**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**








**FORM
      10-Q**








x **QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d)**


**OF
      THE SECURITIES EXCHANGE ACT OF 1934**





**For
      the quarterly period ended September 30, 2006**


**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**








**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 November 10, 2006: 8,010,295














FRANKLIN
      CREDIT MANAGEMENT CORPORATION





FORM
      10-Q





INDEX





U**Page**U**PART
                I.**
            **FINANCIAL
                INFORMATION**Item
                1.
            Financial
                Statements (Unaudited)Consolidated
                Balance Sheets at September 30, 2006 and December 31, 2005
            3Consolidated
                Statements of Operations for the three and nine months endedSeptember
                30, 2006 and September 30, 2005 (Restated)
            4Consolidated
                Statement of Changes in Stockholders’ Equityfor
                the nine months ended September 30, 2006
            5Consolidated
                Statements of Cash Flows for the nine months endedSeptember
                30, 2006 and September 30, 2005 (Restated)
            6Notes
                to Consolidated Financial Statements
            7Item
                2.
            Management’s
                Discussion and Analysis of Financial Conditionand
                Results of Operations
            18Application
                of Critical Accounting Policies and Estimates
            18Portfolio
                Characteristics
            19Results
                of Operations
            28Liquidity
                 and Capital Resources
            33Borrowings
            35Item
                3.
            Quantitative
                and Qualitative Disclosures about Market Risk
            41Item
                4.
            Controls
                and Procedures
            42**PART
                II.**
            **OTHER
                INFORMATION**Item
                1.
            Legal
                Proceedings
            44Item
                1A.
            Risk
                Factors
            44Item
                2.
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            47Item
                3.
            Defaults
                Upon Senior Securities
            47Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            47Item
                5.
            Other
                Information
            47Item
                6.
            Exhibits
                and Reports on Form 8-K
            48**SIGNATURES**
            49








**FRANKLIN
      CREDIT MANAGEMENT CORPORATION AND SUBSIDIARIES**


CONSOLIDATED
      BALANCE SHEETS








**September
                30, 2006**
              **(Unaudited)**
            
            **December
                31, 2005****ASSETS**Cash
                and cash equivalents
            
            $
            5,127,839
            
            $
            3,886,506Restricted
                cash
            
            
            26,287,705
            
            
            17,008,649Short-term
                investments
            
            
            16,803,114
            
            
            16,954,019Notes
                Receivable:Principal
            
            
            1,102,342,813
            
            
            934,657,413Purchase
                discount
            
            
            (13,925,438
            )
            
            (17,809,940
            )Allowance
                for loan losses
            
            
            (55,361,125
            )
            
            (67,276,155
            )Net
                notes receivable
            
            
            1,033,056,250
            
            
            849,571,318Originated
                loans held for sale
            
            
            7,571,552
            
            
            12,844,882Originated
                loans held for investment, net
            
            
            407,199,604
            
            
            372,315,935Accrued
                interest receivable
            
            
            19,031,418
            
            
            13,341,964Other
                real estate owned
            
            
            22,717,436
            
            
            19,936,274Deferred
                financing costs, net
            
            
            10,450,580
            
            
            10,008,473Other
                receivables
            
            
            6,884,779
            
            
            7,309,505Building,
                furniture and equipment, net
            
            
            3,959,521
            
            
            4,029,481Other
                assets
            
            
            4,773,770
            
            
            1,033,583Total
                assets
            
            $
            1,563,863,568
            
            $
            1,328,240,589**LIABILITIES
                AND STOCKHOLDERS’ EQUITY**Liabilities:Notes
                payable, net of debt discount of $2,931,637 at September 30,
                2006
              and
                $3,002,767 at December 31, 2005
            
            $
            1,428,725,988
            
            $
            1,203,880,994Financing
                agreements
            
            
            63,502,316
            
            
            57,284,085Accounts
                payable and accrued expenses
            
            
            15,598,333
            
            
            12,971,954Success
                fee liability
            
            
            6,706,541
            
            
            5,721,918Deferred
                income tax liability
            
            
            374,098
            
            
            787,470Total
                liabilities
            
            
            1,514,907,276
            
            
            1,280,646,421Commitments
                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: 7,870,295 at September
                30, 2006
                and 7,539,295 at December 31, 2005
            
            
            22,523,704
            
            
            21,292,252Retained
                earnings
            
            
            26,432,588
            
            
            26,599,207Unearned
                compensation
            
            
            -
            
            
            (297,291
            )Total
                stockholders’ equity
            
            
            48,956,292
            
            
            47,594,168Total
                liabilities and stockholders’ equity
            
            $
            1,563,863,568
            
            $
            1,328,240,589





See
      Notes
      to Consolidated Financial Statements.




