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 July 31, 2006

       [ ] 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 of              (IRS Employer Identification No.)
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 ____
                                                       --


                      APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuer's classes of common
equity as of September 10, 2006. 6,791,360



<PAGE>




                      TRANSNATIONAL FINANCIAL NETWORK, INC.
                                  July 31, 2006
                                    UNAUDITED





                                TABLE OF CONTENTS

PART I.    FINANCIAL INFORMATION

                                                                        Page
Item 1.  Financial Statements
         Condensed Balance Sheet as of July 31, 2006                    F-2
         Condensed Statements of Operations for
                the three months ended July 31, 2006 and 2005           F-3
         Condensed Statements of Cash Flow for the three months
                ended July 31, 2006 and 2005                            F-4
         Notes to the Condensed Financial Statements              F-5 - F-11

Item 2   Management's Discussion and Analysis of
                Financial Condition and Results of Operations    MD-1 - MD-18

Item 3.  Controls and Procedures                                        O-1

Part II. OTHER INFORMATION

Item 6.  Exhibits and Reports on Form 8K                                O-1

Signatures                                                              O-1




                                      F-1
<PAGE>




PART I. FINANCIAL INFORMATION

ITEM 1.
FINANCIAL STATEMENTS

                      TRANSNATIONAL FINANCIAL NETWORK, INC.
                            CONDENSED BALANCE SHEETS
                               As of July 31, 2006
<TABLE>
<CAPTION>


                                                                                                 July 31, 2006
                                                                                                 -------------
                                                                                                 (Unaudited)

ASSETS
Current Assets:

<S>                                                                                              <C>
Cash and cash equivalents                                                                        $   1,868,833
Restricted cash                                                                                        125,000
Restricted - Certificate of deposit                                                                    900,000
Short-term mortgage related receivables                                                                860,607
Mortgage loans held for sale                                                                         1,281,941
Prepaid Expenses                                                                                       139,998
Fair Value of Financial Instruments                                                                      9,940
                                                                                                         -----

  Total Current Assets                                                                               5,186,319
                                                                                                     ---------

Fixed Assets:
Furniture & Fixtures                                                                                   994,980
Leasehold Improvements                                                                                  98,234
  Accumulated Depreciation                                                                            (996,776)
                                                                                                      ---------

  Total Fixed Assets                                                                                    96,438
                                                                                                        ------

Other Assets:
Goodwill                                                                                               459,934
Other Assets                                                                                           191,845
                                                                                                       -------

  Total Other Assets                                                                                   651,779
                                                                                                       -------


TOTAL ASSETS                                                                                     $   5,934,536
                                                                                                     =========
</TABLE>



             See accompanying notes to these financial statements.

                                       F-2


<PAGE>

                      TRANSNATIONAL FINANCIAL NETWORK, INC.
                            CONDENSED BALANCE SHEETS
                               As of July 31, 2006





                      LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>


                                                                                                July 31, 2006
                                                                                                -------------
                                                                                                 (Unaudited)

CURRENT LIABILITIES:

<S>                                                                                              <C>
Accounts Payable and Other Liabilities                                                           $     308,846
Accrued Interest                                                                                        53,554
Loans Payable                                                                                           35,975
Fair Value of Financial Instruments                                                                     15,069
Income Taxes Payable                                                                                     1,200
Short-term portion of Subordinated debt                                                                850,000
                                                                                                       -------

  Total Current Liabilities                                                                          1,264,644
                                                                                                     ---------



Long-Term Liabilities

Subordinated Debt                                                                                    2,887,700


  Total Long-Term Liabilities                                                                        2,887,700
                                                                                                   -----------



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; 6,791,360 shares issued and outstanding
   at July 31, 2006.                                                                                13,562,038
Common Stock - Subscribed                                                                              900,000
Accumulated deficit                                                                                (12,679,846)
                                                                                                  ------------

Total Stockholders' Equity                                                                           1,782,192
                                                                                                   -----------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                                       $   5,934,536
                                                                                                   ===========
</TABLE>

             See accompanying notes to these financial statements.

                                       F-3


<PAGE>


                      TRANSNATIONAL FINANCIAL NETWORK, INC.
                       CONDENSED STATEMENTS OF OPERATIONS
                  For the Quarters Ended July 31, 2006 and 2005
<TABLE>
<CAPTION>

                                                                                            (Unaudited)


                                                                                         2006         2005
                                                                                         ----         ----
Revenue:
<S>                                                                                <C>          <C>
Net Gain on Sale of Loans                                                          $1,190,089   $1,897,026
Production Income                                                                   1,315,724    1,494,851
Other Income                                                                            5,680       20,283
                                                                                        -----       ------

Total Revenue                                                                       2,511,493    3,412,160

Direct Expenses:
Commissions & Production Incentives                                                   868,432    1,043,754
Production Expenses                                                                   345,016      208,780
Early Loan Payoff Penalties                                                                 -       15,000
                                                                                   -----------       ------
Pair-Off Fees

Total Direct Expenses                                                               1,213,448    1,267,534

Interest Income (Expenses):
Interest Income from loans in warehouse                                               259,393      468,372
Interest Expense on loans in warehouse                                               (265,780)    (405,740)
Warehouse transaction fees                                                            (31,534)     (45,475)
                                                                                      --------    ---------

Net warehouse interest income (expense)                                               (37,921)      17,157

Interest Expense - Subordinated Debt                                                  (91,318)     (87,081)
                                                                                     ---------    ---------
Net Interest Income (Expense)                                                        (129,239)     (69,924)

Gross Profit on Mortgage Activities                                                 1,168,806    2,074,702

