<PAGE>


                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

                QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                       FOR THE QUARTER ENDED JUNE 30, 2002

                         COMMISSION FILE NUMBER: 0-23469

                          FRANKLIN FINANCE CORPORATION
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

                     MICHIGAN                          38-3372606
           (STATE OR OTHER JURISDICTION OF          (I.R.S. EMPLOYER
           INCORPORATION OR ORGANIZATION)         (IDENTIFICATION NO.)

                  24725 WEST TWELVE MILE ROAD
                      SOUTHFIELD, MICHIGAN                48034
           (ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)      (ZIP CODE)

                                 (248) 358-4710
              (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)


INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.

                                 YES (X) NO
                                     ---    ---

THE NUMBER OF SHARES OUTSTANDING OF THE REGISTRANT'S SOLE CLASS OF COMMON STOCK
IS 22,077 SHARES, $300 PAR VALUE, AS OF JUNE 30, 2002.



<PAGE>




                          FRANKLIN FINANCE CORPORATION

                                TABLE OF CONTENTS


                         PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
  ITEM 1.  FINANCIAL STATEMENTS:                                                                             PAGE
<S>        <C>                                                                                                  <C>
           STATEMENTS OF FINANCIAL CONDITION AT JUNE 30, 2002 (unaudited)
             AND DECEMBER 31, 2001 ............................................................................ 1

           STATEMENTS OF OPERATIONS FOR THE SIX MONTHS AND THREE MONTHS ENDED JUNE 30,
             2002 AND 2001 (unaudited) ........................................................................ 2

           STATEMENTS OF COMPREHENSIVE INCOME FOR SIX MONTHS AND THREE MONTHS ENDED JUNE 30,
             2002 AND 2001 (unaudited) ........................................................................ 2

           STATEMENTS OF SHAREHOLDER'S EQUITY FOR SIX MONTHS ENDED JUNE 30, 2002
             (unaudited) AND FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000 ................................... 3

           STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2002
             AND 2001 (unaudited) ............................................................................. 4

           NOTES TO FINANCIAL STATEMENTS ...................................................................... 5

  ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
             RESULTS OF OPERATIONS ............................................................................ 6

           COMPARISION OF SIX MONTHS ENDED JUNE 30, 2002 TO SIX MONTHS ENDED JUNE 30, 2001 .................... 9

           COMPARISON OF THREE MONTHS ENDED JUNE 30, 2002 TO THREE MONTHS ENDED JUNE 30,
             2001 ............................................................................................. 9


  ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
             RISK ............................................................................................. 10

                           PART II - OTHER INFORMATION

  ITEM 1.  LEGAL PROCEEDINGS .................................................................................. 10

  ITEM 2.  CHANGES IN SECURITIES .............................................................................. 10

  ITEM 3.  DEFAULTS UPON SENIOR SECURITIES .................................................................... 10

  ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ................................................ 10

  ITEM 5.  OTHER INFORMATION .................................................................................. 10

  ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K ................................................................... 10


  SIGNATURES .................................................................................................. 11
</TABLE>


                                       ii
<PAGE>


                          FRANKLIN FINANCE CORPORATION
                        STATEMENTS OF FINANCIAL CONDITION


<TABLE>
<CAPTION>
                                                                                     AT
                                                                     ------------------------------------
                                                                     JUNE 30, 2002      DECEMBER 31, 2001
                                                                     ------------------------------------
ASSETS                                                                (Unaudited)
<S>                                                                  <C>                <C>
Cash in checking                                                     $     22,706         $     78,468
Cash in savings                                                            60,150              250,099
-------------------------------------------------------------------------------------------------------
Total cash in bank                                                         82,856              328,567
Loans
  Residential mortgage loans                                           10,589,238           10,189,063
  Commercial mortgage loans                                            31,172,100           22,898,516
  Allowance for loan losses                                               (12,000)             (12,000)
-------------------------------------------------------------------------------------------------------
Net loans                                                              41,749,338           33,075,579

Mortgage-backed securities, available for sale                             34,339            9,267,333
Accrued interest                                                          182,922              213,048
Due from parent company                                                   169,523              138,795
Prepaid expenses and other assets                                          19,036
-------------------------------------------------------------------------------------------------------
Total assets                                                         $ 42,238,014         $ 43,023,322
=======================================================================================================

