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 October 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                 (IRS Employer Identification No.)
of incorporation or organization)

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

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


Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No ____
                                                              --

Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act. Yes __ No X


                      APPLICABLE ONLY TO CORPORATE ISSUERS

    State the number of shares outstanding of each of the issuer's classes of
                common equity as of December 4, 2006. 10,248,005



<PAGE>




                      TRANSNATIONAL FINANCIAL NETWORK, INC.
                                October 31, 2006
                                    UNAUDITED





                                TABLE OF CONTENTS

PART I.    FINANCIAL INFORMATION

                                                                    Page
Item 1.  Financial Statements
         Condensed Balance Sheet as of October 31, 2006 (Unaudited) F-2-3
         Condensed Statements of Operations
          for the three and six months ended
          October 31, 2006 and 2005 (Unaudited)                     F-4
         Condensed Statements of Cash Flow for the six months
           ended October 31, 2006 and 2005 (Unaudited)              F-5
         Notes to the Condensed Financial Statements                F-6 - F-13

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

Item 3.  Controls and Procedures                                    O-1

Part II. OTHER INFORMATION

Item 4. Submission of Matters to a Vote of Security Holders         O-1

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

Signatures                                                          O-1





<PAGE>




PART I. FINANCIAL INFORMATION

ITEM 1.
FINANCIAL STATEMENTS

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

                                   (Unaudited)

<TABLE>
<CAPTION>


                                                                                                 October 31, 2006
                                                                                                 ----------------
                                                                                                 (Unaudited)

ASSETS
Current Assets:

<S>                                                                                              <C>
Cash and Cash Equivalents                                                                        $   1,389,792
Restricted Cash                                                                                        125,000
Restricted - Certificate of Deposit                                                                    900,000
Short-term Mortgage Related Receivables                                                                640,313
Mortgage Loans Held for Sale                                                                         1,156,741
Prepaid Expenses                                                                                       239,934
Fair Value of Financial Instruments                                                                     18,009
                                                                                                        ------

  Total Current Assets                                                                               4,469,789
                                                                                                     ---------

Fixed Assets:
Furniture & Fixtures                                                                                   997,018
Leasehold Improvements                                                                                  98,234
  Accumulated Depreciation                                                                          (1,015,844)
                                                                                                     ----------

  Total Fixed Assets                                                                                    79,408
                                                                                                        ------

Other Assets:
Investment in RML                                                                                    1,196,052
Goodwill                                                                                               459,934
Other Assets                                                                                           205,503
                                                                                                       -------

  Total Other Assets                                                                                 1,861,489
                                                                                                     ---------


TOTAL ASSETS                                                                                     $   6,410,686
                                                                                                     =========
</TABLE>






              See accompanying notes to these financial statements
                                     F - 2


<PAGE>


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

                                   (Unaudited)


<TABLE>
<CAPTION>





                           LIABILITIES AND STOCKHOLDERS' EQUITY


October 31, 2006
                                                                                                 (Unaudited)

CURRENT LIABILITIES:

<S>                                                                                              <C>
Accounts Payable and Other Liabilities                                                           $     305,401
Accrued Interest                                                                                        59,374
Loans Payable                                                                                           17,327
Fair Value of Financial Instruments                                                                        987
Income Taxes Payable                                                                                     1,200
Short-term portion of Subordinated debt                                                              1,000,000
                                                                                                   -----------

  Total Current Liabilities                                                                          1,384,289
                                                                                                     ---------



Long-Term Liabilities

Subordinated Debt                                                                                    2,737,700
                                                                                                   -----------


  Total Long-Term Liabilities                                                                        2,737,700
                                                                                                   -----------

STOCKHOLDERS' EQUITY:

Preferred Stock, no par value: 2,000,000 shares
   authorized; no shares issued or outstanding                                                            -
Common Stock, no par value: 20,000,000 shares
   authorized; 10,248,005 shares issued and outstanding
   at October 31, 2006.                                                                             15,883,802
Accumulated Deficit                                                                                (13,595,105)
                                                                                                   ------------

Total Stockholders' Equity                                                                           2,288,697
                                                                                                     ---------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                                       $   6,410,686
                                                                                                   ===========
</TABLE>


              See accompanying notes to these financial statements
                                      F - 3

<PAGE>


                      TRANSNATIONAL FINANCIAL NETWORK, INC.
                       CONDENSED STATEMENTS OF OPERATIONS
                 For the Periods Ended October 31, 2006 and 2005

                                   (Unaudited)
<TABLE>
<CAPTION>

                                                 3 Months Ending October 31            Six Months Ending October 31
                                                 --------------------------             ---------------------------
                                                 2006         2005    % Chg.             2006         2005    % Chg.
                                                 ----         ----    -----              ----         ----    ------
Revenue:
<S>                                         <C>          <C>          <C>           <C>           <C>          <C>
Net Gain on Sale of Loans                   $  835,917   $1,394,892    -40.1        $ 2,026,006   $3,291,919    -38.5
Production Income                            1,259,657    1,524,186    -17.4          2,575,381    3,019,037    -14.7
Other Income                                     6,702       49,721    -86.5             12,383       70,004    -82.3
                                                -----       ------                       ------       ------

Total Revenue                                2,102,276    2,968,799    -29.2          4,613,770    6,380,960    -27.7

