**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-Q**





**xQUARTERLY
      REPORT
      PURSUANT TO SECTION 13 OR 15(d)**


**OF
      THE SECURITIES EXCHANGE ACT OF 1934**





**For
      the quarterly period ended June 30, 2007**




**o Transition
      report
      pursuant to Section 13 or 15(d) of the Securities Exchange Act of
      1934**





**For
      the transition period from ________ to ___________**





**Commission
      file number** **0-17771** U




**FRANKLIN
      CREDIT MANAGEMENT CORPORATION**


(Exact
      name of Registrant as specified in its charter)





**Delaware**
            **75-2243266**(State
                or other jurisdiction of incorporation or
                organization)
            (I.R.S.
                Employer Identification
                No.)




**101
      Hudson Street**


**Jersey
      City, New Jersey 07302**


**(201)
      604-1800**


(Address
      of principal executive offices)





Indicate
      by check mark whether the registrant: (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Exchange Act of 1934 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
o





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer” and “large accelerated filer” in Rule 12b-2 of the Exchange
      Act.


o Large
      accelerated
      filer  o Accelerated filer  x Non-accelerated filer





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


Yes
o  No
x





Number
      of
      shares of the registrant’s common stock, par value $0.01 per share, outstanding
      as of August 9, 2007: 8,025,295










FRANKLIN
      CREDIT MANAGEMENT CORPORATION





FORM
      10-Q





INDEX


**Page****PART
                  I.**
              **FINANCIAL
                  INFORMATION**Item
                  1.
              Financial
                  Statements (Unaudited)Consolidated
                  Balance Sheets at June 30, 2007 and December 31, 2006
              
              3Consolidated
                  Statements of Income for the three and six months endedJune
                  30, 2007 and June 30, 2006
              
              4Consolidated
                  Statement of Changes in Stockholders’ Equityfor
                  the six months ended June 30, 2007
              
              5Consolidated
                  Statements of Cash Flows for the six months endedJune
                  30, 2007 and June 30, 2006
              
              6Notes
                  to Consolidated Financial Statements
              
              7Item
                  2.
              Management’s
                  Discussion and Analysis of Financial Condition and
                  Results of Operations
              
              20Application
                  of Critical Accounting Policies and Estimates
              
              20Portfolio
                  Characteristics
              
              21Results
                  of Operations
              
              31Liquidity
                  and Capital Resources
              
              37Borrowings
              
              39Item
                  3.
              Quantitative
                  and Qualitative Disclosures about Market Risk
              
              44Item
                  4.
              Controls
                  and Procedures
              
              45**PART
                  II.**
              **OTHER
                  INFORMATION**Item
                  1.
              Legal
                  Proceedings
              
              46Item
                  1A.
              Risk
                  Factors
              
              46Item
                  2.
              Unregistered
                  Sales of Equity Securities and Use of Proceeds
              
              49Item
                  3.
              Defaults
                  Upon Senior Securities
              
              49Item
                  4.
              Submission
                  of Matters to a Vote of Security Holders
              
              49Item
                  5.
              Other
                  Information
              
              49Item
                  6.
              Exhibits
              
              50**SIGNATURES**
              
              51


U








**FRANKLIN
      CREDIT MANAGEMENT CORPORATION AND SUBSIDIARIES**


CONSOLIDATED
      BALANCE SHEETS (UNAUDITED)





**June
                30, 2007**
              **(Unaudited)**
            
            **December
                31, 2006****ASSETS**Cash
                and cash equivalents
            
            $
            8,544,360
            
            $
            3,983,104Restricted
                cash
            
            
            33,583,678
            
            
            32,689,154Short-term
                investments
            
            
            23,342,223
            
            
            20,311,193Notes
                Receivable:Principal
            
            
            1,392,325,773
            
            
            1,174,039,567Purchase
                discount
            
            
            (11,322,314
            )
            
            (12,423,746
            )Allowance
                for loan losses
            
            
            (46,276,474
            )
            
            (52,424,375
            )Net
                notes receivable
            
            
            1,334,726,985
            
            
            1,109,191,446Originated
                loans held for sale
            
            
            9,830,115
            
            
            4,114,284Originated
                loans held for investment, net
            
            
            485,775,053
            
            
            422,682,795Accrued
                interest receivable
            
            
            26,562,620
            
            
            22,010,027Other
                real estate owned
            
            
            33,142,484
            
            
            22,977,725Deferred
                financing costs, net
            
            
            11,777,638
            
            
            10,622,961Other
                receivables
            
            
            7,065,179
            
            
            6,614,386Building,
                furniture and equipment, net
            
            
            3,936,342
            
            
            3,715,908Income
                tax receivable
            
            
            8,328,939
            
            
            8,594,119Other
                assets
            
            
            1,041,424
            
            
            850,897Total
                assets
            
            $
            1,987,657,040
            
            $
            1,668,357,999**LIABILITIES
                AND STOCKHOLDERS’ EQUITY**Liabilities:Notes
                payable, net of debt discount of $425,499 at June 30, 2007
              and
                $515,799 at December 31, 2006
            
            $
            1,861,277,953
            
            $
            1,520,217,264Financing
                agreements
            
            
            58,260,637
            
            
            55,962,315Accounts
                payable and accrued expenses
            
            
            25,128,779
            
            
            22,875,527Repurchase
                obligation
            
            
            -
            
            
            18,094,061Deferred
                tax liability
            
            
            727,276
            
            
            3,655,483Total
                liabilities
            
            
            1,945,394,645
            
            
            1,620,804,650Commitments
                and ContingenciesStockholders’
                Equity:Preferred
                stock, $.01 par value; authorized 3,000,000; issued - none
            
            
            -
            
            
            -Common
                stock and additional paid-in capital, $.01 par value, 22,000,000
                authorized shares; issued and outstanding: 8,025,295 at June 30,
                2007 and
                8,025,295 at December 31, 2006
            
            
            22,961,215
            
            
            22,715,180Retained
                earnings
            
            
            19,301,180
            
            
            24,838,169Total
                stockholders’ equity
            
            
            42,262,395
            
            
            47,553,349Total
                liabilities and stockholders’ equity
            
            $
            1,987,657,040
            
            $
            1,668,357,999


See
        Notes
        to Consolidated Financial Statements.
  3


**FRANKLIN
      CREDIT MANAGEMENT CORPORATION AND SUBSIDIARIES**


CONSOLIDATED
      STATEMENTS OF INCOME


THREE
      AND
      SIX MONTHS ENDED JUNE 30, 2007 AND 2006 (UNAUDITED)




**Three
                Months Ended June 30,**
            
            **Six
                Months Ended June 30,****2007**
            
            **2006**
            
            **2007**
            
            **2006****Revenues:**Interest
                income
            
            $
            43,393,657
            
            $
            35,272,864
            
            $
            82,297,592
            
            $
            68,715,174Purchase
                discount earned
            
            
            1,366,649
            
            
            2,223,710
            
            
            2,780,207
            
            
            4,202,673Gain
                on sale of notes receivable
            
            
            31,118
            
            
            -
            
            
            31,118
            
            
            69,049Gain
                on sale of originated loans
            
            
            197,694
            
            
            170,924
            
            
            200,733
            
            
            336,796Gain
                on sale of other real estate owned
            
            
            117,632
            
            
            440,741
            
            
            238,807
            
            
            1,242,283Prepayment
                penalties and other income
            
            
            2,024,813
            
            
            2,335,115
            
            
            4,124,793
            
            
            4,540,321Total
                revenues
            
            
            47,131,563
            
            
            40,443,354
            
            
            89,673,250
            
            
            79,106,296**Operating
                Expenses:**Interest
                expense
            
            
            35,408,803
            
            
            27,898,497
            
            
            66,968,607
            
            
            52,390,065Collection,
                general and administrative
            
            
            10,769,328
            
            
            10,432,793
            
            
            19,662,773
            
            
            18,380,672Provision
                for loan losses
            
            
            5,663,222
            
            
            3,162,146
            
            
            9,996,686
            
            
            5,031,275Amortization
                of deferred financing costs
            
            
            977,663
            
            
            1,130,415
            
            
            1,753,498
            
            
            2,038,430Depreciation
            
            
            369,809
            
            
            251,613
            
            
            717,355
            
            
            563,318Total
                expenses
            
            
            53,188,825
            
            
            42,875,464
            
            
            99,098,919
            
            
            78,403,760(Loss)/income
                before provision for income taxes
            
            
            (6,057,262
            )
            
            (2,432,110
            )
            
            (9,425,669
            )
            
            702,536Income
                tax (benefit)/expense
            
            
            (2,473,949
            )
            
            (1,042,698
            )
            
            (3,888,680
            )
            
            305,200Net
                (loss)/income
            
            $
            (3,583,313
            )
            $
            (1,389,412
            )
            $
            (5,536,989
            )
            $
            397,336**Net
                (loss)/income per common share:**Basic
            
            $
            (0.45
            )
            $
            (0.18
            )
            $
            (0.70
            )
            $
            0.05Diluted
            
            $
            (0.45
            )
            $
            (0.18
            )
            $
            (0.70
            )
            $
            0.05**Weighted
                average number of shares outstanding:**Basic
            
            
            7,940,295
            
            
            7,634,878
            
            
            7,935,295
            
            
            7,574,837Diluted
            
            
            7,940,295
            
            
            7,634,878
            
            
            7,935,295
            
            
            8,055,260


See
        Notes
        to Consolidated Financial Statements.
  4


**FRANKLIN
      CREDIT MANAGEMENT CORPORATION AND SUBSIDIARIES**


CONSOLIDATED
      STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY


SIX
      MONTHS ENDED JUNE 30, 2007 (UNAUDITED)





**Common
                Stock and**
              **Additional
                Paid-in Capital**
            
            **Retained****Shares**
            
            **Amount**
            
            **Earnings**
            
            **Total**BALANCE,
                JANUARY 1, 2007
            
            
            8,025,295
            
            $
            22,715,180
            
            $
            24,838,169
            
            $
            47,553,349Stock-based
                compensation
            
            
            -
            
            
            246,035
            
            
            -
            
            
            246,035Net
                (loss)
            
            
            -
            
            
            -
            
            
            (5,536,989
            )
            
            (5,536,989
            )BALANCE,
                JUNE 30, 2007
            
            
            8,025,295
            
            $
            22,961,215
            
            $
            19,301,180
            
            $
            42,262,395





See
        Notes
        to Consolidated Financial Statements.
  5


**FRANKLIN
      CREDIT MANAGEMENT CORPORATION AND SUBSIDIARIES**


CONSOLIDATED
      STATEMENTS OF CASH FLOWS


SIX
      MONTHS ENDED JUNE 30, 2007 AND 2006 (UNAUDITED)





**Six
                Months Ended June 30,****2007**
            
            **2006**CASH
                FLOWS FROM OPERATING ACTIVITIES:Net
                (loss)/income
            
            $
            (5,536,989
            )
            $
            397,336Adjustments
                to reconcile (loss)/income to net cash provided by/(used in) operating
                activities:Gain
                on sale of notes receivable
            
            
            (31,118
            )
            
            (69,049
            )Gain
                on sale of other real estate owned
            
            
            (238,807
            )
            
            (1,242,283
            )Gain
                on sale of originated loans
            
            
            (200,733
            )
            
            (336,796
            )Depreciation
            
            
            717,355
            
            
            563,318Amortization
                of deferred costs and fees on originated loans
            
            
            1,007,867
            
            
            734,090Amortization
                of deferred financing costs
            
            
            1,753,498
            
            
            2,038,430Amortization
                of debt discount
            
            
            90,300
            
            
            680,646Excess
                tax benefit
            
            
            -
            
            
            (531,403
            )Non-cash
                compensation
            
            
            246,035
            
            
            484,108Proceeds
                from the sale of and principal collections on loans held for
                sale
            
            
            26,397,862
            
            
            20,988,948Deferred
                tax provision
            
            
            (2,928,207
            )
            
            1,138,572Purchase
                discount earned
            
            
            (2,780,207
            )
            
            (4,202,673
            )Provision
                for loan losses
            
            
            9,996,686
            
            
            5,031,275Origination
                of loans held for sale
            
            
            (32,221,015
            )
            
            (11,946,300
            )Changes
                in operating assets and liabilities:Accrued
                interest receivable
            
            
            (4,552,593
            )
            
            (1,246,127
            )Other
                receivables
            
            
            (450,793
            )
            
            1,181,629Income
                tax receivable
            
            
            265,180
            
            
            -Other
                assets
            
            
            (190,527
            )
            
            (4,718,708
            )Accounts
                payable and accrued expenses
            
            
            2,253,252
            
            
            2,553,000Net
                cash (used) in/provided by operating activities
            
            
            (6,402,954
            )
            
            11,498,013CASH
                FLOWS FROM INVESTING ACTIVITIES:Increase
                in restricted cash
            
            
            (894,524
            )
            
            (22,417,907
            )Purchase
                of notes receivable
            
            
            (386,132,716
            )
            
            (216,054,219
            )Principal
                collections on notes receivable
            
            
            105,768,330
            
            
            141,008,398Principal
                collections on loans held for investment
            
            
            97,018,212
            
            
            110,406,287Origination
                of loans held for investment
            
            
            (177,642,361
            )
            
            (192,466,907
            )Investment
                in short-term securities
            
            
            (3,031,030
            )
            
            825,165Repurchase
                of loans held for sale and loans held for investment
            
            
            (6,325,528
            )
            
            -Putback
                of acquired notes receivable
            
            
            12,598,126
            
            
            -Proceeds
                from sale of other real estate owned
            
            
            16,189,577
            
            
            17,078,333Proceeds
                from sale of loans held for investment
            
            
            11,088,596
            
            
            13,519,573Proceeds
                from sale of notes receivable
            
            
            20,998,838
            
            
            84,553Purchase
                of building, furniture and equipment
            
            
            (937,788
            )
            
            (309,598
            )Net
                cash used in investing activities
            
            
            (311,302,268
            )
            
            (148,326,322
            )CASH
                FLOWS FROM FINANCING ACTIVITIES:Proceeds
                from notes payable
            
            
            600,860,150
            
            
            431,163,623Principal
                payments of notes payable
            
            
            (259,889,760
            )
            
            (270,268,195
            )Proceeds
                from financing agreements
            
            
            285,207,486
            
            
            206,386,407Principal
                payments of financing agreements
            
            
            (282,909,162
            )
            
            (228,651,503
            )Repurchase
                obligation
            
            
            (18,094,061
            )
            
            -Excess
                tax benefit
            
            
            -
            
            
            531,403Payment
                of deferred financing costs
            
            
            (2,908,175
            )
            
            (2,665,458
            )Exercise
                of options
            
            
            -
            
            
            326,845Net
                cash provided by financing activities
            
            
            322,266,478
            
            
            136,823,122NET
                CHANGE IN CASH AND CASH EQUIVALENTS
            
            
            4,561,256
            
            
            (5,187
            )CASH
                AND CASH EQUIVALENTS, BEGINNING OF PERIOD
            
            
            3,983,104
            
            
            3,886,506CASH
                AND CASH EQUIVALENTS, END OF PERIOD
            
            $
            8,544,360
            
            $
            3,881,319SUPPLEMENTAL
                DISCLOSURES OF CASH FLOW INFORMATION:Cash
                payments for interest
            
            $
            82,993,281
            
            $
            47,212,204Cash
                payments for taxes
            
            $
            89,708
            
            $
            3,524,080NON-CASH
                INVESTING AND FINANCING ACTIVITY:Transfer
                of loans from held for sale to loans held for investment
            
            $
            704,698
            
            $
            483,601Transfer
                from notes receivable and loans held for investment to
                OREO
            
            $
            26,115,529
            
            $
            23,354,090




See
      Notes
      to Consolidated Financial Statements.




6


**FRANKLIN
      CREDIT MANAGEMENT CORPORATION AND SUBSIDIARIES**


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS





**1.**  **BUSINESS**




**Overview**




As
      used
      herein references to the “Company,” “FCMC,” “we,” “our” and “us” refer to
      Franklin Credit Management Corporation, collectively with its
      subsidiaries.




We
      are a
      specialty consumer finance company primarily engaged in two related lines of
      business: (1) the acquisition, servicing and resolution of performing,
      reperforming and nonperforming residential mortgage loans and real estate
      assets; and (2) the origination of subprime mortgage loans, both for our
      portfolio and for sale into the secondary market. We specialize in acquiring
      and
      originating loans secured by 1-4 family residential real estate that generally
      fall outside the underwriting standards of Fannie Mae and Freddie Mac and
      involve elevated credit risk as a result of the nature or absence of income
      documentation, limited credit histories, higher levels of consumer debt or
      past
      credit difficulties. We typically purchase loan portfolios at a discount, and
      originate loans with interest rates and fees, calculated to provide us with
      a
      rate of return adjusted to reflect the elevated credit risk inherent in the
      types of loans we acquire and originate. Unlike many of our competitors, we
      generally hold for investment the loans we acquire and a significant portion
      of
      the loans we originate.




From
      inception through June 30, 2007, we had purchased and originated in excess
      of
      $4.57 billion in mortgage loans. As of June 30, 2007, we had total assets of
      $1.99 billion and our portfolios of notes receivable, loans held for investment,
      and loans held for sale, net, totaled $1.83 billion.




***Loan
      Acquisitions***




Since
      commencing operations in 1990, we have become a nationally recognized buyer
      of
      portfolios of residential mortgage loans and real estate assets from a variety
      of financial institutions in the United States, including mortgage banks,
      commercial banks and thrifts, other traditional financial institutions and
      other
      specialty finance companies. These portfolios generally consist of one or more
      of the following types of mortgage loans:




·
            *performing
                loans*-
                loans to borrowers who are contractually current, but may have been
                delinquent in the past and which may have deficiencies relating to
                credit
                history, loan-to-value ratios, income ratios or
                documentation;




·
            *reperforming
                loans*-
                loans to borrowers who are not contractually current, but have recently
                made regular payments and where there is a good possibility the loans
                will
                be repaid in full; and




·
            *nonperforming
                loans*-
                loans to borrowers who are delinquent, not expected to cure, and
                for which
                a primary avenue of recovery is through the sale of the property
                securing
                the loan.





We
      sometimes refer collectively to these types of loans as “scratch and dent” or
“S&D” loans.




We
      have
      developed a specialized expertise at risk-based pricing, credit evaluation
      and
      loan servicing that allows us to effectively evaluate and manage the higher
      risks associated with this segment of the residential mortgage industry,
      including the rehabilitation or resolution of reperforming and nonperforming
      loans.