LIABILITIES AND SHAREHOLDERS' EQUITY

Dividend payable - Common                                            $        -           $  1,279,356
Accrued expenses                                                           10,700               23,000
-------------------------------------------------------------------------------------------------------
Total current liabilities                                                  10,700            1,302,356

Shareholders' equity
Common Stock, par value $300.00; 60,000 shares
   authorized, 22,077 shares issued and outstanding                     6,623,100            6,623,100
Preferred Stock, liquidation preference $10.00; 2,500,000 shares
   authorized, 2,070,000 shares issued and outstanding                 20,700,000           20,700,000
Paid in surplus                                                        14,319,178           14,319,178
Accumulated other comprehensive (loss) income                                 (67)              78,688
Retained earnings                                                         585,103
-------------------------------------------------------------------------------------------------------
Total shareholders' equity                                             42,227,314           41,720,966
-------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity                           $ 42,238,014         $ 43,023,322
=======================================================================================================
</TABLE>

The Notes to Financial Statements are an integral part of these statements.

                                       1
<PAGE>




                          FRANKLIN FINANCE CORPORATION
                      STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
                                                              SIX MONTHS ENDED               THREE MONTHS ENDED
                                                    ----------------------------------------------------------------
                                                                   JUNE 30,                        JUNE 30,
                                                             2002            2001            2002            2001
                                                    ----------------------------------------------------------------
<S>                                                      <C>             <C>             <C>             <C>
INTEREST INCOME
Interest on residential loans                            $  365,333      $  433,946      $  190,311      $  213,087
Interest on commercial loans                                941,843         649,613         469,473         317,778
Interest on mortgage-backed securities                      201,125         500,671          82,111         245,899
Interest on money market                                      8,910           9,445           7,540           5,929
--------------------------------------------------------------------------------------------------------------------
Total interest income                                     1,517,211       1,593,675         749,435         782,693
--------------------------------------------------------------------------------------------------------------------

NON INTEREST INCOME
Gain on sale of securities                                  158,672                         158,672

NON INTEREST EXPENSE
Advisory fee - paid to parent                                62,498          62,498          31,251          31,251
Loan service fee - paid to parent                            69,314          45,885          29,848          23,611
Other general and administrative                             58,518          45,232          33,680          26,832
--------------------------------------------------------------------------------------------------------------------
Total non interest expense                                  190,330         153,615          94,779          81,694
--------------------------------------------------------------------------------------------------------------------
Net income                                                1,485,553       1,440,060         813,328         700,999
====================================================================================================================
Preferred stock dividend                                    900,450         900,450         450,225         450,225
--------------------------------------------------------------------------------------------------------------------
Net income available to common shareholders              $  585,103      $  539,610      $  363,103      $  250,774
====================================================================================================================
 EARNINGS PER COMMON SHARE                               $    26.50      $    24.44      $    16.45      $    11.36
</TABLE>


                          FRANKLIN FINANCE CORPORATION
                 STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
<TABLE>
<CAPTION>
                                                  SIX MONTHS ENDED              THREE MONTHS ENDED
                                            ----------------------------------------------------------
                                                      JUNE 30,                     JUNE 30,
                                                 2002          2001           2002          2001
                                            ----------------------------------------------------------
<S>                                             <C>           <C>             <C>           <C>
Net income                                      $1,485,553    $1,440,060      $ 813,328     $ 700,999

Other comprehensive income
    Unrealized (loss)/gain on securities:
         Unrealized holding (loss)/gain arising
            during the period                       79,917        88,748         21,053        11,622
LESS: RECLASS ADJUSTMENT
    INCLUDED IN NET INCOME                         158,672                      158,672
------------------------------------------------------------------------------------------------------
Other comprehensive income (loss)                  (78,755)       88,748       (137,619)       11,622
------------------------------------------------------------------------------------------------------
Comprehensive income                            $1,406,798    $1,528,808      $ 675,709     $ 712,621
======================================================================================================
</TABLE>


The Notes to Financial Statements are an integral part of these statements.