Direct Expenses:
Commissions & Production Incentives            864,745      921,874     -6.2          1,730,677    1,965,627    -12.0
Production Expenses                            253,873      208,319     21.9            598,889      417,099     43.6
Early Loan Payoff Penalties                     36,000            -                      38,500       15,000    156.7
                                                ------                                   ------       ------


Total Direct Expenses                        1,154,618    1,130,193      2.2          2,368,066    2,397,726     -1.2

Interest Income (Expenses):
Interest Income from Loans in Warehouse        228,166      353,418    -35.4            487,559      821,788    -40.7
Interest Expense on Loans in Warehouse        (239,676)    (309,237)   -22.5           (505,456)    (714,978)   -29.3
Warehouse Transaction Fees                     (22,875)     (31,700)   -27.8            (54,409)     (77,174)   -29.5
                                              --------     --------                    --------    ---------

Net Warehouse Interest Income (expense)        (34,385)      12,481   -375.5            (72,306)      29,636   -344.0

Interest Expense - Subordinated Debt           (93,446)     (87,081)     7.3           (184,763)    (174,162)     6.1
                                              --------     --------                   ----------   ----------
Net Interest Income (Expense)                 (127,831)     (74,600)    71.4           (257,069)    (144,526)    77.9

Gross Profit on Mortgage Activities            819,827    1,764,006    -53.5          1,988,635    3,838,708    -48.2

Indirect Expenses:
Salaries & Benefits                            867,822    1,221,904    -29.0          1,832,009    2,340,700    -21.7
General & Administrative                       700,243      520,847     34.4          1,459,596    1,107,125     31.8
Occupancy                                      187,016      175,502      6.6            370,442      350,143      5.8
Depreciation & Amortization                     22,785       17,960     26.9             45,570       36,116     26.2
                                                ------       ------                      ------      -------

Total Indirect Expenses                      1,777,866    1,936,213     -8.2          3,707,617    3,834,084     -3.3

Operating Loss                                (958,039)    (172,207)   456.3        $(1,718,982)  $    4,624       nm

Other Interest Income (Expense)                 22,938       24,649     -6.9             45,874       43,022      6.6
Change in RML Investment                        (2,309)           -       nm             (2,309)           -
Change in Fair Value of Financial Instrument    22,150       (4,754)      nm             11,862       42,425    -72.0
                                                ------       -------                     ------       ------
Total Other Income (Expense)                    42,779       19,895    115.0             55,427       85,447     35.1

Net Loss before Taxes                       $ (915,260)    (152,312)      nm         (1,663,555)      90,071       nm
                                             ==========    =========                ===========       ======

Basic net loss per share                      $(0.09)      $(0.02)                    $(0.16)         $0.01
Fully diluted loss per share                  $(0.09)      $(0.02)                    $(0.16)         $0.01

Weighted-average shares outstanding
Basic                                       10,248,005    6,791,360                  10,248,005    6,791,360
Diluted                                     10,248,005    6,791,360                  10,248,005    6,795,905
</TABLE>





              See accompanying notes to these financial statements
                                      F - 4


<PAGE>


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


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

Cash flows from operating activities:

<S>                                                               <C>                        <C>
Net Income (loss)                                                 $       (1,663,555)        $          90,071
Adjustments to reconcile net income (loss) to net cash
   Used in operating activities:
     Depreciation and Amortization                                            45,570                    36,116
     Provision for Early Loan Payoffs                                              -                    (5,000)
     Change in Fair Value of Financial Instruments                           (11,863)                  (42,425)
Net effect of changes in assets and liabilities:
     Other Assets                                                            (14,641)                   (3,150)
     Prepaid Expenses                                                       (101,413)                        -
     Accrued Interest Payable                                                 18,102                    13,913
     Accounts Payable and Other Liabilities                                 (136,524)                  (96,847)
Net effect of changes in mortgage lending activities:
     Short-term Mortgage Related Receivable                                  165,109                  (228,955)
     Mortgage Loans Originated for Sale                                 (278,118,844)             (230,456,551)
     Proceeds from Sales of Mortgage Loans                               278,003,044               231,287,871
                                                                     ---------------           ---------------

Net cash (used) provided by operating activities:                         (1,815,015)                  595,043
                                                                     ----------------          ---------------


Cash flows from investing activities:

Purchases of Property and Equipment                                          (10,997)                  (49,106)
Investment in RML                                                         (1,196,052)                        -
                                                                          -----------

Net cash (used) by investing activities:                                  (1,207,049)                  (49,106)
                                                                          -----------                  --------


Cash flows from financing activities:

Financing Provided by Insurance                                              (22,547)                        -
Common Stock Issued                                                        2,419,652                         -
Due Diligence Fee                                                            (97,888)
Stock Options Exercised                                                        3,000                         -


Net cash provided by financing activities:                                 2,302,217                         -
                                                                     ---------------           ---------------


Net (decrease) increase in unrestricted
     cash and cash equivalents                                              (719,847)                  545,937

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

Unrestricted cash and cash equivalents, end of period             $        1,389,792         $       3,604,077
                                                                     ===============           ===============


Interest paid                                                     $          632,969         $         813,044
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 six-month periods ended October 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 Form 8-K, filed
February 22, 2006, 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
six-months ended October 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 SFAS 123R and SFAS 148 in
accounting for its employee stock options. The disclosure provisions of
Statement of Financial Accounting Standards SFAS 148 have been incorporated into
these financial statements and accompanying footnotes.