7




We
      refer
      to the S&D loans we acquire as “notes receivable.” In the second quarter of
      2007, we purchased notes receivable with an aggregate unpaid principal balance
      of $311.2 million at an aggregate purchase price equal to 84% of the face
      amount of the notes. Approximately 42% of the unpaid principal balance of the
      loans purchased was secured by first lien residential 1-4 family properties.
      During the six months ended June 30, 2007, we acquired $457.5 million of notes
      receivable, of which approximately 45% were secured by first lien residential
      1-4 family properties, at an aggregate purchase price equal to 84% of the face
      amount of the notes.




***Loan
      Originations***




We
      conduct our loan origination business through our wholly-owned subsidiary,
      Tribeca Lending Corp. (“Tribeca”), which we formed in 1997 in order to
      capitalize on our experience in evaluating and servicing scratch and dent
      residential mortgage loans. We originate primarily subprime residential mortgage
      loans to individuals with serious financial difficulties and whose
      documentation, credit histories, income and other factors cause them to be
      classified as subprime borrowers and to whom, as a result, conventional mortgage
      lenders often will not make loans. The loans we originate typically carry
      interest rates that are significantly higher than those of prime loans and
      we
      believe have fairly conservative loan-to-value ratios. The principal factor
      in
      our underwriting guidelines has historically been our determination of the
      borrower’s equity in his or her home and the related calculation of the
      loan-to-value ratio based on the appraised value of the property, and not,
      or to
      a lesser extent, on a determination of the borrower’s ability to repay the loan.
      In 2005, we began in an increasing number of cases to gather and analyze
      additional information that allows us to assess to a reasonable degree the
      borrower’s ability and intent to repay the loan in connection with our credit
      decision. We have chosen to focus our marketing efforts on this segment of
      the
      1-4 family residential real estate mortgage market in order to capitalize on
      our
      extensive experience in acquiring and servicing loans with similar credit risk
      characteristics.




During
      the second quarter of 2007, we originated $118.7 million in subprime
      mortgage loans, 88% of which were adjustable-rate (fixed-rate for the first
      two
      years) loans. We originated approximately 36% of our mortgage loans on a retail
      basis, compared with 33% in the second quarter of 2006, and the remainder
      through our wholesale network of mortgage brokers. During the six months ended
      June 30, 2007, we originated $209.9 million in subprime mortgage loans, 86%
      of
      which were adjustable-rate (fixed-rate for the first two years) loans. We
      originated approximately 35% of these mortgage loans on a retail basis, compared
      with 67% in the six months ended June 30, 2006, and the remainder through our
      wholesale network of mortgage lenders. We hold the majority of mortgages we
      originate in our portfolio and sell the remainder for cash in the whole-loan
      market, depending on market conditions and our own portfolio goals.




In
      February 2007, Tribeca acquired a wholesale mortgage origination operation,
      which included the employment of 59 sales and processing personnel located
      in
      Bridgewater, New Jersey. The principal purpose of the acquisition was to add
      experienced origination personnel and senior management to Tribeca in order
      to
      further expand the origination of its Liberty Loan products.




Tribeca
      paid $485,000 for the associated fixed assets and assumed the lease obligation
      for the Bridgewater office facility. In addition, Tribeca took over the existing
      pipeline of “Alt-A” loans (loans on the credit scale between prime and subprime
      where the borrower possesses a strong credit history but is in need of
      non-traditional underwriting and processing) in various stages of processing
      as
      of the closing of the transaction, which included approximately $17 million
      of
      loans that were locked with the borrower out of a total pipeline of $27 million.
      Tribeca was required to pay 50 basis points to the seller of the wholesale
      mortgage origination operation for each loan in the acquired pipeline that
      was
      subsequently closed by Tribeca within 90 days of the acquisition. Tribeca did
      not purchase any closed loans or other assets, nor assume any liabilities other
      than those under the seller’s lease for the Bridgewater office
      space.




8




As
      of
      June 30, 2007, Tribeca has closed $6.5 million of the loans in the pipeline
      and
      has paid $33,000 in fees. As of June 30, 2007, Tribeca’s obligation to pay 50
      basis points to the seller for closed loans from the acquired pipeline has
      been
      satisfied.




In
      early
      August, we consolidated the processing, underwriting, closing and administrative
      operations of Tribeca, and as a result, reduced the number of employees by
      37.




From
      time
      to time, we sell a portion of the Tribeca loan originations for cash on a
      whole-loan, servicing-released basis. Certain whole-loan sale contracts include
      provisions requiring the Company to repurchase a loan if a borrower fails to
      make one or more of the first loan payments due on the loan after the date
      of
      sale. In addition, the purchaser may require that the Company refund a portion
      of the premium paid on the sale of mortgage loans if a loan is prepaid in full
      within a certain amount of time from the date of sale.




In
      the
      three and six months ended June 30, 2007, the Company repurchased $4.6 million
      and $25.0 million, respectively, of Liberty Loans previously sold to investors.
      The Company did not have any remaining repurchase obligations, for the reasons
      described above, in respect to Liberty Loans sold on or before June 30, 2007.
      The Company’s total potential repurchase obligation outstanding for all loans
      sold to investors was approximately $1.5 million at June 30, 2007.




***Loan
      Servicing***




We
      have
      invested heavily to create a loan servicing capability that is focused on
      collections, loss mitigation and default management. In general, we seek to
      ensure that the loans we acquire and originate are repaid in accordance with
      the
      original terms or according to amended repayment terms negotiated with the
      borrowers. Because we expect our loans will experience above average
      delinquencies, erratic payment patterns and defaults, our servicing operation
      is
      focused on maintaining close contact with our borrowers and as a result is
      more
      labor-intensive than traditional mortgage servicing operations. Through frequent
      communication we are able to encourage positive payment performance, quickly
      identify those borrowers who are likely to move into seriously delinquent status
      and promptly apply appropriate loss mitigation strategies. Our servicing staff
      employs a variety of collection strategies that we have developed to
      successfully manage serious delinquencies, bankruptcy and foreclosure.
      Additionally, we maintain a real estate department with extensive experience
      in
      property management and the sale of residential properties.




**Financing**




We
      have
      historically financed both our acquisitions of mortgage loan portfolios and
      our
      loan originations through various long and short-term borrowing arrangements
      with Sky Bank, the banking affiliate of Sky Financial Group, Inc., an
      $18 billion regional publicly-held bank holding company headquartered in
      Bowling Green, Ohio, and its predecessors (collectively referred to as “Sky”).
      We have had a strong relationship with Sky since the early 1990s. On July 2,
      2007, the pending merger between Sky Bank and Huntington Bancshares Inc. that
      was announced in December 2006 was completed. The combined bank, which will
      be
      the successor to our credit facilities provided by Sky, will have over $50
      billion in assets and will be the 24 th largest
      bank holding company headquartered in the United States.




In
      October 2004, we consolidated all of our arrangements with Sky relating to
      the
      term funding of loan acquisitions under a Master Credit and Security Agreement
      (referred to as “Master Credit Facility”). Under this Master Credit Facility,
      which has been extended to September 30, 2007, we request loans to finance
      the
      purchase of pools of residential mortgage loans or refinance existing
      outstanding loans. In connection with our continued business expansion, Sky
      has
      arranged for additional financial institutions to participate under our master
      credit facility. In August 2006, we entered into a $40 million revolving
      warehouse agreement (referred to as “Flow Warehouse”) with Sky and a participant
      to accumulate loans acquired on a flow basis prior to aggregating such loans
      into term debt under the Master Credit Facility. Prior to August 2006, loan
      acquisitions acquired on a flow basis were funded directly under the Master
      Credit Facility. Our borrowings under the Flow Warehouse and Master Credit
      Facility are secured by a first priority lien on the mortgage loans financed
      by
      the proceeds of our borrowings. This facility was renewed in August 2007 by
      Sky
      for $20 million and for a term of one year.




9




To
      finance the loans it originates, in October 2005, Tribeca entered into a
      Warehousing Credit and Security Agreement (referred to as “Tribeca Warehouse
      Facility” or “Tribeca Warehousing Agreement”) with Sky and a participant in
      order to accumulate loans originated prior to aggregating such loans into term
      debt under a separate master credit and security agreement with Sky. This
      warehousing agreement is a revolving commitment for $60 million. The Tribeca
      Warehouse Facility was renewed in June 2007 and expires on April 30, 2008.
      In
      the first quarter of 2006, Tribeca and certain of its subsidiaries entered
      into
      a Master Credit and Security Agreement (referred to as “Tribeca Master Credit
      Facility”) with Sky pursuant to which Tribeca may borrow term funds to finance
      originated loans temporarily financed under its Warehouse Facility. In the
      first
      quarter of 2006, Tribeca also entered into a $100 million Master Credit and
      Security Agreement with BOS (USA) Inc., an affiliate of the Bank of Scotland;
      $98 million under this facility was used to consolidate and refinance term
      loans
      previously made to Tribeca by Sky.




**2.**  **SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES**




***Basis
      of Presentation*** -
      The
      consolidated financial statements include the accounts of the Company and its
      wholly owned subsidiaries. All significant intercompany accounts and
      transactions have been eliminated in consolidation. The accompanying unaudited
      consolidated financial statements have been prepared in accordance with
      instructions to Form 10-Q. Accordingly, they do not include all of the
      information and footnotes required by accounting principles generally accepted
      in the United States of America for complete financial statements. However,
      such
      information reflects all adjustments which are, in the opinion of management,
      necessary for a fair statement of results for the periods.




Certain
      amounts in prior periods have been reclassified to conform to the current
      period’s presentation.




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 the reported amounts of assets and
      liabilities and disclosure of contingent assets and 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.
      The most significant estimates of the Company are the allowance for loan losses,
      the allocation of discount between accretable and nonaccretable, and income
      taxes. The Company’s estimates and assumptions primarily arise from risks and
      uncertainties associated with interest rate volatility and credit exposure.
      Although management is not currently aware of any factors that would
      significantly change its estimates and assumptions in the near term, future
      changes in market trends and conditions may occur which could cause actual
      results to differ materially. These financial statements should be read in
      conjunction with the Company’s Annual Report on Form 10-K for the year ended
      December 31, 2006. The operating and financial results for interim periods
      reported are not necessarily indicative of the results that may be expected
      for
      the full year.




10




***Notes
      Receivable and Income Recognition*** **** -
      The
      notes receivable portfolio consists primarily of secured real estate mortgage
      loans purchased from financial institutions and mortgage and finance companies.
      Such notes receivable are performing, non-performing or sub-performing at the
      time of purchase and are generally purchased at a discount from the principal
      balance remaining. Notes receivable are stated at the amount of unpaid
      principal, reduced by purchase discount and allowance for loan losses. Notes
      purchased are stated net of purchase discount. Impaired notes receivable are
      measured based on the present value of expected future cash flows discounted
      at
      the note’s effective interest rate or, as a practical expedient, at the
      observable market price of the note receivable or the fair value of the
      collateral if the note is collateral dependent. The Company periodically
      evaluates the collectibility of both interest and principal of its notes
      receivable to determine whether they are impaired. A note receivable is
      considered impaired when it is probable the Company will be unable to collect
      all contractual principal and interest payments due in accordance with the
      terms
      of the note agreement.




In
      general, interest on the notes receivable is calculated based on contractual
      interest rates applied to daily balances of the principal amount outstanding
      using the accrual method. Accrual of interest on notes receivable, including
      impaired notes receivable, is discontinued when management believes, after
      considering economic and business conditions and collection efforts, that the
      borrower’s financial condition is such that collection of interest is doubtful.
      When interest accrual is discontinued, all unpaid accrued interest is reversed
      against interest income. Subsequent recognition of income occurs only to the
      extent payment is received, subject to management’s assessment of the
      collectibility of the remaining interest and principal. A non-accrual note
      is
      restored to an accrual status when it is no longer delinquent and collectibility
      of interest and principal is no longer in doubt and past due interest is
      recognized at that time.




***Discounts
      on Acquired Loans*** -
      Effective January 1, 2005, as a result of the required adoption of SOP 03-3,
      the
      Company was required to change its accounting for loans acquired subsequent
      to
      December 31, 2004, which have evidence of deterioration of credit quality since
      origination and for which it is probable, at the time of our acquisition, that
      the Company will be unable to collect all contractually required payments.
      For
      these loans, the excess of the undiscounted contractual cash flows over the
      undiscounted cash flows estimated by us at the time of acquisition is not
      accreted into income (nonaccretable discount). The amount representing the
      excess of cash flows estimated by us at acquisition over the purchase price
      is
      accreted into purchase discount earned over the life of the loan (accretable
      discount). The nonaccretable discount is not accreted into income. If cash
      flows
      cannot be reasonably estimated for any loan, and collection is not probable,
      the
      cost recovery method of accounting may be used. Under the cost recovery method,
      any amounts received are applied against the recorded amount of the
      loan.




Subsequent
      to acquisition, if cash flow projections improve, and it is determined that
      the
      amount and timing of the cash flows related to the nonaccretable discount are
      reasonably estimable and collection is probable, the corresponding decrease
      in
      the nonaccretable discount is transferred to the accretable discount and is
      accreted into interest income over the remaining life of the loan on the
      interest method. If cash flow projections deteriorate subsequent to acquisition,
      the decline is accounted for through the allowance for loan losses.




There
      is
      judgment involved in estimating the amount of the loan’s future cash flows. The
      amount and timing of actual cash flows could differ materially from management’s
      estimates, which could materially affect our financial condition and results
      of
      operations. Depending on the timing of an acquisition, the initial allocation
      of
      discount generally will be made primarily to nonaccretable discount until the
      Company has boarded all loans onto its servicing system; at that time, any
      cash
      flows expected to be collected over the purchase price will be transferred
      to
      accretable discount. Generally, the allocation will be finalized no later than
      ninety days from the date of purchase.




11




For
      loans
      not addressed by SOP 03-3 that are acquired subsequent to December 31, 2004,
      the
      discount, which represents the excess of the amount of reasonably estimable
      and
      probable discounted future cash collections over the purchase price, is accreted
      into purchase discount earned using the interest method over the term of the
      loans. This is consistent with the method the Company utilizes for its
      accounting for loans purchased prior to January 1, 2005, except that for these
      loans an allowance allocation was also made at the time of
      acquisition.




The
      following table sets forth certain information relating to the activity in
      the
      accretable and nonaccretable discounts, which are shown as a component of notes
      receivable principal on the balance sheet, in accordance with SOP 03-3 for
      the
      periods indicated:




**Three
                Months Ended June 30,****2007**
            
            **2006**U**Accretable
                Discount**UBalance,
                beginning of period
            
            $
            16,311,205
            
            $
            14,454,449New
                acquisitions
            
            
            -
            
            
            -Accretion
            
            
            (807,939
            )
            
            (1,063,092
            )Transfers
                from nonaccretable
            
            
            2,303,550
            
            
            815,934Net
                reductions relating to loans sold
            
            
            (558,022
            )
            
            -Net
                reductions relating to loans repurchased
            
            
            -
            
            
            -Other
            
            
            -
            
            
            33,237Balance,
                end of period
            
            $
            17,248,794
            
            $
            14,240,528U**Nonaccretable
                Discount**UBalance,
                beginning of period
            
            $
            73,782,538
            
            $
            27,516,933New
                acquisitions
            
            
            50,637,093
            
            
            13,314,691Transfers
                to accretable
            
            
            (2,303,550
            )
            
            (815,934
            )Net
                reductions relating to loans sold
            
            
            (227,821
            )
            
            -Net
                reductions relating to loans repurchased
            
            
            (340,347
            )
            
            (197,153
            )Net
                reduction relating to loans charged off
            
            
            (1,905,237
            )
            
            -Other,
                loans transferred to OREO
            
            
            (1,755,372
            )
            
            (606,075
            )Balance,
                end of period
            
            $
            117,887,304
            
            $
            39,212,462




12




**Six
                Months Ended June 30,****2007**
            
            **2006**U**Accretable
                Discount**UBalance,
                beginning of period
            
            $
            12,842,755
            
            $
            11,360,617New
                acquisitions
            
            
            29,080
            
            
            2,545,873Accretion
            
            
            (1,530,698
            )
            
            (1,926,473
            )Transfers
                from nonaccretable
            
            
            6,467,051
            
            
            2,187,617Net
                reductions relating to loans sold
            
            
            (558,022
            )
            
            -Net
                reductions relating to loans repurchased
            
            
            -
            
            
            (2,189
            )Other
            
            
            (1,372
            )
            
            75,083Balance,
                end of period
            
            $
            17,248,794
            
            $
            14,240,528U**Nonaccretable
                Discount**UBalance,
                beginning of period
            
            $
            60,531,503
            
            $
            23,981,013New
                acquisitions
            
            
            71,516,117
            
            
            18,689,222Transfers
                to accretable
            
            
            (6,467,052
            )
            
            (2,187,617
            )Net
                reductions relating to loans sold
            
            
            (227,821
            )
            
            (7,885
            )Net
                reductions relating to loans repurchased
            
            
            (493,614
            )
            
            (204,026
            )Net
                reduction relating to loans charged off
            
            
            (3,990,477
            )
            
            -Other,
                loans transferred to OREO
            
            
            (2,981,352
            )
            
            (1,058,245
            )Balance,
                end of period
            
            $
            117,887,304
            
            $
            39,212,462




The
      Company purchased $311,333,817 and $457,630,219 of loans subject to SOP 03-3,
      respectively, during the three and six months ended June 30, 2007. The
      outstanding balance of notes receivable subject to SOP 03-3 at June 30, 2007
      was
      $1,209,993,643.




***Allowance
      for Loan Losses*** **** -
      The
      Company performs reviews of its loan portfolio upon purchase, at loan boarding,
      and on a frequent basis thereafter to segment impaired loans under SFAS No.
      114,
“ *Accounting
      by Creditors for Impairment of a Loan - an amendment of FASB Statements No.
      5
      and 15* .”
A
      loan
      is considered impaired when it is probable that we will be unable to collect
      all
      contractual principal and interest payments due in accordance with the terms
      of
      the note agreement. An allowance for loan losses is estimated based on our
      impairment analysis.  Management’s
      judgment in determining the adequacy of the allowance for loan losses is based
      on the evaluation of individual loans within the portfolios, the known and
      inherent risk characteristics and size of the portfolio, the assessment of
      current economic and real estate market conditions, estimates of the current
      value of underlying collateral, past loan loss experience and other relevant
      factors. In connection with the determination of the allowance for loan losses,
      management obtains independent appraisals for the underlying collateral when
      considered necessary. Management believes that the allowance for loan losses
      is
      adequate. The allowance for loan losses is a material estimate, which could
      change significantly in the near term.