                                       2

<PAGE>




                          FRANKLIN FINANCE CORPORATION
                       STATEMENTS OF SHAREHOLDERS' EQUITY


<TABLE>
<CAPTION>
                                                                                        Accumulated Other
                                                Common       Preferred     Paid in        Comprehensive     Retained
                                                Stock          Stock       Surplus        Income (Loss)     Earnings       Totals
------------------------------------------------------------------------------------------------------------------------------------
<S>                                          <C>           <C>           <C>            <C>              <C>           <C>
BALANCE AT JANUARY 1, 2000                   $ 6,623,100   $ 20,700,000  $ 14,319,178       $ (360,542)  $             $ 41,281,736
Net Income                                                                                                 2,847,455      2,847,455
Dividends on 8.70% Noncumulative
   Series A Preferred Shares                                                                              (1,800,900)    (1,800,900)
Dividend on Common Stock ($43.58 per share)                                                               (1,046,555)    (1,046,555)
Change in accumulated other
   comprehensive income                                                                        402,065                      402,065
------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2000                   6,623,100     20,700,000    14,319,178           41,523                   41,683,801
Net Income                                                                                                 3,092,256      3,092,256
Dividends on 8.70% Noncumulative
   Series A Preferred Shares                                                                              (1,800,900)    (1,800,900)
Dividend on Common Stock ($47.40 per share)                                                               (1,291,356)    (1,291,356)
Change in accumulated other
   comprehensive income                                                                         37,165                       37,165
------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2001                   6,623,100     20,700,000    14,319,178           78,688                   41,720,966
Net Income                                                                                                 1,485,553      1,485,553
Dividends on 8.70% Noncumulative
   Series A Preferred Shares                                                                                (900,450)      (900,450)
Change in accumulated other
   comprehensive income                                                                        (78,755)                     (78,755)
------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 2002 (UNAUDITED)         $ 6,623,100   $ 20,700,000  $ 14,319,178       $      (67)  $   585,103   $ 42,227,314
====================================================================================================================================
</TABLE>

The Notes to Financial Statements are an integral part of these statements.


                                       3
<PAGE>





                          FRANKLIN FINANCE CORPORATION
                      STATEMENTS OF CASH FLOWS (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                         SIX MONTHS ENDED
                                                                                -------------------------------
                                                                                              June 30,
                                                                                        2002           2001
                                                                                -------------------------------
<S>                                                                                 <C>            <C>
OPERATING ACTIVITIES:
Net Income                                                                          $ 1,485,553    $ 1,440,060
Adjustments to reconcile net income to cash provided by
operating activities:
   Amortization on securities                                                           104,968         30,856
   Gain on sale of available for sale securities, net                                  (158,672)
   Change in accrued interest receivable                                                 30,126        (37,980)
   Change in due from parent, prepaid expenses and other assets                         (49,764)    (2,008,741)
   Change in other liabilities                                                           12,300         (4,050)
---------------------------------------------------------------------------------------------------------------
Total adjustments                                                                       (61,042)    (2,019,915)
---------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities                                   1,424,511       (579,855)

INVESTING ACTIVITIES:
Proceeds from sale of available for sale securities                                   6,586,897
Proceeds from maturities and paydowns of mortgage-backed securities                   2,596,446        811,255
Net (increase) decrease in loans                                                     (8,673,759)     1,729,609
---------------------------------------------------------------------------------------------------------------
Net cash provided by investing activities                                               509,584      2,540,864

FINANCING ACTIVITIES:
Dividends paid on common stock                                                       (1,279,356)    (1,046,555)
Dividends paid on preferred stock                                                      (900,450)      (900,450)
---------------------------------------------------------------------------------------------------------------
Net cash used in financing activities                                                (2,179,806)    (1,947,005)
---------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents                                   (245,711)        14,004
---------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of period                                        328,567         12,666
---------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period                                          $    82,856    $    26,670
===============================================================================================================
</TABLE>


The Notes to Financial Statements are an integral part of these statements.