Indirect Expenses:
Salaries & Benefits                                                                   964,187    1,118,796
General & Administrative                                                              759,353      586,277
Occupancy                                                                             183,425      174,641
Depreciation & Amortization                                                            22,785       18,156
                                                                                       ------      -------

Total Indirect Expenses                                                             1,929,750    1,897,870

Operating Loss                                                                     $ (760,944)  $  176,832

Other Interest Income (Expense)                                                        22,937       18,373
Chg in fair value of financial instrument                                             (10,288)      47,179
                                                                                       -------      ------
Total Other Income (Expense)                                                           12,649       65,552

Net Loss before Taxes                                                                (748,295)     242,384
                                                                                     =========     =======

Basic net loss per share                                                              $(0.11)       $0.04
Fully diluted loss per share                                                          $(0.11)       $0.04

Weighted-average shares outstanding
Basic                                                                               6,791,360    6,791,360
Diluted                                                                             6,791,360    6,795,110
</TABLE>


             See accompanying notes to these financial statements.

                                       F-4

<PAGE>


                      TRANSNATIONAL FINANCIAL NETWORK, INC.
                       CONDENSED STATEMENTS OF CASH FLOWS
                  For the Quarter Ended July 31, 2006 and 2005
                                   (Unaudited)
<TABLE>
<CAPTION>

                                                                         2006                      2005
                                                                  ------------------         -----------------

Cash flows from operating activities:

<S>                                                               <C>                        <C>
Net income (loss)                                                 $         (748,295)        $         242,384
Adjustments to reconcile net income (loss) to net cash
   Used in operating activities:
     Depreciation and amortization                                            22,785                    18,156
     Provision for early loan payoffs                                              -                    15,000
     Changes in Restricted Cash Requirement                                                             (5,000)
     Change in fair value of financial instruments                            10,288                   (47,179)
Net effect of changes in assets and liabilities:
     Other assets                                                              2,734                   (19,258)
     Prepaid Expenses                                                         (1,477)                        -
     Accrued interest payable                                                 12,282                    16,956
     Accounts payable and other liabilities                                 (133,079)                   (8,011)
                                                                                   -
Net effect of changes in mortgage lending activities:
     Short-term mortgage related receivable                                  (55,185)                  (89,985)
     Mortgage loans originated for sale                                 (145,852,987)             (129,989,923)
     Proceeds from sales of mortgage loans                               145,611,987               130,247,211
                                                                     ---------------           ---------------

Net cash (used) provided by operating activities:                         (1,130,947)                  380,351
                                                                     ----------------          ---------------


Cash flows from investing activities:

Purchases of property and equipment                                           (8,959)                  (18,156)
                                                                              -------                  --------
Net cash (used) by investing activities:                                      (8,959)                  (18,156)
                                                                              -------                  --------


Cash flows from financing activities:

Financing provided by insurance                                               (3,900)                        -
Common Stock Subscribed                                                      900,000                         -
Stock options exercised                                                        3,000


Net cash provided by financing activities:                                   899,100                         -
                                                                     ---------------           ---------------


Net (decrease) increase in unrestricted
     cash and cash equivalents                                              (240,806)                  362,195

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

Unrestricted cash and cash equivalents, end of period             $        1,868,833         $       3,420,335
                                                                     ===============           ===============


Interest paid                                                     $          304,855         $         386,289
Income taxes paid                                                 $               -0-        $              -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 three-month periods ended July 31, 2006 and
2005 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 most recently filed
Form 8K 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 three-months
ended July 31, 2006 and 2005 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 Accounting Points Bulletin (APB)
25 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:


                                     F - 6
<PAGE>

<TABLE>
<CAPTION>



                                                                  Three-Months Ended
                                                                  ------------------
                                                                     July 31       July 31
                                                                      2006          2005
                                                                      ----          ----

Net loss:
<S>                                                               <C>              <C>
As reported                                                       (798,295)        242,384

Deduct:  fair value amount                                               0              0
                                                                         -              -
Pro forma                                                         (798,295)        242,384

Basic (loss) per common share:
As reported                                                           (0.11)         0.04
Deduct:  fair value amount                                             0.00          0.00
                                                                       ----          ----
Pro forma                                                             (0.11)         0.04

Diluted (loss) per common share:
As reported                                                           (0.11)        (0.07)
Deduct:  fair value amount                                             0.00         (0.02)
                                                                       ----        -------
Pro forma                                                             (0.11)        (0.09)
</TABLE>


There were no options granted during the quarter ended July 31, 2006. 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 July 31, 2006, the Company had a maximum mortgage loan financing capacity
of $75 million through two 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 three-month period ended July 31, 2006 the
Company had no loans subject to any purchase agreements. During the three-month
period ending July 31, 2005 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

                                     F - 7

<PAGE>

the financial institution, until it is ultimately resold to a third party
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 $15 million as of
July 31, 2006. Under this arrangement, an additional bulge capacity of $20
million is available if needed, bringing the total capacity under this
arrangement to $35 million. The Company has not used this interim bulge capacity
to date. Interest on the $15 million portion of the line is at the Prime Rate or
3.99%, whichever is higher. Prime was 8.25% at July 31, 2006. Interest on the
remaining $20 million of the line is 0.05% higher than that charged on the $15
million portion. The rate paid by the Company on this line as of July 31, 2006
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 sheets. 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. The
second master sale agreement provides a credit facility of $40 million as of
July 31, 2006. 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
July 31, 2006 was between 7.28% and 7.90%. 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 sheets.

These two 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 July 31, 2006 the Company was not in compliance with its net income
financial covenant but anticipates compliance prior to its fiscal year end,
April 30, 2007.