Effective
      January 1, 2005, and as a result of the adoption of SOP 03-3, additions to
      the
      allowance for loan losses relating to newly acquired loans reflect only those
      losses incurred by us subsequent to acquisition. The Company no longer increases
      the allowances through allocations from purchase discount for loans that meet
      the requirements of SOP 03-3. Additionally, general risk allocations are no
      longer applied to loans purchased subsequent to December 31, 2004. Consequently,
      the allowance for loan losses has declined since the adoption of SOP 03-3,
      and
      it is anticipated that the allowance will continue to decline as credits for
      loan losses may continue to be recorded if loans pay off and allowances related
      to these loans are not required or additions due to loan impairment are not
      required.




13




***Originated
      Loans Held for Sale*** -
      The
      loans held for sale consist primarily of secured real estate first and second
      mortgages originated by the Company. Such loans held for sale are performing
      and
      are carried at lower of cost or market. The gain/loss on sale is recorded as
      the
      difference between the carrying amount of the loan and the proceeds from sale
      on
      a loan-by-loan basis. **** The **** Company
      records a sale upon settlement and when the title transfers to the
      seller.




Transfers
      of financial assets are accounted for as sales, when control over the assets
      has
      been surrendered. Control over transferred assets is deemed to be surrendered
      when (1) the assets have been isolated from the Company, (2) the transferee
      has
      the right (free of conditions that constrain it from taking advantage of that
      right) to pledge or exchange the transferred assets, and (3) the Company does
      not maintain effective control over the transferred assets through either (a)
      an
      agreement that entitles and obligates the Company to repurchase or redeem them
      before their maturity or (b) the ability to unilaterally cause the holder to
      return specific assets.




Gains
      or
      losses resulting from loan sales are recognized at the time of sale, based
      on
      the difference between the net sales proceeds and the carrying value of the
      loans sold.




Certain
      whole-loan sale contracts include provisions requiring the Company to repurchase
      a loan if a borrower fails to make one or more of the first loan payments due
      on
      the loan. In addition, an investor may request that the Company refund a portion
      of the premium paid on the sale of mortgage loans if a loan is prepaid in full
      within a certain amount of time from the date of sale. The Company records
      a
      provision for estimated repurchases and premium recapture on loans sold, which
      is charged to gain on sale of loans.




***Originated
      Loans Held for Investment*** -
      During
      the third quarter of 2006, the Company modified its estimate of the
      collectibility of accrued interest on certain fully secured loans that are
      in
      the foreclosure process. As a result, the Company continues to accrue interest
      on secured real estate first mortgage loans originated by the Company up to
      a
      maximum of 209 days contractually delinquent with a recency payment in the
      last
      179 days, and that are judged to be fully recoverable for both principal and
      accrued interest based on a foreclosure analysis, which includes an updated
      estimate of the realizable value of the property securing the loan.




In
      general, interest on originated loans held for investment is calculated based
      on
      contractual interest rates applied to daily balances of the principal amount
      outstanding using the accrual method. The Company’s decision to revise its
      estimate of collectibility was based on recent collection information, which
      shows that the Company is collecting 100% of principal and between 90% to 100%
      of delinquent interest when these loans in the foreclosure process are paid
      off
      or settled.




The
      accrual of interest is discontinued when management believes, after considering
      economic and business conditions and collection efforts, that the borrower’s
      financial condition is such that collection of interest is doubtful, which
      can
      be less than 209 days contractually delinquent with a recency payment in the
      last 179 days. When interest accrual is discontinued, all unpaid accrued
      interest is reversed against interest income. Subsequent recognition of income
      occurs only to the extent payment is received, subject to management’s
      assessment of the collectibility of the remaining interest and principal. A
      non-accrual loan is restored to an accrual status when the collectibility of
      interest and principal is no longer in doubt and past due interest is recognized
      at that time.




***Stock-Based
      Compensation Plans*** - The
      Company maintains share-based payment arrangements under which employees are
      awarded grants of restricted stock, non-qualified stock options, incentive
      stock
      options and other forms of stock-based payment arrangements. Prior to January
      1,
      2006, the Company accounted for these awards under the recognition and
      measurement provisions of Accounting Principles Board Opinion No. 25,
“ *Accounting
      for Stock Issued to Employees* ”
(“APB
      25”) as permitted under SFAS No. 123, “ *Accounting
      for Stock-Based Compensation* ”
(“SFAS
      123”). Accordingly, compensation cost for stock options was not recognized as
      long as the stock options granted had an exercise price equal to the market
      price of the Company’s common stock on the date of grant. Effective January 1,
      2006, the Company adopted the fair value recognition provisions of SFAS No.
      123
      (revised 2004), “ *Share-Based
      Payment* ,”
(“SFAS
      123(R)”) using the modified-prospective transition method. Under this transition
      method, compensation cost recognized beginning January 1, 2006 includes
      compensation cost for all share-based payment arrangements issued, but not
      yet
      vested as of December 31, 2005, based on the grant date fair value and expense
      attribution methodology determined in accordance with the original provisions
      of
      SFAS 123. Compensation cost for all share-based payment arrangements granted
      subsequent to December 31, 2005, is based on the grant-date fair value estimated
      in accordance with the provisions of SFAS 123(R). In addition, the effect of
      forfeitures on restricted stock (if any), is estimated when recognizing
      compensation cost. Results for prior periods have not been recast for the
      adoption of SFAS No. 123(R).




14




Prior
      to
      adoption of SFAS 123(R), the Company presented all tax benefits of deductions
      resulting from the exercise of stock options as operating cash flows in the
      Statement of Cash Flows. SFAS 123(R) requires the cash flows resulting from
      the
      tax benefits of tax deductions in excess of the compensation cost recognized
      for
      those options (excess tax benefits) to be classified as financing cash
      flows.




The
      compensation cost recognized in income for the plans described below was
      $124,190 and $335,350 for the three months ended June 30, 2007 and 2006,
      respectively. The compensation cost recognized in income for the plans described
      below was $246,035 and $484,108 for the six months ended June 30, 2007 and
      2006,
      respectively.




·  ***Stock
      Options*** - The
      Company awarded stock options to certain officers and directors under the
      Franklin Credit Management Corporation 1996 Stock Incentive Plan (the “Plan”) as
      amended. The Compensation Committee of the Board of Directors (the “Compensation
      Committee”) determines which eligible employees or directors will receive
      awards, the types of awards to be received, and the terms and conditions
      thereof.




Options
      granted under the Plan may be designated as either incentive stock options
      or
      non-qualified stock options. The Compensation Committee determines the terms
      and
      conditions of the option, including the time or times at which an option may
      be
      exercised, the methods by which such exercise price may be paid, and the form
      of
      such payment. Options are generally granted with an exercise price equal to
      the
      market value of the Company’s stock at the date of grant. These option awards
      generally vest over 1 to 3 years and have a contractual term of 10
      years.




The
      Company estimated the fair value of stock options granted on the date of grant
      using the Black-Scholes option-pricing model. The table below presents the
      assumptions used to estimate the fair value of stock options granted on the
      date
      of grant using the Black-Scholes option-pricing model for the six months ended
      June 30, 2007 and 2006. The risk-free rate for periods within the contractual
      life of the stock option is based on the U.S. Treasury yield curve in effect
      at
      the time of grant. The Company uses historical data to estimate stock option
      exercise. The expected term of stock options granted is derived from the output
      of the model and represents the period of time that stock options granted are
      expected to be outstanding. The estimates of fair value from these models are
      theoretical values for stock options and changes in the assumptions used in
      the
      models could result in materially different fair value estimates.




15


The
      actual value of the stock options will depend on the market value of the
      Company’s common stock when the stock options are exercised.




**Six
                Months Ended June 30,****2007**
            
            **2006**Risk-free
                interest rate
            
            
            4.96
            %
            
            3.85
            %Weighted
                average volatility
            
            
            95.15
            
            
            47.57Expected
                lives (years)
            
            
            6.0
            
            
            6.0





A
      summary
      of the status of the Company’s stock option awards as of June 30, 2007 and
      changes during the six month period then ended is presented below:




**Shares**
            
            **Weighted
                Average Exercise**
            
            **Weighted
                Average Remaining Contractual Term**
            
            **Aggregate
                Intrinsic Value**Balance,
                January 1, 2007
            
            
            355,000
            
            $
            3.38
            
            
            5.41
                years
            
            $
            1,014,560Granted
            
            
            15,000
            
            
            4.98
            
            
            10.00
                years
            
            
            -Balance,
                June 30, 2007
            
            
            370,000
            
            
            3.44
            
            
            5.12
                years
            
            
            1,069,560Options
                exercisable at June 30, 2007
            
            
            370,000
            
            $
            3.44
            
            
            
            
            $
            1,069,560





There
      were 15,000 stock option awards granted to the board of directors that
      immediately vested during the six months ended June 30, 2007 and 2006. At June
      30, 2007 and 2006, the weighted average fair value per stock option was $3.94
      and $3.89, respectively.




As
      of
      June 30, 2007, all of the stock options were vested and related compensation
      cost was fully recognized. At June 30, 2007, the Company had 10,000 warrants
      outstanding at an exercise price of $5.00.




**2006
      Stock Incentive Plan**




On
      May
      24, 2006, the shareholders approved the 2006 Stock Incentive Plan. This approval
      authorized and reserved 750,000 shares for grant under the 2006 stock incentive
      plan. Awards can consist of non-qualified stock options, incentive stock
      options, stock appreciation rights, shares of restricted stock, restricted
      stock
      units, shares of unrestricted stock, performance shares and dividend equivalent
      rights are authorized. Grants of non-qualified stock options, incentive stock
      options and stock appreciation rights under the 2006 Stock Incentive Plan
      generally qualify as “performance-based compensation” under Section 162(m) of
      the Internal Revenue Code, and, therefore, are not subject to the provisions
      of
      Section 162(m), which disallow a federal income tax deduction for certain
      compensation in excess of $1 million per year paid to the Company’s Chief
      Executive Officer and each of its four other most highly compensated executive
      officers.


16


·***Restricted
      Stock*** -
      Restricted shares of the Company’s common stock have been awarded to certain
      executives. The stock awards are subject to restrictions on transferability
      and
      other restrictions, and step vest over a three year period.




A
      summary
      of the status of the Company’s restricted stock awards as of June 30, 2007 and
      changes during the period then ended is presented below:




**Shares**
            
            **Weighted
                Average Grant Date**
              **Fair
                Value**Non-vested
                balance, January 1, 2007
            
            
            95,000
            
            $
            8.36Vested
            
            
            (15,000
            )
            
            9.55Forfeited
            
            
            -
            
            
            -Non-vested
                balance, June 30, 2007
            
            
            80,000
            
            $
            8.13




As
      of
      June 30, 2007, there was $612,307 of unrecognized compensation cost related
      to
      the Company’s restricted stock awards, which will be recognized over a period of
      2.50 years.




***Operating
      Segments*** -
      SFAS
      No. 131, “ *Disclosures
      about Segments of an Enterprise and Related Information* ,”
      requires companies to report financial and descriptive information about their
      reportable operating segments, including segment profit or loss, certain
      specific revenue and expense items, and segment assets. The Company has two
      reportable operating segments: (i) portfolio asset acquisition and resolution;
      and (ii) mortgage banking. The portfolio asset acquisition and resolution
      segment acquires performing, reperforming or nonperforming notes receivable
      and
      promissory notes from financial institutions and mortgage and finance companies,
      and services and collects such notes receivable through enforcement of terms
      of
      the original note, modification of original note terms and, if necessary,
      liquidation of the underlying collateral. The mortgage banking segment
      originates or purchases, subprime residential mortgage loans from individuals
      whose credit histories, income and other factors cause them to be classified
      as
      subprime borrowers.




17


The
      Company’s management evaluates the performance of each segment based on profit
      or loss from operations before unusual and extraordinary items and income
      taxes.




**Three
                Months Ended June 30,****2007**
            
            **2006****CONSOLIDATED
                REVENUE:**Portfolio
                asset acquisition and resolution
            
            $
            35,097,042
            
            $
            27,890,748Mortgage
                banking
            
            
            12,034,521
            
            
            12,552,606Consolidated
                revenue
            
            $
            47,131,563
            
            $
            40,443,354**CONSOLIDATED
                NET INCOME:**Portfolio
                asset acquisition and resolution
            
            $
            (2,072,685
            )
            $
            (2,378,743
            )Mortgage
                banking
            
            
            (1,510,628
            )
            
            989,331Consolidated
                net income
            
            $
            (3,583,313
            )
            $
            (1,389,412
            )




**Six
                Months Ended June 30,****2007**
            
            **2006****CONSOLIDATED
                REVENUE:**Portfolio
                asset acquisition and resolution
            
            $
            67,126,405
            
            $
            55,834,379Mortgage
                banking
            
            
            22,546,845
            
            
            23,271,917Consolidated
                revenue
            
            $
            89,673,250
            
            $
            79,106,296**CONSOLIDATED
                NET INCOME:**Portfolio
                asset acquisition and resolution
            
            $
            (3,632,572
            )
            $
            (1,601,295
            )Mortgage
                banking
            
            
            (1,904,417
            )
            
            1,998,631Consolidated
                net income
            
            $
            (5,536,989
            )
            $
            397,336




**June
                30, 2007**
            
            **December
                31, 2006****CONSOLIDATED
                ASSETS:**Portfolio
                asset acquisition and resolution
            
            $
            1,449,990,989
            
            $
            1,207,914,463Mortgage
                banking
            
            
            537,666,051
            
            
            460,443,536Consolidated
                assets
            
            $
            1,987,657,040
            
            $
            1,668,357,999




***Recent
      Accounting Pronouncements*** - In
      February 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS
      No. 159, “ *The
      Fair Value Option for Financial Assets and Financial Liabilities, including
      an
      amendment of FASB Statement No. 115* .”
SFAS
      No. 159 permits entities to choose to measure many financial instruments
      and certain other items at fair value. Unrealized gains and losses on items
      for
      which the fair value option has been elected will be recognized in earnings
      at
      each subsequent reporting date. This accounting standard is effective for
      financial statements issued for fiscal years beginning after November 15,
      2007. The Company is evaluating the impact the adoption of this statement may
      have on its consolidated financial statements.




In
      September 2006, the FASB issued Statement of Financial Accounting Standards
      No.
      157, “ *Fair
      Value Measurements* ”
(SFAS
      157). SFAS 157 enhances existing guidance for measuring assets and liabilities
      using fair value. Prior to the issuance of SFAS 157, guidance for applying
      fair
      value was incorporated in several accounting pronouncements. SFAS 157 provides
      a
      single definition of fair value, together with a framework for measuring it,
      and
      requires additional disclosure about the use of fair value to measure assets
      and
      liabilities. SFAS 157 also emphasizes that fair value is a market-based
      measurement, not an entity-specific measurement, and sets out a fair value
      hierarchy with the highest priority being quoted prices in active markets.
      Under
      SFAS 157, fair value measurements are disclosed by level within that hierarchy.
      While SFAS 157 does not add any new fair value measurements, it does change
      current practice. Changes to practice include: (1) a requirement for an entity
      to include its own credit standing in the measurement of its liabilities; (2)
      a
      modification of the transaction price presumption; (3) a prohibition on the
      use
      of block discounts when valuing large blocks of securities for broker-dealers
      and investment companies; and (4) a requirement to adjust the value of
      restricted stock for the effect of the restriction even if the restriction
      lapses within one year. SFAS 157 is effective for financial statements issued
      for fiscal years beginning after November 15, 2007, and interim periods within
      those fiscal years. Management is currently evaluating the effect of the
      statement, if any, on the Company’s results of operations and financial
      condition.




18




On
      July 13, 2006, the FASB released FASB Interpretation No. 48,
“ *Accounting
      for Uncertainty in Income Taxes* ,”
an
      interpretation of FASB Statement No. 109 (FIN 48). FIN 48 clarifies the
      accounting and reporting for income taxes where interpretation of the tax law
      may be uncertain. FIN 48 prescribes a comprehensive model for the financial
      statement recognition, measurement, presentation and disclosure of income tax
      uncertainties with respect to positions taken or expected to be taken in income
      tax returns. We adopted the provisions of FASB Interpretation No. 48,
“ *Accounting
      for Uncertainty in Income Taxes* ,”
an
      interpretation of FASB Statement No. 109 (FIN 48), on January 1, 2007. FIN
      48 clarifies the accounting for uncertainty in income taxes recognized in an
      enterprises financial statements in accordance with FASB Statement 109,
“ *Accounting
      for Income Taxes* ,”
and
      prescribes a recognition threshold and measurement process for financial
      statement recognition and measurement of a tax position taken or expected to
      be
      taken in a tax return. FIN 48 also provides guidance on derecognition,
      classification, interest and penalties, accounting in interim periods,
      disclosure and transition.




Based
      on
      our evaluation, we have concluded that there are no significant uncertain tax
      positions, requiring recognition in our financial statements. Our evaluation
      was
      performed for the tax years ended 2003 through 2006, which remain open to
      examination by major tax jurisdictions to which we are subject as of June 30,
      2007.




We
      may
      from time to time be assessed interest or penalties by major tax jurisdictions,
      although any such assessments historically have been minimal and immaterial
      to
      our financial results. Should we receive an assessment for interest and/or
      penalties, it would be classified in the financial statements as collection,
      general and administrative expenses.