                                       4

<PAGE>




                          FRANKLIN FINANCE CORPORATION
                          NOTES TO FINANCIAL STATEMENTS
                                   (UNAUDITED)


NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION

The accompanying financial statements of Franklin Finance Corporation (the
"Company") have been prepared in accordance with the instructions for Form 10-Q.
Accordingly, they do not include all information and footnotes necessary for a
fair presentation of financial condition, results of operations and cash flows
in conformity with generally accepted accounting principles. The statements do,
however, include all adjustments (consisting of normal recurring accruals) which
management considers necessary for a fair presentation of the interim periods.

This Form 10-Q is written with the presumption that the users of the interim
financial statements have read or have access to the Company's Annual Report on
Form 10-K, which contains the latest audited financial statements and notes
thereto, together with Management's Discussion and Analysis of Financial
Condition and Results of Operations as of December 31, 2001 and for the year
then ended. Therefore, only material changes in financial condition and results
of operations are discussed in the remainder of Part I.

The results of operations for the six month period ended June 30, 2002 are not
necessarily indicative of the results to be expected for the year ended December
31, 2002.

The Statement of Financial Condition as of December 31, 2001 has been derived
from the audited Statement of Financial Condition as of that date.

Franklin Finance Corporation is a Michigan corporation, which was incorporated
on September 25, 1997 and created for the purpose of acquiring and holding real
estate mortgage assets. The Company is a wholly-owned subsidiary of Franklin
Bank, N.A. (the "Bank"), a nationally chartered commercial bank.

On September 25, 1997, the Company was initially capitalized with the issuance
to the Bank of 1,000 shares of the Company's common stock (the "Common Stock"),
$1.00 par value. On December 22, 1997, the Company commenced its operations upon
consummation of an initial public offering of 2,070,000 shares of the Company's
8.70% Noncumulative Preferred Stock, Series A (the "Series A Preferred Shares"),
$10.00 liquidation preference. These offerings, together with a separate capital
contribution of $20.9 million made by the Bank on December 22, 1997, raised net
capital of approximately $41.6 million.

The Company used the proceeds raised from the initial public offering of the
Series A Preferred Shares, the sale of Common Stock to the Bank and the
additional capital contribution to the Company by the Bank to pay the expenses
related to the offering and the formation of the Company and to purchase from
the Bank the Company's initial portfolio of residential and commercial mortgage
loans at their estimated fair value of approximately $41.5 million. Such loans
were recorded in the accompanying balance sheet at their estimated fair values.


NOTE 2 - RESIDENTIAL AND COMMERCIAL MORTGAGE LOANS

Of the residential mortgage loans included in the portfolio, 55.77% and 19.90%
bear interest at fixed rates at June 30, 2002 and 2001, respectively. At June
30, 2002, the interest rates of the fixed rate residential mortgage loans
included in the portfolio ranged from 6.50% to 10.88% per annum. At June 30,
2001 these rates ranged from 6.63% to 9.00%. The weighted average interest rate
of the fixed rate residential mortgage loans included in the portfolio at June
30, 2002 and 2001, respectively, was approximately 7.65% and 7.25% per annum.

Of the residential mortgage loans included in the portfolio, 44.23% and 80.10%
bear interest at adjustable rates at June 30, 2002 and 2001, respectively. The
interest rates on the "adjustable rate mortgages" or "ARMs" contained in the
portfolio are all tied to the one-year Treasury Index ("One-Year ARM") and
adjust periodically. The interest rates of the residential mortgage loans
included in the portfolio that are ARMs ranged from 3.50% to 8.88% per annum as
of June 30, 2002. At June 30, 2001 these rates ranged from 6.00% to 9.50%. As of
June 30, 2002 and 2001, respectively, the weighted average current interest rate
of the residential mortgage loans included in the portfolio that are ARMs was
approximately 6.49% and 7.82% per annum.

                                       5
<PAGE>




The commercial mortgage loans included in the portfolio generally consist of
retail strip centers, multi-family residential rental properties, warehouse,
industrial and office center properties located in Michigan. The outstanding
principal balances of the commercial mortgage loans included in the portfolio
ranged from $110,173 to $2.0 million as of June 30, 2002, and $121,030 to $2.0
million as of June 30, 2001.