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


                                     F - 6
<PAGE>

<TABLE>
<CAPTION>



                                   Three-Months Ended              Six-Months Ended
                                   ------------------                 -------------
                                 October 31   October 31          October 31    October 31
                                   2006         2005                2006          2005
                                   ----         ----                ----          ----

Net income (loss):
<S>                                <C>           <C>              <C>               <C>
As reported                        (915,260)     (152,312)        (1,663,555)       90,071

Deduct:  fair value amount                0             0                  0             0
                                                                           -             -
Pro forma                          (915,260)     (152,312)        (1,663,555)       90,071

Basic (loss) per common share:
As reported                           (0.09)       (0.02)             (0.16)         0.01
Deduct:  fair value amount            (0.00)        0.00               0.00          0.00
                                       -----        ----               ----          ----
Pro forma                             (0.09)       (0.02)             (0.16)         0.01

Diluted (loss) per common share:
As reported                           (0.09)       (0.02)             (0.16)         0.01
Deduct:  fair value amount            (0.00)        0.00               0.00          0.00
                                       -----        ----               ----         -----
Pro forma                             (0.09)       (0.02)             (0.16)         0.01
</TABLE>


There were no options granted during the quarter ended October 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 October 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 six-month period ended October 31, 2006 the
Company had no loans subject to any purchase agreements. During the six-month
period ending October 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
the financial institution, until it is ultimately resold to a third party

                                     F - 7
<PAGE>

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

The first master sale agreement provides a credit facility of $15 million as of
October 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 October 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 October 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 sheet. Additionally, the company arranged to have
$900,000 of its restricted funds to be held in an interest-bearing twelve-month
restricted certificate of deposit with the warehouse lender. The second master
sale agreement provides a credit facility of $40 million as of October 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 October 31, 2006 was
between 7.19% and 7.82%. The Company is required to maintain a non-interest
bearing cash collateral deposit with this lender of $25,000, which has been
included as restricted cash in the balance sheet.

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 October 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 October 31, 2006, the Company had a total of $3,737,700 of subordinated
debentures outstanding, of which $1,000,000 is represented as the short-term
portion in our balance sheet as of October 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 $93,446 and $87,081 was incurred in the
three-month periods ended October 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-R. The Board of Directors continues to evaluate the situation with
respect to future option issuance. The acceleration of options resulted in the
immediate vesting of options to purchase 228,989 shares of the Company's common
stock. Using the intrinsic value method for valuing these accelerated employee
options, compensation expense of $2,010 was recognized in the year ended April
30, 2005. Using the fair value method for valuing these accelerated independent
contractors' options, an additional $4,402 in expense was recognized in the year
ended April 30, 2005.

Information about stock options outstanding as of October 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 October 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 October 31, 2006:

                                            Number of Options

      Initially Reserved                       750,000
      January 1, 2001                          171,172
      January 1, 2002                          205,503
      January 1, 2003                          270,407
      January 1, 2004                          272,640
      January 1, 2005                          271,654
                                            -----------
    Reserve amount at October 31, 2006       1,941,376

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


                                               Stock                Exercise
                                             Warrants                Price

Outstanding at April 30, 2006                   45,000                $1.32
Grants and Adjustments                       1,650,000                 $.70
                                             ---------                 ----
Outstanding at October 31, 2006              1,695,000                 $.72
                                             =========                 ====


As of October 31, 2006, there were 1,695,000 warrants to purchase shares of the
Company's common stock outstanding. The exercise prices of the warrants ranged
from $0.55 to $7.50. The warrants outstanding as of April 30, 2006 have
expiration dates of January 2007 and November 2008. The warrants issued in the
current quarter expire in June 2009.


                                     F -10
<PAGE>


Note 7 - Basic and Diluted Net Loss Per Share

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

                                                         Three Months Ended                  Six Months Ended
                                                                                             ----------------
                                                      October 31      October 31         October 31       October 31
                                                          2006           2005                2006           2005
                                                          ----           ----                ----           ----

<S>                                                  <C>              <C>               <C>              <C>
Net Income (Loss)                                    $  (915,260)     $ (152,312)       $(1,663,555)     $   90,071
Weighted average of shares outstanding                10,248,005       6,791,360         10,248,005       6,791,360
Basic net loss per share                                 $(0.09)         $(0.02)            $(0.16)         $ 0.01
Effect of dilutive options                                                                       -                -
Diluted weighted average of shares outstanding        10,248,005       6,791,360         10,248,005       6,795,110
Diluted net loss per share                               $(0.09)         $(0.02)            $(0.16)         $ 0.01
</TABLE>


As of October 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 October 31, 2006 and April 30, 2005, including financial
instruments whose contract amount represents credit risk only is as follows:
                                                        October 31, 2006

Commitments to extend credit                            $     26,285,891
Mandatory forward delivery commitments                         1,471,497

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 October 31, 2006, under the agreement with Pegasus, the Company had issued
1,748,000 shares of the 3.0 million shares contracted for, with a gross amount
of funds received by the Company of $1,223,600.

                                     F -11
<PAGE>

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



Note 10 - Restatements

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
second quarter ended October 31, 2005 and the changes to the balance sheet for
the period ending October 2005.