3




**FRANKLIN
      CREDIT MANAGEMENT CORPORATION AND SUBSIDIARIES**


CONSOLIDATED
      STATEMENTS OF OPERATIONS


THREE
      AND
      NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005 (UNAUDITED)









**Three
                Months Ended September 30,**
            
            **Nine
                Months Ended September 30,****2006**
            
            **2005**
              **(Restated)**
            
            **2006**
            
            **2005**
              **(Restated)****Revenues:**Interest
                income
            
            $
            35,855,704
            
            $
            24,563,184
            
            $
            104,570,879
            
            $
            71,418,710Purchase
                discount earned
            
            
            2,660,711
            
            
            3,146,839
            
            
            6,863,384
            
            
            8,266,115Gain
                on sale of notes receivable
            
            
            94,862
            
            
            644,985
            
            
            163,911
            
            
            1,310,887Gain
                on sale of originated loans
            
            
            1,349,724
            
            
            229,906
            
            
            1,686,520
            
            
            1,136,139Gain
                on sale of other real estate owned
            
            
            70,056
            
            
            535,308
            
            
            1,312,339
            
            
            1,191,691Prepayment
                penalties and other income
            
            
            2,435,600
            
            
            1,753,121
            
            
            6,975,920
            
            
            4,797,806Total
                revenues
            
            
            42,466,657
            
            
            30,873,343
            
            
            121,572,953
            
            
            88,121,348**Operating
                Expenses:**Interest
                expense
            
            
            29,494,108
            
            
            18,283,805
            
            
            81,884,172
            
            
            47,777,134Collection,
                general and administrative
            
            
            10,420,831
            
            
            6,874,657
            
            
            28,801,503
            
            
            21,462,817Provision
                for loan losses
            
            
            1,709,165
            
            
            1,080,155
            
            
            6,740,440
            
            
            3,331,087Amortization
                of deferred financing costs
            
            
            1,550,790
            
            
            1,233,089
            
            
            3,589,221
            
            
            2,938,810Depreciation
            
            
            286,616
            
            
            365,170
            
            
            849,934
            
            
            779,997Total
                expenses
            
            
            43,461,510
            
            
            27,836,876
            
            
            121,865,270
            
            
            76,289,845(Loss)/income
                before provision for income taxes
            
            
            (994,853
            )
            
            3,036,467
            
            
            (292,317
            )
            
            11,831,503Income
                tax (benefit)/expense
            
            
            (430,898
            )
            
            1,381,029
            
            
            (125,698
            )
            
            5,431,118Net
                (loss)/income
            
            $
            (563,955
            )
            $
            1,655,438
            
            $
            (166,619
            )
            $
            6,400,385**Net
                (loss)/income per common share:**Basic
            
            $
            (0.07
            )
            $
            0.23
            
            $
            (0.02
            )
            $
            1.01Diluted
            
            $
            (0.07
            )
            $
            0.22
            
            $
            (0.02
            )
            $
            0.91**Weighted
                average number of shares outstanding:**Basic
            
            
            7,755,628
            
            
            7,060,989
            
            
            7,635,989
            
            
            6,353,526Diluted
            
            
            7,755,628
            
            
            7,610,161
            
            
            7,635,989
            
            
            7,005,029


See
        Notes
        to Consolidated Financial Statements.




4




**FRANKLIN
      CREDIT MANAGEMENT CORPORATION AND SUBSIDIARIES**


CONSOLIDATED
      STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY


NINE
      MONTHS ENDED SEPTEMBER 30, 2006 (UNAUDITED)








**Common
                Stock and**
              **Additional
                Paid-in Capital****Shares**
            
            **Amount**
            
            **Retained**
              **Earnings**
            
            **Unearned**
              **Compensation**
            
            **Total**BALANCE,
                JANUARY 1, 2006
            
            
            7,539,295
            
            $
            21,292,252
            
            $
            26,599,207
            
            $
            (297,291
            )
            $
            47,594,168Reclassification
                adjustment on adoptionof
                FASB 123(R)
            
            
            -
            
            
            (297,291
            )
            
            -
            
            
            297,291
            
            
            -Options
                and warrants exercised
            
            
            217,000
            
            
            335,805
            
            
            -
            
            
            -
            
            
            335,805Stock-based
                compensation
            
            
            114,000
            
            
            653,263
            
            
            -
            
            
            -
            
            
            653,263Excess
                tax benefit
            
            
            -
            
            
            539,675
            
            
            -
            
            
            -
            
            
            539,675Net
                loss
            
            
            -
            
            
            -
            
            
            (166,619
            )
            
            -
            
            
            (166,619
            )BALANCE,
                SEPTEMBER 30, 2006
            
            
            7,870,295
            
            $
            22,523,704
            
            $
            26,432,588
            
            $
            -
            
            $
            48,956,292





See
      Notes
      to Consolidated Financial Statements.


5


**FRANKLIN
      CREDIT MANAGEMENT CORPORATION AND SUBSIDIARIES**


CONSOLIDATED
      STATEMENTS OF CASH FLOWS


NINE
      MONTHS ENDED SEPTEMBER 30, 2006 AND 2005 (UNAUDITED)





**Nine
                Months Ended September 30,****2006**
            
            **2005**
              **(Restated)**CASH
                FLOWS FROM OPERATING ACTIVITIES:Net
                (loss)/income
            
            $
            (166,619
            )
            $
            6,400,385Adjustments
                to reconcile income to net cash provided by/(used in) operating
                activities:Gain
                on sale of notes receivable
            
            
            (163,911
            )
            
            (1,310,887
            )Gain
                on sale of other real estate owned
            
            
            (1,312,339
            )
            
            (1,191,691
            )Gain
                on sale of originated loans
            
            
            (1,686,520
            )
            
            (1,136,139
            )Depreciation
            
            
            849,934
            
            
            779,997Amortization
                of deferred costs and fees on originated loans
            
            
            1,036,244
            
            
            1,289,376Amortization
                of deferred financing costs
            
            
            3,589,221
            
            
            2,938,810Amortization
                of debt discount and success fees
            
            
            1,055,753
            
            
            720,713Excess
                tax benefit
            
            
            (539,675
            )
            
            -Non-cash
                compensation
            
            
            653,263
            
            
            377,760Proceeds
                from the sale of and principal collections on loans held for
                sale
            