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 July 31, 2006, the Company had a total of $3,737,700 of subordinated
debentures outstanding, of which $850,000 is represented as the short-term
portion in our balance sheet as of July 31, 2006. 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 $1,050,000 of subordinated debt bears interest at 10%, and has
maturities ranging from October 31, 2006 to October 1, 2007.

Subordinated debt interest expense of $91,318 and $87,081 was incurred in the
three-month periods ended July 31, 2006 and 2005, 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.


                                     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. 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 July 31, 2006 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        692,345            6.04             $0.73            692,345           $0.73
                $1.01 - $2.45        243,201            7.23             $1.24            243,201           $1.24
                    $7.50            258,000            3.53             $7.50            258,000           $7.50
                                     -------                                              -------
                                   1,193,546            6.15             $2.30          1,193,546           $2.30
                                   =========                                            =========
</TABLE>


As of July 31, 2006, 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 July 31, 2006,
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.

In June 2002, the Board of Directors of the Company unanimously granted to
Joseph Kristul, the Chief Executive Officer of the Company, an option to
purchase 300,000 shares of the Company's common stock at an exercise price of
$0.73 per share. The shares will be unregistered. The options are vested as of
April 30, 2005 and as noted above expire in four years. 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.


                                     F - 9
<PAGE>


Accordingly, the following table is a roll forward of the share reserve limit
through July 31, 2006:
<TABLE>
<CAPTION>

                                                                                Number of Options

<S>               <C>                                                               <C>
                  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
                                                                                    ---------
                  Reserve amount at July 31, 2006                                   1,941,376
</TABLE>


The table below summarizes aggregate activity for all options programs for the
three-month period ended July 31, 2006:
<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                                                         -                       -
Forfeitures                                                                    -                       -
                                                                       ---------                   -----
Outstanding at July 31, 2006                                           1,193,546                   $2.30
                                                                       =========                   =====
</TABLE>


As of July 31, 2006, there were 45,000 warrants to purchase shares of the
Company's common stock outstanding. The exercise prices of the warrants ranged
from $0.55 to $7.50.

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
                                                                                            ------------------
                                                                                            July 31        July 31
                                                                                             2006           2005
                                                                                             ----           ----

<S>                                                                                      <C>             <C>
Net Income (Loss)                                                                        $ (748,295)     $  242,384
Weighted average of shares outstanding                                                    6,791,360       6,791,360
Basic net loss per share                                                                 $    (0.11)     $     0.04
Effect of dilutive options                                                                        -               -
Diluted weighted average of shares outstanding                                            6,791,360       6,795,110
Diluted net loss per share                                                               $    (0.11)     $     0.04
</TABLE>


As of July 31, 2006 and 2005, potential dilutive securities of 4,166,772 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 July 31, 2006 and April 30, 2005, including financial
instruments whose contract amount represents credit risk only is as follows:

                                                          July 31, 2006
                                                          ----------------
Commitments to extend credit                              $     14,981,800
Mandatory forward delivery commitments                           3,609,450

                                     F - 10
<PAGE>

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 July 31, 2006, 1,285,000 shares of the 3.0 million contracted to be sold
had been subscribed and paid for. As of September 12, 2006, a total of 1,748,000
shares, for a gross amount of funds received by the Company of $1,223,600, had
been subscribed and paid for.



Note 10 - Restatements

As disclosed in a Form 8-K filing dated February 23, 2006, pursuant to internal
management review, our management, audit committee, and prior outside
independent accountant, Burr, Pilger & Mayer, LLP, concluded that our accounting
for the Fair Value of Financial Instruments pursuant to SAB 105, which we
adopted at the end of fiscal year 2004, and SFAS 133 had been incorrect.

There were two errors detected. First, there was an error in the underlying
worksheets calculating the change in value of our locked pipeline of mortgage
loan commitments to borrowers. This error resulted in a reversal of the sign of
the change in value the locked pipeline. Second, we did not properly account for
the derivative value of the "best efforts" loan locks we secure with secondary
market investors upon making loan commitments to borrowers.

We report the "Fair Value of Financial Instruments" as an asset or liability on
our balance sheet. The change in this amount from period to period is included
in our statement of operations.

These matters affected our annual report on Form 10-KSB for the years ended
April 30, 2005 and 2004 and our quarterly reports on Form 10-QSB for the
quarters ended July 31, October 31, 2005 and 2004 and our quarterly report on
Form 10-QSB for the quarter ended January 31, 2005.

The table below presents the changes to the statement of operations for the
first quarter ended July 31, 2005 and the changes to the balance sheet for the
period ending July 2005.


                                     F -11
<PAGE>




                                             Three Months ended July 31, 2005
                                             --------------------------------
                                          As Reported       Restated     % Chg.
                                          -----------       --------     ------
Changes in fair value
 of financial instruments                 $(70,947)         $(47,179)   -33.5%
Net Loss                                  $266,152          $242,384     -8.9%
Earnings per Share                        $  0.04           $  0.04       0.0%


                                     F - 12
<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 ENDED JULY 31, 2006 COMPARED TO QUARTER ENDED JULY 31, 2005

For the recently ended quarter, year-over-year revenues decreased 26%, gross
profits decreased 44% and the net income swung from a profit of $242,000 to loss
of $748,000.