                                     F - 12
<PAGE>

<TABLE>
<CAPTION>



                                      Three-Months ended October 31, 2005    Six-Months ended October 31, 2005
                                      -----------------------------------    ---------------------------------
                                 As Reported          Restated      % Chg    As Reported       Restated     % Chg.
                                 -----------          --------      -----    -----------       --------     ------
Changes in fair value
<S>                              <C>                 <C>             <C>     <C>               <C>          <C>
 of financial instruments        $ (38,836)          $  (4,754)     -87.8%   $32,111           $42,425      32.2%
Net Income (Loss)                $(186,394)          $(152,312)     -18.3%   $ 79,757          $90,071      12.9%
Earnings per Share                 $(0.03)             $(0.02)      -33.3%     $0.01            $0.01        0.0%
</TABLE>


Note 11 - Acquisition

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

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

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



Note 12 - Subsequent Events

Subsequent to October 31, 2006, the following events occurred:

o    The warehouse line of $15 million with a $20 million bulge capability
     (totaling $35 million) referred to in Note 3 has been reduced to $10
     million with a $3 million bulge capability (totaling $13 million). The
     $900,000 CD that had been associated with this line matured, is reinvested
     with a different bank, and is no longer classified as restricted.

o    The Company received a new warehouse line from Texas Capital Bank for $25
     million that is priced at LIBOR plus 1.75 percentage points.

o    The Company agreed to repurchase 6 fraudulent loans totaling $350,000 in
     principal value from one of its secondary market investors. $50,000 of the
     repurchase price was paid up front, and the remainder will be paid at the
     rate of $12,500 per month for 24 months.

o    The Company raised $100,000 of subordinated debt, with an annual interest
     rate of 15%, due three years from the dates of issuance.


o    The Company repaid $50,000 of its outstanding Subordinated Debt.




                                     F -13
<PAGE>

ITEM 2.

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

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

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

QUARTER AND SIX MONTHS ENDED OCTOBER 31, 2006 COMPARED TO QUARTER AND SIX MONTHS
ENDED OCTOBER 31, 2005

For the recently ended quarter, year-over-year revenues decreased 29%, gross
profits decreased 54% and the net income moved from a loss of approximately
$152,000 to loss of approximately $915,000.

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

                                     TABLE 1
                               ORIGINATION VOLUMES
                                  ($ millions)

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

<S>                        <C>        <C>      <C>        <C>        <C>        <C>       <C>       <C>       <C>
Wholesale                  $ 77       $ 94     $ 80       $ 81       $100       $130      $ 84      $ 91      $ 94
Retail                       55         52       45         47         69         79        71        72        64
                             --         --       --         --         --         --        --        --        --
Total                      $132       $146     $125       $128       $169       $209      $155      $163      $158
                           ====       ====     ====       ====       ====       ====      ====      ====      ====
</TABLE>

* For comparison purposes, excludes $28M of wholesale and $14M of retail
production generated by RML for October 2006.

REVENUE ANALYSIS

In the second quarter, the most significant factors leading to the 29% revenue
decline were as follows:

     1.  Our Net Gain on Sale of Loans declined 40%, in contrast to a 23%
         decline in our wholesale mortgage originations, the source of the Net
         Gain on Sale revenues.


                                    MD - 19
<PAGE>

     2.  Our Net Gain on Sale of Loans margin declined from 139 basis points to
         109 basis points. Approximately one third (9 basis points) of this
         decline was due to the absence of receipt of Forward Commitment Payout
         Fees in the recently ended quarter, compared to the recognition of
         $87,000 of such fees a year ago.

         The rest of the decline reflects pricing pressures we are experiencing
         in the mortgage markets. As with in the commodity market, when demand
         declines, pricing pressures come to the fore, and this is most
         assuredly happening in the current mortgage markets.

         Adding further to the pressure on our Gain on Sale margin was a shift
         in product mix away from the higher margin Alt-A Minus loans of our Alt
         Funding group toward our standard Alt A loan types.

     3.  Secondarily, Production Income decreased only 17% in the face of a 33%
         decline in the total number of loans originated by the company in the
         recently ended quarter.

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

     1.  The Net Gain on Sale of Loans declined 39% in the first half, a
         contrast to the 15% decline in Production Income.

     2.  The Net Gain on Sale margin in the half declined from 143 basis point a
         year ago to 119 basis points this year.

     3.  Approximately 40% of the decline in Net Gain on Sale margin in the
         first half was due to the absence of Forward Commitment Payout Fees
         this year versus last year. The remainder was due to pricing pressure
         in the mortgage origination markets, which has accelerated as this year
         has progressed.

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 lesser 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 64%, a material drop from the 83% in the
comparable period a year ago . Second, the average credit scores of our loans
have gone 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 93.4% in the second
quarter two years ago to 77.4% in the most recently ended quarter. The most
significant increase occurred among borrowers with FICO scores in the 600 to 649
range, rising from 6.1% to 14.3% in the same period of time.

