and sells mortgage loans
secured by one to four family residential properties, principally in the San
Francisco Bay Area, Southern California, and Arizona.

Since 1985, when the Company was incorporated, it has been engaged in the
origination of retail mortgage loans, and currently maintains wholly owned
retail offices in San Francisco and Campbell, California. In addition, the
Company maintains net branches in association with local mortgage brokerage
companies. As of January 31, 2007, the Company maintained one net branch in
Scottsdale, Arizona. We expect to continue our policy of adding and subtracting
net branches from our branch network on an opportunistic basis.

In 1995, the Company began a wholesale division to close and fund loans
originated by independent third party mortgage brokers as well as those
originated through the Company's retail division. At January 31, 2007 the
Company maintained wholesale offices in San Francisco, Costa Mesa, California
and, Scottsdale, Arizona. The Company operates in one business segment -
mortgage banking.

The Company's loan production and results of operations are strongly affected by
mortgage interest rates, with origination volumes increasing in periods of
declining interest rates, and declining during periods of increasing interest
rates. Increasing mortgage rates raises the qualifying income required of a
homebuyer and reduces housing affordability. Interest rate increases also cause
mortgage refinance activity to decline because fewer homeowners can successfully
obtain a mortgage at a lower interest rate than their original mortgage. Higher
interest rates increase the cost of home ownership resulting in diminished
demand for mortgage loans, whether the purpose of the mortgage loan is for the
purchase of a home, refinancing of a home to obtain a lower rate or longer term,
home improvement, debt consolidation, or obtaining cash. When rates are high,
the mortgage loan financing that does occur usually takes the form of variable
rate mortgage loans, that is, mortgage loans that have interest rates that
frequently change and, consequently, have lower initial interest rates than
those charged on longer term fixed interest rate mortgage loans.

Furthermore, the Company's mortgage origination capability is also affected by
the direction of housing prices in the markets it serves. To the extent local
housing prices peak and begin declining, mortgage originations normally fall
off, at least for a period of time before the market adjusts to the new levels.

To diminish the overall effects of a variable interest rate market, the Company
has employed other measures to stabilize business. These measures include
offering a broader menu of products, delivering mortgages to the secondary
market in volume packages, and expanding both the nature and scope of mortgage
originations. Wholesale operations are centralized in two regional centers for
both conventional and government programs to provide greater economic
efficiencies.

Nonetheless, the Company's origination volume trends have been and will continue
to be heavily influenced by both the level and trend of interest rates, as well
as housing prices if they decline.


                                     MD - 9
<PAGE>


The following table summarizes mortgage loan production volume by division
(dollars in thousands):


                                    TABLE 11
                        DIVISIONAL LOAN PRODUCTION VOLUME
                                    ($ 000s)
<TABLE>
<CAPTION>

Quarter Ending                       1/31/07          10/31/06           7/31/06          4/31/06           1/31/06
--------------                       -------          --------           -------          -------           -------

Wholesale Division
<S>                                 <C>               <C>               <C>              <C>               <C>
         Volume                     $ 96,574          $ 77,060          $ 93,898         $ 80,233          $ 80,624
Percent of Volume                         67%               58%               64%              64%               63%
Number of Loans                          506               323               426              360               357
Average Loan Size                   $    191          $    238          $    220         $    223          $    226

Retail Division
         Volume                     $ 46,560          $ 55,206          $ 51,955         $ 45,288          $ 47,391
         Percent of Volume                33%               42%               36%              36%               37%
         Number of Loans                 114               142               172              117               123
         Average Loan Size          $    408          $    389          $    302         $    387          $    385

Total Loan Production
         Volume                     $143,134          $132,266          $145,853         $125,521          $128,015
Number of Loans                          620               465               598              477               480
Average Loan Size                   $    231          $    284          $    244         $    263          $    267
</TABLE>


THE WHOLESALE LOAN DIVISION

OVERVIEW

Our wholesale lending division operates from our executive offices in San
Francisco with offices in Costa Mesa, California and Scottsdale, Arizona.

During the quarter ended January 31, 2007, we originated mortgage loan volume
through a network of approximately 650 independent mortgage brokers and other
financial intermediaries who are all screened and approved by us. No single
source of independent brokers accounted for more than 3% of our total wholesale
mortgage originations. Mortgage brokers are qualified to participate in our
wholesale program after the completion of an application process that includes
our checking and verifying references, resumes, licenses and financial
statements. New broker relationships are established through business
development staff. Approved mortgage brokers are monitored by our wholesale
account representatives and the broker's financial statements are updated and
re-verified on an annual basis.

Our underwriters, all of whom have many years of experience, process and
underwrite mortgage loans. Only those mortgage loan applications that meet our
underwriting criteria are funded.