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            7/31/06    4/30/06    1-31-06  10-31-05    7-31-05  4-30-05  1-31-05 10-31-04   7-31-04
-------------            -------    -------    -------    ------     ------   ---------------   ------   -------

<S>                        <C>        <C>       <C>       <C>        <C>        <C>       <C>       <C>       <C>
Wholesale                  $ 94       $ 80      $ 81      $100       $130       $ 84      $ 91      $ 94      $ 98
Retail                       52         45        47        69         79         71        72        64        83
                             --        ---      ----      ----       ----       ----      ----      ----      ----
Total                      $146       $125      $128      $169       $209       $155      $163      $158      $181
                           ====       ====      ====      ====       ====       ====      ====      ====      ====
</TABLE>


REVENUE ANALYSIS

In the first quarter, the most significant factors leading to the 26% revenue
decline were as follows:

      1.  Our Net Gain on Sale of Loans declined 37%, in contrast to a 28%
          decline in our mortgage originations.

      2.  Our Net Gain on Sale of Loans margin declined from 147 basis points to
          127 basis points. Somewhat less then half of this decline was due to
          the absence of receipt of Forwared Commitment Payout Fees in the
          recently ended quarter, compared to the recognition of $125,000 of
          such fees a year ago. The rest of the decline reflects pricing
          pressures in the secondary markets as the final buyers of (investors
          in) debt securities have increasingly greater choices than they have
          had in the past few years.

      3.  Secondarily, Production Income decreased only 12% in the face of a 29%
          decline in the total number of loans originated by the company in the
          recently ended quarter.

We believe that the slowing of the housing markets and increased interest rates
that has occurred over the last year has decreased the demand for mortgages
generally, and in our principal markets, California and Arizona particularly,
with consequent decrease in mortgage originations and our revenues.


                                     MD - 1
<PAGE>


As we noted in our last several reports, in mid-fiscal 2005, we set up a
wholesale origination operation (Alt Funding) that operates in parallel to our
existing one. The purpose is to focus on a different market segment than the
Alt-A borrowers of our traditional focus. This market is for borrowers with
lower credit scores, but higher than what one normally sees in sub-prime
mortgage lending. We consider them to be Alt-A-Minus borrowers. We initially set
this operation up on a pilot basis in our Arizona office, and have rolled it out
to our other markets.

The growth in our Alt Funding business has two effects on the types of loans we
originate. First, since the borrowers typically have financial abilities, a
declining portion of our loans is comprised of first liens. I.e., we are making
a greater portion of loans of the second lien and/or home equity line types than
in earlier periods; For example, the portion of loans in the recently ended
quarter that were first liens was 62%, a material drop from the 83% in the
comparable period a year ago . Second, the average credit scores of our loans
are going down in parallel.

Specifically, the percentage of our loans (by principal loan balance) where the
borrower's FICO score is 650 or above has declined from 86.2% to 78.5% over the
last year. The most significant increase occurred among borrowers with FICO
scores in the 600 to 649 range, rising from 12.3% to 15.9% in the same period of
time.

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

<S>               <C>                    <C>          <C>         <C>         <C>          <C>
                  Above 700               49.1         40.1        45.5%       49.4%        54.3%
                  650-699                 29.4         36.0        31.3        30.0         31.9
                  600-649                 15.9         18.5        17.2        16.6         12.3
                  550-599                  3.5          4.8         4.8         2.6           .2
                  Below 550                1.6          0.3         0.6         1.2           .2
                  Not available            0.5          0.3         0.6         0.2          1.1
                                           ---          ---         ---         ---         ----
                  Total                  100.0%       100.0%      100.0%      100.0%       100.0%
</TABLE>



In addition the Loan-to-Value (LTV) ratio of our loans has declined materially
over the last year. For example, the percentage (by dollar value) of our loans
with less than 70% LTVs decreased from 34.0% in the quarter a year ago to 26.2%
in the recently ended quarter. Part of this is due to the growth of our
Alt-Funding business. Over the last year borrowers are obtaining mortgage loans
whose amount constitutes a higher percentage of the value of the property
securing that mortgage loan, that is an increased Loan-to-Value or LTV ratio.

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. Somewhat
less than half was due to there being no Forward Commitment Payout Fees
recognized in the recently ended quarter. The rest is attributable to pricing
pressures in the secondary purchase market for mortgages.

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

Quarter Ended          7/31/06    4/30/06   1-31-06   10-31-05   7-31-05    4-30-05    1-31-05  10-31-04    7-31-04
-------------          -------    -------   -------   --------   -------    -------    -------  --------    -------

<S>                       <C>       <C>        <C>       <C>        <C>       <C>        <C>       <C>        <C>
Gain on Sale              127       136        169       139        147       163        119       145        113
</TABLE>

                                     MD - 2

<PAGE>

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. While this was not material in the recently ended quarter, it will
likely be, although episodically so, in the future.

                                     TABLE 4
                     FORWARD COMMITMENT PAYOUT FEES RECEIVED
                                    ($ 000's)
<TABLE>
<CAPTION>

Quarter Ended          7/31/06    4/30/06   1/31/06   10/31/05   7-31-05    4-30-05    1-31-05  10-31-04    7-31-04
-------------          -------    -------   -------   --------   -------    -------    -------  --------    -------

<S>                       <C>       <C>       <C>        <C>      <C>         <C>      <C>       <C>          <C>
Fees Received             $-0-      $-0-      $125       $87      $ 125       $98      $ 105     $ 271        $-0-
</TABLE>


GROSS PROFIT ANALYSIS

Gross profits for the quarter just ended decreased by 44%, materially worse than
our 26% revenue decline. The principal reasons are as follows:

      1.  Our Direct Operating expenses declined only 4%, a contrast to our 26%
          revenue decline. The lesser decline of our Direct Operating expenses
          reflects the increased compensation required to keep our production
          personnel and the increased production personnel compensation
          expenses/guarantees associated with opening new offices that have not
          yet become productive.

      2.  Total Net Interest Expense increased 85%, or $60,000. Warehouse
          interest expense decreased 34.5%, a somewhat greater rate of decline
          than the 28% decline of our wholesale originations, despite increased
          borrowing rates over the last year. This is due to a shorter time our
          loans spent being financed prior to transfer to the secondary market
          buyers. I.e., the average number of Days in the Warehouse dropped from
          19 a year ago to 13 in the recent quarter.