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


                                     MD - 2
<PAGE>


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

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

<S>                <C>                   <C>          <C>         <C>         <C>          <C>
                  Above 700               47.5%        49.1%       40.1%       45.5%        49.4%
                  650-699                 29.9         29.4        36.0        31.3         30.0
                  600-649                 14.3         15.9        18.5        17.2         16.6
                  550-599                  4.7          3.5         4.8         4.8          2.6
                  Below 550                0.0          1.6         0.3         0.6          1.2
                  Not available            3.6          0.5         0.3         0.6          0.2
                                           ---          ---         ---         ---          ---
                  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 two years. For example, the percentage (by dollar value) of our loans
with less than 70% LTVs decreased from 40.9% in the quarter two years ago to
15.1% in the recently ended quarter. Part of this is due to the growth of our
Alt-Funding business. Over the last two years borrowers have been obtaining
mortgage loans thatconstitute 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. About a
third of this decline in the quarter and about 40% in the first six months was
due to there being no Forward Commitment Payout Fees recognized in the recently
ended quarter. The rest is attributable to two factors: pricing pressures in the
origination markets for mortgages, and a shift in the mix of our business from
the Alt-A minus type of loans originated by our Alt Funding group back to our
more standard Alt-A loans.

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

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

<S>                       <C>       <C>        <C>       <C>        <C>       <C>        <C>       <C>        <C>
Gain on Sale              109       127        136       169        139       147        163       119        145
</TABLE>


As we have observed in the past the magnitude and time of our receipt of Forward
Commitment Payout Fees can have a material impact on our reported Gain on Sale
margin. While this was not material in the recently ended quarter, it may be,
although episodically so, in the future.

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


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

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


GROSS PROFIT ANALYSIS

Gross profits for the quarter just ended decreased by 54%, materially worse than
our 29% revenue decline. The principal reasons are as follows:

     1.  Our Direct Operating expenses increased 2%, a contrast to our 29%
         revenue decline. This 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 yet to become productive.

                                     MD - 3
<PAGE>

     2.  Total Net Interest Expense increased 71%, or approximately $53,000.
         This was principally a result of Net Warehouse expense moving from a
         positive carry of approximately $12,000 a year ago to a negative carry
         of approximately $34,000 this year. This largely reflects the fact that
         our interest costs for financing loans prior to sale decreased at a
         substantially lesser rate than our interest income received while we
         carry the mortgages on our books.

         In short, our financing interest rates increased more over the last
         year than did the interest rates we receive on mortgages prior to their
         ultimate sale.


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

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

<S>                        <C>       <C>        <C>       <C>        <C>       <C>        <C>       <C>        <C>
Gross Profit Margin        39.0%     46.5%      48.9%     51.6%      59.4%     60.8%      57.6%     61.7%      66.6%
</TABLE>


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

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

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

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

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



INDIRECT EXPENSE ANALYSIS

Our Indirect Expenses decreased 8% on a year-over-year basis during the recently
ended quarter, while decreasing only 3% year-over-year for the first half.

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

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

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




                                     MD- 4
<PAGE>


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


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

<S>                     <C>        <C>         <C>        <C>      <C>         <C>        <C>        <C>        <C>
Total Indirect Exp.     $1,778     $1,930      $1,851     $1,844   $1,936      $1,898     $1,823     $1,661     $1,637
Percent of Rev.           84.6%      76.8%       83.2%      73.3%    65.2%       55.6%      65.0%      75.6%      66.9%
Selected Components:

    Salaries and Ben.   $  868     $  964      $  938     $  962   $1,222      $1,119     $1,086     $  949     $  895
    Percent of Rev.       41.3%      38.4%       42.2%      38.3%    41.2%       32.8%      38.8%      43.2%      36.5%
    Gen. and Admin.     $  700     $  759      $  712     $  687   $  521      $  586     $  515     $  520     $  550
    Percent of Rev.       33.3%      30.2%       32.0%      27.3%    17.5%       17.2%      18.3%      23.7%      22.5%
</TABLE>



LIQUIDITY AND CAPITAL RESOURCES

Our unrestricted and restricted cash position plus liquid investments as of
October 31, 2006, decreased by $479,041 from what it was at the end of our last
fiscal quarter, July 31, 2006. Management and the Company's board of directors
believe this is a more appropriate figure to examine than unrestricted cash
alone. The restricted cash is cash held on deposit with the Company's warehouse
lenders and represent a management decision and strategy. We can negotiate for
lower deposit requirements, but at the expense of other variables associated
with the lending facility, including, but not limited to, nominal interest rate,
per transaction fees, and loan haircuts. For example, in renegotiating some of
the conditions of our various warehouse borrowing facilities during the first
quarter, 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 - 5
<PAGE>




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

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


Operating Cash Flows
Income Statement Related Cash Flows
<S>                                                          <C>              <C>              <C>               <C>
Net Income (Loss)                                            $ (915,260)      $ (748,295)      $(1,555,317)      $ (488,566)
Add back non-cash charges/(income)
Depreciation & Amortization                                      22,785           22,785            23,599           20,595
Impairment of Goodwill                                                0                0           797,855                0
Fair Value of Financial Derivatives changes                     (22,151)          10,288            21,141          (25,106)
Income Taxes Payable                                                                   0               864                0
Provision for Early Payoff Penalties,
   net of payments                                               36,000            2,500                 0                0
Actual Early Payoff Penalties paid                               (9,631)          (7,529)           (4,599)         (13,790)
                                                                 -------          -------           -------         --------
Operational Cash Flows from the Income Statement               (888,257)        (720,251)         (716,457)        (506,867)