            
            26,808,669
            
            
            49,938,438Origination
                of loans held for sale
            
            
            (21,856,300
            )
            
            (44,672,145
            )Deferred
                tax provision
            
            
            (413,372
            )
            
            (88,409
            )Purchase
                discount earned
            
            
            (6,863,384
            )
            
            (8,266,115
            )Provision
                for loan losses
            
            
            6,740,440
            
            
            3,331,087Changes
                in operating assets and liabilities:Accrued
                interest receivable
            
            
            (5,689,454
            )
            
            (2,906,914
            )Other
                receivables
            
            
            424,726
            
            
            (3,142,805
            )Other
                assets
            
            
            (3,200,512
            )
            
            927,569Accounts
                payable and accrued expenses
            
            
            2,626,379
            
            
            5,393,985Net
                cash provided by operating activities
            
            
            1,892,543
            
            
            9,383,015CASH
                FLOWS FROM INVESTING ACTIVITIES:Increase
                in restricted cash
            
            
            (9,279,056
            )
            
            (8,654,784
            )Purchase
                of notes receivable
            
            
            (417,334,295
            )
            
            (291,141,892
            )Principal
                collections on notes receivable
            
            
            207,537,510
            
            
            202,769,050Principal
                collections on loans held for investment
            
            
            177,590,686
            
            
            58,553,146Origination
                of loans held for investment
            
            
            (274,236,127
            )
            
            (254,693,532
            )Investment
                in marketable securities
            
            
            150,905
            
            
            (12,584,482
            )Proceeds
                from sale of other real estate owned
            
            
            23,245,259
            
            
            25,649,992Proceeds
                from sale of loans
            
            
            60,810,585
            
            
            8,375,669Proceeds
                from sale of notes receivable
            
            
            3,807,050
            
            
            15,120,539Purchase
                of building, furniture and equipment
            
            
            (779,974
            )
            
            (2,967,855
            )Net
                cash used in investing activities
            
            
            (228,487,457
            )
            
            (259,574,149
            )CASH
                FLOWS FROM FINANCING ACTIVITIES:Proceeds
                from notes payable
            
            
            678,872,363
            
            
            556,081,930Principal
                payments of notes payable
            
            
            (454,098,499
            )
            
            (311,115,759
            )Proceeds
                from financing agreements
            
            
            318,708,828
            
            
            301,055,917Principal
                payments of financing agreements
            
            
            (312,490,597
            )
            
            (301,471,013
            )Excess
                tax benefit
            
            
            539,675
            
            
            -Payment
                of deferred financing costs
            
            
            (4,031,328
            )
            
            (4,664,925
            )Exercise
                of options
            
            
            335,805
            
            
            225,190Proceeds
                from issuance of common stock
            
            
            -
            
            
            12,656,006Net
                cash provided by financing activities
            
            
            227,836,247
            
            
            252,767,346NET
                CHANGE IN CASH AND CASH EQUIVALENTS
            
            
            1,241,333
            
            
            2,576,212CASH
                AND CASH EQUIVALENTS, BEGINNING OF PERIOD
            
            
            3,886,506
            
            
            5,127,732CASH
                AND CASH EQUIVALENTS, END OF PERIOD
            
            $
            5,127,839
            
            $
            7,703,944SUPPLEMENTAL
                DISCLOSURES OF CASH FLOW INFORMATION:Cash
                payments for interest
            
            $
            78,912,461
            
            $
            45,253,723Cash
                payments for taxes
            
            $
            3,625,115
            
            $
            3,367,101NON-CASH
                INVESTING AND FINANCING ACTIVITY:Transfer
                of loans from held for sale to loans held for investment
            
            $
            483,604
            
            $
            5,278,073Transfer
                from notes receivable and loans held for investment to
                OREO
            
            $
            35,353,176
            
            $
            20,408,512


See
        Notes
        to Consolidated Financial Statements.


6


**FRANKLIN
      CREDIT MANAGEMENT CORPORATION AND SUBSIDIARIES**


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)







**1.**  **BUSINESS**




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 non-prime mortgage loans, both for our
      portfolio and for sale into the secondary market. We specialize in acquiring
      and
      originating loans secured by 1-to-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 September 30, 2006, we had purchased and originated in excess
      of $3.64 billion in mortgage loans. As of September 30, 2006, we had total
      assets of $1.56 billion, our portfolios of notes receivable and loans held
      for
      investment, net, totaled $1.44 billion and we serviced approximately 30,000
      loans.




***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 potentially
      higher risks associated with this segment of the residential mortgage industry,
      including the rehabilitation or resolution of reperforming and nonperforming
      loans.




We
      refer
      to the S&D loans we acquire as “notes receivable.” In the third quarter of
      2006, we purchased notes receivable with an aggregate unpaid principal balance
      of $215.0 million at an aggregate purchase price equal to 94% of the face
      amount of the notes. During the nine months ended September 30, 2006, we
      acquired $452.3 million of notes receivable at an aggregate purchase price
      equal
      to 92% of the face amount of the notes.




7


***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 non-prime residential
      mortgage loans to individuals whose documentation, credit histories, income
      and
      other factors cause them to be classified as non-prime 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. We have recently begun 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-to-4 family residential real estate
      mortgage market in order to capitalize on our extensive experience in acquiring
      and servicing loans with similar performance characteristics.