19





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




**General**




***Safe
      Harbor Statements.*** Statements contained herein that are not historical fact may be forward-looking
      statements within the meaning of Section 27A of the Securities Act of 1933,
      as
      amended, and Section 21E of the Securities Exchange Act of 1934, as amended,
      that are subject to a variety of risks and uncertainties. There are a number
      of
      important factors that could cause actual results to differ materially from
      those projected or suggested in forward-looking statements made by the Company.
      These factors include, but are not limited to: (i) unanticipated changes in
      the
      U.S. economy, including changes in business conditions such as interest rates,
      and changes in the level of growth in the finance and housing markets; (ii)
      the
      status of the Company’s relations with the Company’s principal lender and such
      lender’s willingness to extend credit to the Company; (iii) the availability for
      purchases of additional loans; (iv) the availability of subprime borrowers
      for
      the origination of additional loans; (v) changes in the statutes or regulations
      applicable to the Company’s business or in the interpretation and enforcement
      thereof by the relevant authorities; (vi) the status of the Company’s regulatory
      compliance; and (vii) other risks detailed from time to time in the Company’s
      SEC reports and filings. Additional factors that would cause actual results
      to
      differ materially from those projected or suggested in any forward-looking
      statements are contained in the Company’s filings with the Securities and
      Exchange Commission, including, but not limited to, those factors discussed
      under the captions “Risk Factors,” “Interest Rate Risk” and “Real Estate Risk”
in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006
      and Quarterly Reports on Form 10-Q, which the Company urges investors to
      consider. The Company undertakes no obligation to publicly release the revisions
      to such forward-looking statements that may be made to reflect events or
      circumstances after the date hereof or to reflect the occurrences of
      unanticipated events, except as otherwise required by securities, and other
      applicable laws. Readers are cautioned not to place undue reliance on these
      forward-looking statements, which speak only as of the date hereof. The Company
      undertakes no obligation to release publicly the results on any events or
      circumstances after the date hereof or to reflect the occurrence of
      unanticipated events.




**Application
      of Critical Accounting Policies and Estimates**




The
      Company’s significant accounting policies are described in Note 2 to the
      December 31, 2006 consolidated financial statements filed on Form 10-K. We
      have
      identified notes receivable and income recognition, discounts on acquired loans,
      allowance for loan losses, originated loans held for sale, originated loans
      held
      for investment, and other real estate owned as the Company’s most critical
      accounting policies and estimates. The following discussion and analysis of
      financial condition and results of operations is based on the amounts reported
      in our consolidated financial statements, which are prepared in accordance
      with
      accounting principles generally accepted in the United States of America, or
      GAAP. In preparing the consolidated financial statements, management is required
      to make various judgments, estimates and assumptions that affect the financial
      statements and disclosures. Changes in these estimates and assumptions could
      have a material effect on our consolidated financial statements. Management
      believes that the estimates and judgments used in preparing these consolidated
      financial statements were the most appropriate at that time.




20


**Portfolio
      Characteristics**




***Overall
      Portfolio***




At
      June
      30, 2007, our portfolio (excluding OREO) consisted of $1.53 billion of notes
      receivable (inclusive of purchase discount not reflected on the face of the
      balance sheet), $491.3 million of loans held for investment and $9.9 million
      of
      loans held for sale. Our total loan portfolio grew 22% to $2.03 billion as
      of
      June 30, 2007, from $1.66 billion at December 31, 2006. Not boarded loans
      represent loans serviced by the seller on a temporary basis. The following
      table
      sets forth information regarding the types of properties securing our
      loans.




U**Property
                Types**U
            
            U**Principal
                Balance**U
            
            **Percentage
                of Total**
              U**Principal
                Balance**UResidential
                1-4 family
            
            $
            1,674,949,031
            
            
            82.56
            %Condos,
                co-ops, PUD dwellings
            
            
            251,725,088
            
            
            12.41
            %Manufactured
                and mobile homes
            
            
            20,663,493
            
            
            1.02
            %Multi-family
            
            
            761,755
            
            
            0.04
            %Secured,
                property type unknown(1)
            
            
            35,356,433
            
            
            1.74
            %Commercial
            
            
            3,144,598
            
            
            0.16
            %Unsecured
                loans(2)
            
            
            31,836,515
            
            
            1.57
            %Other
            
            
            596,500
            
            
            0.03
            %Not
                Boarded(3)
            
            
            9,626,489
            
            
            0.47
            %Total
            
            $
            2,028,659,902
            
            
            100.00
            %





(1)
            The
                loans included in this category are principally small balance (less
                than
                $10,000) second-lien loans acquired, and are collateralized by residential
                real estate.




(2)
            The
                loans included in this category are principally second-lien loans
                where
                the residential real estate collateral has been foreclosed by the
                first-lien holder.




(3)
            A
                portion of not boarded loans has been included in the appropriate
                property
                type categories based on available information provided by the
                servicer-seller. The total amount of not boarded loans was $111.5
                million
                at June 30, 2007.




21


***Geographic
      Dispersion.*** The
      following table sets forth information regarding the geographic location of
      properties securing the loans in our portfolio at June 30, 2007:




U**Location**U
            
            U**Principal
                Balance**U
            
            **Percentage
                of Total**
              U**Principal
                Balance**UCalifornia
            
            $
            282,313,427
            
            
            13.92
            %New
                York
            
            
            211,512,748
            
            
            10.43
            %New
                Jersey
            
            
            189,068,429
            
            
            9.32
            %Florida
            
            
            174,612,816
            
            
            8.61
            %Texas
            
            
            91,883,054
            
            
            4.53
            %Pennsylvania
            
            
            87,007,262
            
            
            4.29
            %Ohio
            
            
            71,876,962
            
            
            3.54
            %Illinois
            
            
            66,141,335
            
            
            3.26
            %Maryland
            
            
            65,386,568
            
            
            3.22
            %Michigan
            
            
            62,870,798
            
            
            3.10
            %All
                Others
            
            
            716,360,014
            
            
            35.31
            %Not
                Boarded*
            
            
            9,626,489
            
            
            0.47
            %Total
            
            $
            2,028,659,902
            
            
            100.00
            %





* A
      portion
      of not boarded loans has been included in the appropriate states based on
      available information provided by the servicer-seller. The total amount of
      not
      boarded loans was $111.5 million at June 30, 2007.





Amounts
      included in the tables above under the heading “Principal Balance” represent the
      aggregate unpaid principal balance outstanding of notes receivable, loans held
      for investment and loans held for sale.


22


***Asset
      Quality***




***Delinquency*** **.** The
      following tables provide a breakdown of the delinquency status of our notes
      receivable, loans held for investment and loans held for sale portfolios as
      of
      the dates indicated, by principal balance. Because we specialize in acquiring
      and servicing loans with erratic payment patterns and an elevated level of
      credit risk, a portion of the loans we acquire are in various stages of
      delinquency, foreclosure and bankruptcy when we acquire them. We monitor the
      payment status of our borrowers based on both contractual delinquency and
      recency delinquency. By contractual delinquency, we mean the delinquency of
      payments relative to the contractual obligations of the borrower. By recency
      delinquency, we mean the recency of the most recent full monthly payment
      received from the borrower. By way of illustration, on a recency delinquency
      basis, if the borrower has made the most recent full monthly payment within
      the
      past 30 days, the loan is shown as current regardless of the number of
      contractually delinquent payments. In contrast, on a contractual delinquency
      basis, if the borrower has made the most recent full monthly payment, but has
      missed an earlier payment or payments, the loan is shown as contractually
      delinquent. We classify a loan as in foreclosure when we determine that the
      best
      course of action to maximize recovery of unpaid principal balance is to begin
      the foreclosure process. We classify a loan as in bankruptcy when we receive
      notice of a bankruptcy filing from the bankruptcy court.




**June
                30, 2007****Days
                Past**
            
            **Contractual
                Delinquency**
            
            **Recency
                Delinquency****Due**
            
            **Amount**
            ****
            **%**
            
            **Amount**
            ****
            **%****Current**
            
            
            0
                - 30 days
            
            $
            1,101,749,313
            
            
            54.31
            %
            $
            1,250,018,729
            
            
            61.62
            %**Delinquent**
            
            
            31
                - 60 days
            
            
            112,030,175
            
            
            5.52
            %
            
            73,818,987
            
            
            3.64
            %61
                - 90 days
            
            
            67,867,470
            
            
            3.35
            %
            
            41,765,848
            
            
            2.06
            %90+
                days
            
            
            219,997,673
            
            
            10.84
            %
            
            136,041,067
            
            
            6.70
            %U**Bankruptcy**U
            
            
            0
                - 30 days
            
            
            31,576,639
            
            
            1.56
            %
            
            91,529,459
            
            
            4.51
            %**Delinquent**
            
            
            31
                - 60 days
            
            
            6,583,052
            
            
            0.32
            %
            
            6,939,507
            
            
            0.34
            %61
                - 90 days
            
            
            6,338,693
            
            
            0.31
            %
            
            4,992,138
            
            
            0.25
            %90+
                days
            
            
            107,217,088
            
            
            5.29
            %
            
            48,254,368
            
            
            2.38
            %U**Foreclosure**U
            
            
            0
                - 30 days
            
            
            2,148,447
            
            
            0.10
            %
            
            23,959,975
            
            
            1.18
            %**Delinquent**
            
            
            31
                - 60 days
            
            
            625,461
            
            
            0.03
            %
            
            5,472,433
            
            
            0.27
            %61
                - 90 days
            
            
            6,645,615
            
            
            0.33
            %
            
            15,528,917
            
            
            0.76
            %90+
                days
            
            
            254,366,935
            
            
            12.54
            %
            
            218,825,133
            
            
            10.79
            %**Not
                Boarded***
            
            
            
            
            
            111,513,341
            
            
            5.50
            %
            
            111,513,341
            
            
            5.50
            %**Total**
            
            $
            2,028,659,902
            
            
            100.00
            %
            $
            2,028,659,902
            
            
            100.00
            %**Total
                loans**
            
            
            **0
                - 30 days**
            
            $
            1,135,474,399
            
            
            55.97
            %
            $
            1,365,508,163
            
            
            67.31
            %





*
            Not
                boarded represents recently acquired loans serviced by the seller
                on a
                temporary basis. Approximately $93.5 million of these loans were
                contractually current at the time of
                acquisition.




23





**December
                31, 2006****Days
                Past**
            
            **Contractual
                Delinquency**
            
            **Recency
                Delinquency****Due**
            
            **Amount**
            ****
            **%**
            ****
            **Amount**
            ****
            **%****Current**
            
            
            0
                - 30 days
            
            $
            868,344,388
            
            
            52.29
            %
            $
            1,003,457,115
            
            
            60.43
            %**Delinquent**
            
            
            31
                - 60 days
            
            
            89,662,792
            
            
            5.40
            %
            
            57,397,832
            
            
            3.46
            %61
                - 90 days
            
            
            12,558,911
            
            
            0.76
            %
            
            20,572,952
            
            
            1.24
            %90+
                days
            
            
            195,922,320
            
            
            11.80
            %
            
            85,060,512
            
            
            5.12
            %**Bankruptcy**
            
            
            0
                - 30 days
            
            
            38,276,181
            
            
            2.31
            %
            
            101,649,384
            
            
            6.12
            %**Delinquent**
            
            
            31
                - 60 days
            
            
            8,523,006
            
            
            0.51
            %
            
            6,957,591
            
            
            0.42
            %61
                - 90 days
            
            
            3,231,686
            
            
            0.19
            %
            
            2,920,336
            
            
            0.18
            %90+
                days
            
            
            104,883,243
            
            
            6.32
            %
            
            43,386,805
            
            
            2.61
            %**Foreclosure**
            
            
            0
                - 30 days
            
            
            622,379
            
            
            0.04
            %
            
            8,371,118
            
            
            0.50
            %**Delinquent**
            
            
            31
                - 60 days
            
            
            214,085
            
            
            0.01
            %
            
            1,789,362
            
            
            0.11
            %61
                - 90 days
            
            
            244,283
            
            
            0.02
            %
            
            2,593,268
            
            
            0.16
            %90+
                days
            
            
            208,091,113
            
            
            12.53
            %
            
            196,418,112
            
            
            11.83
            %**Not
                Boarded****(1)**
            
            
            
            
            
            129,906,356
            
            
            7.82
            %
            
            129,906,356
            
            
            7.82
            %**Total****(2)**
            
            $
            1,660,480,743
            
            
            100.00
            %
            $
            1,660,480,743
            
            
            100.00
            %**Total
                loans**
            
            
            **0
                - 30 days**
            
            $
            907,242,948
            
            
            54.64
            %
            $
            1,113,477,617
            
            
            67.06
            %





(1)
            Not
                boarded represents recently acquired loans serviced by the seller
                on a
                temporary basis. Approximately $93.2 million of these loans were
                contractually current at the time of
                acquisition.




(2)
            Excludes
                $17.2 million of loans sold to investors, which the Company committed
                to
                repurchase, that are included on the face of the balance sheet at
                December
                31, 2006.




24


***Notes
      Receivable Portfolio***




At
      June
      30, 2007, our notes receivable portfolio, which consists of purchased loans,
      included approximately 32,176 loans with an aggregate unpaid principal balance
      (“UPB”) of $1.53 billion and a net UPB of $1.35 billion (after allowance for
      loan losses of $46.3 million), compared with approximately 29,460 loans with
      an
      aggregate UPB of $1.25 billion and a net UPB of $1.12 billion (after allowance
      for loan losses of $52.4 million) as of December 31, 2006. Impaired loans
      comprise and will continue to comprise a significant portion of our portfolio.
      A
      portion of the loans we acquire are impaired loans at the time of purchase.
      We
      generally purchase such loans at significant discounts and have considered
      the
      payment status, underlying collateral value and expected cash flows when
      determining our purchase price. While interest income is not accrued on impaired
      loans, interest and fees are received on a portion of loans classified as
      impaired. The following table provides a breakdown of the notes receivable
      portfolio by year:




**June
                30, 2007**
            
            **December
                31, 2006**Performing
                loans
            
            $
            1,151,646,479
            
            $
            866,296,721Allowance
                for loan losses
            
            
            2,790,659
            
            
            7,745,261Nonaccretable
                discount*
            
            
            64,768,963
            
            
            29,536,412Total
                performing loans, net of allowance for loan losses
              and
                nonaccretable discount
            
            
            1,084,086,857
            
            
            829,015,048Impaired
                loans
            
            
            264,302,051
            
            
            251,210,748Allowance
                for loan losses
            
            
            43,485,815
            
            
            44,679,114Nonaccretable
                discount*
            
            
            32,901,028
            
            
            19,892,190Total
                impaired loans, net of allowance for loan losses
              and
                nonaccretable discount
            
            
            187,915,208
            
            
            186,639,444Not
                yet boarded onto servicing system
            
            
            111,513,341
            
            
            129,906,356Nonaccretable
                discount*
            
            
            20,217,313
            
            
            11,102,901Not
                yet boarded onto servicing system, net of allowance
              for
                loan losses and nonaccretable discount
            
            
            91,296,028
            
            
            118,803,455Total
                notes receivable, net of allowance for loan losses
              and
                nonaccretable discount
            
            
            1,363,298,093
            
            
            1,134,457,947Accretable
                discount*
            
            
            17,248,794
            
            
            12,842,755Total
                Notes Receivable, net of allowance for loan losses
              and
                accretable/nonaccretable discount
            
            $
            1,346,049,299
            
            $
            1,121,615,192





* Represents
      purchase discount not reflected on the face of the balance sheet in accordance
      with SOP 03-3 for loans acquired after December 31, 2004. Accretable discount
      is
      the excess of the loan’s estimated cash flows over the purchase prices, which is
      accreted into income over the life of the loan. Nonaccretable discount is the
      excess of the undiscounted contractual cash flows over the undiscounted cash
      flows estimated at the time of acquisition.


25




The
      following table provides a breakdown of the balance of our portfolio of notes
      receivable between fixed-rate and adjustable-rate loans, net of allowance for
      loan losses and excluding loans purchased but not yet boarded onto our servicing
      operations system as of June 30, 2007 of $111,513,341 and $129,906,356 as of
      December 31, 2006, respectively.




**June
                30, 2007**
            
            **December
                31, 2006**Performing
                Loans:Fixed
                rate
            
            $
            931,926,671
            
            $
            755,334,985Adjustable
                rate
            
            
            216,929,149
            
            
            103,216,474Total
                Performing Loans
            
            $
            1,148,855,820
            
            $
            858,551,459Impaired
                Loans:Fixed
                rate
            
            $
            168,272,356
            
            $
            169,586,108Adjustable
                rate
            
            
            52,543,880
            
            
            36,945,527Total
                Impaired Loans
            
            $
            220,816,236
            
            $
            206,531,635Not
                Boarded Loans
            
            $
            111,513,341
            
            $
            129,906,356Total
                Notes
            
            $
            1,481,185,397
            
            $
            1,194,989,450Accretable
                discount
            
            $
            17,248,794
            
            $
            12,842,755Nonaccretable
                discount
            
            $
            117,887,304
            
            $
            60,531,503Total
                Notes Receivable, net of allowance for loan losses
            
            $
            1,346,049,299
            
            $
            1,121,615,192





***Loan
      Acquisitions***




We
      purchased over $311.2 million in assets (principally residential single-family
      first and second lien loans) during the second quarter of 2007, compared with
      approximately $133.5 million in assets (principally residential single-family
      loans secured by second liens) during the second quarter of 2006. During the
      six
      months ended June 30, 2007, we purchased $457.5 million of loans as compared
      with $237.3 million for the same period in 2006. Approximately 42% and 45%
      of
      the loans purchased in the three and six months ended June 30, 2007,
      respectively, were secured by first liens. The following table sets forth the
      amounts and purchase prices of our mortgage loan acquisitions during the three
      and six months ended June 30, 2007 and 2006:




**Three
                Months Ended June 30,**
            
            **Six
                Months Ended June 30,****2007**
            
            **2006**
            
            **2007**
            
            **2006**Number
                of loans
            
            
            3,876
            
            
            3,740
            
            
            5,990
            
            
            6,278Aggregate
                unpaid principal balance at acquisition
            
            $
            311,210,405
            
            $
            133,462,289
            
            $
            457,506,807
            
            $
            237,289,905Purchase
                price
            
            $
            260,746,325
            
            $
            120,146,984
            
            $
            386,132,716
            
            $
            216,054,218Purchase
                price percentage
            
            
            84
            %
            
            90
            %
            
            84
            %
            
            91
            %Percentage
                of 1stliens
            
            
            42
            %
            
            7
            %
            
            45
            %
            
            11
            %Percentage
                of 2ndliens
            
            
            58
            %
            
            93
            %
            
            55
            %
            
            89
            %





During
      the quarter ended June 30, 2007, we put back $12.6 million of loans principally
      to one seller, which were purchased in late 2006, and recovered the total amount
      paid at the time of purchase.