Wholesale lending allows us to benefit from cost efficiencies derived from not
having to take a mortgage loan application, a labor intensive function, thereby
reducing mortgage loan processing time, as well as being able to centralize
support functions and reduce fixed operating costs. Wholesale lending offers us
economies of scale while building substantial loan volume.

                                    MD - 10
<PAGE>

One measure of efficiency widely used in the mortgage banking business is the
"pull through rate", or a percentage that measures the dollar volume of loans
that are funded versus the dollar volume of loans that we contract for with
mortgage borrowers using interest rate lock commitments. The more loans that we
close and fund, the higher our pull through rate. If we end up not funding and
closing a loan for which we have provided an interest rate lock commitment, then
our pull through rate will be negatively affected. The following table presents
our pull through rates for each of the nine previous quarterly periods:

                                    TABLE 12
                               PULL THROUGH RATES
<TABLE>
<CAPTION>

         Quarter Ended           Jan 07  Oct 06   Jul 06   Apr 06   Jan 06   Oct 05  Jul 05   Apr 05   Jan 05
         -------------           ------  ------   ------   ------   ------   ------  ------   ------   ------
<S>                               <C>     <C>      <C>     <C>      <C>      <C>      <C>      <C>      <C>
         Rate                     60%     73%      75%     75%      73%      75%      75%      74%      77%
</TABLE>


Our pull through rate has declined materially in the last six months. We are
finding that fewer and fewer loan applications will fit the guidelines and
criteria from secondary market investors. This means that our ability to use our
operational staff efficiently is being undermined. While we believe we can
process a greater number of loans with our current staff, we will not,
ultimately, know this until it happens because it will be dependent upon the
quality of our applications (which is currently trending downward).

We generate revenues through gains on the sale of mortgage loans and related
servicing rights to investors, interest generated on mortgage loans held or
warehoused from the time the mortgage loan is originated until the mortgage loan
is sold and, in the case of retail operations, origination fees.

Our wholesale mortgage banking business is directly dependent upon the size of
our capital base. The Company's financing facilities are generally limited to a
maximum leverage ratio of 15 to 1, so for every dollar in additional capital
earned or raised by the company, our financing facilities could be increased by
$15, thereby supporting increased business volumes. As of January 31, 2007, we
had three financing facilities in place for a total borrowing capacity of up to
$78 million. In the aggregate, the Company believes that its existing financing
facilities are adequate to support current business levels. However, failure to
obtain additional financing facilities could limit our ability to expand
substantially our business levels, and failure to maintain existing facilities
would have a material adverse effect on our operations and financial
performance.

WHOLESALE LOAN PRODUCTION

ADMINISTRATION

All mortgage loan applications must be underwritten and approved in accordance
with our underwriting standards and criteria. Underwriting standards used for
conforming loans follow the guidelines and standards issued by FNMA and FHLMC.
Non-conforming (Jumbo) loans are underwritten subject to credit and appraisal
standards established by the specific private investors to whom we intend to
sell these loans. We analyze the borrower's credit standing, financial resources
and repayment ability as well as the risk of the underlying collateral. All
mortgage loans must have a property appraisal provided by an independent third
party, fee-based appraiser. Nationally recognized credit reporting agencies
provide complete reports of the borrower's credit history including bankruptcies
and delinquencies.

A borrower may qualify for a mortgage loan through five mortgage loan
documentation programs:

     1.  Full documentation - the borrower's assets, income and employment are
         all verified by written or verbal confirmation

     2.  Limited documentation - more emphasis is placed on the ability to pay
         and the property value

     3.  Alternative documentation - income and assets are confirmed by
         reviewing the borrower's supporting documentation

     4.  No ratio loan documentation - no income ratios are calculated

                                     MD- 11

<PAGE>

     5.  No income/no asset verification - no income/no asset program, the value
         of the loan collateral is as critical as the borrower's credit history

Each program places a heavy emphasis on credit scores and differing loan to
value ratios.

The Company's underwriting department consists of four underwriters who maintain
the consistent quality of mortgage loans expected by secondary market investors.
The Company generally takes from 24 to 48 hours to underwrite a mortgage loan
from the initial receipt of the application from the broker. Quality
underwriting affects both our exposure to loss from fraud and our ability to
sell the mortgages we originate quickly for favorable prices.

Upon completion of the underwriting process and funding of the loan by one of
our financing facilities, the mortgage loan is closed by a title agency chosen
by the borrower. We perform a pre-funding audit on all mortgage loans, which
includes a verification of certain mortgage loan documentation to determine the
integrity of the data and a review for compliance with underwriting guidelines.
Post-funding audits are performed by an independent third party to monitor and
evaluate our origination policies and procedures. A sample of ten percent of all
mortgage loans closed is subjected to a full quality control review including
re-underwriting the mortgage loan. Our management receives a monthly report on
any deficiencies found in the randomly sampled mortgage loans and believes that
its use of the IRS Verification of Income program increases significantly the
quality of its originations.