During
      the third quarter of 2006, we originated $91.7 million in non-prime
      mortgage loans, 87% of which were adjustable-rate (fixed-rate for the first
      two
      years) loans. We originated approximately 44% of these mortgage loans on a
      retail basis and the remainder through our wholesale network of mortgage
      brokers. During the nine months ended September 30, 2006, we originated $296.1
      million in non-prime mortgage loans, 92% of which were adjustable-rate (fixed
      rate for the first two years) loans. We originated approximately 36% of these
      mortgage loans on a retail basis and the remainder through our wholesale network
      of mortgage brokers. 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. During the third quarter of
      2006,
      we sold $51.5 million of newly originated loans to various investors for cash,
      realizing a pre-tax net gain of $1.3 million.




***Loan
      Servicing***




We
      have 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.




**2.**  **RESTATEMENT**




In
      connection with the preparation of the Annual Report on Form 10-K for the year
      ended December 31, 2005, management identified certain errors in and restated
      its previously issued financial statements for the years ended December 31,
      2004
      and 2003, for the first three quarters in 2005 and the quarterly periods in
      2004. These restatements and resulting revisions related principally to (i)
      the
      accounting treatment of certain fees and costs related to the successful
      acquisition of pools of residential mortgage loans (“deferred acquisition
      costs”) and (ii) the accounting treatment of success fees that are both
      currently and potentially payable to the Company’s primary lending bank
      following repayment of existing term debt (“success fees”).




8


In
      addition, the Company restated previously reported “Cash and cash equivalents”
to classify the restricted portion separately on the balance sheet with related
      adjustments to the statements of cash flows, and restated the presentation
      of
      deferred origination costs for loans sold by reclassifying these costs from
      “Collection, general and administrative” expenses to “Gain on sale of originated
      loans held for sale.” Neither restatement had an impact on previously reported
      net income. The Company’s restated financial statements also include certain
      other adjustments that were immaterial individually and in the
      aggregate.




The
      net
      after-tax effects of the restatement on the Company’s consolidated net income
      for the three and nine months ended September 30, 2005 were as
      follows:




**Net
                Income**
              **(As
                Previously**
              **Reported)**
            
            **Deferred
                Acquisition Costs (SFAS No. 91)**
            
            **Success
                Fees**
              **(SFAS
                No. 133)**
            
            **Other**
            
            **Net
                Income**
              **(Restated)**Three
                months ended September 30, 2005
            
            $
            1,842,800
            
            $
            (159,054
            )
            $
            (186,373
            )
            $
            158,065
            
            $
            1,655,438Nine
                months ended September 30, 2005
            
            $
            7,022,291
            
            $
            (405,264
            )
            $
            (394,092
            )
            $
            177,450
            
            $
            6,400,385





The
      significant effects of the restatement on the Company’s consolidated financial
      statements for the three and nine months ended September 30, 2005
      follow.




***Restated
      Statement of Income Information for Three and Nine Months Ended September 30,
      2005 (Unaudited)***




**Three
                Months Ended September 30, 2005**
            
            **Nine
                Months Ended September 30, 2005****As
                Previously**
              **Reported**
            
            **Restated**
            
            **As
                Previously**
              **Reported**
            
            **Restated**REVENUES:Gain
                on sale of loans held for sale
            
            $
            542,588
            
            $
            229,906
            
            $
            2,232,681
            
            $
            1,136,139Prepayment
                penalties and other income
            
            
            2,245,954
            
            
            1,753,121
            
            
            6,291,800
            
            
            4,797,806Total
                revenues
            
            
            31,678,858
            
            
            30,873,343
            
            
            90,711,884
            
            
            88,121,348OPERATING
                EXPENSES:Interest
                expense
            
            
            18,018,930
            
            
            18,283,805
            
            
            47,319,051
            
            
            47,777,134Collection,
                general and administrative
            
            
            7,600,208
            
            
            6,874,657
            
            
            23,368,940
            
            
            21,462,817Total
                expenses
            
            
            28,297,552
            
            
            27,836,876
            
            
            77,737,885
            
            
            76,289,845INCOME
                BEFORE PROVISION FOR INCOME TAXES
            
            
            3,381,306
            
            
            3,036,467
            
            
            12,973,999
            
            
            11,831,503PROVISION
                FOR INCOME TAXES
            
            
            1,538,506
            
            
            1,381,029
            
            
            5,951,708
            
            
            5,431,118NET
                INCOME
            
            
            1,842,800
            
            
            1,655,438
            
            
            7,022,291
            
            
            6,400,385EARNINGS
                PER SHARE:Basic
            
            $
            0.26
            
            $
            0.23
            
            $
            1.09
            
            $
            1.01Diluted
            
            $
            0.24
            
            $
            0.22
            
            $
            1.00
            
            $
            0.91Weighted
                average shares, basic
            
            
            7,158,406
            
            
            7,060,989
            
            
            6,444,943
            
            
            6,353,526Weighted
                average shares, diluted
            
            
            7,825,406
            
            
            7,610,161
            
            
            7,043,554
            
            
            7,005,029





9


***Restated
      Statement of Cash Flows Information for Nine Months Ended September 30, 2005
      (Unaudited)***




**Nine
                Months Ended September 30, 2005****As
                Previously**
              **Reported**
            
            **Restated**CASH
                FLOWS FROM OPERATING ACTIVITIES:Net
                income
            
            $
            7,022,291
            
            $
            6,400,385Adjustments
                to reconcile income to net cash provided by/(used in)operating
                activities:Gain
                on sale of originated loans held for sale
            
            
            (2,232,681
            )
            
            (1,136,139
            )Amortization
                of deferred costs and fees on originated loans
            