26


***Notes
      Receivable Dispositions***




In
      the
      ordinary course of our loan servicing process and through the periodic review
      of
      our portfolio of purchased loans, there are certain loans that, for various
      reasons, we determine to sell. We typically sell these loans on a whole-loan,
      servicing-released basis, for cash. The following table sets forth our
      dispositions of purchased loans during the three and six months ended June
      30,
      2007 and June 30, 2006:




**Three
                Months Ended June 30,**
            
            **Six
                Months Ended June 30,****2007**
            
            **2006**
            
            **2007**
            
            **2006****Sale
                of Performing Loans**Aggregate
                unpaid principal balance
            
            $
            22,255,982
            
            $
            -
            
            $
            22,255,982
            
            $
            -Gain
                on sale
            
            $
            31,118
            
            $
            -
            
            $
            31,118
            
            $
            -**Sale
                of Non-Performing Loans**Aggregate
                unpaid principal balance
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            161,149Gain
                on sale
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            69,049Total
                gain on sale
            
            $
            31,118
            
            $
            -
            
            $
            31,118
            
            $
            69,049




***Tribeca’s
      Loan Originations***




The
      following table sets forth Tribeca’s loan originations, as well as dispositions,
      during the three and six months ended June 30, 2007 and 2006.




**Three
                Months Ended June 30,**
            
            **Six
                Months Ended June 30,****2007**
            
            **2006**
            
            **2007**
            
            **2006**Number
                of loans originated
            
            471
            
            467
            
            851
            
            944Original
                principal balance(1)
            
            $
            118,699,834
            
            $
            99,638,002
            
            $
            209,863,371
            
            $
            204,413,207Average
                loan amount
            
            $
            252,017
            
            $
            213,358
            
            $
            246,608
            
            $
            216,539Originated
                as fixed
            
            $
            13,890,040
            
            $
            6,415,450
            
            $
            29,465,540
            
            $
            10,479,900Originated
                as ARM(2)
            
            $
            104,809,794
            
            $
            93,222,552
            
            $
            180,397,831
            
            $
            193,933,307Number
                of loans sold
            
            
            104
            
            
            119
            
            
            119
            
            
            144Aggregate
                face value
            
            $
            27,425,560
            
            $
            27,041,507
            
            $
            31,268,022
            
            $
            33,793,948Gain
                on sale
            
            $
            197,694
            
            $
            170,924
            
            $
            200,733
            
            $
            336,796Gain
                on sale percentage
            
            
            0.72
            %*
            
            0.63
            %**
            
            0.64
            %*
            
            1.00
            %**







(1) In
      the
      three and six months ended June 30, 2007, we originated $9.9 million and $22.1
      million, respectively, of “Alt-A” loans.




(2) Originated
      ARM loans are principally fixed-rate for the first two years and six-month
      adjustable-rate for the remaining term.




* Included
      in gain on sale for the three and six months ended June 30, 2007 are: net gain
      of $132,000 on the sale of Liberty Loans; net loss of $56,000 from sales of
      “Alt-A” loans and other loans specifically originated for sale to investors;
      and, a recovery of $122,000 for previously established early payment default
      reserves for Liberty Loans sold in 2006.




** In
      the
      three and six months ended June 30, 2006, we sold $7.5 million of originated
      loans held for sale to investors at a loss of $269,000; these loans did not
      meet
      investor requirements.




27




***Property
      Types of Originated Loans Held for Investment.*** At June
      30, 2007, Tribeca’s portfolio consisted of $491.3 million of loans originated
      and held for investment and $9.9 million of loans held for sale. Tribeca’s
      portfolio of loans held for investment grew 15% to $491.3 million as of June
      30,
      2007, from $426.1 million at December 31, 2006. The following table sets forth
      information regarding the types of properties securing Tribeca’s portfolio of
      loans held for investment.




**Loans
                Held for Investment**
              **at
                June 30, 2007**U**Property
                Types**U
            
            U**Principal
                Balance**U
            
            **Percentage
                of Total**
              U**Principal
                Balance**UResidential
                1-4 family
            
            $
            458,773,250
            
            
            93.43
            %Condos,
                co-ops, PUD dwellings
            
            
            29,775,910
            
            
            6.07
            %Commercial
            
            
            2,268,040
            
            
            0.46
            %Other
            
            
            205,918
            
            
            0.04
            %Total
            
            $
            491,023,118
            
            
            100.00
            %




***Geographic
      Dispersion of Originated Loans.*** The
      following table sets forth information regarding the geographic location of
      properties securing all loans originated by Tribeca during the six months ended
      June 30, 2007 and the aggregate portfolio of loans originated and held for
      investment at June 30, 2007:




**Loans
                Originated**
              **for
                Six Months Ended June 30, 2007**
            
            **Loans
                Held for Investment**
              **at
                June 30, 2007****Location**
            
            **Principal**
              **Balance**
            
            **Percentage
                of Total**
              **Principal
                Balance**
            
            **Principal**
              **Balance**
            
            **Percentage
                of Total**
              **Principal
                Balance**New
                Jersey
            
            $
            60,527,054
            
            
            28.84
            %
            $
            145,757,662
            
            
            29.69
            %New
                York
            
            
            57,239,942
            
            
            27.28
            %
            
            146,089,542
            
            
            29.75
            %Florida
            
            
            15,849,845
            
            
            7.55
            %
            
            28,104,029
            
            
            5.72
            %Pennsylvania
            
            
            13,665,956
            
            
            6.51
            %
            
            43,460,120
            
            
            8.85
            %Maryland
            
            
            12,476,823
            
            
            5.95
            %
            
            25,211,851
            
            
            5.14
            %Connecticut
            
            
            9,755,406
            
            
            4.65
            %
            
            17,831,379
            
            
            3.63
            %Massachusetts
            
            
            9,626,200
            
            
            4.59
            %
            
            28,214,793
            
            
            5.75
            %Virginia
            
            
            8,275,220
            
            
            3.94
            %
            
            16,900,335
            
            
            3.44
            %California
            
            
            4,616,250
            
            
            2.20
            %
            
            10,064,522
            
            
            2.05
            %North
                Carolina
            
            
            3,114,150
            
            
            1.48
            %
            
            4,767,691
            
            
            0.97
            %All
                Others
            
            
            14,716,525
            
            
            7.01
            %
            
            24,621,194
            
            
            5.01
            %Total
            
            $
            209,863,371
            
            
            100.00
            %
            $
            491,023,118
            
            
            100.00
            %




28


***Delinquency*** **.** The
      following tables provide a breakdown of the delinquency status of our loans
      held
      for investment and loans held for sale portfolios as of the dates indicated,
      by
      principal balance. Because we specialize in originating residential mortgage
      loans for individuals with credit histories, income and/or factors that cause
      them to be classified as subprime borrowers, a substantially greater portion
      of
      the loans we originate experience varying degrees of delinquency, foreclosure
      and bankruptcy than those of prime lenders. However, due to the fairly
      conservative loan-to-value ratios, we typically collect full payment of
      principal and interest on delinquent loans that are in the process of
      foreclosure. We monitor the payment status of our borrowers based on both
      contractual delinquency and recency delinquency. By contractual delinquency,
      we
      mean the delinquency of payments relative to the contractual obligations of
      the
      borrower. By recency delinquency, we mean the recency of the most recent full
      monthly payment received from the borrower. By way of illustration, on a recency
      delinquency basis, if the borrower has made the most recent full monthly payment
      within the past 30 days, the loan is shown as current regardless of the number
      of contractually delinquent payments. In contrast, on a contractual delinquency
      basis, if the borrower has made the most recent full monthly payment, but has
      missed an earlier payment or payments, the loan is shown as contractually
      delinquent. We classify a loan as in foreclosure when we determine that the
      best
      course of action to maximize recovery of unpaid principal balance is to begin
      the foreclosure process. We classify a loan as in bankruptcy when we receive
      notice of a bankruptcy filing from the bankruptcy court.




**June
                30, 2007****Contractual
                Delinquency**
            
            **Recency
                Delinquency****Days
                Past Due**
            
            **Amount**
            ****
            **%**
            ****
            **Amount**
            ****
            **%****Current**
            
            
            0
                - 30 days
            
            $
            254,561,907
            
            
            50.79
            %
            $
            299,147,753
            
            
            59.68
            %**Delinquent**
            
            
            31
                - 60 days
            
            
            30,638,392
            
            
            6.11
            %
            
            22,418,230
            
            
            4.47
            %61
                - 90 days
            
            
            17,045,315
            
            
            3.40
            %
            
            5,914,581
            
            
            1.18
            %90+
                days
            
            
            46,922,792
            
            
            9.36
            %
            
            21,687,842
            
            
            4.33
            %U**Bankruptcy**U
            
            
            0
                - 30 days
            
            
            138,857
            
            
            0.03
            %
            
            4,789,041
            
            
            0.96
            %**Delinquent**
            
            
            31
                - 60 days
            
            
            -
            
            
            -
            
            
            1,275,392
            
            
            0.25
            %61
                - 90 days
            
            
            55,297
            
            
            0.01
            %
            
            1,402,811
            
            
            0.28
            %90+
                days
            
            
            19,179,533
            
            
            3.83
            %
            
            11,906,443
            
            
            2.38
            %U**Foreclosure*******U
            
            
            0
                - 30 days
            
            
            845,930
            
            
            0.17
            %
            
            16,030,034
            
            
            3.20
            %**Delinquent**
            
            
            31
                - 60 days
            
            
            466,822
            
            
            0.09
            %
            
            3,828,799
            
            
            0.76
            %61
                - 90 days
            
            
            5,554,033
            
            
            1.11
            %
            
            12,963,977
            
            
            2.59
            %90+
                days
            
            
            125,789,153
            
            
            25.10
            %
            
            99,833,128
            
            
            19.92
            %**Total**
            
            $
            501,198,031
            
            
            100.00
            %
            $
            501,198,031
            
            
            100.00
            %**Total
                loans**
            
            
            **0
                - 30 days**
            
            $
            255,546,694
            
            
            50.99
            %
            $
            319,966,828
            
            
            63.84
            %





*
            $132.7
                million of loans were in various stages of the foreclosure process;
                our
                servicing practice for this portfolio is to move loans into our
                foreclosure collection process at an early stage of
                delinquency.


29





**December
                31, 2006****Days
                Past**
            
            **Contractual
                Delinquency**
            
            **Recency
                Delinquency****Due**
            
            **Amount**
            ****
            **%**
            ****
            **Amount**
            ****
            **%****Current**
            
            
            0
                - 30 days
            
            $
            188,855,227
            
            
            45.72
            %
            $
            239,784,515
            
            
            58.05
            %**Delinquent**
            
            
            31
                - 60 days
            
            
            31,652,388
            
            
            7.66
            %
            
            23,558,856
            
            
            5.70
            %61
                - 90 days
            
            
            2,561,701
            
            
            0.62
            %
            
            8,105,861
            
            
            1.96
            %90+
                days
            
            
            76,292,627
            
            
            18.47
            %
            
            27,912,711
            
            
            6.76
            %U**Bankruptcy**U
            
            
            0
                - 30 days
            
            
            134,904
            
            
            0.03
            %
            
            2,039,871
            
            
            0.49
            %**Delinquent**
            
            
            31
                - 60 days
            
            
            55,652
            
            
            0.02
            %
            
            330,509
            
            
            0.08
            %61
                - 90 days
            
            
            -
            
            
            -
            
            
            -
            
            
            -90+
                days
            
            
            9,885,179
            
            
            2.39
            %
            
            7,705,355
            
            
            1.87
            %U**Foreclosure****(1)**
            
            
            0
                - 30 days
            
            
            -
            
            
            -
            
            
            1,894,422
            
            
            0.46
            %**Delinquent**
            
            
            31
                - 60 days
            
            
            -
            
            
            -
            
            
            621,003
            
            
            0.15
            %61
                - 90 days
            
            
            -
            
            
            -
            
            
            1,258,886
            
            
            0.31
            %90+
                days
            
            
            103,629,240
            
            
            25.09
            %
            
            99,854,929
            
            
            24.17
            %**Total****(2)**
            
            $
            413,066,918
            
            
            100.00
            %
            $
            413,066,918
            
            
            100.00
            %**Total
                loans**
            
            
            **0
                - 30 days**
            
            $
            188,990,131
            
            
            45.75
            %
            $
            243,718,808
            
            
            59.00
            %


__________________




(1)
            $103.6
                million of loans were in various stages of the foreclosure process;
                our
                servicing practice for this portfolio is to move loans into our
                foreclosure collection process at an early stage of
                delinquency.




(2)
            Excludes
                $17.2 million of loans sold to investors, which the Company committed
                to
                repurchase, that are included on the face of the balance sheet at
                December
                31, 2006.




During
      2006, our loans held for investment, principally Liberty Loans, became more
      seasoned and, as generally anticipated, a significant portion of our Liberty
      Loans moved into the foreclosure process. At June 30, 2007, $131.4 million
      of
      Liberty Loans, or 27% of the portfolio of loans held for investment were in
      our
      foreclosure process, compared with $102.7 million, or 25%, at December 31,
      2006
      and $44.7 million, or 12%, at December 31, 2005. Our Servicing department
      personnel evaluates the collateral of each loan in the foreclosure process
      for
      its estimated realizable value, utilizing updated BPOs; the estimated losses
      on
      disposition, which were included in the allowance for loan losses, aggregated
      approximately $1.3 million at June 30, 2007. In addition, our experience with
      Liberty Loans is that a percentage of the loans in the foreclosure process
      pay
      off in full, and that such payoffs include approximately 90% of all unpaid
      interest due on the loans being repaid at the time of payoff, prior to actual
      foreclosure sale.




30




***Other
      Real Estate Owned***




The
      following table sets forth our real estate owned, or OREO portfolio, and OREO
      sales during the three and six months ended June 30, 2007 and June 30,
      2006:




**Three
                Months Ended June 30,**
            
            **Six
                Months Ended June 30,****2007**
            
            **2006**
            
            **2007**
            
            **2006**Other
                real estate owned
            
            $
            33,142,484
            
            $
            19,394,263
            
            $
            33,142,484
            
            $
            19,394,263OREO
                as a percentage of total assets
            
            
            1.67
            %
            
            1.32
            %
            
            1.67
            %
            
            1.32
            %OREO
                sold
            
            $
            7,574,705
            
            $
            8,284,103
            
            $
            15,927,485
            
            $
            15,830,201Gain
                on sale
            
            $
            117,632
            
            $
            440,741
            
            $
            238,807
            
            $
            1,242,283





**Results
      of Operations**




***Three
      Months Ended June 30, 2007 Compared to Three Months Ended June 30,
      2006***




***Overview.*** The
      Company had a net loss of $3.6 million for the second quarter of 2007, compared
      with a net loss of $1.4 million for the second quarter of 2006. Revenues
      increased by 17% to $47.1 million for the three months ended June 30, 2007,
      from
      $40.4 million for the three months ended June 30, 2006. The Company had a loss
      per common share for the three months ended June 30, 2007 of $0.45 both on
      a
      diluted and basic basis, compared to a loss of $0.18 both on a diluted and
      basic
      basis for the three months ended June 30, 2006. During the second quarter of
      2007, we acquired first and second lien loans with an aggregate face amount
      of
      $311.2 million and we originated $118.7 million of subprime 1-4 family
      residential loans. We increased the size of our total portfolio of net notes
      receivable, loans held for sale, loans held for investment and OREO at June
      30,
      2007 to $1.86 billion from $1.56 billion at the end of 2006. Interest income
      increased by $8.1 million, or 23%, in the second quarter of 2007 compared with
      the second quarter of 2006, due to the increase in our total loan portfolios.
      Correspondingly, our total debt outstanding grew to $1.92 billion at June 30,
      2007 from $1.58 billion at December 31, 2006. As a result principally of
      the increase of our total debt, interest expense (inclusive of amortization
      of
      deferred financing costs and success fees) increased by $7.4 million, or 25%,
      for the second quarter of 2007 compared with the same period in 2006. Our
      average cost of funds during the three months ended June 30, 2007 decreased
      to
      7.84% from 7.86% during the three months ended June 30, 2006. At June 30, 2007,
      the weighted average interest rate of borrowed funds was 7.82%. Collection,
      general and administrative expenses increased $337,000, or 3%, to $10.8 million
      during the three months ended June 30, 2007, from $10.4 million for the same
      period in 2006. The increase in collection, general and administrative expenses
      reflected for the most part the additional operating expenses of the wholesale
      origination unit acquired in February 2007. The provision for loan losses
      increased $2.5 million to $5.7 million in the three months ended June 30, 2007,
      principally due to increased defaults experienced in certain pools of loans
      purchased in 2005 and for the portfolio of Liberty Loans and lower values on
      foreclosed properties. Gains on loan sales increased by $27,000 to $198,000
      in
      the three months ended June 30, 2007. Stockholders’ equity decreased 11% to
      $42.3 million at June 30, 2007, from $47.6 million at December 31,
      2006.




***Revenues.*** Total
      revenues increased by $6.7 million, or 17%, to $47.1 million during the second
      quarter of 2007, from $40.4 million during the same period in 2006. Revenues
      include interest income, purchase discount earned, gains on sales of notes
      receivable, gains on sales of originated loans, gains on sales of OREO and
      prepayment penalties and other income.




Interest
      income increased by $8.1 million, or 23%, to $43.4 million during the three
      months ended June 30, 2007 from $35.3 million during the three months ended
      June
      30, 2006. The increase in interest income reflected a 36% increase in the
      portfolios of gross notes receivable and loans held for investment, partially
      offset by an increase in non-accrual loans, during the three months ended June
      30, 2007 compared to the three months ended June 30, 2006.




31




Purchase
      discount earned decreased by $857,000, or 39%, to $1.4 million during the second
      quarter of 2007 from $2.2 million during the second quarter of 2006. This
      decrease resulted primarily from less purchase discount available for accretion
      from portfolios purchased in 2005 and 2006, a declining balance of purchase
      discount remaining for accretion from pre-2005 acquisitions and a slower rate
      of
      prepayments. We received $44.7 million of principal payments from notes
      receivable during the three months ended June 30, 2007, compared with $73.0
      million of principal payments during the same period in 2006.




The
      Company realized a gain on sales of notes receivable of $31,000 from sales
      of
      $22.3 million of performing low-coupon notes receivable during the three months
      ended June 30, 2007. The Company did not sell any notes receivable during the
      three months ended June 30, 2006.