Of the commercial mortgage loans included in the portfolio at June 30, 2002 and
2001, respectively, 72.37% and 73.80% bear interest at fixed rates. The interest
rates of the fixed rate commercial mortgage loans included in the portfolio
ranged from 5.25% to 11.00% per annum at June 30, 2002 and 7.75% to 9.75% per
annum at June 30, 2001. The weighted average current interest rate of the
commercial mortgage loans included in the portfolio that are fixed rate loans
was 8.03% and 8.51% per annum, as of June 30, 2002 and June 30, 2001,
respectively.

Of the commercial mortgage loans included in the portfolio at June 30, 2002 and
2001, respectively, 27.63% and 26.20% bear interest at variable rates which are
typically tied to an index (such as the Bank's Prime Rate or the U.S. Treasury
Index adjusted for a constant maturity of either one year or three years) and
are adjustable periodically. The interest rates borne by the variable rate
commercial mortgage loans included in the portfolio ranged from 5.00% per annum
to 8.00% per annum as of June 30, 2002 and 7.00% to 8.25% per annum as of June
30, 2001. The weighted average yield equaled 6.64% and 7.40% per annum, at June
30, 2002 and 2001, respectively.


NOTE 3 -- FEDERAL HOME LOAN MORTGAGE CORPORATION ("FHLMC") MORTGAGE-BACKED
SECURITIES AND FEDERAL NATIONAL MORTGAGE ASSOCIATION ("FNMA") MORTGAGE-BACKED
SECURITIES

At June 30, 2002 and 2001, the mortgage-backed securities held by the Company
totaled $34,339 and $14.8 million, respectively. At June 30, 2002, these
securities had a weighted average yield of 2.57% and a weighted average term to
maturity of .15 years. At June 30, 2001, these securities had a weighted average
yield of 6.78% and a weighted average term to maturity of 2.06 years.


NOTE 4 - PREFERRED STOCK

Cash dividends on the Series A Preferred Shares are payable quarterly in arrears
at an annual rate of 8.70%. The liquidation value of each Series A Preferred
Share is $10.00 plus accrued and unpaid dividends for the most recent quarter
thereon, if any, to the date of liquidation. The Series A Preferred Shares are
not redeemable until December 22, 2002, and are redeemable thereafter at the
option of the Company. Except under certain circumstances, the holders of the
Series A Preferred Shares have no voting rights. The Series A Preferred Shares
are automatically exchangeable for a new series of preferred stock of the Bank
upon the occurrence of certain events.

NOTE 5 - DIVIDENDS

To comply with current IRS regulations, it is expected that common dividends
will be declared in 2002.

                                     PART I

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

Except for the historical information contained herein, the matters discussed in
this Report may be deemed to be forward-looking statements that involve risk and
uncertainties. Words or phrases "will likely result", "are expected to", "will
continue", "is anticipated", "estimate", "project" or similar expressions are
intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Factors which could cause
actual results to differ include, but are not limited to, fluctuations in
interest rates, changes in economic conditions in the Bank's market area,
changes in policies by regulatory agencies, the acceptance of new products, the
impact of competitive products and pricing and the other risks detailed from
time to time in the Company's SEC reports. These forward-looking statements
represent the Bank's judgement as of the date of this report. The Bank
disclaims, however, any intent or obligation to update these forward-looking
statements.




                                       6
<PAGE>



FINANCIAL CONDITION

ORGANIZATION

Franklin Finance Corporation is a Michigan corporation incorporated on September
25, 1997, and created for the purpose of acquiring and holding real estate
mortgage assets ("Mortgage Assets"). The Company elected to be treated as a real
estate investment trust (a "REIT") under the Internal Revenue Code of 1986, as
amended (the "Code"), and generally will not be subject to Federal income tax to
the extent that it distributes its earnings to its stockholders and maintains
its qualification as a REIT. All of the shares of the Company's common stock,
par value $300.00 per share (the "Common Stock"), are owned by Franklin Bank,
N.A., a nationally chartered and federally insured national bank (the "Bank").
The Company was formed by the Bank to provide the Bank with a cost-effective
means of raising capital.

The Bank administers the day-to-day activities of the Company in its role as
advisor under an Advisory Agreement. The Bank also services the Company's
Mortgage Assets pursuant to servicing agreements between the Company and the
Bank. These assets represent residential loans, commercial mortgage loans, FHLMC
mortgage-backed securities and FNMA mortgage-backed securities.