            
            -
            
            
            1,289,376Amortization
                of debt discount and success fees
            
            
            -
            
            
            720,713Non-cash
                compensation
            
            
            430,190
            
            
            377,760Proceeds
                from the sale of and principal collections on loansheld
                for sale
            
            
            51,352,615
            
            
            49,938,438Changes
                in operating assets and liabilities:Deferred
                income tax
            
            
            2,368,276
            
            
            (88,409
            )Other
                assets
            
            
            (849,291
            )
            
            927,569Accounts
                payable and accrued expenses
            
            
            4,029,934
            
            
            5,393,985Net
                cash provided by operating activities
            
            
            4,972,820
            
            
            9,383,015CASH
                FLOWS FROM INVESTING ACTIVITIES:Increase
                in restricted cash
            
            
            -
            
            
            (8,654,784
            )Loan
                fees
            
            
            (2,481,179
            )
            
            -Net
                cash used in investing activities
            
            
            (251,097,785
            )
            
            (259,574,149
            )CASH
                FLOWS FROM FINANCING ACTIVITIES:Payment
                of deferred financing costs
            
            
            -
            
            
            (4,664,925
            )Net
                cash provided by financing activities
            
            
            257,432,272
            
            
            252,767,346NET
                CHANGE IN CASH AND CASH EQUIVALENTS
            
            
            11,307,307
            
            
            2,576,212CASH
                AND CASH EQUIVALENTS, BEGINNING OF PERIOD
            
            
            19,648,271
            
            
            5,127,732CASH
                AND CASH EQUIVALENTS, END OF PERIOD
            
            
            30,955,578
            
            
            7,703,944





**3.**  **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.




In
      the
      opinion of management, all adjustments, consisting of all normal and recurring
      items, which are necessary for a fair presentation, have been
      included.




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 allowance for loan losses,
      discounts on acquired loans and success fee liability. 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, 2005. 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


***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. The Company now continues to accrue interest on secured
      real estate first mortgage loans originated by the Company up to 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 and updated estimate of the realizable
      value of the property securing the loan. This change in estimate increased
      interest income by approximately $1.7 million (pre-tax) in the three months
      ended September 30, 2006.




Generally,
      interest is accrued on loans that are performing and are carried at the
      amortized cost of 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 95% 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, requisite services
      rendered prior to, 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).




11


The
      compensation cost recognized in income for the plans described below was
      $169,025 and $84,521 for the three months ended September 30, 2006 and 2005,
      respectively. The compensation cost recognized in income for the plans described
      below was $653,263 and $377,760 for the nine months ended September 30, 2006
      and
      2005, respectively.




Prior
      to
      January 1, 2006, our stock-based compensation was accounted for under the
      recognition and measurement principles of APB Opinion 25 and related
      interpretations. The following table illustrates the effect on net income and
      earnings per share if the fair value based method had been applied to all awards
      during the three and nine months ended September 30, 2005.





**Three
                Months Ended**
              **September
                30, 2005**
            
            **Nine
                Months Ended**
              **September
                30, 2005**Net
                income - as reported
            
            $
            1,655,438
            
            $
            6,400,385Stock-based
                compensation expense determined under fair value method, net of related
                tax effects(1)
            
            
            (123,317
            )
            
            (228,805
            )Net
                income - pro forma
            
            $
            1,532,121
            
            $
            6,171,580Earnings
                per share:Basic
                - as reported
            
            $
            0.23
            
            $
            1.01Basic
                - pro forma
            
            $
            0.22
            
            $
            0.97Diluted
                - as reported
            
            $
            0.22
            
            $
            0.91Diluted
                - pro forma
            
            $
            0.20
            
            $
            0.88


__________________




(1)
            The
                stock-based compensation cost, net of related tax effects, that would
                have
                been included in the determination of net income if the fair value
                based
                method had been applied to all
                awards.





The
      Company awards 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.




Prior
      to
      January 1, 2006, 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 nine months ended September 30, 2006 and 2005. 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. 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.


12




**Nine
                Months Ended September 30,****2006**
            
            **2005**Risk-free
                interest rate
            
            
            3.85
            %
            
            5.60
            %Weighted
                average volatility
            
            
            47.57
            
            
            108.76Expected
                lives (years)
            
            
            6.0
            
            
            6.0







A
      summary
      of the status of the Company’s stock option awards as of September 30, 2006 and
      changes during the nine month period then ended is presented below:




**Shares**
            
            **Weighted
                Average Exercise**
            
            **Weighted
                Average Remaining Contractual Term**
            
            **Aggregate
                Intrinsic Value**Balance,
                January 1, 2006
            
            
            667,500
            
            $
            2.88
            
            
            5.1
                years
            
            $
            3,901,085Granted
            
            
            15,000
            
            
            7.73
            
            
            10
                years
            
            
            -Exercised
            
            
            130,000
            
            
            1.39
            
            
            1.75
                years
            
            
            723,140Canceled
            
            
            -
            
            
            -
            
            
            -
            
            
            -Forfeited
            
            
            20,000
            
            
            10.70
            
            
            8.5
                years
            
            
            26,950Balance,
                September 30, 2006
            
            
            532,500
            
            
            3.05
            
            
            5.5
                years
            
            $
            2,629,260Options
                exercisable at September 30, 2006
            
            
            501,750
            
            $
            2.40
            
            
            5.32
                years





There
      were 15,000 stock option awards granted, which vested at the time of grant,
      during the nine months ended September 30, 2006. A total of 106,500 options
      were
      granted to management and the board of directors during the nine months ended
      September 30, 2005.