WHOLESALE LOAN PRODUCTS

We originate a variety of mortgage loan products. Conforming mortgage loans are
those that qualify for inclusion in guarantee programs sponsored by the Federal
National Mortgage Association (or FNMA) and the Federal Home Loan Mortgage
Corporation (or FHLMC). In addition, the Department of Housing and Urban
Development (or HUD) offers Government Insured loan programs through the Federal
Housing Administration (or FHA) and Veterans Administration (or VA).
Non-conforming mortgage loans are those that do not conform to FNMA, FHLMC, FHA
& VA requirements. The principal deviation from such standards relates to the
size of the mortgage loan although some do not conform because of lower
documentation standards where there is a higher loan-to-value ratio. Those loans
that exceed the FNMA/FHLMC guidelines presently mortgage loans larger than
$417,000) are called Jumbo loans. Jumbo loans comprised approximately 38% and
41% of the wholesale mortgage loans we originated for the quarters ended January
31, 2007 and 2006, respectively.

In periods of declining interest rates, our predominant products are fixed rate
mortgages with terms of either 15 or 30 years. When interest rates are rising,
adjustable rate mortgages make up a larger percentage of our originations.

We primarily originate prime first lien residential mortgage loans. The Company
also originates a lesser amount of second mortgage loans and home equity lines
of credit, although these products have constituted an increasing portion of our
business recently.

The following table details the mortgage loan types originated by the wholesale
division, as measured by principal balance, for the past five quarters:


                                     MD- 12
<PAGE>




                                    TABLE 13
                        WHOLESALE MORTGAGE LOANS BY TYPE
<TABLE>
<CAPTION>

Quarter Ending                                                1/31/07   10/31/06    7/31/06   4/30/06  1/31/06
--------------                                                -------   --------    -------   -------  -------

<C>                                                           <C>        <C>        <C>       <C>        <C>
1 month adjustable-rate (various total terms)                   4.9%      14.6%      13.6%      7.2%       9.6%
6 month adjustable-rate (various total terms)                   0.0        0.3        0.3       1.1        0.6
2 year fixed-rate, adjustable-rate hybrid
   (various total terms)                                        3.8       10.2       11.0      18.8       16.9
3 year fixed-rate, adjustable-rate hybrid
   (various total terms)                                        0.2        0.3        1.4       0.3        0.3
5 year fixed-rate, adjustable-rate hybrid
   (various total terms)                                       22.1       26.7       20.1      21.7       23.0
7 year fixed-rate, adjustable-rate hybrid
   (various total terms)                                        1.4        1.6        1.4       0.8        2.5
10 year fixed-rate, adjustable-rate hybrid
   (various total terms)                                        0.4        1.2        3.5       2.8        0.6
10 year term fixed-rate                                         0.2        0.0        0.0       0.0        0.0
15 year term fixed-rate                                        14.6        8.5       10.3      13.3        7.3
20 year term fixed-rate                                         0.4        1.2        1.9       2.5        2.5
30 year term fixed-rate                                        46.4       29.2       22.7      15.6       19.1
Federal Housing Authority (various total terms and rates)       0.0        0.0        0.0       0.0        0.0
HELOC                                                           0.2        1.2        6.5      11.4       11.2
Equity Line                                                     2.4        2.2        3.5       3.9        5.6
Other                                                           3.0        2.8        3.8       0.6        0.8
Total                                                         100.0%     100.0%     100.0%    100.0%     100.0%
</TABLE>



WHOLESALE LOAN TO VALUE RATIOS

A loan's loan-to-value ratio, or LTV, is an important way for many loan
originators and loan investors to discern risk within a loan. An LTV is
calculated by using the 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
loan amount is $80,000. This assumes the appraised value of the home is at least
$100,000.

The table below shows the wholesale division's first lien mortgage loan
origination volume, as measured by principal balance, within the following LTV
ranges:

                                    TABLE 14
                      WHOLESALE LOAN TO VALUE DISTRIBUTION
<TABLE>
<CAPTION>

                  Quarter Ended          1/31/07     10/31/06     7/31/06     4/30/06      1/31/06
                  -------------          -------     --------     -------     -------       ------
<S>               <C>                    <C>          <C>         <C>         <C>          <C>
                  50 or less               3.8%         3.9%        3.9%        3.4%         4.3%

                  50.01 - 60               3.8          2.4         6.8         4.4          4.8
                  60.01 - 70               6.8          8.8        15.5         9.4         17.1
                  70.01 - 80              68.0         74.5        68.2        77.3         70.3
                  80.01 - 85               1.8          2.0         1.1         2.5          1.0
                  85.01 - 90               2.6          4.4         1.5         2.5          1.0
                  90.01 - 95               5.6          2.0         1.1         0.0          0.5
                  95.01 or more            7.6          2.0         1.9         0.5          1.0
                  Total                  100.0%       100.0%      100.0%      100.0%       100.0%
</TABLE>
                                    MD - 13
<PAGE>