Balance Sheet Related Cash Flows
Mortgages Held for Sale                                         125,200         (241,000)           54,380         (205,191)
Short-term Mortgage Receivables                                 193,925          (50,156)         (211,854)         293,326
Prepaid Expenses                                                (99,936)          (1,477)          (33,240)          10,871
Other Assets                                                    (17,376)           2,734            (5,500)           2,478
Accounts Payable and Other Accrued Liabilities                    2,375         (120,797)           99,960         (278,424)
                                                                  -----         ---------           ------         ---------
Operational Cash Flow from the Balance Sheet                    204,188         (410,696)          (96,254)        (176,940)
Total Cash Flow Generated/(Used) in Operations                 (684,069)      (1,130,947)         (812,711)         683,807

Financing Activity Cash Flows
Financing Provided for Insurance                                (18,647)          (3,900)                0                0
Deposits received for Common Stock                                    0          900,000                 0                0
Issuance of Common Stock                                      1,519,652
Due Diligence Fee                                               (97,888)
Stock Options Exercised                                               0            3,000                 0                0
Capital Lease Obligations change                                      0                0            39,874                0
                                                                                       -            ------                -
Total Cash Flow from Financings Activities                    1,403,117          899,100            39,874                0

Investing Activity Cash Flows
Purchase of Property and Equipment                               (2,037)      $   (8,959)      $   (15,893)      $  (21,901)
Investment in RML                                            (1,196,052)

Total Cash Flow from Investing Activities                    (1,198,089)      $   (8,959)      $   (15,893)      $  (21,901)

Net Change to Aggregate Cash                                 $ (479,041)      $ (240,806)      $  (788,730)      $ (705,708)
</TABLE>

                                     MD - 6
<PAGE>

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

     1.  The Company's operations led the decline in our cash balances, with
         Income Statement-related cash losses increasing from approximately
         $211,000 in the quarter ended January 31st, 2006 to approximately
         $888,000 in the recently ended quarter.

     2.  The Company decreased its Mortgages Held for Sale by approximately
         $125,000 in the recently ended quarter. This asset tends to fluctuate
         from quarter to quarter due to where the Company is with respect to our
         overall origination volume.

     3.  The Company decreased its Short-Term Mortgage-Related Receivables by
         approximately $220,000. This largely reflects the drop in mortgage
         origination volume in the quarter.

     4.  The Company received $323,600 in the current quarter as deposits for
         the purchase of common shares and issued 1,748,000 shares to Pegasus
         Group as part of the capital raising activity previously discussed in
         the Notes to the Financial Statements.



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 October 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
October 31, 2006:


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

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

<S>                            <C>           <C>             <C>           <C>                   <C>
Master sales agreement         $35,000,000   $   6,275,526   $ 100,000          8.25%(1)         Annual or 30 days notice
Master sales agreement          40,000,000       7,092,873      25,000     7.19 - 7.82%(2)       Annual or 30 days notice
                                ----------    ------------      ------
Totals                         $75,000,000   $  13,368,399   $ 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%.

Subsequent to October 31, 2006, the following events occurred with respect to
our financing facilities:

                                      MD-7

o    The warehouse line of $15 million with a $20 million bulge capability
     (totaling $35 million) was reduced to $10 million with a $3 million bulge
     capability (totaling $13 million). The $900,000 CD that had been associated
     with this line matured, is reinvested with a different bank, and is no
     longer classified as a Restricted Investment.

o    The Company received a new warehouse line from Texas Capital Bank for $25
     million that is priced at LIBOR plus 1.75 percentage points.


FUTURE NON-OPERATIONAL CASH REQUIREMENTS

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

                                     TABLE 9
                   NON-OPERATIONAL CASH REPAYMENT REQUIREMENTS

            March 31, 2007                                     $  800,000
            May 31, 2007                                       $  200,000
            January 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

                                                            October 31, 2006
                                                            ----------------
Commitments to extend credit                                26,285,891
Mandatory forward delivery commitments                       1,471,497

                                      MD-8
<PAGE>


                                  MD&A APPENDIX

               UPDATED GENERAL AND OPERATIONAL COMPANY INFORMATION

GENERAL

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

Since 1985, when the Company was incorporated, it has been engaged in the
origination of retail mortgage loans, and currently maintains wholly owned
retail offices in San Francisco and Campbell, California. In addition, the
Company maintains net branches in association with local mortgage brokerage
companies. As of January 31, 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 October 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-9
<PAGE>


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

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

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

Wholesale Division
<S>                                    <C>               <C>               <C>              <C>               <C>
    Volume                             $ 77,060          $ 93,898          $ 80,233         $ 80,624          $100,467
    Percent of Volume                        58%               64%               64%              63%               59%
    Number of Loans                         323               426               360              357               492
    Average Loan Size                       238               220               223             $226              $204

Retail Division
         Volume                          55,206          $ 51,955            45,288         $ 47,391          $ 68,617
         Percent of Volume                   42%               36%               36%              37%               41%

         Number of Loans                    142               172               117              123               205
         Average Loan Size                  389               302               387             $385              $335

Total Loan Production
         Volume                        $132,266          $145,853          $125,521         $128,015          $169,084
         Number of Loans                    465               598               477              480               697
         Average Loan Size                 $284              $244              $263             $267              $243
</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 October 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-10
<PAGE>