As
      of
      September 30, 2006, there was $178,811 of unrecognized compensation cost related
      to the Company’s stock option awards. The weighted average period over which
      this cost is expected to be recognized is one year. Cash received from the
      exercise of stock options for the nine months ended September 30, 2006 and
      2005
      was $335,805 and $225,190, respectively.




The
      Company’s policy is to issue newly issued shares upon the exercise of
      options.




**2006
      Stock Incentive Plan**




On
      May
      24, 2006, the shareholders approved the 2006 Stock Incentive Plan to be
      effective June 15, 2006. This approval authorized and reserved 750,000 shares
      for grant in addition to the remaining amount under the 1996 stock option
      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.




13


·  ***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 September 30, 2006
      and changes during the period then ended is presented below:




**Shares**
            
            **Weighted
                Average Grant Date**
              **Fair
                Value**Non-vested
                balance, January 1, 2006
            
            
            27,000
            
            $
            12.92Granted
            
            
            122,000
            
            
            7.82Vested
            
            
            31,000
            
            
            9.12Forfeited
            
            
            8,000
            
            
            13.00Non-vested
                balance, September 30, 2006
            
            
            110,000
            
            $
            8.29





The
      total
      fair value of the Company’s restricted stock that vested during the nine months
      ended September 30, 2006 was $328,350.




As
      of
      September 30, 2006, there was $820,521 of unrecognized compensation cost related
      to the Company’s restricted stock awards.




***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 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.




14


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 tables set 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 September 30,****2006**
            
            **2005**U**Accretable
                Discount**UBalance,
                beginning of period
            
            $
            14,240,528
            
            $
            6,721,220New
                Acquisitions
            
            
            4,000
            
            
            2,964,243Accretion
            
            
            (1,010,378
            )
            
            (460,587
            )Transfers
                from nonaccretable
            
            
            695,508
            
            
            -Net
                reductions relating to loans sold
            
            
            (93,020
            )
            
            (108,110
            )Net
                reductions relating to loans repurchased
            
            
            (4,297
            )
            
            (2,015
            )Other
            
            
            32,530
            
            
            (55,607
            )Balance,
                end of period
            
            $
            13,864,871
            
            $
            9,059,144U**Nonaccretable
                Discount**UBalance,
                beginning of period
            
            $
            39,212,462
            
            $
            14,624,151New
                Acquisitions
            
            
            13,741,125
            
            
            124,147Transfers
                to accretable
            
            
            (695,508
            )
            
            -Net
                reductions relating to loans sold
            
            
            (77,996
            )
            
            (11,391
            )Net
                reductions relating to loans repurchased
            
            
            -
            
            
            (1,881
            )Other,
                loans transferred to OREO
            
            
            (3,036,816
            )
            
            (81,055
            )Balance,
                end of period
            
            $
            49,143,267
            
            $
            14,653,971





**Nine
                Months Ended September 30,****2006**
            
            **2005**U**Accretable
                Discount**UBalance,
                beginning of period
            
            $
            11,360,617
            
            $
            -New
                Acquisitions
            
            
            2,549,873
            
            
            19,233,009Accretion
            
            
            (2,936,851
            )
            
            (717,572
            )Transfers
                from nonaccretable
            
            
            2,883,125
            
            
            (9,221,874
            )Net
                reductions relating to loans sold
            
            
            (93,020
            )
            
            (163,857
            )Net
                reductions relating to loans repurchased
            
            
            (6,486
            )
            
            (14,954
            )Other
            
            
            107,613
            
            
            (55,608
            )Balance,
                end of period
            
            $
            13,864,871
            
            $
            9,059,144U**Nonaccretable
                Discount**UBalance,
                beginning of period
            
            $
            23,981,013
            
            $
            -New
                Acquisitions
            
            
            32,430,347
            
            
            14,807,954Transfers
                to accretable
            
            
            (2,883,125
            )
            
            -Net
                reductions relating to loans sold
            
            
            (85,881
            )
            
            (71,047
            )Net
                reductions relating to loans repurchased
            
            
            (204,026
            )
            
            (1,881
            )Other,
                loans transferred to OREO
            
            
            (4,095,061
            )
            
            (81,055
            )Balance,
                end of period
            
            $
            49,143,267
            
            $
            14,653,971


15




The
      Company purchased $215,021,204 and $452,311,109 of loans subject to SOP 03-3,
      respectively, during the three and nine months ended September 30, 2006. The
      outstanding balance of notes receivable subject to SOP 03-3 at September 30,
      2006 was $762,320,937.




***Segments*** - 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, nonperforming, nonconforming and
      sub-performing notes receivable and promissory notes from financial
      institutions, mortgage and finance companies, and services and collects such
      notes receivable through enforcement of original note terms, modification of
      original note terms and, if necessary, liquidation of the underlying collateral.
      The mortgage-banking segment originates or purchases for sale and investment
      purposes residential mortgage loans to individuals whose credit histories,
      income and other factors cause them to be classified as subprime
      borrowers.




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.