          More than offsetting this, however was a 45% decline in our Interest
          Income from loans in the warehouse. As normally happens in rising
          interest rate environments, borrowers increasingly turn to low, or
          teaser, rate Adjustable Rate Mortgages. The interest rates we receive
          on these types of loans are lower than our warehouse financing costs.
          Thus, our carry interest turned from a positive $63,000 a year ago to
          a negative $6,000 this year.


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

Quarter Ended            7/31/06    4/30/06   1-31-06   10-31-05    7-31-05    4-30-05    1-31-05   10-31-04    7-31-04
-------------            -------    -------   -------   --------    -------    -------    -------   --------    -------

<S>                        <C>       <C>        <C>       <C>        <C>       <C>        <C>       <C>         <C>
Gross Profit Margin        46.5%     48.9%      51.6%     59.4%      60.8%     57.6%      61.7%     66.6%       61.0%
</TABLE>


INDIRECT EXPENSE ANALYSIS

Our Indirect Expenses increased 2% on a year-over-year basis during the recently
ended quarter.

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 has been
associated with our attempts 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.


                                     MD - 3
<PAGE>




                                     TABLE 6
                         INDIRECT EXPENSE AND COMPONENTS
                                    ($ 000s)
<TABLE>
<CAPTION>

Quarter Ended            7/31/06    4/30/06    1-31-06  10-31-05   7-31-05    4-30-05    1-31-05   10-31-04    7-31-04
-------------            -------    -------    -------  --------   -------    -------    -------   --------    -------

<S>                      <C>         <C>       <C>      <C>        <C>        <C>        <C>       <C>         <C>
Total Indirect Exp.      $1,930      $1,851    $1,844   $1,936     $1,898     $1,823     $1,661    $1,637      $1,702
    Percent of Rev.        76.8%       83.2%     73.3%    65.2%      55.6%      65.0%      75.6%     66.9%       68.3%

Selected Components:
    Salaries and Ben.    $  964      $  938    $  962   $1,222     $1,119     $1,086     $  949    $  895      $  950
    Percent of Rev.         8.4%       42.2%     38.3%    41.2%      32.8%      38.8%      43.2%     36.5%       38.2%

    Gen. and Admin.      $  759      $  712    $  687   $  521     $  586     $  515     $  520    $  550      $  559
    Percent of Rev.        30.2%       32.0%     27.3%    17.5%      17.2%      18.3%      23.7%     22.5%       22.5%
</TABLE>


LIQUIDITY AND CAPITAL RESOURCES

Our unrestricted and restricted cash position plus liquid investments as of July
31, 2006, decreased by $240,806 from what it was at the end of our last fiscal
quarter, April 30, 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 last quarter, 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.

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 - 4
<PAGE>


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

                                                                               Change from Prior Period End
                                                                 Quarter           Quarter           Quarter          Quarter
Sources (Uses)                                                   7-31-06           4-30-06           1-31-06         10-31-05
-----------------------------------------------------------------------------------------------------------------------------


Operating Cash Flows
Income Statement Related Cash Flows
<S>                                                         <C>              <C>                <C>              <C>
Net Income (Loss)                                           $  (748,295)     $(1,555,317)       $ (488,566)      $ (152,312)
Add back non-cash charges/(income)
Depreciation & Amortization                                      22,785           23,599            20,595           17,960
Accrued liability write-down                                          0                0                 0          (61,333)
Impairment of goodwill                                                0          797,855                 0                0
Fair value of financial derivatives changes                      10,288           21,141           (25,106)           4,753
Income taxes payable                                                  0              864                 0                0
Provision for early payoff penalties,
   net of payments                                                2,500                0                 0                0
Actual early payoff penalties paid                               (7,529)          (4,599)          (13,790)         (20,475)
                                                                 -------          -------          --------         --------
Operational Cash Flows from the Income Statement               (720,251)        (716,457)         (506,867)        (211,405)

Balance Sheet Related Cash Flows
Mortgages held for sale                                        (241,000)          54,380          (205,191)         574,032
Short-term mortgage receivables                                 (50,156)        (211,854)          293,306         (133,495)
Prepaid Expenses                                                 (1,477)         (33,240)           10,871           15,887
Other Assets                                                      2,734           (5,500)            2,478              221
Accounts payable and other accrued liabilities                 (120,797)          99,960          (278,424)         (30,548)
                                                               ---------          ------          ---------         --------
Operational Cash Flow from the Balance Sheet                   (410,696)         (96,254)         (176,940)         426,097

Total Cash Flow Generated/(Used) in Operations               (1,130,947)        (812,711)         (683,807)         214,692

Financing Activity Cash Flows
Financing provided for insurance                                 (3,900)               0                 0                0
Deposits received for Common Stock                              900,000                0                 0                0
Stock options exercised                                           3,000                0                 0                0
Capital lease obligations change                                      0           39,874                 0                0
                                                                      -           ------                 -                -
Total Cash Flow from Financings Activities                      899,100           39,874                 0                0

Investing Activity Cash Flows
Purchase of property and equipment                          $    (8,959)     $   (15,893)       $  (21,901)      $  (30,950)

Total Cash Flow from Investing Activities                   $    (8,959)     $   (15,893)       $  (21,901)      $  (30,950)

Net Change to Aggregate Cash                                $  (240,806)     $  (788,730)       $ (705,708)      $  183,742
</TABLE>

                                     MD - 5
<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 lost about $720,000 in cash flow from income
          statement-related operations during the recently ended quarter. This
          reflects our low level of mortgage originations in the period, and the
          fact that we had not yet taken actions to stem the losses as of July
          31, 2006.