Gain
      on
      sales of originated loans, which included a $122,000 recovery of the unused
      portion of a repurchase reserve for loans sold in 2006, increased by $27,000,
      or
      16%, to $198,000 during the three months ended June 30, 2007, from $171,000
      during the three months ended June 30, 2006. The Company sold $27.4 million
      of
      originated loans during the three months ended June 30, 2007, compared with
      $27.0 million of loans during the three months ended June 30, 2006. $7.5 million
      of the loans sold in the second quarter of 2006, which were originated for
      sale
      to investors, but, for various reasons, did not meet investor requirements,
      were
      sold at a loss. In the three months ended June 30, 2007, $11.0 million of
      Liberty Loans were sold for a net gain of $132,000. The average gain on loans
      sold, exclusive of the reserve recapture and a $24,000 mark-to-market adjustment
      on the remaining “Alt-A” loans held for sale, was 0.46% during the second
      quarter of 2007 compared with an average gain of 1.63% during the second quarter
      of 2006, excluding the $7.5 million of loans sold at a loss.




Gain
      on
      sales of OREO decreased by $323,000, or 73%, to $118,000 during the three months
      ended June 30, 2007, from $441,000 during the three months ended June 30, 2006.
      We sold 112 OREO properties with an aggregate carrying value of $7.6 million
      during the second quarter of 2007, as compared to 150 OREO properties in the
      aggregate amount of $8.3 million during the second quarter of 2006. The decrease
      in gain on sale of OREO properties was due in part to the sale of properties
      in
      certain parts of the country where housing values have declined.




Prepayment
      penalties and other income (principally late charges and other servicing fees)
      decreased by $310,000, or 13%, to $2.0 million during the three months ended
      June 30, 2007 from $2.3 million during the corresponding period last year.
      This
      decrease was primarily due to a slower rate of loan payoffs in general and
      fewer
      payoffs from states where prepayment penalties are allowed during the three
      months ended June 30, 2007, as compared with the corresponding period in 2006.
      This decrease was partially offset by increased late charges resulting primarily
      from the growth in the size of our loan portfolios.




***Operating
      Expenses.*** Total
      operating expenses increased by $10.3 million, or 24%, to $53.2 million during
      the second quarter of 2007 from $42.9 million during the same period in 2006.
      Total operating expenses include interest expense, collection, general and
      administrative expenses, provisions for loan losses, amortization of deferred
      financing costs and depreciation expense.




Interest
      expense increased by $7.5 million, or 27%, to $35.4 million during the three
      months ended June 30, 2007, from $27.9 million during the three months ended
      June 30, 2006. This increase was the result of the increase in total debt,
      which
      was $1.92 billion as of June 30, 2007 as compared with $1.40 billion as of
      June
      30, 2006, reflecting additional borrowings to fund the growth in total assets
      during this period. Our average cost of funds during the three months ended
      June
      30, 2007 decreased to 7.84% from 7.86% during the three months ended June 30,
      2006, reflecting repayments of older term debt at rates higher than the rates
      on
      new term debt.




32




Collection,
      general and administrative expenses increased by $337,000, or 3%, to $10.8
      million during the three months ended June 30, 2007, from $10.4 million during
      the corresponding period in 2006, principally reflecting $1.2 million of
      operating expenses incurred by the wholesale origination unit that the Company
      acquired in late February 2007 and the growth of the Company and the increase
      in
      total assets. Collection, general and administrative expenses as a percentage
      of
      average assets decreased to 2.30% during the three months ended June 30, 2007
      from 2.89% during the three months ended June 30, 2006. Salaries and employee
      benefits expenses increased by $289,000, or 6%, principally reflecting an
      increase in the number of employees, primarily due to the growth of our Company
      including the addition of employees from the acquisition of the wholesale
      origination unit in February 2007. We ended the second quarter of 2007 with
      318
      employees, which included 62 employees from the acquired wholesale origination
      unit, as compared to 225 at the end of the second quarter of 2006. The cost
      of
      outside services, principally appraisals and title searches, incurred in
      servicing delinquent loans decreased by $72,000, or 16%, to $386,000 during
      the
      three months ended June 30, 2007 compared to $457,000 for the three months
      ended
      June 30, 2006. Legal fees, principally relating to increased activity with
      respect to foreclosures, increased by $240,000, or 17%, to $1.7 million from
      $1.4 million during the same period last year. The increase in foreclosure
      activity and the associated legal costs were principally the result of an
      increase of Liberty Loans in the foreclosure process. Professional fees
      decreased by $385,000, or 43%, to $514,000 from $899,000 due to decreased
      recruitment fees compared to the same period last year. All other general and
      administrative expenses, including rent, insurance, licenses, maintenance and
      support for our computer systems, and portfolio acquisition costs, increased
      by
      $265,000, which is attributable to the growth of our business.




The
      provision for loan losses increased by $2.5 million, or 79%, to $5.7 million
      during the three months ended June 30, 2007, from $3.2 million during the three
      months ended June 30, 2006. This increase was primarily due to increased
      defaults experienced in certain pools of loans purchased in 2005, increased
      reserves required on Liberty Loans moving through the foreclosure process and
      declining property values on new and existing properties acquired through
      foreclosure.




Amortization
      of deferred financing costs decreased by $153,000, or 14%, to $978,000 during
      the second quarter of 2007 from $1.1 million during the second quarter of 2006.
      This decrease resulted primarily from a slower rate of prepayments on all
      portfolios of loans that caused reduced prepayments of borrowed funds, combined
      with a reduction of the origination fees charged by our lender. The origination
      fee for term debt was reduced from 0.75% to 0.50% for loans acquired after
      June
      23, 2006, and from 1.00% to 0.50% for loans originated after June 30,
      2005.




Depreciation
      expenses increased by $118,000, or 47%, to $370,000 in the second quarter of
      2007. This increase during the three months ended June 30, 2007 was principally
      due to $485,000 in fixed assets purchased with the acquisition of the wholesale
      originations unit and new enhancements to our mortgage origination
      software.




Our
      pre-tax income decreased by $3.6 million to a net loss of $3.6 million during
      the three months ended June 30, 2007, from a loss of $1.4 million during the
      three months ended June 30, 2006 for the reasons set forth above.




During
      the three months ended June 30, 2007, the Company had a tax benefit of $2.5
      million, as compared to $1.0 million during the three months ended June 30,
      2006.




33




***Six
      Months Ended June 30, 2007 Compared to Six Months Ended June 30,
      2006***




***Overview.*** The
      Company had a net loss of $5.5 million for the first half of 2007, compared
      with
      net income of $397,000 for the first half of 2006. Revenues increased by 13%
      to
      $89.7 million for the six months ended June 30, 2007, from $79.1 million for
      the
      six months ended June 30, 2006. The Company had a loss per common share for
      the
      six months ended June 30, 2007 of $0.70 both on a diluted and basic basis,
      compared to earnings per share of $0.05 both on a diluted and basic basis for
      the six months ended June 30, 2006. During the first half of 2007, we acquired
      first and second lien loans with an aggregate face amount of $457.5 million
      and
      we originated $209.9 million of subprime 1-4 family residential loans. We
      increased the size of our total portfolio of net notes receivable, loans held
      for sale, loans held for investment and OREO at June 30, 2007 to $1.86 billion
      from $1.56 billion at the end of 2006, and from $1.37 billion at June 30, 2006.
      Interest income increased by $13.6 million, or 20%, to $82.3 million during
      the
      six months ended June 30, 2007, from $68.7 million during the six months ended
      June 30, 2006, due to the growth of our total loan portfolios. Correspondingly,
      our total debt outstanding grew to $1.92 billion at June 30, 2007 from
      $1.58 billion at December 31, 2006, and from $1.40 billion at June 30,
      2006. As a result of the increase of our total debt, and the impact of
      approximately a 101 basis points rise in short-term interest rates since the
      beginning of 2006 on our interest-sensitive borrowings, interest expense
      (inclusive of amortization of deferred financing costs and success fees)
      increased by $14.3 million, or 26%, during the first half of 2007 compared
      with
      the same period in 2006. Our average cost of funds during the six months ended
      June 30, 2007 increased to 7.78% from 7.69% during the six months ended June
      30,
      2006. At June 30, 2007, the weighted average interest rate of borrowed funds
      was
      7.82%. Collection, general and administrative expenses increased $1.3 million,
      or 7%, to $19.7 million during the six months ended June 30, 2007, from $18.4
      million for the same period in 2006. The increase in collection, general and
      administrative expenses reflected for the most part the additional operating
      expenses of the wholesale origination unit acquired in February 2007. The
      provision for loan losses increased $5.0 million to $10.0 million in the six
      months ended June 30, 2007, principally due to increased defaults experienced
      in
      certain pools of loans purchased in 2005 and lower values on foreclosed
      properties. Gains on loan sales decreased by $136,000 to $201,000 in the six
      months ended June 30, 2007. Stockholders’ equity decreased 11% to $42.3 million
      at June 30, 2007, from $47.6 million at December 31, 2006.




***Revenues.*** Total
      revenues increased by $10.6 million, or 13%, to $89.7 million during the first
      half of 2007, from $79.1 million during the same period in 2006. Revenues
      include interest income, purchase discount earned, gains on sales of notes
      receivable, gains on sales of originated loans, gains on sales of OREO and
      prepayment penalties and other income.




Interest
      income increased by $13.6 million, or 20%, to $82.3 million during the six
      months ended June 30, 2007 from $68.8 million during the six months ended June
      30, 2006. The increase in interest income reflected a 36% increase in the
      portfolios of gross notes receivable and loans held for investment, partially
      offset by an increase in non-accrual loans, during the six months ended June
      30,
      2007 compared to the six months ended June 30, 2006.




Purchase
      discount earned decreased by $1.4 million, or 34%, to $2.8 million during the
      first half of 2007 from $4.2 million during the first half of 2006. This
      decrease resulted primarily from less purchase discount available for accretion
      from portfolios purchased in 2005 and 2006, a declining balance of purchase
      discount remaining for accretion from pre-2005 acquisitions and a slower rate
      of
      prepayments. We received $105.8 million of principal payments from notes
      receivable during the six months ended June 30, 2007, compared with $141.0
      million of principal payments during the same period in 2006.




34




Gain
      on
      sales of notes receivable decreased by $38,000, or 55%, to $31,000 for the
      six
      months ended June 30, 2007 from $69,000 for the six months ended June 30, 2006.
      The Company sold $22.3 million of performing low-coupon notes receivable during
      the six months ended June 30, 2007, as compared to $161,000 of non-performing
      notes receivable during the six months ended June 30, 2006.




Gain
      on
      sales of originated loans, which included a $122,000 recovery of the unused
      portion of a repurchase reserve for loans sold in 2006 and a negative
      mark-to-market adjustment of $149,000 on “Alt-A” loans held for sale, decreased
      by $136,000, or 27%, to $201,000 during the six months ended June 30, 2007,
      from
      $337,000 during the six months ended June 30, 2006. The Company sold $31.3
      million of originated loans during the six months ended June 30, 2007, compared
      with $33.8 million of loans during the six months ended June 30, 2006. $7.5
      million of the loans sold in the first half of 2006, which were originated
      for
      sale to investors, but, for various reasons, did not meet investor requirements,
      were sold at a loss. In the six months ended June 30, 2007, $11.0 million of
      Liberty Loans were sold for a net gain of $132,000. The average gain on loans
      sold, exclusive of the reserve recapture and mark-to-market adjustment, was
      0.76% during the first half of 2007 compared with an average gain of 1.79%
      during the first half of 2006, excluding the $7.5 million of loans sold at
      a
      loss.




Gain
      on
      sales of OREO decreased by $1.0 million, or 81%, to $239,000 during the six
      months ended June 30, 2007, from $1.2 million during the six months ended June
      30, 2006. We sold 241 OREO properties with an aggregate carrying value of $15.9
      million during the first half of 2007, as compared to 285 OREO properties in
      the
      aggregate amount of $15.8 million during the first half of 2006. The decrease
      in
      gain on sale of OREO properties was due in part to the sale of properties in
      certain parts of the country where housing values have declined.




Prepayment
      penalties and other income (principally late charges and other servicing fees)
      decreased by $416,000, or 9%, to $4.1 million during the six months ended June
      30, 2007 from $4.5 million during the corresponding period last year. This
      decrease was primarily due to a slower rate of loan payoffs in general and
      fewer
      payoffs of self-originated Liberty Loans from states where prepayment penalties
      are allowed, during the six months ended June 30, 2007, as compared with the
      corresponding period in 2006. This decrease was partially offset by increased
      late charges resulting primarily from the growth in the size of our loan
      portfolios.




***Operating
      Expenses.*** Total
      operating expenses increased by $20.7 million, or 26%, to $99.1 million during
      the first half of 2007 from $78.4 million during the same period in 2006. Total
      operating expenses include interest expense, collection, general and
      administrative expenses, provisions for loan losses, amortization of deferred
      financing costs and depreciation expense.




Interest
      expense increased by $14.6 million, or 28%, to $67.0 million during the six
      months ended June 30, 2007, from $52.4 million during the six months ended
      June
      30, 2006. This increase was the result of the increase in total debt, which
      was
      $1.92 billion as of June 30, 2007 as compared with $1.40 billion as of June
      30,
      2006, reflecting additional borrowings to fund the growth in total assets during
      this period. In addition, our average cost of funds during the six months ended
      June 30, 2007 increased to 7.78% from 7.69% during the six months ended June
      30,
      2006, reflecting the 101 basis point rise in short-term interest rates during
      the first seven months of 2006 and its impact on our interest-rate sensitive
      borrowings.




Collection,
      general and administrative expenses increased by $1.3 million, or 7%, to $19.7
      million during the six months ended June 30, 2007, from $18.4 million during
      the
      corresponding period in 2006, principally reflecting the growth of the Company
      and the increase in total assets, and $1.7 million of operating expenses
      incurred by the wholesale origination unit that the Company acquired in late
      February 2007. Collection, general and administrative expenses as a percentage
      of average assets decreased to 2.15% during the six months ended June 30, 2007
      from 2.62% during the six months ended June 30, 2006. Salaries and employee
      benefits expenses increased by $831,000, or 10%, principally reflecting an
      increase in the number of employees, primarily due to the growth of our Company
      and the addition of employees from the acquisition of the wholesale origination
      unit during the first quarter of 2007. We ended the first half of 2007 with
      318
      employees, which included 62 employees from the acquired wholesale origination
      unit, as compared to 225 at the end of the first half of 2006. The cost of
      outside services, principally appraisals and title searches, incurred in
      servicing delinquent loans increased by $37,000, or 6%, to $697,000 during
      the
      six months ended June 30, 2007 compared to $660,000 for the six months ended
      June 30, 2006 due to increases in foreclosure activity as a result of a larger
      total portfolio of notes receivable and certain loans purchased in various
      stages of delinquency and foreclosure. Legal fees, principally relating to
      increased activity with respect to foreclosures, increased by $513,000, or
      21%,
      to $3.0 million from $2.5 million during the same period last year. Increased
      foreclosure activity of Liberty Loans was the major contributor to the increase
      in foreclosure legal costs. Professional fees decreased by $448,000, or 30%,
      to
      $1.1 million from $1.5 million due to decreased recruitment fees compared to
      the
      same period last year. All other general and administrative expenses, including
      rent, insurance, licenses, maintenance and support for our computer systems,
      and
      portfolio acquisition costs, decreased by $26,000.




35




The
      provision for loan losses increased by $5.0 million, or 99%, to $10.0 million
      during the six months ended June 30, 2007, from $5.0 million during the six
      months ended June 30, 2006. This increase was primarily due to increased
      defaults experienced in certain pools of loans purchased in 2005, increased
      reserves required for Liberty Loans moving through the foreclosure process
      and
      reductions in estimated values on new and existing properties acquired through
      foreclosure.




Amortization
      of deferred financing costs decreased by $285,000, or 14%, to $1.8 million
      during the first half of 2007 from $2.0 million during the first half of 2006.
      This decrease resulted primarily from a slower rate of prepayments on all
      portfolios of loans, which caused reduced prepayments of borrowed funds, coupled
      with a reduction of the origination fees charged by our lender to fund portfolio
      acquisitions and loan originations. The origination fee for term debt was
      reduced from 0.75% to 0.50% for loans acquired after June 23, 2006, and from
      1.00% to 0.50% for loans originated after June 30, 2005.




Depreciation
      expenses increased by $154,000, or 27%, to $717,000 in the first half of 2007.
      This increase during the six months ended June 30, 2007 was principally due
      to
      $485,000 in fixed assets purchased with the acquisition of the wholesale
      originations unit and new enhancements to our mortgage origination
      software.




Our
      pre-tax income decreased by $10.1 million to a net loss of $5.5 million during
      the six months ended June 30, 2007, from net income of $397,000 during the
      six
      months ended June 30, 2006 for the reasons set forth above.




During
      the six months ended June 30, 2007, the Company had a tax benefit of $3.9
      million, as compared to a tax provision of $305,000 during the six months ended
      June 30, 2006. The effective tax rate for the six months ended June 30, 2006
      was
      43%.


36


**Liquidity
      and Capital Resources**




***General***




During
      the three months ended June 30, 2007, we purchased 3,876 loans, consisting
      primarily of first and second mortgages, with an aggregate face value of $311.2
      million at an aggregate purchase price of $260.7 million, or 84% of face value.
      During the six months ended June 30, 2007, we purchased 5,990 loans with an
      aggregate face value of $457.5 million at an aggregate purchase price of $386.1
      million, or 84% of face value. All purchased loans were funded through
      borrowings under our master credit facility. While our lender funded a
      significant volume of purchased loan pools during the second quarter of 2007,
      our lender is not required under the terms of our master credit facility to
      provide fundings for new purchases of loan pools.




During
      the three and six months ended June 30, 2007, we originated $118.7 million
      and
      $209.9 million of loans, respectively, through our origination subsidiary,
      Tribeca. Originations are initially funded through borrowings under our
      warehouse facility, and loans originated for portfolio are subsequently funded
      with term debt under our Tribeca master credit facility after transfer from
      the
      warehouse facility. In the first quarter of 2006, Tribeca and certain of its
      subsidiaries entered into master credit and security agreements with each of
      our
      principal lender, Sky Bank, and BOS (USA) Inc., an affiliate of Bank of
      Scotland, the proceeds of which were used to refinance and consolidate certain
      term loans with our principal lender. While our lenders funded a significant
      volume of loans originated during the second quarter of 2007, our lenders are
      not required to fund additional loan originations under the terms of their
      respective master credit facilities.




We
      have
      one principal source of external funding to meet our liquidity requirements,
      in
      addition to the cash flow provided from borrower payments of interest and
      principal on mortgage loans. See




“-
      Borrowings.” In addition, we have the ability to sell loans in the secondary
      market. We sell pools of acquired mortgage loans and newly originated Liberty
      Loans from time to time, and we sell loans that we originate specifically for
      sale into the secondary market on a regular basis.