**For
                the Three Months Ended September 30,****2006**
            
            **2005****CONSOLIDATED
                REVENUE:**Portfolio
                asset acquisition and resolution
            
            $
            28,939,922
            
            $
            23,042,339Mortgage
                banking
            
            
            13,526,735
            
            
            7,831,004Consolidated
                revenue
            
            $
            42,466,657
            
            $
            30,873,343**CONSOLIDATED
                NET INCOME:**Portfolio
                asset acquisition and resolution
            
            $
            (1,558,423
            )
            $
            724,414Mortgage
                banking
            
            
            994,468
            
            
            931,024Consolidated
                net (loss)/income
            
            $
            (563,955
            )
            $
            1,655,438




**For
                the Nine Months Ended September 30,****2006**
            
            **2005****CONSOLIDATED
                REVENUE:**Portfolio
                asset acquisition and resolution
            
            $
            84,774,301
            
            $
            69,562,213Mortgage
                banking
            
            
            36,798,652
            
            
            18,559,135Consolidated
                revenue
            
            $
            121,572,953
            
            $
            88,121,348**CONSOLIDATED
                NET INCOME:**Portfolio
                asset acquisition and resolution
            
            $
            (3,149,719
            )
            $
            3,899,932Mortgage
                banking
            
            
            2,983,100
            
            
            2,500,453Consolidated
                net (loss)/income
            
            $
            (166,619
            )
            $
            6,400,385






16




**September
                30, 2006**
            
            **December
                31, 2005****CONSOLIDATED
                ASSETS:**Portfolio
                asset acquisition and resolution
            
            $
            1,116,766,233
            
            $
            924,564,871Mortgage
                banking
            
            
            447,097,335
            
            
            403,675,718Consolidated
                assets
            
            $
            1,563,863,568
            
            $
            1,328,240,589





17


***Recent
      Accounting Pronouncements*** - On
      July 13, 2006, the Financial
      Accounting Standards Board (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. The Company will adopt FIN 48 on January 1, 2007. The
      cumulative effect, if any, of applying FIN 48 will be recorded as an adjustment
      to the beginning balance of “Retained earnings.” Management is currently
      evaluating the effect of FIN 48 on the Company.




On
      February 16, 2006, the FASB issued SFAS No. 155, “ *Accounting
      for Certain Hybrid Instruments* ”
(SFAS
      155), which permits, but does not require, fair value accounting for any hybrid
      financial instrument that contains an embedded derivative that would otherwise
      require bifurcation in accordance with SFAS 133. The statement also subjects
      beneficial interests issued by securitization vehicles to the requirements
      of
      SFAS 133. The statement is effective as of January 1, 2007, with earlier
      adoption permitted. Management is currently evaluating the effect of the
      statement, if any, on the Company’s results of operations and financial
      condition.




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





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




**Restatement**




As
      discussed in Note 2 of the Consolidated Financial Statements, Franklin Credit
      Management Corporation restated its historical consolidated financial statements
      for the fiscal years ended December 31, 2004 and 2003, for the first three
      quarters in 2005 and the quarterly periods in 2004. The accompanying
      Management’s Discussion and Analysis reflects the effects of the
      restatement.




**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 sole lender and the
      lender's willingness to extend additional credit to the Company; (iii) the
      availability for purchases of additional loans; (iv) the availability of
      sub-prime borrowers for the origination of additional loans; (vi) changes in
      the
      statutes or regulations applicable to the Company’s business or in the
      interpretation and enforcement thereof by the relevant authorities; (vii) the
      status of the Company’s regulatory compliance; and (viii) 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 “Interest Rate Risk” and “Real
      Estate Risk” in Item 3 herein, under the caption “Risk Factors” in Item 1A
      herein, and under the caption “Risk Factors” in Item 1A of the Company’s Annual
      Report on Form 10-K for the year ended December 31, 2005, all of 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 other wise 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 3 to the
      December 31, 2005 consolidated financial statements included in the Company’s
      Annual Report on Form 10-K for the year ended December 31, 2005. 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, other real estate owned and success fees 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.




19


**Portfolio
      Characteristics**




***Overall
      Portfolio***




At
      September 30, 2006, our portfolio (excluding OREO) consisted of $1.17 billion
      of
      notes receivable (inclusive of purchase discount not reflected on the face
      of
      the balance sheet), $410.1 million of loans held for investment and $7.7 million
      of loans held for sale. Our total loan portfolio grew 17% to $1.58 billion
      as of
      September 30, 2006, from $1.36 billion at December 31, 2005. Not boarded loans
      represent loans serviced by the seller on a temporary basis. Included in not
      boarded loans is a $116.6 million pool of loans acquired on September 29, 2006.
      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
            
            $
            1,172,210,436
            
            
            74.04
            %Condos,
                co-ops, PUD dwellings
            
            
            138,646,211
            
            
            8.76
            %Manufactured
                homes
            
            
            22,950,301
            
            
            1.45
            %Multi-family
            
            
            1,063,149
            
            
            0.07
            %Secured,
                property type unknown
            
            
            44,586,128
            
            
            2.82
            %Commercial
            
            
            2,401,119
            
            
            0.15
            %Unsecured
                loans
            
            
            18,600,365
            
            
            1.17
            %Other
            
            
            320,104
            
            
            0.02
            %Not
                boarded
            
            
            182,376,537
            
            
            11.52
            %Total
            
            $
            1,583,154,350
            
            
            100.00
            %





***Geographic
      Dispersion.*** The
      following table sets forth information regarding the geographic location of
      properties securing the loans in our portfolio at September 30,
      2006:




U**Location**U
            
            U**Principal
                Balance**U
            
            **Percentage
                of Total**
              U**Principal
                Balance**UNew
                York
            
            $
            169,260,260
            
            
            10.69
            %New
                Jersey
            
            
            146,524,881
            
            
            9.26
            %California
            
            
            122,712,896
            
            
            7.75
            %Florida
            
            
            93,859,322
            
            
            5.93
            %Pennsylvania
            
            
            76,644,719
            
            
            4.84
            %Ohio
            
            
            72,716,812
            
            
            4.59
            %Texas
            
            
            71,374,521
            
            
            4.51
            %Michigan
            
            
            51,010,182
            
            
            3.22
            %Georgia
            
            
            45,963,949
            
            
            2.90
            %Illinois
            
            
            45,659,326
            
            
            2.89
            %All
                Others
            
            
            687,427,482
            
            
            43.42
            %Total
            
            $
            1,583,154,350
            
            
            100.00
            %





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.