LOANS

At June 30, 2002 and December 31, 2001, respectively, the Company had $10.6
million and $10.2 million invested in loans secured by first mortgages or deeds
of trust on single-family residential real estate properties ("Residential
Mortgage Loans"). The $400,175 net increase from the balance at December 31,
2001, resulted from a combination of decreases due to Residential Mortgage Loan
principal collections and payoffs along with increases caused by loan purchases.
Management intends to continue to reinvest proceeds received from repayments of
loans into additional Residential or Commercial Mortgage Loans to be purchased
from either the Bank or its affiliates. See "Results of Operations."

At June 30, 2002 and December 31, 2001, respectively, the Company had $31.2
million and $22.9 million invested in mortgage loans secured by income-producing
properties ("Commercial Mortgage Loans") that consist of retail strip centers,
multi-family residential rental properties, warehouse, industrial and office
center properties located in Michigan. The $8.3 million net increase from the
balance at December 31, 2001, resulted from Commercial Mortgage Loan purchases.
Management intends to continue to reinvest proceeds received from repayments of
loans in additional Commercial or Residential Mortgage Loans to be purchased
from either the Bank or its affiliates.
See "Results of Operations."

At June 30, 2002 and December 31, 2001, respectively, the Company had no
non-accrual loans (loans contractually past due 90 days or more or with respect
to which other factors indicate that full payment of principal and interest is
unlikely).

ALLOWANCE FOR LOAN LOSSES

The allowance for loan losses is maintained at a level believed adequate by
management to absorb potential losses in the loan portfolio. Management's
determination of the adequacy of the allowance is based on an evaluation of the
portfolio, past loan loss experience, current economic conditions, volume,
amount and composition of the loan portfolio and other factors. The allowance is
increased by provisions for loan losses which is charged to income and reduced
by net charge-offs. No provisions were deemed necessary during the three months
ended June 30, 2002 or June 30, 2001.

MORTGAGE-BACKED SECURITIES

At June 30, 2002 and December 31, 2001, the Company had outstanding principal
balances of $34,339 and $9.3 million, respectively, invested in "FHLMC"
mortgage-backed securities and "FNMA" mortgage-backed securities. The $9.2
million net decrease from the balance at December 31, 2001, resulted from sales
of securities, principal collections and maturities. These mortgage backed
securities were created from single family residential loans. Management intends
to continue to invest proceeds received from repayments and maturities of
securities into Residential and Commercial Mortgage Loans.




                                       7
<PAGE>



INTEREST RATE RISK

The Company's income consists primarily of interest payments on mortgage loans.
If there is a decline in interest rates (as measured by the indices upon which
the interest rates of the adjustable rate mortgage loans are based), then the
Company will experience a decrease in income available to be distributed to its
shareholders. Conversely, an increase in interest rates would cause the Company
to experience an increase in interest income. There can be no assurance that an
interest rate environment, in which there is a significant decline in interest
rates, over an extended period of time, would not adversely affect the Company's
ability to pay dividends on the Series "A" Preferred Shares. Currently, the
Company does not use any derivative products to manage its interest rate risk.

SIGNIFICANT CONCENTRATION OF CREDIT RISK

Concentration of credit risk arises when a number of customers engage in similar
business activities, or activities in the same geographical region, or have
similar economic features that would cause their ability to meet contractual
obligations to be similarly affected by changes in economic conditions.
Concentration of credit risk indicates the relative sensitivity of the Company's
performance to both positive and negative developments affecting a particular
industry.

Geographically, the Company's Mortgage Loans generally are concentrated in the
State of Michigan. Geographic concentration of loans may present risks in
addition to those present with respect to mortgage loans generally. All of the
properties underlying the Company's Residential and Commercial Mortgage Loans
included in the current portfolio are located in Michigan. Mortgage Loans
secured by properties located in Michigan may be subject to a greater risk of
default than other comparable mortgage loans in the event of adverse economic,
political or business developments or natural hazards that may affect Michigan
and the ability of borrowers in Michigan to make payments of principal and
interest on such loans.