On
      July
      2, 2007, the pending merger between Sky Bank and Huntington Bancshares Inc.
      that
      was announced in December 2006 was completed. The combined bank, which will
      be
      the successor to our credit facilities provided by Sky, will have over $50
      billion in assets and will be the 24 th largest
      bank holding company headquartered in the United States.




As
      a
      result of the growth of the loan portfolios, management continues to explore
      potential additional sources of funding for financing portfolio acquisitions
      and
      loan originations. We have been evaluating the feasibility of securitizing
      certain acquired and originated loans in order to seek a lower cost funding
      alternative and possibly to reduce somewhat the short-term interest sensitivity
      of our borrowings. In addition, we have been actively seeking additional term
      debt funding alternatives with banks, financial institutions and other entities
      in order to expand our borrowing capabilities.




***Short-term
      Investments.*** The
      Company’s short-term investment portfolio includes U.S. treasury bills,
      investment-grade commercial paper and money market accounts. The Company’s
      investment policy is structured to provide an adequate level of liquidity in
      order to meet normal working capital needs and expansion of the loan portfolio.
      At June 30, 2007, the Company had short-term investments of $23.3
      million.


37


***Cost
      of Funds.*** As of
      June 30, 2007, we had total borrowings of $1.92 billion, of which $1.86 billion
      was under our term loan facilities and an aggregate of $58.3 million was under
      our warehouse facilities. Substantially all of the debt under our term loan
      facilities was incurred in connection with the purchase and origination of,
      and
      is secured by, our acquired notes, originated loans held for investment and
      OREO
      portfolios. At June 30, 2007, the interest rates on our term debt were as
      follows:




Prime
                rate plus a margin of 0.50% to 1.75%
            
            $
            2,929,359FHLB
                30-day LIBOR advance rate plus 2.00%
            
            
            158,158,300FHLB
                30-day LIBOR advance rate plus 2.30%
            
            
            143,413,370FHLB
                30-day LIBOR advance rate plus 2.35%
            
            
            552,501,874FHLB
                30-day LIBOR advance rate plus 2.50%
            
            
            1,003,496,038FHLB
                30-day LIBOR advance rate plus 3.375%
            
            
            352,102FHLB
                30-day LIBOR advance rate plus 3.875%
            
            
            852,409$
            1,861,703,452




At
      June
      30, 2007, the weighted average interest rate on term debt was 7.82%. Our
      warehouse facilities are utilized to fund Tribeca’s originations of loans and
      the acquisition of loans through our “Flow Acquisitions Group” pending sale to
      others or pending funding under our term debt facilities for loans to be held
      in
      portfolio. The interest rate on the warehouse debt was 7.75% at June 30, 2007
      and June 30, 2006.




***Cash
      Flow from Operating, Investing and Financing
      Activities***




Liquidity
      represents our ability to obtain adequate funding to meet our financial
      obligations. Our liquidity position is affected by mortgage loan purchase and
      origination volume, mortgage loan payments, including prepayments, loan
      maturities and the amortization and maturity structure of borrowings under
      our
      term loan facilities. In accordance with the terms of our credit facilities
      with
      our lenders, we receive a cash allowance that is adequate to meet our operating
      expenses.




At
      June
      30, 2007, we had cash and cash equivalents of $8.5 million compared with $4.0
      million at December 31, 2006. Restricted cash of $33.6 million and $32.7 million
      at June 30, 2007 and December 31, 2006, respectively, was restricted under
      our
      credit agreements and lockbox facility with our lead lending bank, Sky
      Bank.




Substantially
      all of our assets are invested in our portfolios of notes receivable, loans
      held
      for investment, OREO and loans held for sale. Primary sources of our cash flow
      for operating and investing activities are borrowings under our debt facilities,
      collections of interest and principal on notes receivable and loans held for
      investment and proceeds from sales of notes and OREO properties. Primary uses
      of
      cash include purchases of notes receivable, origination of loans and for
      operating expenses. We rely significantly upon our lender and the other banks
      that participate in the loans made to us by our lender to provide the funds
      necessary for the purchase of notes receivable portfolios and the origination
      of
      loans. While we have historically been able to finance these purchases and
      originations, we have not had committed loan facilities in significant excess
      of
      the amount we currently have outstanding under our credit
      facilities.




Net
      cash
      used in operating activities was $6.4 million as of June 30, 2007, compared
      with
      cash provided of $11.5 million during the six months ended June 30, 2006. The
      decrease in cash provided by operating activities during the six months ended
      June 30, 2007 was due primarily to an increase in the volume of “Alt-A” loans
      originated for sale in the secondary market that were not sold as of June 30,
      2007.




38




Net
      cash
      used in investing activities was $311.3 million in the six months ended June
      30,
      2007, compared to $148.3 million of cash used in the six months ended June
      30,
      2006. The increase in cash used during the six months ended June 30, 2007 was
      primarily due to a $170.1 million increase in purchases of notes receivable
      and
      a $48.6 million decrease in principal collections on both notes receivable
      and
      loans held for investment due to a slower rate or prepayments compared to the
      same period last year.




Net
      cash
      provided by financing activities increased to approximately $322.3 million
      during the six months ended June 30, 2007, from $136.8 million provided by
      financing activities during the six months ended June 30, 2006. Proceeds from
      notes payable increased $169.7 million and proceeds from financing agreements
      increased $78.8 million, both due to increased portfolio purchases during the
      period. Payoffs of financing agreements increased $54.3 million, due to the
      addition of a Flow Warehouse line in August 2006 that is used to temporarily
      warehouse loan acquisitions from our flow acquisitions channel pending term
      debt
      financing. These changes were partially offset by an $18.1 million decrease
      in
      the repurchase obligation in the first half of 2007, which was funded by an
      increase in the proceeds from notes payable.




**Borrowings**




As
      of
      June 30, 2007, the Company owed an aggregate of $1.92 billion under several
      credit facilities with our lenders. These borrowings are shown in the Company’s
      financial statements as “Notes payable” (referred to as “term loans” herein) and
“Financing agreements” (referred to as the “Warehouse Facility” or “Warehouse
      Facilities” herein).




***Master
      Credit Facilities - Term Loans***




***General.*** ** In
      October 2004, the Company, and its finance subsidiaries, excluding Tribeca,
      entered into a master credit and security agreement (the “Franklin Master Credit
      Facility”) with Sky Bank, an Ohio banking corporation, which we refer to as our
      lender or Sky Bank. Under this master credit facility, we request term loans
      to
      finance the purchase of residential mortgage loans or refinance existing
      outstanding loans under this facility. The facility does not include a
      commitment to additional lendings or a commitment to refinance existing
      outstanding term loans when they mature, which are therefore subject to our
      lender’s discretion as well as any regulatory limitations to which our lender is
      subject. The facility has been extended by Sky Bank and currently expires on
      September 30, 2007.




In
      February 2006, Tribeca and certain of its subsidiaries entered into the Tribeca
      Master Credit Facility with Sky Bank, pursuant to which certain Tribeca
      subsidiaries may borrow term loans to finance their origination of loans Tribeca
      previously financed under its warehouse line of credit with Sky Bank and
      consolidate and refinance prior term loans made by Sky Bank to such
      subsidiaries. The facility does not include a commitment for additional lendings
      or a commitment to refinance existing outstanding term loans when they mature,
      which are subject to our lender’s discretion, as well as any regulatory
      limitations to which Sky Bank is subject. The facility expires on February
      28,
      2008.




39


***Interest
      Rates and Fees.*** Interest
      on the term loans is payable monthly at a floating rate equal to the highest
      Federal Home Loan Bank of Cincinnati 30-day advance rate as published daily
      by
      Bloomberg under the symbol FHL5LBRI, or the “30-day advance rate,” plus the
      applicable margin in effect prior to August 2006 as follows:




**For
                Loans Funded****Prior
                to July 1, 2005**
            
            **On
                or After July 1, 2005**If
                the 30-day advance rate is
            
            the
                applicable margin is
            
            the
                applicable margin isLess
                than 2.26%
            
            350
                basis points
            
            300
                basis points2.26
                to 4.50%
            
            325
                basis points
            
            275
                basis pointsGreater
                than 4.50%
            
            300
                basis points
            
            250
                basis points




***August
      2006 Modifications to Sky Bank Financing Arrangements***




In
      August
      2006, the master credit facilities were modified to reduce the interest rate
      on
      all debt originated under the master credit facilities before July 1, 2005
      by 25
      basis points effective October 1, 2006. This rate was lowered by an additional
      25 basis points effective January 1, 2007.




***December
      2006 Modifications to Sky Bank Financing Arrangements***




In
      December 2006, the master credit facilities were modified to change the interest
      rate on term loans funded under the master credit facilities after November
      14,
      2006 for loans originated by Tribeca and purchases of second mortgages by the
      Company to the Federal Home Loan Bank of Cincinnati 30-day advance rate as
      published daily by Bloomberg under the symbol FHL5LBRI (the “30-day advance
      rate”), plus the applicable margin as follows:




If
                the 30-day advance rate is
            the
                applicable margin isLess
                than 2.26%
            300
                basis points2.26
                to 4.50%
            260
                basis pointsGreater
                than 4.50%
            235
                basis points





Additionally,
      the interest rate payable to Sky Bank on term loans funded under the Franklin
      Master Credit Facility after November 14, 2006 in respect of purchases of first
      mortgages by the Company will be the 30-day advance rate, plus the applicable
      margin as follows:




If
                the 30-day advance rate is
            the
                applicable margin isLess
                than 2.26%
            300
                basis points2.26
                to 4.50%
            225
                basis pointsGreater
                than 4.50%
            200
                basis points




40


As
      a
      result of these modifications, effective January 1, 2007, the interest rate
      on
      term borrowings under our Master Credit Facilities is based on a floating rate
      equal to the 30-day advance rate, plus the applicable margin as
      follows:




**For
                Loans Funded****Prior
                to November 15, 2006**
            
            **On
                or After November 15, 2006****Purchase
                of First Mortgages**
            
            **Tribeca
                Originated Loans/**
              **Second
                Mortgage Purchases**If
                the 30-day advance rate is
            
            the
                applicable margin is
            
            the
                applicable margin is
            
            the
                applicable margin isLess
                than 2.26%
            
            300
                basis points
            
            300
                basis points
            
            300
                basis points2.26
                to 4.50%
            
            275
                basis points
            
            225
                basis points
            
            260
                basis pointsGreater
                than 4.50%
            
            250
                basis points
            
            200
                basis points
            
            235
                basis points




Upon
      each
      closing of a loan after June 23, 2006, we are required to pay an origination
      fee
      equal to 0.50% of the amount of the loan unless otherwise agreed to by our
      lender. For loans funded between July 1, 2005 and June 23, 2006, under the
      Franklin Master Credit Facility, the origination fee paid was 0.75% of the
      amount of the loan (0.50% for loans funded under the Tribeca Master Credit
      Facility), and for loans funded prior to July 1, 2005, the origination fee
      paid
      was 1% of the amount of the loan unless otherwise agreed to by our
      lender.




***Principal;
      Prepayments; Termination of Commitments*** **.** The
      unpaid principal balance of each loan is amortized over a period of twenty
      years, but matures three years after the date the loan was made. Historically,
      our lender has agreed to extend the maturities of such loans for additional
      three-year terms upon their maturity. We are required to make monthly payments
      of the principal on each of our outstanding loans.




In
      the
      event there is a material and adverse breach of the representations and
      warranties with respect to a pledged mortgage loan that is not cured within
      30
      days after notice by our lender, we will be required to repay the loan with
      respect to such pledged mortgage loan in an amount equal to the price at which
      such mortgage loan could readily be sold (as determined by our
      lender).




***Covenants;
      Events of Default.*** The
      Master Credit Facilities contain affirmative, negative and financial covenants
      customary for financings of this type, including, among other things, a covenant
      under the Franklin Master Credit Facility that we and our subsidiaries together
      maintain a minimum net worth of at least $10 million; and, a covenant under
      the
      Tribeca Master Credit Facility that Tribeca and its subsidiaries, together,
      maintain a minimum net worth of at least $3.5 million and rolling four-quarter
      pre-tax net income of at least $750,000. These master credit facilities contain
      events of default customary for facilities of this type (with customary grace
      and cure periods, as applicable). Franklin was in compliance with such covenants
      as of June 30, 2007. At June 30, 2007, Tribeca was in default of the rolling
      four-quarter pre-tax income requirement, and Sky has permanently waived this
      covenant effective June 30, 2007.




***Security*** **.** ****** Our
      obligations under the Franklin Master Credit Facility are secured by a first
      priority lien on loans that are financed by proceeds of loans made to us under
      the facility. The collateral securing each loan cross-collateralizes all other
      loans made under this facility. In addition, pursuant to a lockbox arrangement,
      our lender is entitled to receive substantially all sums payable to us in
      respect of any of the collateral. Tribeca’s and its subsidiary borrowers’
obligations under the Tribeca Master Credit Facility are secured by a first
      priority lien on loans originated by Tribeca or such subsidiary that are
      financed or refinanced by proceeds of loans made to Tribeca or its borrowers
      under the facility. The collateral securing each loan cross-collateralizes
      all
      other loans made under this facility. In addition, pursuant to a lockbox
      arrangement, Sky Bank is entitled to receive substantially all sums payable
      to
      Tribeca and any subsidiary borrower in respect of any of the
      collateral.




41




***Bank
      of Scotland Term Loan***




In
      March
      2006, Tribeca and one of Tribeca’s subsidiaries (the “Tribeca Subsidiary
      Borrower”) entered into a $100 million Master Credit and Security Agreement (the
“BOS Loan”) with BOS (USA) Inc., an affiliate of Bank of Scotland. $98.2 million
      of proceeds of the BOS Loan were used to consolidate and refinance prior term
      loans made to certain Tribeca subsidiaries. Interest on the BOS Loan is
      payable monthly at a floating rate equal to the 30-day advance rate plus an
      applicable margin as follows:




If
                the 30-day advance rate is
            the
                applicable margin isLess
                than 2.26%
            300
                basis points2.26
                to 4.50%
            275
                basis pointsGreater
                than 4.50%
            250
                basis points




The
      unpaid principal balance of the BOS Loan will be amortized over a period of
      20
      years, but matures in March 2009. The Tribeca Subsidiary Borrower is required
      to
      make monthly amortization payments and payments of interest on the BOS Loan.
      The
      facility does not include a commitment to additional lendings or a commitment
      to
      refinance the remaining outstanding balance of the loan when it
      matures.




The
      facility contains affirmative, negative and financial covenants customary for
      financings of this type, including, among other things, covenants that require
      Tribeca and its subsidiaries, together, to maintain a minimum net worth of
      at
      least $3.5 million and rolling four-quarter pre-tax net income of $750,000.
      The
      facility contains events of default customary for facilities of this type.
      At
      June 30, 2007, Tribeca was in default of the rolling four quarter pre-tax net
      income requirement, and BOS has permanently waived this covenant effective
      June
      30, 2007.




Tribeca’s
      and the Tribeca subsidiary borrower’s obligations under the facility are secured
      by (i) a first priority lien on loans acquired by the Tribeca Subsidiary
      Borrower that are refinanced by the proceeds of the BOS Loan and (ii) a second
      priority lien on collateral securing loans made to Tribeca or its
      subsidiaries under the Tribeca Master Credit Facility described above. In
      addition, pursuant to a lockbox arrangement, BOS is entitled to receive
      substantially all sums payable to Tribeca and the Tribeca Subsidiary Borrower
      in
      respect of any of the primary collateral under the facility. Tribeca’s BOS Loan
      and the Tribeca Master Credit Facility are cross-collateralized.




***Warehouse
      Facilities***




***Tribeca
      Warehouse*** **.** In
      October 2005, Tribeca entered into a Warehousing Credit and Security Agreement
      (the “Tribeca Warehouse Facility”) with our lender, which replaced previous
      warehouse lending agreements. In April 2006, our lender increased the commitment
      to $60 million. The facility has been renewed by our lender and expires on
      April
      30, 2008.




Interest
      on advances is payable monthly at a rate per annum equal to the greater of
      (i) a
      floating rate equal to the Wall Street Journal Prime Rate minus 50 basis points
      or (ii) 5%.




The
      Tribeca Warehouse Facility is secured by a lien on all of the mortgage loans
      delivered to our lender or in respect of which an advance has been made as
      well
      as by all mortgage insurance and commitments issued by insurers to insure or
      guarantee pledged mortgage loans. Tribeca also assigns all of its rights under
      third-party purchase commitments covering pledged mortgages and the proceeds
      of
      such commitments and its rights with respect to investors in the pledged
      mortgages to the extent such rights are related to pledged mortgages. In
      addition, we have provided a guaranty of Tribeca’s obligations under the Tribeca
      Warehouse Facility, which is secured by substantially all of Tribeca’s personal
      property. As of June 30, 2007, Tribeca had approximately $13.2 million available
      under this facility.




42




***Flow
      Warehouse*** **.** In
      August
      2006, we entered into a new $40 million Flow Warehousing Credit and Security
      Agreement (the “Flow Warehouse Facility”) for a term of one year with our lender
      to accumulate loans acquired by the Company on a flow basis prior to
      consolidating such loans into term debt. This warehouse facility was renewed
      in
      August 2007 by Sky for $20 million and for a term of one year.




Interest
      on advances is payable monthly at a rate per annum equal to a floating rate
      equal to the Wall Street Journal Prime Rate minus 50 basis points.




The
      Flow
      Warehouse Facility is secured by a lien on all of the mortgage loans delivered
      to our lender or in respect of which an advance has been made as well as by
      all
      mortgage insurance and commitments issued by insurers to insure or guarantee
      pledged mortgage loans. The Company also assigns all of its rights under
      third-party purchase commitments covering pledged mortgages and the proceeds
      of
      such commitments and its rights with respect to investors in the pledged
      mortgages to the extent such rights are related to pledged mortgages. In
      addition, we have provided a guaranty of the Company’s obligations under the
      Flow Warehouse Facility, which is secured by substantially all our personal
      property. As of June 30, 2007, we had approximately $31.5 million available
      under this facility. Under the new $20 million Flow Warehouse Credit Facility,
      we would have had approximately $11.5 million available as of June 30,
      2007.