WHOLESALE LOAN CREDIT SCORES

Borrower credit scores are also a very important tool in determining the quality
of loans produced by a lender. In underwriting a potential mortgage loan, we
will obtain credit scores from the borrower's credit report. A credit report
contains information on credit history, including existing and previously repaid
debt, and payment history on each obligation. There are three primary credit
repositories that keep historical data and provide credit reports on potential
borrowers. Each has a scoring model, the most common of which is referred to as
a FICO score. The FICO score is a 3-digit number that can range from 300 to 850
and is based on payment histories, amounts owed, length of credit history, new
credit and types of credit use.

Higher scores are considered better scores. That is, the higher the score, the
more favorably lenders look upon the borrower as a credit risk. Each primary
credit repository produces their own score based on the data they have on a
potential borrower. We compare the scores from the three repositories and
generally will use the middle of the three in rating the risk profile of a
proposed mortgage loan. We generally consider loans to borrowers with FICO
scores below the 600 - 650 range to have higher repayment risk than loans to
borrowers with higher FICO scores, although FICO scores alone do not always
accurately reflect repayment risk or a lack thereof.

The table below shows the trend of FICO scores on mortgages the company
originated over the last five quarters:


                                    TABLE 15
                        WHOLESALE FICO SCORE DISTRIBUTION
<TABLE>
<CAPTION>

                  Quarter Ended          1/31/07     10/31/06     7/31/06     4/30/06      1/31/06
                  -------------          -------     --------     -------     -------       ------

<S>               <C>                    <C>          <C>         <C>         <C>          <C>
                  800 +                    1.6%         1.2%        0.7%        0.6%         0.6%
                  775 - 799               11.6          5.0         5.8         3.9          5.3
                  750 - 774               10.7         12.1         8.7         9.2          8.4
                  725 - 749               13.8         10.9        17.1         9.7         12.4
                  700 - 724               12.8         18.3        16.8        16.7         18.8
                  675 - 699               17.4         19.3        15.4        15.0         18.4
                  650 - 674               12.3         10.6        14.0        21.0         12.9
                  625 - 649                9.1          8.7        12.2        11.7         12.1
                  600 - 624                6.3          5.6         3.7         6.8          5.1
                  575 - 599                1.2          2.5         2.8         4.2          3.1
                  550 - 574                0.0          2.2         0.7         0.6          1.7
                  Below 550                0.8          0.0         1.6         0.3          0.6
                  No score available       2.4          3.6         0.5         0.3          0.6
                  Total                  100.0%       100.0%      100.0%      100.0%       100.0%
</TABLE>



                                    MD - 14
<PAGE>


WHOLESALE GEOGRAPHIC CONCENTRATION

The Company originates wholesale loans most heavily in Texas, California and
Arizona. During the quarters ended January 31, 2007 and 2006, the Company's
wholesale loan origination volume, as measured by principal balance, came from
the following states:

                                    TABLE 16
                     WHOLESALE LOAN GEOGRAPHIC DISTRIBUTION
<TABLE>
<CAPTION>

         Quarter Ended                   1/31/07     10/31/06     7/31/06     4/30/06      1/31/06
         -------------                   -------     --------     -------     -------      -------

<S>                                      <C>          <C>         <C>         <C>          <C>
         California                       20.9%        44.1%       43.5%       38.6%        44.1%
         Arizona                          21.9         35.6        43.2        39.9         40.2
         Nevada                            2.0          4.3         3.7         2.8          2.0
         Florida                           6.5          4.7         3.5        10.8          4.5
         Texas                            30.2          3.4         0.0         0.0          0.0
         Washington                        1.6          3.1         1.6         4.7          4.2
         North Carolina                    4.5          0.0         0.0         0.0          0.0
         Missouri                          4.0          0.0         0.0         0.0          0.0
         Others                            8.4          0.0         4.5         3.2          5.0
         Total                           100.0%       100.0%      100.0%      100.0%       100.0%
</TABLE>


WHOLESALE LOAN PROPERTY TYPES AND SIZES

During the quarters ended January 31, 2007 and 2006, 100% of our wholesale loan
origination volume, as measured by principal balance, was collateralized by
residential property.