LIQUIDITY AND CAPITAL RESOURCES

The objective of liquidity management is to ensure the availability of
sufficient cash flows to meet all of the Company's financial commitments. In
managing liquidity, the Company takes into account various legal limitations
placed on a REIT as discussed below in "Tax Status of the Company."

The Company's principal liquidity needs are to maintain the current portfolio
size through the acquisition of additional mortgage loans as Mortgage Loans
currently in the portfolio mature or prepay, and to pay dividends on the Series
A Preferred Shares. The acquisition of additional mortgage loans is intended to
be funded with proceeds obtained from repayment of principal balances by the
individual mortgagees. The Company does not have and does not anticipate having
any material capital expenditures.

To the extent that the Board of Directors determines that additional funding is
required, the Company may raise such funds through additional equity offerings,
debt financing or retention of cash flows (after consideration of provisions of
the Code requiring the distribution by a REIT of at least 90% of its "REIT
taxable income" and taking into account taxes that would be imposed on
undistributed income) or a combination of these methods, subject to certain
approvals as described in the Company's organizational documents.

TAX STATUS OF THE COMPANY

The Company has elected to be taxed as a REIT under Sections 856 through 860 of
the Code, commencing with its taxable year ended December 31, 1998. As a REIT,
the Company generally will not be subject to Federal income tax on its net
income (excluding capital gains) provided that it distributes annually 90
percent (95% in taxable years prior to January 1, 2001) of its REIT taxable
income to its stockholders, and meets certain organizational, stock ownership
and operational requirements. If in any taxable year the Company fails to
qualify as a REIT, the Company would not be allowed a deduction for
distributions to stockholders in computing its taxable income and would be
subject to Federal and state income tax (including any applicable alternative
minimum tax) on its taxable income at regular corporate rates. In addition, the
Company would also be disqualified from treatment as a REIT for the four taxable
years following the year during which qualification was lost. As of June 30,
2002, the Company believed that it was in compliance with the REIT tax rules and
that it will continue to qualify as a REIT under the provisions of the Code.




                                       8

<PAGE>

RESULTS OF OPERATIONS

COMPARISON OF SIX MONTHS ENDED JUNE 30, 2002 TO SIX MONTHS ENDED JUNE 30, 2001

During the six-month periods ended June 30, 2002 and June 30, 2001 (the
"six-month period"), the Company reported net income of $1,485,553 and
$1,440,060, respectively. Interest income on Residential Mortgage Loans totaled
$365,333 and $433,946 for the six-month periods, respectively, which represents
an average yield on such loans of 7.04% and 8.09%, respectively. Interest income
on Commercial Mortgage Loans totaled $941,843 and $649,613 for the six-month
periods, respectively, which represents an average yield on such loans of 7.75%
and 8.59%, respectively. The average loan balance of the Residential Mortgage
Loan portfolio for the six-month periods was $10.5 million and $10.9 million,
respectively. The average balance of the Commercial Mortgage Loan portfolio for
the six-month periods was $24.7 million and $15.1 million, respectively.

Interest income earned on the mortgage-backed investment securities for
six-month periods ended June 30, 2002 and June 30, 2001 totaled $201,125 and
$510,115, respectively. The six-month average yield for June 30, 2002 and June
30, 2001 was 6.19% and 6.85% on an average balance of $6.6 million and $15.1
million, respectively.

Gain on sale of available for sale securities total $158,672 and $0 for the
six-month periods ended June 30, 2002 and June 30, 2001. Management intends to
use the proceeds from investment sales to purchase higher yielding commercial
and residential mortgage loans.

Non interest expenses totaled $190,330 and $153,615 for the six-month periods
ended June 30, 2002 and June 30, 2001, respectively, and were comprised of loan
servicing fees and advisory fees paid to the Bank, and general and
administrative expenses. Advisory fees paid to the Bank were $62,498 for each of
the six-month periods ended June 30, 2002 and June 30, 2001. Loan servicing fees
paid to the Bank of $69,314 and $45,885 for the six-month periods, respectively,
were based on a servicing fee rate of 0.375% of the outstanding principal
balances of the Residential and Commercial Mortgage Loans, pursuant to the
servicing agreements between the Company and the Bank. Loan servicing fees
increased due to the overall increase in average loan balances when comparing
$35.2 million as of June 30, 2002 to $26.2 million as of June 30, 2001. General
and administrative expenses consist primarily of insurance, single business tax
and outside audit costs.