      2.  The Company decreased its Mortgages Held for Sale by $241,000 in the
          recently ended quarter. This asset tends to fluctuate from quarter to
          quarter due to where the Company is at any particular point in time
          with respect to its accumulation of mortgages for bulk sale, as well
          as our overall origination volume. Since we stopped accumulating
          mortgages for bulk sale in October, 2005, the swing in the current
          quarter due to our lower origination level was magnified.

      3.  The Company decreased Short-Term Mortgage-Related Receivables by
          approximately $50,000. This largely reflects the large drop in
          mortgage origination volume in the quarter.

      4.  The Company received $900,000 in the quarter as deposits for the
          purchase of common shares as part of the capital raising activity
          previously discussed in the Notes to the Financial Statements.

      5.  The paying down of Accounts Payable and other Accrued Liabilities in
          the quarter resulted in the use of approximately $121,000 of cash in
          the quarter just ended. This principally reflects the lower level of
          business the company generated during the past quarter, thus creating
          a corresponding low level of payables and accruals.

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 July 31, 2006, the Company had a total of two financing
facilities for a maximum financing capacity of up to $75 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
$125,000 and a restricted certificate of deposit of $900,000.

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

Our overall funding strategy is to use committed facilities, summarized as of
July 31, 2006:

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

                             Committed        Outstanding     Required        Interest Rate
Type of Facility             Facility           Balance     Cash Deposit      July 31, 2006      Maturity
----------------           -------------    --------------  ------------      -------------      --------

<S>                            <C>           <C>             <C>                <C>              <C>
Master sales agreement         $35,000,000   $   5,732,729   $ 100,000          8.25%(1)         Annual or 30 days notice
Master sales agreement          40,000,000      10,686,421      25,000          7.28 - 7.90%(2)  Annual or 30 days notice
                               -----------   -------------   ---------
Totals                         $75,000,000   $  11,129,050   $ 125,000
                               ===========   =============   =========
</TABLE>



(1)  For the first $15 million of this facility, the contractual interest rate
     facility was 3.99% or Prime, whichever is greater. The rate for the next
     $20 million is 0.05% greater than the rate for the first $15 million.

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

                                     MD - 6

<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

         October 31, 2006                                   $   50,000
         March 31, 2007                                     $  800,000
         May 31, 2007                                       $  200,000
         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

                                                             July 31,
                                                               2006

Commitments to extend credit                                 21,772,820
Mandatory forward delivery commitments                        2,741,500

                                     MD - 7
<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, 2005, 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 July 31, 2006 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 - 8
<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                       7/31/06           4/30/06           1/31/06         10/31/05          07/31/05
--------------                       -------           -------           -------         --------          --------

Wholesale Division
<S>                                 <C>               <C>               <C>              <C>               <C>
         Volume                     $ 93,898          $ 80,233          $ 80,624         $100,467          $129,469
         Percent of Volume                64%               64%               63%              59%               62%

         Number of Loans                 426               360               357              492               617
         Average Loan Size          $    220          $    223          $    226         $    204          $    210

Retail Division
         Volume                       51,955          $ 45,288          $ 47,391         $ 68,617          $ 79,092
         Percent of Volume                36%               36%               37%              41%               38%

         Number of Loans                 172               117               123              205               223
         Average Loan Size          $    302          $    387          $    385         $    335          $    355

Total Loan Production
         Volume                     $145,853          $125,521          $128,015         $169,084          $208,561
         Number of Loans                 598               477               480              697               840
         Average Loan Size          $    244          $    263          $    267         $    243          $    248
</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 July 31, 2006, 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 - 9

<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            Jul06   Apr06    Jan06    Oct05   Jul 05   Apr 05   Jan 05   Oct 04  Jul 04
         -------------            -----   -----    -----    -----   ------   ------   ------   ------  ------

<S>                               <C>     <C>      <C>      <C>      <C>     <C>      <C>      <C>     <C>
         Rate                     75%     75%      73%      75%      75%     74%      77%      65%     66%
</TABLE>


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 July 31, 2006, we had
two financing facilities in place for a total borrowing capacity of up to $75
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 are those promulgated by FNMA and FHLMC. Non-conforming (Jumbo)
loans are underwritten subject to credit and appraisal standards established by
specific private investors. 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

     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

                                    MD - 10

<PAGE>

underwriting affects both our exposure to loss from fraud and our ability to
sell the mortgages we originate quickly for favorable prices. For this reason,
we are retaining our underwriting staff, even though we are not currently making
full use of it. We believe we could process 2-3 times the number of loans we are
currently doing with our current staff.

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 21% and
41% of the wholesale mortgage loans we originated for the quarters ended July
31, 2006 and 2005, 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- 11
<PAGE>





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


Quarter Ending                                                7/31/06    4/30/06    1/31/06  10/31/05   7/31/05
--------------                                                -------    -------    -------   --------------------