The following table shows the trend of loans originated by property type:

                                    TABLE 17
                    WHOLESALE MORTGAGE LOANS BY PROPERTY TYPE
<TABLE>
<CAPTION>


                  Quarter Ended          1/31/07     10/31/06     7/31/06     4/30/06      1/31/06
                  -------------          -------     --------     -------     -------      -------

<S>                                      <C>          <C>         <C>         <C>          <C>
                  Single family           56.5%        59.9%       57.0%       52.8%        57.0%
                  Planned Unit Dev.       33.0         25.2        20.3        29.2         22.5
                  Condominium              7.1         11.2        16.8        14.4         12.9
                  2 - 4 family             3.0          3.7         5.9         3.6          7.6
                  Other                    0.4          0.0         0.0         0.0          0.0
                  Total                  100.0%       100.0%      100.0%      100.0%       100.0%
</TABLE>



                                     MD -15
<PAGE>


The table below shows the trend of the wholesale division's mortgage loan
origination volume, as measured by principal balance:

                                    TABLE 18
                WHOLESALE MORTGAGES BY ORIGINAL PRINCIPAL BALANCE
<TABLE>
<CAPTION>

              Quarter Ended              1/31/07     10/31/06     7/31/06     4/30/06      1/31/06
              -------------              -------     --------     -------     -------      -------

<S>            <C>                       <C>          <C>         <C>         <C>          <C>
               $100,000 or less           37.5%        29.2%       30.8%       36.1%        34.8%
               $100,001-200,000           32.2         29.5        30.8        26.7         24.4
               $200,001-300,000           13.2         12.5        14.7        17.2         17.1
               $300,001-400,000            6.3          9.0         9.1         6.1          9.0
               $400,001-500,000            4.7          9.3         5.4         4.2          6.2
               $500,001-600,000            1.9          5.6         4.0         3.3          2.6
               $600,001-700,000            1.4          2.8         2.6         1.9          2.2
               $700,001-800,000            0.6          0.0         0.7         1.4          0.6
               $800,001-900,000            0.8          0.9         0.5         0.0          0.6
               $900,001-1,000,000          0.6          0.6         1.2         0.8          1.1
               $1,000,001-1,500,000        0.6          0.3         0.2         1.7          1.1
               over $1,500,001             0.2          0.3         0.0         0.6          0.3
                                         100.0%       100.0%      100.0%      100.0%       100.0%
</TABLE>


First lien mortgage loan originations represented 67% and 86% of our wholesale
loan originations, as measured by principal balance, for the quarters ended
January 31, 2007 and 2006, respectively.

WHOLESALE MORTGAGE LOAN FUNDING AND SALES

We originate and purchase all of our mortgage loans with the intent to sell the
mortgage loans, without retaining any interest in them, or in the related
servicing rights, into the secondary market. We sell the mortgage loans with
limited recourse, primarily to institutional investors, national banks and
mortgage lenders. As of January 31, 2007, we had active relationships to sell to
approximately 20 mortgage investors.

As part of the sale, we provide representations and warranties that are
customary to the industry and which cover compliance with program standards,
laws and regulations as well as the accuracy of the information. In the event of
a breach of these representations and warranties, we may be required to
repurchase these mortgage loans and/or may be liable for certain damages. Prior
to the last nine months, any repurchased mortgage loan was able to be corrected
and resold back to the original investor, although a loss may have be incurred
on the sale due to subsequent changes in market conditions since the original
closing date of the loan. Historically, loan repurchases and related losses had
not been material or significant.

However, in the last nine months, we have experienced an unprecedented increase
in loans being identified as problem loans by investors, and we have had to
provide substantial and material indemnifications to the investors in
fulfillment of our representations and warranties. We believe that we will
continue to see more such requirements laid upon us for the better part of the
current calendar year.

We hold the originated or purchased mortgage loan for sale from the time that
the mortgage loan application is funded by us until the time the mortgage loan
is sold to an investor. During that time, the note rate on the mortgage loan
might be higher or lower than the market rate at which we can sell the mortgage
loan to an investor. Therefore, a market gain or loss results on the sale of the
mortgage loan.

To protect against interest rate changes on mortgage loans that are in the
warehouse (mortgage loans that have been funded, but not sold) and committed
pipeline loans (loans which are not yet funded, but on which an interest rate
has been committed to the borrower) we undertake certain activities to protect
our mortgage position. We follow the practice of entering into forward delivery
commitments for the sale of whole mortgage loans to mitigate our exposure to
interest rate risk on substantially all funded and committed mortgage loans.

                                     MD -16

<PAGE>

These forward delivery commitments are either on a "best efforts" or "mandatory"
basis. The best efforts commitments generally result in a lower gain on sale,
but simply require that we make an effort to deliver a loan or group of loans at
a specified interest rate and balance, with no cost or penalty if we fail to
make delivery of such loans. A mandatory commitment generally results in a
higher gain on sale; however, it requires that we deliver loans as promised.
Failure to do so results in the payment of a penalty ("pair-off" fee), which can
be significant in the event of large changes in the interest rate environment.
The Company has not designated its practice of entering into forward delivery
commitments as a hedging activity within the definition of Statement of
Financial Accounting Standard ("SFAS") No. 133, Accounting for Derivative
Instrument and Hedging Activities.