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

                                    TABLE 12
                               PULL THROUGH RATES
<TABLE>
<CAPTION>

         Quarter Ended           Oct 06  Jul 06   Apr 06   Jan 06   Oct 05   Jul 05  Apr 05   Jan 05   Oct 04
         -------------           ------  ------   ------   ------   ------   ------  ------   ------   ------
<S>                              <C>     <C>      <C>      <C>      <C>      <C>     <C>      <C>      <C>
         Rate                    73%     75%      75%      73%      75%      75%     74%      77%      65%
</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 October 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-11

<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 19% and
36% of the wholesale mortgage loans we originated for the quarters ended October
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-12
<PAGE>




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

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

<S>                                                           <C>        <C>         <C>       <C>        <C>
1 month adjustable-rate (various total terms)                  14.6%      13.6%       7.2%      9.6%       5.9%
6 month adjustable-rate (various total terms)                   0.3        0.3        1.1       0.6        0.4
2 year fixed-rate, adjustable-rate hybrid
   (various total terms)                                       10.2       11.0       18.8      16.9       16.4
3 year fixed-rate, adjustable-rate hybrid
   (various total terms)                                        0.3        1.4        0.3       0.3        0.8
5 year fixed-rate, adjustable-rate hybrid
   (various total terms)                                       26.7       20.1       21.7      23.0       24.2
7 year fixed-rate, adjustable-rate hybrid
   (various total terms)                                        1.6        1.4        0.8       2.5        0.4
10 year fixed-rate, adjustable-rate hybrid
   (various total terms)                                        1.2        3.5        2.8       0.6        0.0
10 year term fixed-rate                                         0.0        0.0        0.0       0.0        0.0
15 year term fixed-rate                                         8.5       10.3       13.3       7.3        4.9
20 year term fixed-rate                                         1.2        1.9        2.5       2.5        2.8
30 year term fixed-rate                                        29.2       22.7       15.6      19.1       21.4
Federal Housing Authority (various total terms and rates)       0.0        0.0        0.0       0.0        0.0
HELOC                                                           1.2        6.5       11.4      11.2       11.0
Equity Line                                                     2.2        3.5        3.9       5.6        5.9
Other                                                           2.8        3.8        0.6       0.8        5.9
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         10/31/06      7/31/06     4/30/06     1/31/06     10/31/05
                  -------------         --------      -------     -------     -------      -------
<S>               <C>                    <C>          <C>         <C>         <C>          <C>
                  50 or less               3.9%         3.9%        3.4%        4.3%         6.0%

                  50.01 - 60               2.4          6.8         4.4         4.8          4.9
                  60.01 - 70               8.8         15.5         9.4        17.1         19.1
                  70.01 - 80              74.5         68.2        77.3        70.3         65.7
                  80.01 - 85               2.0          1.1         2.5         1.0          1.8
                  85.01 - 90               4.4          1.5         2.5         1.0          1.8
                  90.01 - 95               2.0          1.1         0.0         0.5          0.0
                  95.01 or more            2.0          1.9         0.5         1.0          0.7
                  Total                  100.0%       100.0%      100.0%      100.0%       100.0%
</TABLE>
                                     MD-13
<PAGE>

WHOLESALE LOAN CREDIT SCORES

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

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

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

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

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

<S>               <C>                    <C>          <C>         <C>         <C>          <C>
                  800 +                    1.2%         0.7%        0.6%        0.6%         1.2%
                  775 - 799                5.0          5.8         3.9         5.3          4.5
                  750 - 774               12.1          8.7         9.2         8.4         12.8
                  725 - 749               10.9         17.1         9.7        12.4         15.0
                  700 - 724               18.3         16.8        16.7        18.8         15.9
                  675 - 699               19.3         15.4        15.0        18.4         15.0
                  650 - 674               10.6         14.0        21.0        12.9         15.0
                  625 - 649                8.7         12.2        11.7        12.1          9.7
                  600 - 624                5.6          3.7         6.8         5.1          6.9
                  575 - 599                2.5          2.8         4.2         3.1          1.8
                  550 - 574                2.2          0.7         0.6         1.7          0.8
                  Below 550                0.0          1.6         0.3         0.6          1.2
                  No score available       3.6          0.5         0.3         0.6          0.2
                  Total                  100.0%       100.0%      100.0%      100.0%       100.0%
</TABLE>



                                     MD-14
<PAGE>


WHOLESALE GEOGRAPHIC CONCENTRATION

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

<S>                                      <C>          <C>         <C>         <C>          <C>
         California                       44.1%        43.5%       38.6%       44.1%        36.9%
         Arizona                          35.6         43.2        39.9        40.2         54.3
         Nevada                            4.3          3.7         2.8         2.0          2.6
         Florida                           4.7          3.5        10.8         4.5          2.4
         Texas                             3.4          0.0         0.0         0.0          0.0
         Washington                        3.1          1.6         4.7         4.2          0.0
         Others                            0.0          4.5         3.2         5.0          3.8%
         Total                           100.0%       100.0%      100.0%      100.0%       100.0%
</TABLE>


WHOLESALE LOAN PROPERTY TYPES AND SIZES

During the quarters ended October 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 October 31)
<TABLE>
<CAPTION>