***Interest
      Rate Caps***




On
      August
      29, 2006, the Company purchased a $300 million (notional amount) one-month
      LIBOR
      cap with a strike price of 5.75% at a price of $101,000, and on August 30,
      2006,
      the Company purchased a $500 million (notional amount) one-month LIBOR cap
      with
      a strike price of 6.0% at a price of $60,000. Both cap agreements are
      non-amortizing and will be in effect for one year. The cap resets match the
      interest rate resets on a portion of the Company’s term debt. These caps will
      limit the Company’s exposure to increased borrowing costs on $300 million of
      term debt should the 30-day LIBOR rate exceed 5.75%, and on a total of $800
      million of term debt should such rate exceed 6.0%. The interest rate caps are
      not designated as hedging instruments for accounting purposes; therefore, a
      change in the fair market value of the caps is recognized as gain or loss in
      earnings in the current period.




The
      following table presents the contract/notional and fair value amounts of all
      derivative transactions at June 30, 2007:




**Interest
                Rate Caps**
            
            **Notional
                Amount**
            
            **Expiration
                Date**
            
            **Premium
                Paid**
            
            **Fair
                Value**Cap
                1
            
            $
            300,000,000
            
            
            August
                31, 2007
            
            $
            101,000
            
            $
            -Cap
                2
            
            
            500,000,000
            
            
            August
                31, 2007
            
            
            60,000
            
            
            -Total
            
            $
            800,000,000
            
            
            
            
            $
            161,000
            
            $
            -




43


**ITEM
                3.**
            **QUANTITATIVE
                AND QUALITATIVE DISCLOSURES ABOUT MARKET
                RISK**




We
      are
      exposed to various types of market risk in the normal course of business,
      including the impact of interest rate changes and changes in corporate tax
      rates. A material change in these rates could adversely affect our operating
      results and cash flows.




**Interest
      Rate Risk**




Interest
      rate fluctuations can adversely affect our operating results and present a
      variety of risks, including the risk of a mismatch between the repricing of
      interest-earning assets and borrowings, variances in the yield curve and
      changing prepayment rates on notes receivable, loans held for investment and
      loans held for sale.




Interest
      rates are highly sensitive to many factors, including governmental monetary
      policies and domestic and international economic and political conditions.
      Conditions such as inflation, recession, unemployment, money supply and other
      factors beyond our control may also affect interest rates. Fluctuations in
      market interest rates are neither predictable nor controllable and may have
      a
      material adverse effect on our business, financial condition and results of
      operations.




The
      Company’s operating results will depend in large part on differences between the
      interest earned on its assets and the interest paid on its borrowings. Most
      of
      the Company’s assets, consisting primarily of mortgage notes receivable,
      generate fixed returns and have remaining contractual maturities in excess
      of
      five years, while the majority of originated loans held for investment generate
      fixed returns for the first two years and six-month adjustable returns
      thereafter. We fund the origination and acquisition of these assets with
      borrowings, which have interest rates that are based on the monthly Federal
      Home
      Loan Bank of Cincinnati (“FHLB”) 30-day advance rate. In most cases, the
      interest income from our assets will respond more slowly to interest rate
      fluctuations than the cost of our borrowings, creating a mismatch between
      interest earned on our interest-yielding assets and the interest paid on our
      borrowings. Consequently, changes in interest rates, particularly short-term
      interest rates, will significantly impact our net interest income and,
      therefore, net income. Our borrowings bear interest at rates that fluctuate
      with
      the FHLB Bank of Cincinnati 30-day advance rate or, to a lesser extent, the
      prime rate. Based on approximately $1.92 billion of borrowings under term loan
      and warehouse facilities outstanding at June 30, 2007, a 1% instantaneous and
      sustained increase in both FHLB and prime rates could increase quarterly
      interest expense by as much as approximately $4.8 million, pre-tax, which would
      negatively impact our quarterly after-tax net income. Due to our
      liability-sensitive balance sheet, increases in these rates will decrease both
      net income and the market value of our net assets. During the period from April
      1, 2007 to August 31, 2007, the offsetting benefit of the Company’s interest
      rate caps could reduce the quarterly negative impact of a 1% instantaneous
      and
      sustained increase in both FHLB and prime rates by approximately $973,000,
      pre-tax.




The
      value
      of our assets may be affected by prepayment rates on investments. Prepayment
      rates are influenced by changes in current interest rates and a variety of
      economic, geographic and other factors beyond our control. Consequently, such
      prepayment rates cannot be predicted with certainty. When we originate and
      purchase mortgage loans, we expect that such mortgage loans will have a measure
      of protection from prepayment in the form of prepayment lockout periods or
      prepayment penalties. In periods of declining mortgage interest rates,
      prepayments on mortgages generally increase. If general interest rates decline
      as well, the proceeds of such prepayments received during such periods are
      likely to be reinvested by us in assets yielding less than the yields on the
      investments that were prepaid. In addition, the market value of mortgage
      investments may, because of the risk of prepayment, benefit less from declining
      interest rates than other fixed-income securities. Conversely, in periods of
      rising interest rates, prepayments on mortgages generally decrease, in which
      case we would not have the prepayment proceeds available to invest in assets
      with higher yields. Under certain interest rate and prepayment scenarios we
      may
      fail to recoup fully our cost of acquisition of certain
      investments.




44




**Real
      Estate Risk**




Residential
      property values are subject to volatility and may be affected adversely by
      a
      number of factors, including, but not limited to, national, regional and local
      economic conditions, which may be adversely affected by industry slowdowns
      and
      other factors; local real estate conditions (such as the supply of housing
      or
      the rapid increase in home values). Decreases in property values reduce the
      value of the collateral and the potential proceeds available to a borrower
      to
      repay our mortgage loans, which could cause us to suffer losses on the ultimate
      disposition of foreclosed properties.




We
      purchase and originate principally fixed and adjustable rate residential
      mortgage loans, which are secured primarily by the underlying single-family
      properties. Because the vast majority of our loans are to non-prime borrowers,
      delinquencies and foreclosures are substantially higher than those of prime
      mortgage loans, and if not serviced actively and effectively could result in
      an
      increase in losses on dispositions of properties acquired through foreclosure.
      In addition, a decline in real estate values would reduce the value of the
      residential properties securing our loans, which could lead to an increase
      in
      borrower defaults, reductions in interest income and increased losses on the
      disposition of foreclosed properties. Recently, residential real estate values
      have been declining in many markets and it is expected that housing price
      depreciation will continue in many markets in the near term.




**ITEM
                4.**
            **CONTROLS
                AND PROCEDURES**




**Disclosure
      Controls and Procedures**




The
      Company’s management, with the participation of the Company’s Chief Executive
      Officer and Chief Financial Officer, has evaluated the effectiveness of the
      Company’s disclosure controls and procedures (such term is defined in Rules
      13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended
      (the “Exchange Act”) as of the end of the period covered by this Quarterly
      Report on Form 10-Q. Based upon that evaluation, the Corporation’s Chief
      Executive Officer and Chief Financial Officer concluded that the Corporation’s
      disclosure controls and procedures were effective as of the end of the period
      covered by this report.




**Changes
      in Internal Controls over Financial Reporting**




There
      have been no changes in the Company’s internal control over financial reporting
      during the quarter ended June 30, 2007 that have materially affected, or are
      reasonably likely to materially affect, such internal control over financial
      reporting.


45


**PART
      II**


**OTHER
      INFORMATION**




**ITEM
                1.**
            **LEGAL
                PROCEEDINGS**




We
      are
      involved in routine litigation matters generally incidental to our business,
      which primarily consist of legal actions related to the enforcement of our
      rights under mortgage loans we hold, none of which is individually or in the
      aggregate material. In addition, because we originate and service mortgage
      loans
      throughout the country, we must comply with various state and federal lending
      laws, rules and regulations and we are routinely subject to investigation and
      inquiry by regulatory agencies, some of which arise from complaints filed by
      borrowers, none of which is individually or in the aggregate
      material.




**ITEM
                1A.**
            **RISK
                FACTORS**




There
      have been no material changes from the risk factors previously disclosed in
      Item
      1A of our Annual Report on Form 10-K for the year ended December 31, 2006.
      The
      risk factors discussed in detail in the Company’s Form 10-K include the
      following:




**Risks
      Related to Our Business**




·
            If
                we are not able to identify and acquire portfolios of “scratch and dent”
                residential mortgage loans on terms acceptable to us, our revenues
                and
                profitability could be materially
                reduced.




·
            We
                may not be able to successfully market our residential mortgage loan
                origination products to non-prime
                borrowers.




·
            Our
                business is dependent on external financing, and we currently receive
                the
                substantial majority of our financing from a single lender. If our
                principal lender ceases to provide financing to us or increases the
                cost
                to us of such financing and we are unable to access alternative external
                sources of financing on favorable terms or at all, we would not be
                able to
                fund and grow our operations and our business will be materially
                harmed.




·
            The
                completed merger of our principal lender, Sky Bank, with Huntington
                Bancshares Inc., could harm our ability to borrow funds to support
                our
                business.




·
            Our
                ability to fund increased operating expenses depends on the agreement
                of
                our principal lender to increases in our operating
                allowance.




·
            If
                our principal lender ceases to renew our maturing loans for additional
                terms or provide us with refinancing opportunities, or we are unable
                to
                secure refinancing opportunities with other lenders, our indebtedness
                will
                become due and payable upon the contractual maturity of each
                borrowing.




·
            Our
                credit facilities require us to observe certain covenants, and our
                failure
                to satisfy such covenants could render us insolvent or preclude our
                seeking additional financing from this or other
                sources.




·
            Our
                business is sensitive to, and can be materially affected by, changes
                in
                interest rates.




46


·
            A
                prolonged economic slowdown or a lengthy or severe recession could
                harm
                our operations, particularly if it results in a decline in the real
                estate
                market. During the past year, residential real estate values in many
                markets have been declining and could harm our financial
                performance.




·
            The
                residential mortgage origination business is a cyclical industry,
                with
                volumes recently reaching their highest levels ever, volumes and
                profitability declining in 2006 and continuing to decline in the
                first
                half of 2007, which could reduce the number of mortgage loans we
                originate
                and could adversely impact our
                business.




·
            Our
                reliance on cash-out refinancings as a significant source of our
                origination activities increases the risk that our earnings will
                be harmed
                if the demand for this type of refinancing
                declines.




·
            When
                we acquire S&D loans, the price we pay is based on a number of
                assumptions. A material difference between the assumptions we use
                in
                determining the value of S&D loans we acquire and our actual
                experience could harm our financial
                position.




·
            We
                may experience higher loan losses than we have reserved for in our
                financial statements.




·
            We
                use estimates for recognizing revenue on a majority of our portfolio
                investments and our earnings would be reduced if actual results are
                less
                than our estimates.




·
            If
                we do not manage our growth effectively, our financial performance
                could
                be harmed.




·
            The
                inability to attract and retain qualified employees could significantly
                harm our business.




·
            We
                may have to outsource a portion of the servicing of the loans we
                hold due
                to capacity constraints or lack of sufficient
                personnel.




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




·
            A
                significant amount of our mortgage loan originations and acquisitions
                are
                secured by property in California, New York, New Jersey and Florida,
                and
                our operations could be harmed by economic downturns or other adverse
                events in these states, including substantial and/or sustained declines
                in
                residential real estate values.




·
            Competition
                with other lenders for the business of independent mortgage brokers
                could
                negatively affect the volume and pricing of our originated
                loans.




·
            We
                may not be adequately protected against the risks inherent in subprime
                residential mortgage loans.




·
            We
                are subject to losses due to fraudulent and negligent acts on the
                part of
                loan applicants, mortgage brokers, sellers of loans we acquire, vendors
                and our employees.




·
            An
                interruption in or breach of our information systems may result in
                lost
                business and increased expenses.




·
            The
                success and growth of our business will depend on our ability to
                adapt to
                and implement technological changes to remain competitive, and any
                failure
                to do so could result in a material adverse effect on our
                business.




47


·
            We
                are exposed to the risk of environmental liabilities with respect
                to
                properties to which we take title.




·
            A
                loss of our Chairman may adversely affect our
                operations.




·
            If
                we do not obtain and maintain the appropriate state licenses we will
                not
                be allowed to originate, purchase and service mortgage loans in some
                states, which would adversely affect our
                operations.




**Risks
      Related to the Restatement of Our Financial Statements**




·
            We
                may become subject to liability and incur increased expenditures
                as a
                result of our restatement of our financial
                statements.




·
            Failures
                in our internal controls and disclosure controls and procedures could
                lead
                to material errors in our financial statements and cause us to fail
                to
                meet our reporting obligations.




**Risks
      Related to the Regulation of Our Industry**




·
            New
                legislation and regulations directed at curbing predatory lending
                practices could restrict our ability to originate, purchase, price,
                sell,
                or finance non-prime residential mortgage loans, which could adversely
                impact our earnings.




·
            The
                broad scope of our operations exposes us to risks of noncompliance
                with an
                increasing and inconsistent body of complex laws and regulations
                at the
                federal, state and local levels.




·
            If
                financial institutions face exposure stemming from legal violations
                committed by the companies to which they provide financing or underwriting
                services, this could increase our borrowing costs and negatively
                affect
                the market for whole-loans and mortgage-backed
                securities.




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




·
            We
                are subject to significant legal and reputational risks and expenses
                under
                federal and state laws concerning privacy, use and security of customer
                information.




·
            If
                many of our borrowers become subject to the Servicemembers Civil
                Relief
                Act of 2003, our cash flows and interest income may be adversely
                affected.




**Risks
      Related to Our Securities**




·
            Thomas
                J. Axon effectively controls our company, substantially reducing
                the
                influence of our other
                stockholders.




·
            Our
                organizational documents, Delaware law and our credit facility may
                make it
                harder for us to be acquired without the consent and cooperation
                of our
                board of directors, management and
                lender.




·
            Our
                quarterly operating results may fluctuate and cause our stock price
                to
                decline.




·
            Various
                factors unrelated to our performance may cause the market price of
                our
                common stock to become volatile, which could harm our ability to
                access
                the capital markets in the future.




48


·
            Future
                sales of our common stock may depress our stock
                price.




·
            Compliance
                with the rules of the market in which our common stock trades and
                proposed
                and recently enacted changes in securities laws and regulations are
                likely
                to increase our costs.




Additional
      information on these risk factors is contained in the Company’s Annual Report on
      Form 10-K for the year ended December 31, 2006.




**ITEM
                2.**
            **UNREGISTERED
                SALES OF EQUITY SECURITIES AND USE OF
                PROCEEDS**




None.




**ITEM
                3.**
            **DEFAULTS
                UPON SENIOR SECURITIES**




None.




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




On
      June
      5, 2007, at the Company’s annual meeting, the stockholders voted to elect eight
      Directors to the Board of Directors and to ratify the appointment of Deloitte
      & Touche LLP as the Company’s independent registered public accountants for
      the fiscal year ending December 31, 2007.




***Election
      of Directors***




**Director**
            
            **For**
            
            **Withhold**
            
            **Abstain**
            
            **Not
                Voted**
            
            **Total**Thomas
                J. Axon
            
            
            7,051,661
            
            
            235
            
            
            12,830
            
            
            944,572
            
            
            8,009,298Alexander
                Gordon Jardin
            
            
            7,051,661
            
            
            235
            
            
            12,830
            
            
            944,572
            
            
            8,009,298William
                F. Sullivan
            
            
            7,051,661
            
            
            235
            
            
            12,830
            
            
            944,572
            
            
            8,009,298Michael
                Bertash
            
            
            7,051,661
            
            
            235
            
            
            12,830
            
            
            944,572
            
            
            8,009,298Robert
                M. Chiste
            
            
            7,051,661
            
            
            235
            
            
            12,830
            
            
            944,572
            
            
            8,009,298Frank
                B. Evans
            
            
            7,051,661
            
            
            235
            
            
            12,830
            
            
            944,572
            
            
            8,009,298Steven
                W. Lefkowitz
            
            
            7,051,661
            
            
            235
            
            
            12,830
            
            
            944,572
            
            
            8,009,298Allan
                R. Lyons
            
            
            7,051,661
            
            
            235
            
            
            12,830
            
            
            944,572
            
            
            8,009,298





***Independent
      Registered Public Accountants***




**For**
            
            **Against**
            
            **Abstain**
            
            **Not
                Voted**
            
            **Total**3,725,667
            
            
            505
            
            
            3,333,554
            
            
            944,572
            
            
            8,009,298





**ITEM
                5.**
            **OTHER
                INFORMATION**




None.




49


**ITEM
                6.**
            **EXHIBITS**




Exhibit
                Number3.1
            
            Fifth
                Amended and Restated Certificate of Incorporation. Incorporated by
                reference to Appendix A to the Registrant’s Definitive Information
                Statement on Schedule 14C, filed with the Securities and Exchange
                Commission (the “Commission”) on January 20, 2005.3.2
            
            Amended
                and Restated By-laws. Incorporated by reference to Appendix B to
                the
                Registrant’s Definitive Information Statement on Schedule 14C, filed with
                the Commission on January 20, 2005.31.1*
            
            Rule
                13a-14(a) Certification of Chief Executive Officer of the Registrant
                in
                accordance with Section 302 of the Sarbanes-Oxley Act of
                2002.31.2*
            
            Rule
                13a-14(a) Certification of Chief Financial Officer of the Registrant
                in
                accordance with Section 302 of the Sarbanes-Oxley Act of
                2002.32.1*
            
            Certification
                of Chief Executive Officer of the Registrant in accordance with Section
                906 of the Sarbanes-Oxley Act of 2002.32.2*
            
            Certification
                of Chief Financial Officer of the Registrant in accordance with Section
                906 of the Sarbanes-Oxley Act of
                2002.





*  Filed
      herewith.




50


**SIGNATURES**





Pursuant
      to the requirements 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.




August
      14, 2007




FRANKLIN CREDIT MANAGEMENT
              CORPORATIONBy:
            /s/ALEXANDER
              GORDON JARDINUAlexander
                Gordon JardinChief
                Executive Officer




Pursuant
      to the requirements of the Securities Exchange Act, this report has been signed
      below by the following persons on behalf of the registrant and in the capacity
      and on the dates indicated.




Signature
              
              Title
              
              DateU/s/
                  ALEXANDER GORDON JARDIN
              
              Chief
                  Executive Officer
              
              August
                  14, 2007Alexander
                  Gordon Jardin(Principal
                  Executive Officer)U/s/
                  PAUL D. COLASONOU
              
              Executive
                  Vice PresidentU
              
              August
                  14, 2007Paul
                  D. Colasono
              
              and
                  Chief Financial Officer
              
              U(Principal
                  Financial Officer)


51