Historically, we have normally sold each loan as it is funded. Doing so has
limited our exposure to changes in the market value of the loan due to interest
rate changes since the period of time from which we fund a loan to when we
receive the proceeds from a secondary market buyer has been in the area of only
two weeks. At the same time, we get a lower gain on sale from the secondary
market for mortgages when we sell the loans one-by-one.

The company has periodically on a "best execution" basis, initiated a program to
accumulate certain types of loans and then sell them in bulk. The types of loans
we have done bulk or mini-bulk sales, have been Home Equity Lines of Credit
(HELOCs) and adjustable rate mortgages (ARMs), both of which are less
susceptible to value changes from changes in interest rates than are fixed rate
mortgages.

The purpose of doing this is to increase our gain on sale, while still limiting
our exposure to changes in loan values from interest rate changes. We have not
engaged in these activities since October, 2005 because the secondary market has
not been willing to pay either any or enough of a premium to compensate us for
the increased risks we take by accumulating loans for sale on an uncovered
basis.

WHOLESALE MORTGAGE LOAN FUNDING

We need substantial cash resources to facilitate the funding and closing of the
originated and purchased loans. These funds are provided on a short-term basis
by financial institutions that specialize in purchasing loans or providing lines
of credit (collectively known as "master sale agreements"). We submit the
mortgage loan to the financial institutions for funding, along with the investor
commitment, if any, to purchase the loan.

As of January 31, 2007, the Company had a maximum mortgage loan financing
capacity of $78 million through three master sale agreements. When the loans
funded under these arrangements are already sold, the lending financial
institutions purchase a 100% loan participation interest in each loan upon the
Company obtaining a firm forward sale delivery commitment from investors and
upon the financial institutions' approval of the loan based on their
underwriting criteria. The Company recognizes income from loans transferred
under these lines as a gain on sale immediately upon the purchase and funding of
the loans by the financial institutions.

In addition, each of these facilities allows the company to accumulate loans
into bulk or mini-bulk pools for sale as a group at the Company's discretion.

The following table shows the average number of days that the Company's
wholesale mortgage loans are with a financial institution or "in the warehouse",
for each quarter for the last nine fiscal quarters:

                                    TABLE 19
                       AVERAGE NUMBER OF DAYS IN WAREHOUSE
<TABLE>
<CAPTION>

         Quarter Ended            Jan07  Oct 06   Jul 06   Apr 06   Jan 06   Oct 05  Jul 05   Apr 05   Jan 05
         -------------            -----  ------   ------   ------   ------   ------  ------   ------   ------
<S>                                <C>     <C>      <C>      <C>      <C>      <C>     <C>      <C>      <C>
Average # of Days                  18      13       13       14       20       19      19       16       15
</TABLE>




                                     MD -17

<PAGE>


THE RETAIL LOAN ORIGINATION DIVISION

Our retail division was established in 1985 and as of January 31, 2007
contracted with 20 commissioned loan officers, who are based in our Campbell and
San Francisco, California offices. While our retail division advertises
frequently in Bay Area newspapers, most of our retail division's business is
generated through customer referrals. Approximately 18% and 24% of the aggregate
dollar value of mortgage loans originated by the retail division were funded by
our wholesale division during the quarters ended January 31, 2007 and 2006.

The retail division completes and processes the mortgage loan applications and
prepares and organizes necessary mortgage loan documents. The retail division
preliminarily underwrites these mortgage loans to conform to either agency
guidelines or private investor guidelines. Mortgage loans that are funded by our
wholesale division are underwritten by the wholesale division. During the
quarters ended January 31, 2007 and 2006, the average loan size originated by
the retail division was approximately $408,000 and $385,000 respectively.

Our retail division generates revenues from the origination and closing fees
that it collects from the mortgage borrower. These are used to pay commissioned
mortgage loan officers, cover the cost of processing the mortgage loan and
contribute to the fixed operating costs of the retail offices. The retail
division contributes to the financial benefit of the Company as a source of
loans for the wholesale division and as a source of loan fees to improve total
profits.

RETAIL LOAN PRODUCTS

Jumbo loans comprised approximately 46% and 41% of the retail mortgage loans we
originated for the quarters ended January 31, 2007 and 2006, respectively.

In periods of declining interest rates, our predominant products are fixed rate
mortgages with terms of either 15 or 30 years. When interest rates are rising,
adjustable rate mortgages make up a larger percentage of our originations. We
originate some home equity financing through second mortgages and lines of
credit using the home as collateral, but these products constitute a small
portion of our business.

Since inception, our marketing niche has been borrowers that have high credit
ratings and require large mortgage loans with low loan to value ratios.