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

<S>                                      <C>          <C>         <C>         <C>          <C>
                  Single family           59.9%        57.0%       52.8%       57.0%        48.4%
                  Planned Unit Dev.       25.2         20.3        29.2        22.5         26.4
                  Condominium             11.2         16.8        14.4        12.9         19.3
                  2 - 4 family             3.7          5.9         3.6         7.6          5.5
                  Other                    0.0          0.0         0.0         0.0          0.4
                  Total                  100.0%       100.0%      100.0%      100.0%       100.0%
</TABLE>



                                     MD-15
<PAGE>


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

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

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

<S>            <C>                       <C>          <C>         <C>         <C>          <C>
               $100,000 or less           29.2%        30.8%       36.1%       34.8%        33.8%
               $100,001-200,000           29.5         30.8        26.7        24.4         29.7
               $200,001-300,000           12.5         14.7        17.2        17.1         16.3
               $300,001-400,000            9.0          9.1         6.1         9.0          9.6
               $400,001-500,000            9.3          5.4         4.2         6.2          3.7
               $500,001-600,000            5.6          4.0         3.3         2.6          3.3
               $600,001-700,000            2.8          2.6         1.9         2.2          1.2
               $700,001-800,000            0.0          0.7         1.4         0.6          0.4
               $800,001-900,000            0.9          0.5         0.0         0.6          0.6
               $900,001-1,000,000          0.6          1.2         0.8         1.1          0.8
               $1,000,001-1,500,000        0.3          0.2         1.7         1.1          0.4
               over $1,500,001             0.3          0.0         0.6         0.3          0.2
                                         100.0%       100.0%      100.0%      100.0%       100.0%
</TABLE>


First lien mortgage loan originations represented 64% and 83% of our wholesale
loan originations, as measured by principal balance, for the quarters ended
October 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 October 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-16

<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 October 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 October 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-17
<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           Oct 06  Jul 06   Apr 06   Jan 06   Oct 05   Jul 05  Apr 05   Jan 05   Oct 04
         -------------           ------  ------   ------   ------   ------   ------  ------   ------   ------

<S>                                <C>     <C>      <C>      <C>      <C>      <C>     <C>      <C>      <C>
         Average # of Days         13      13       14       20       19       19      16       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 October 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 October 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 October 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 70% and 58% of the retail mortgage loans we
originated for the quarters ended October 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
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 October 31, 2006
and 2005:


                                     MD-18
<PAGE>


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

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

<S>                                      <C>          <C>         <C>         <C>          <C>
         Jumbo mortgages                  34.7%        25.9%       37.6%       40.6%        28.1%
         Conventional ARMs                21.5         27.0        20.5        18.7         24.3
         Conventional Fixed               13.2          4.6         5.1         9.8         11.9
         HELOC & Seconds                  30.6         42.5        36.8        30.9         35.7
         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 October 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                  10/31/06      7/31/06     4/30/06     1/31/06     10/31/05
         -------------                  --------      -------     -------     -------     --------

<S>                                      <C>          <C>         <C>         <C>          <C>
         California                       88.2%        65.6%       85.5%       78.9%        69.0%
         Arizona                           9.7         32.2        12.0        15.4         29.6
         New Mexico                        0.0          0.0         0.0         3.3          0.0
         Others                            2.1          2.2         2.5         2.4          1.4
         Total                           100.0%       100.0%      100.0%      100.0%       100.0%
</TABLE>



RETAIL LOAN SIZES

During the quarters ended October 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            10/31/06      7/31/06     4/30/06     1/31/06     10/31/05
               -------------            --------      -------     -------     -------     --------

<S>            <C>                       <C>          <C>         <C>         <C>          <C>
               $100,000 or less           16.2%        26.4%       26.5%       19.5%        22.8%
               $100,001-200,000           25.7         26.4        17.9        15.5         21.0
               $200,001-300,000            8.3         15.5         9.4        12.2         16.2
               $300,001-400,000           10.4          2.9         4.3        13.8         11.9
               $400,001-500,000           12.5          7.7        12.8        14.6          8.1
               $500,001-600,000            7.6          6.3        10.3         8.9          7.6
               $600,001-700,000            8.3          5.7         5.1         5.7          3.8
               $700,001-800,000            4.2          2.3         6.0         3.3          2.4
               $800,001-900,000            2.1          1.7         0.0         0.0          1.4
               $900,001-1,000,000          2.1          4.0         1.7         1.6          3.3
               $1,000,001-1,500,000        0.7          0.0         3.4         3.3          0.5
               over $1,500,001             2.1          1.1         2.6         1.6          1.0
                                         100.0%       100.0%      100.0%      100.0%       100.0%
</TABLE>


First lien retail mortgage loan originations represented 72% and 84% of our
total loan originations, as measured by principal balance, for the quarters
ended October 31, 2006 and 2005, respectively.


                                     MD-19
<PAGE>

ITEM 3.  CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in the Company's Securities
Exchange Act reports is recorded, processed, summarized and reported within the
time periods specified in the Securities and Exchange Commission's rules and
forms, and that such information is accumulated and communicated to the
Company's management, including its Chief Executive Officer and its Chief
Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure. Based upon that evaluation, 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 2.  RECENT SALES OF EQUITY SECUTITIES AND USE OF PROCEEDS.

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


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

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

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


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

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



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

                                      O-1
<PAGE>

     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-2
<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: December 14, 2006                   /s/ Joseph Kristul
                                          -------------------------------------
                                          Joseph Kristul, Chief Executive




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


                                       O-3
<PAGE>