<C>                                                           <C>        <C>        <C>       <C>        <C>
1 month adjustable-rate (various total terms)                  13.6%       7.2%       9.6%      5.9%       4.1%
6 month adjustable-rate (various total terms)                   0.3        1.1        0.6       0.4        2.3
2 year fixed-rate, adjustable-rate hybrid
   (various total terms)                                       11.0       18.8       16.9      16.4        4.0
3 year fixed-rate, adjustable-rate hybrid
   (various total terms)                                        1.4        0.3        0.3       0.8        1.0
5 year fixed-rate, adjustable-rate hybrid
   (various total terms)                                       20.1       21.7       23.0      24.2       33.5
7 year fixed-rate, adjustable-rate hybrid
   (various total terms)                                        1.4        0.8        2.5       0.4        1.2
10 year fixed-rate, adjustable-rate hybrid
   (various total terms)                                        3.5        2.8        0.6       0.0        0.0
10 year term fixed-rate                                         0.0        0.0        0.0       0.0        0.0
15 year term fixed-rate                                        10.3       13.3        7.3       4.9        3.2
20 year term fixed-rate                                         1.9        2.5        2.5       2.8        0.5
30 year term fixed-rate                                        22.7       15.6       19.1      21.4       28.4
Federal Housing Authority (various total terms and rates)       0.0        0.0        0.0       0.0        0.0
HELOC                                                           6.5       11.4       11.2      11.0       12.4
Equity Line                                                     3.5        3.9        5.6       5.9        7.0
Other                                                           3.8        0.6        0.8       5.9        2.4
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          7/31/06      4/30/06     1/31/06    10/31/05     07/31/05
                  -------------          -------      -------     -------     -------     --------

<S>               <C>                    <C>          <C>         <C>         <C>          <C>
                  50 or less               3.9%         3.4%        4.3%        6.0%         8.9%
                  50.01 - 60               6.8          4.4         4.8         4.9          4.9
                  60.01 - 70              15.5          9.4        17.1        19.1         20.2
                  70.01 - 80              68.2         77.3        70.3        65.7         63.4
                  80.01 - 85               1.1          2.5         1.0         1.8          2.0
                  85.01 - 90               1.5          2.5         1.0         1.8          0.0
                  90.01 - 95               1.1          0.0         0.5         0.0          0.6
                  95.01 or more            1.9          0.5         1.0         0.7          0.0
                  Total                  100.0%       100.0%      100.0%      100.0%       100.0%
</TABLE>

                                    MD - 12

<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         07/31/06      4/30/06     1/31/06    10/31/05     07/31/05
                  -------------         --------      -------     -------     -------     --------

<S>               <C>                    <C>          <C>         <C>         <C>          <C>
                  800 +                    0.7%         0.6%        0.6%        1.2%         1.7%
                  775 - 799                5.8          3.9         5.3         4.5          7.1
                  750 - 774                8.7          9.2         8.4        12.8         11.8
                  725 - 749               17.1          9.7        12.4        15.0         17.9
                  700 - 724               16.8         16.7        18.8        15.9         15.8
                  675 - 699               15.4         15.0        18.4        15.0         20.5
                  650 - 674               14.0         21.0        12.9        15.0         11.4
                  625 - 649               12.2         11.7        12.1         9.7          8.7
                  600 - 624                3.7          6.8         5.1         6.9          3.6
                  575 - 599                2.8          4.2         3.1         1.8          0.0
                  550 - 574                0.7          0.6         1.7         0.8          0.2
                  Below 550                1.6          0.3         0.6         1.2          0.2
                  No score available       0.5          0.3         0.6         0.2          1.1
                  Total                  100.0%       100.0%      100.0%      100.0%       100.0%
</TABLE>



                                     MD- 13
<PAGE>


WHOLESALE GEOGRAPHIC CONCENTRATION

The Company originates wholesale loans most heavily in California and Arizona.
During the quarters ended July 31, 2006 and 2005, 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                   7/31/06      4/30/06     1/31/06    10/31/05     07/31/05
         -------------                   -------      -------     -------    --------     --------

<S>                                      <C>          <C>         <C>         <C>          <C>
         California                       43.5%        38.6%       44.1%       36.9%        44.7%
         Arizona                          43.2         39.9        40.2%       54.3%        43.1%
         Nevada                            3.7          2.8         2.0%        2.6%         5.3%
         Florida                           3.5         10.8         4.5%        2.4%         3.9%
         Washington                        1.6          4.7         4.2%        0.0%         0.0%
         Others                            4.5          3.2         5.0%        3.8%         3.0%
         Total                           100.0%       100.0%      100.0%      100.0%       100.0%
</TABLE>


WHOLESALE LOAN PROPERTY TYPES AND SIZES

During the quarters ended July 31, 2006 and 2005, 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
                            (Quarters Ending July 31)
<TABLE>
<CAPTION>

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

<S>                                      <C>          <C>         <C>         <C>          <C>
                  Single family           57.0%        52.8%       57.0%       48.4%        46.4%
                  Planned Unit Dev.       20.3         29.2        22.5        26.4         35.4
                  Condominium             16.8         14.4        12.9        19.3         10.3
                  2 - 4 family             5.9          3.6         7.6         5.5          7.9
                  Other                    0.0          0.0         0.0         0.4          0.0
                  Total                  100.0%       100.0%      100.0%      100.0%       100.0%
</TABLE>


                                    MD - 14
<PAGE>


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

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

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

<S>            <C>                       <C>          <C>         <C>         <C>          <C>
               $100,000 or less           30.8%        36.1%       34.8%       33.8%        37.3%
               $100,001-200,000           30.8         26.7        24.4        29.7         26.9
               $200,001-300,000           14.7         17.2        17.1        16.3         15.3
               $300,001-400,000            9.1          6.1         9.0         9.6          8.1
               $400,001-500,000            5.4          4.2         6.2         3.7          3.9
               $500,001-600,000            4.0          3.3         2.6         3.3          2.3
               $600,001-700,000            2.6          1.9         2.2         1.2          2.1
               $700,001-800,000            0.7          1.4         0.6         0.4          1.1
               $800,001-900,000            0.5          0.0         0.6         0.6          1.7
               $900,001-1,000,000          1.2          0.8         1.1         0.8          0.7
               $1,000,001-1,500,000        0.2          1.7         1.1         0.4          0.3
               over $1,500,001             0.0          0.6         0.3         0.2          0.3
                                         100.0%       100.0%      100.0%      100.0%       100.0%
</TABLE>


First lien mortgage loan originations represented 62% and 83% of our wholesale
loan originations, as measured by principal balance, for the quarters ended July
31, 2006 and 2005, 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 without
recourse primarily to institutional investors, national banks and mortgage
lenders. As of July 31, 2006, 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.
Normally, any repurchased mortgage loan can be corrected and resold back to the
original investor, although a loss may 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 have not been material or
significant.