The following table details the mortgage loan types originated by our retail
division, as measured by principal balance, the quarters ended January 31, 2007
and 2006:

                                    TABLE 20
                         RETAIL LOAN ORIGINATION BY TYPE
<TABLE>
<CAPTION>

         Quarter Ended                   1/31/07     10/31/06     7/31/06     4/30/06      1/31/06
         -------------                   -------     --------     -------     -------      -------

<S>                                      <C>          <C>         <C>         <C>          <C>
         Jumbo mortgages                  44.7%        34.7%       25.9%       37.6%        40.6%
         Conventional ARMs                17.5         21.5        27.0        20.5         18.7
         Conventional Fixed               11.4         13.2         4.6         5.1          9.8
         HELOC & Seconds                  26.4         30.6        42.5        36.8         30.9
         Total                           100.0%       100.0%      100.0%      100.0%       100.0%
</TABLE>



                                    MD - 18
<PAGE>


RETAIL GEOGRAPHIC CONCENTRATION

The Company originates retail loans primarily in California. During the quarters
ended January 31, 2007 and 2006, the Company's retail loan origination volume,
as measured by principal balance, came from the following states:

                                    TABLE 21
                       RETAIL LOAN GEOGRAPHIC DISTRIBUTION
<TABLE>
<CAPTION>

         Quarter Ended                   1/31/07     10/31/06     7/31/06     4/30/06      1/31/06
         -------------                   -------     --------     -------     -------      -------

<S>                                       <C>          <C>         <C>         <C>          <C>
         California                       88.6%        88.2%       65.6%       85.5%        78.9%
         Arizona                           8.8          9.7        32.2        12.0         15.4
         New Mexico                        0.8          0.0         0.0         0.0          3.3
         Others                            1.8          2.1         2.2         2.5          2.4
         Total                           100.0%       100.0%      100.0%      100.0%       100.0%
</TABLE>



RETAIL LOAN SIZES

During the quarters ended January 31, 2007 and 2006, the Company's first lien
retail mortgage loan origination volume, as measured by principal balance, was
comprised of loans with original principal balances in the following ranges:

                                    TABLE 22
                 RETAIL MORTGAGES BY ORIGINAL PRINCIPAL BALANCE
<TABLE>
<CAPTION>

               Quarter Ended             1/31/07     10/31/06     7/31/06     4/30/06      1/31/06
               -------------             -------     --------     -------     -------      -------

<S>            <C>                       <C>          <C>         <C>         <C>          <C>
               $100,000 or less           13.2%        16.2%       26.4%       26.5%        19.5%
               $100,001-200,000           18.4         25.7        26.4        17.9         15.5
               $200,001-300,000           11.4          8.3        15.5         9.4         12.2
               $300,001-400,000            8.8         10.4         2.9         4.3         13.8
               $400,001-500,000           14.0         12.5         7.7        12.8         14.6
               $500,001-600,000           11.4          7.6         6.3        10.3          8.9
               $600,001-700,000           11.4          8.3         5.7         5.1          5.7
               $700,001-800,000            4.4          4.2         2.3         6.0          3.3
               $800,001-900,000            1.8          2.1         1.7         0.0          0.0
               $900,001-1,000,000          2.6          2.1         4.0         1.7          1.6
               $1,000,001-1,500,000        2.6          0.7         0.0         3.4          3.3
               over $1,500,001             0.0          2.1         1.1         2.6          1.6
                                         100.0%       100.0%      100.0%      100.0%       100.0%
</TABLE>


First lien retail mortgage loan originations represented 91% and 91% of our
total loan originations, as measured by principal balance, for the quarters
ended January 31, 2007 and 2006, respectively.


                                    MD - 19
<PAGE>



ITEM 3.  CONTROLS AND PROCEDURES

The Company maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in the Company's Securities
Exchange Act reports is recorded, processed, summarized and reported within the
time periods specified in the Securities and Exchange Commission's rules and
forms, and that such information is accumulated and communicated to the
Company's management, including its Chief Executive Officer and its Chief
Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure. Based upon that evaluation and except as noted below, the Chief
Executive Officer and the Chief Financial Officer concluded that the Company's
disclosure controls and procedures were effective. Except as noted below, there
have been no significant changes in the Company's internal controls or in other
factors that could significantly affect these controls, and no corrective
actions taken with regard to significant deficiencies or material weaknesses in
such controls, subsequent to the date of our most recent evaluation of internal
controls.

For the five years ending April 30, 2006, our wholesale division funded between
1,764 and 2,643 loans, and in each of those years we have generally been able to
cure any loan identified as a problem that was sold to investors, taking a
charge or incurring an expense for any such loan upon final resolution. As
indicated in Table 11, for the last four quarters ending January 31, 2007, our
wholesale division funded 1,615 loans.