COMPARISON OF THREE MONTHS ENDED JUNE 30, 2002 TO THREE MONTHS ENDED JUNE 30,
2001

During the three-month periods ended June 30, 2002 and June 30, 2001 (the
"three-month period"), the Company reported net income of $813,328 and $700,999,
respectively. The increase of $112,329 can be attributed to the overall increase
in interest income as it relates to increases in both Commercial and Residential
Mortgage loans. See "Financial Condition". Management expects a stabilization in
net income throughout the remainder of 2002 as the company shifts its focus
towards increasing its holdings in commercial real estate loans. Interest income
on Residential Mortgage Loans totaled $190,311 and $213,087 for the three-month
periods, respectively, which represents an average yield on such loans of 7.18%
and 8.11%, respectively. Interest income on Commercial Mortgage Loans totaled
$469,774 and $317,778 for the three-month periods, respectively, which
represents an average yield on such loans of 7.26% and 8.81%, respectively. The
average loan balance of the Residential Mortgage Loan portfolio for the
three-month periods was $10.3 million and $10.9 million, respectively. The
average balance of the Commercial Mortgage Loan portfolio for the three-month
periods were $26.3 million and $15.1 million, respectively.

Interest income earned on the mortgage-backed investment securities for
three-month periods ended June 30, 2002 and June 30, 2001 totaled $82,112 and
$245,899, respectively. The three-month average yield for June 30, 2002 and June
30, 2001 was 6.86% and 6.94% on an average balance of $4.9 million and $14.9
million, respectively.

Operating expenses totaling $82,780 and $81,694 for the three-month periods
ended June 30, 2002 and June 30, 2001 were comprised of loan servicing fees and
advisory fees paid to the Bank, directors fees and general and administrative
expenses. Loan servicing fees paid to the Bank of $29,847 and $23,611 for the
three-month periods, respectively, noting that the increase of $6,236 can be
attributed to the overall increase in the total average loan balances as
compared to the same period of 2001. The amount paid to the Bank is based on a
servicing fee rate of 0.375% of the outstanding principal balances of the
Residential and Commercial Mortgage Loans, pursuant to the servicing agreements
between the Company and the Bank which calls for a fee to be charged when a loan
payment is made each month. General and administrative expenses consist
primarily of insurance and outside audit costs which management expects to
remain consistent throughout the remainder of 2002.





                                       9
<PAGE>

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not Applicable.

                           PART II - OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

The Company is not the subject of any material litigation. Neither the Company,
the Bank or any affiliate of the Bank is currently involved in nor, to the
Company's knowledge, is currently threatened with any material litigation with
respect to the Residential Mortgage Loans or Commercial Mortgage Loans included
in the Company's portfolio, which litigation would have a material adverse
effect on the business or operations of the Company.


ITEM 2.  CHANGES IN SECURITIES

None.


ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

None.



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

None.


ITEM 5.  OTHER INFORMATION

None.


ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits required by item 601 of Regulation S-K are set forth below:

 NO.   EXHIBIT
  11   Computation of Net Income Per Common Share
  12   Computation of ratio of income to fixed charges and Preferred Stock
       dividend  requirements


(b) No reports on Form 8-K were issued during the three months ended June 30,
    2002.

    (See next page).



                                       10
<PAGE>

                                   SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized, in Southfield, Michigan on
August 13, 2002.

                          FRANKLIN FINANCE CORPORATION
                                  (Registrant)


                       By:  /s/ David L. Shelp
                            --------------------------------------
                            David L. Shelp
                            Director, President, CEO and Chief Financial Officer
                            (Principal financial and accounting officer)





                                       11
<PAGE>

                                 EXHIBIT INDEX

NO.     EXHIBIT
 11     Computation of Net Income Per Common Share
 12     Computation of ratio of income to fixed charges and Preferred Stock
        dividend requirements

99.1    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
        to section 906 of the Sarbanes-Oxley Act of 2002


                                       12