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.
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

                                    MD - 15

<PAGE>

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. Subject to
our available capital, we expect to continue to expand our activities in this
area.

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 July 31, 2006, the Company had a maximum mortgage loan financing capacity
of $75 million through two 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.
Presently we have a firm purchase advice from an investor prior to funding under
the master sale agreements for bulk and mini-bulk pools. We anticipate that in
the future the total dollar amount of a given bulk will increase and that we
will have to modify existing agreements or enter additional agreements which
would not necessarily require a firm purchase advice at the time the mortgage
loan was funded.

In addition, both of these facilities have offered to expand our borrowing
capability to permit the Company to accumulate loans for bulk resale. We have
not yet needed to make use of this additionally available borrowing capacity.

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 quarters ended July 31, 2006 and 2005, the
Company had no loans subject to any repurchase agreements. Loan interest charges
incurred in connection with the sale 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 investor.
During the intervening period the Company sub-services the loans on behalf of
the financial institutions.

                                    MD - 16

<PAGE>


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           Jul 06  Apr 06   Jan 06   Oct 05   Jul 05   Apr 05  Jan 05   Oct 04   Jul 04
         -------------           ------  ------   ------   ------   ------   ------  ------   ------   ------

<S>                                <C>     <C>      <C>      <C>      <C>      <C>     <C>      <C>      <C>
         Average # of Days         13      14       20       19       19       16      15       15       15
</TABLE>


The increase in our average number of days loans remain financed by our
warehouse facilities is due to our increasing use of mini-bulk and bulk sales of
mortgage loans, i.e. loans we sell via this method remain financed longer than
loans we sell immediately upon funding to the borrower.

THE RETAIL LOAN ORIGINATION DIVISION

Our retail division was established in 1985 and as of July 31, 2006 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 26% and 18% of the aggregate dollar
value of mortgage loans originated by the retail division were funded by our
wholesale division during the quarters ended July 31, 2006 and 2005.

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 July 31, 2006 and 2005, the average loan size originated by the
retail division was approximately $450,000 and $424,000 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 59% and 58% of the retail mortgage loans we
originated for the quarters ended July31, 2006 and 2005, 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 July 31, 2006 and
2005:

                                    MD - 17

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

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

<S>                                      <C>          <C>         <C>         <C>          <C>
         Jumbo mortgages                  25.9%        37.6%       40.6%       28.1%        58.0%
         Conventional ARMs                27.0         20.5        18.7        24.3         12.6
         Conventional Fixed                4.6          5.1         9.8        11.9         22.7
         HELOC & Seconds                  42.5         36.8        30.9        35.7          6.7
         Total                           100.0%       100.0%      100.0%      100.0%       100.0%
</TABLE>


RETAIL GEOGRAPHIC CONCENTRATION

The Company originates retail loans primarily in California. During the quarters
ended July 31, 2006 and 2005, 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                   7/31/06      4/30/06     1/31/06    10/31/05     07/31/05
         -------------                   ---------------------------------------------------------

<S>                                      <C>          <C>         <C>         <C>          <C>
         California                       65.6%        85.5%       78.9%       69.0%        93.3%
         Arizona                          32.2         12.0        15.4        29.6          5.0
         New Mexico                        0.0          0.0         3.3         0.0          0.0
         Others                            2.2          2.5         2.4         1.4          1.7
         Total                           100.0%       100.0%      100.0%      100.0%       100.0%
</TABLE>


RETAIL LOAN SIZES

During the quarters ended July 31, 2006 and 2005, 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             7/31/06      4/30/06     1/31/06    10/31/05     07/31/05
               -------------             ---------------------------------------------------------

<S>            <C>                       <C>          <C>         <C>         <C>          <C>
               $100,000 or less           26.4%        26.5%       19.5%       22.8%         7.6%
               $100,001-200,000           26.4         17.9        15.5        21.0         16.0
               $200,001-300,000           15.5          9.4        12.2        16.2         19.3
               $300,001-400,000            2.9          4.3        13.8        11.9         11.8
               $400,001-500,000            7.7         12.8        14.6         8.1         11.8
               $500,001-600,000            6.3         10.3         8.9         7.6          9.2
               $600,001-700,000            5.7          5.1         5.7         3.8         10.9
               $700,001-800,000            2.3          6.0         3.3         2.4          5.0
               $800,001-900,000            1.7          0.0         0.0         1.4          3.4
               $900,001-1,000,000          4.0          1.7         1.6         3.3          2.5
               $1,000,001-1,500,000        0.0          3.4         3.3         0.5          1.7
               over $1,500,001             1.1          2.6         1.6         1.0          0.8
                                         100.0%       100.0%      100.0%      100.0%       100.0%
</TABLE>


First lien retail mortgage loan originations represented 85% and 93% of our
total loan originations, as measured by principal balance, for the quarters
ended July 31, 2006 and 2005, respectively.


                                    MD - 18
<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, the Chief Executive Officer and the
Chief Financial Officer concluded that the Company's disclosure controls and
procedures were effective. 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.




PART II. OTHER INFORMATION

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

                  NONE





                                      O-1
<PAGE>


                                   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: September 14, 2006                  /s/ Joseph Kristul
      ------------------                  -------------------------------------
                                          Joseph Kristul, Chief Executive




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

                                      O-2
<PAGE>