Because of the past success of our ability to cure any loan identified as a
problem loan without material cost or loss, we did not have a formal process to
review and quantify the loss with respect to any loan so identified.

Management meets every week to discuss the progress of all open early payment
default and premium recapture claims. We evaluate and decide how to proceed on
new and old claims. Depending on the type of claim, we arrange for Demand
Letters to be sent to the mortgage broker and borrower. We also, decide what
matters should continue the course and have the potential for litigation if
needed.

Beginning in April, 2006, we experienced a change in the severity of
deficiencies and the numbers of loans being reported to us as problem loans by
our investors. The table below shows the trend of problems loan notifications:



                                                            Total
                  Notification    # of      # of            Principal
  Investor        Date            Loans     Borrowers       Amount
  ----------------------------------------------------------------------
  A               04/01/06            1          1          $     241,000
  B               05/01/06            8          1          $   1,294,900
  C               05/01/06            6          1          $     929,900
  C               09/08/06            4          2          $   2,125,000
  B               10/01/06            2          1          $     368,000
  D               11/06/06            4          2          $   2,125,000
  D               11/15/06            2          1          $     800,000
  E               11/15/06            1          1          $     117,800
  B               11/15/06            4          2          $   1,759,000
  D               12/19/06            2          1          $     400,000
  B               01/30/07            4          2          $     824,500
  D               01/30/07            2          1          $     205,000

  Totals                              40         16         $  11,190,100





                                     O - 1
<PAGE>


Accordingly, in connection with our evaluation of our internal controls required
by Rule 13a-15, we have changed our accounting method with respect to these
loans. Upon receipt of notice of a problem loan, the Chief Financial Officer
will be notified. The weekly review will continue. At the end of each month, we
will identify each loan that we have been notified as being a problem loan or we
believe to possess some other difficulty. Each such loan will be reviewed to
determine whether the problem identified will be cured or whether we should
accrue a charge and how much. For the foreseeable future, the audit committee
will discuss this monthly review with management and thereafter will review the
situation on a quarterly basis.

In the event of potential for loan losses as a result of an early payoff default
or premium recapture, the matter is elevated to the CEO and the CFO to determine
on how to proceed or arrange for a settlement. The result of a settlement could
be an extension to cure the claim or to indemnify the investor or a buy out of
the liability. With respect to the accounting treatment of those loans
identified as problems, see Notes 10 and 12 to the financial statements.




PART II. OTHER INFORMATION

ITEM 2.  RECENT SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

Reference is made to Note 9 and 11 of the notes to financial statements set
forth in Item 1 hereof with respect to sales of equity securities during the
second fiscal quarter of fiscal 2007. The issuance of the shares described
therein were exempt from registration pursuant to Section 4(2) of the Securities
Act of 1933, as amended.


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

On October 27, 2006 the registrant held its annual meeting of stockholders. At
the meeting, all of the directors were reelected. The following table sets forth
the votes in that election:

           Name                   For        Against    Abstain
           Joseph Kristul      5,398,261     88,632         0
           Maria Kristul       5,402,061     88,832         0
           Robert Forrester    5,399,761     87,132         0
           Alex Rotzang        5,409,361     77,532         0
           Peter Gaskins       5,216,361    270,032         0
           Paul Garrigues      5,211,061    275,832         0
           Dennis Orsi         5,416,561     70,332         0


The stockholders ratified the appointment of Bedinger & Company. The vote was as
follows:

           For                    Against    Abstain
           5,216,671              71,667     199,155




                                      O -2
<PAGE>


ITEM 6.
EXHIBITS AND REPORTS ON FORM 8-K
(a)      EXHIBITS

         31.1     Certification of the Chief Executive Officer pursuant to 18
                  U.S.C. Section 1350 as adopted pursuant to Section 302 of the
                  Sarbanes-Oxley Act of 2002.

                  Certification of the Chief Financial Officer pursuant to 18
                  U.S.C. Section 1350 as adopted pursuant to Section 302 of the
                  Sarbanes-Oxley Act of 2002.

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

                  Certification of the Chief Financial Officer pursuant to 18
                  U.S.C. Section 1350 as adopted pursuant to Section 906 of the
                  Sarbanes-Oxley Act of 2002

(b)      REPORTS ON FORM 8-K

                  On March 13, 2007, the registrant filed an 8-K under Item 8.01
                  which set forth information requiring a restatement of the
                  registrant's second quarter fiscal 2007 financial results.

                                   SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.


                                      Transnational Financial Network, Inc.

Date: March 19, 2007                  /s/ Joseph Kristul
                                      -----------------------------------------
                                      Joseph Kristul, Chief Executive




                                      /s/ Thomas Schott
                                      -----------------------------------------
                                      Thomas Schott, Chief Financial Officer

                                     O - 3
<PAGE>