20


***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 substantial 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.




**September
                30, 2006****Contractual
                Delinquency**
            
            **Recency
                Delinquency****Days
                Past Due**
            
            Amount
            
            %
            
            Amount
            
            %**Current**
            
            
            0
                - 30 days
            
            $
            786,552,422
            
            
            50
            %
            $
            910,635,040
            
            
            58
            %**Delinquent**
            
            
            31
                - 60 days
            
            
            87,119,194
            
            
            5
            %
            
            36,810,730
            
            
            2
            %61
                - 90 days
            
            
            11,749,264
            
            
            1
            %
            
            23,937,836
            
            
            1
            %90+
                days
            
            
            142,342,422
            
            
            9
            %
            
            56,379,696
            
            
            4
            %U**Bankruptcy**U
            
            
            0
                - 30 days
            
            
            41,750,029
            
            
            3
            %
            
            106,879,192
            
            
            7
            %**Delinquent**
            
            
            31
                - 60 days
            
            
            9,008,145
            
            
            1
            %
            
            8,576,306
            
            
            1
            %61
                - 90 days
            
            
            4,766,021
            
            
            -
            
            
            4,931,368
            
            
            -90+
                days
            
            
            102,485,338
            
            
            6
            %
            
            37,622,667
            
            
            2
            %U**Foreclosure**U
            
            
            0
                - 30 days
            
            
            679,077
            
            
            -
            
            
            9,935,003
            
            
            1
            %**Delinquent**
            
            
            31
                - 60 days
            
            
            1,156,319
            
            
            -
            
            
            2,654,996
            
            
            -61
                - 90 days
            
            
            561,828
            
            
            -
            
            
            5,774,443
            
            
            -90+
                days
            
            
            212,607,754
            
            
            13
            %
            
            196,640,536
            
            
            12
            %**Not
                Boarded**P**(1)**P
            
            
            
            
            
            182,376,537
            
            
            12
            %
            
            182,376,537
            
            
            12
            %**Total**
            
            $
            1,583,154,350
            
            
            100
            %
            $
            1,583,154,350
            
            
            100
            %**Total
                loans**
            
            
            **0
                - 30 days**
            
            $
            828,981,528
            
            
            53
            %
            $
            1,027,449,235
            
            
            66
            %


__________________




(1)
            Not
                boarded represents recently acquired loans serviced by the seller
                on a
                temporary basis and recently originated loans that have been funded
                but
                have not yet been entered into the servicing system. These loans
                include a
                $116.6 million pool of loans (unpaid principal balance) acquired
                on
                September 29, 2006, all of which were current 0 - 30 days on a contractual
                basis at the time of acquisition.





21





**December
                31, 2005****Contractual
                Delinquency**
            
            **Recency
                Delinquency****Days
                Past Due**
            
            **Amount**
            
            **%**
            
            **Amount**
            
            **z%****Current**
            
            
            0
                - 30 days
            
            $
            687,887,057
            
            
            51
            %
            $
            791,779,227
            
            
            58
            %**Delinquent**
            
            
            31
                - 60 days
            
            
            76,225,331
            
            
            6
            %
            
            36,316,774
            
            
            3
            %61
                - 90 days
            
            
            19,629,463
            
            
            1
            %
            
            15,938,651
            
            
            1
            %90+
                days
            
            
            139,882,279
            
            
            10
            %
            
            79,589,478
            
            
            6
            %U**Bankruptcy**U
            
            
            0
                - 30 days
            
            
            38,018,748
            
            
            3
            %
            
            108,931,183
            
            
            8
            %**Delinquent**
            
            
            31
                - 60 days
            
            
            11,207,345
            
            
            1
            %
            
            7,845,350
            
            
            1
            %61
                - 90 days
            
            
            4,725,448
            
            
            -
            
            
            4,851,743
            
            
            -90+
                days
            
            
            113,808,976
            
            
            8
            %
            
            46,132,241
            
            
            3
            %U**Foreclosure**U
            
            
            0
                - 30 days
            
            
            793,327
            
            
            -
            
            
            8,414,493
            
            
            1
            %**Delinquent**
            
            
            31
                - 60 days
            
            
            606,737
            
            
            -
            
            
            2,934,832
            
            
            -61
                - 90 days
            
            
            895,794
            
            
            -
            
            
            2,444,743
            
            
            -90+
                days
            
            
            131,112,327
            
            
            10
            %
            
            119,614,117
            
            
            9
            %**Not
                Boarded**P**(1)**P
            
            
            
            
            
            132,573,874
            
            
            10
            %
            
            132,573,874
            
            
            10
            %**Total**
            
            $
            1,357,366,706
            
            
            100
            %
            $
            1,357,366,706
            
            
            100
            %**Total
                loans**
            
            
            **0
                - 30 days**
            
            $
            726,699,132
            
            
            54
            %
            $
            909,124,903
            
            
            67
            %


__________________




(1)
            Not
                boarded represents recently acquired loans serviced by the seller
                on a
                temporary basis and recently originated loans that have been funded
                but
                have not yet been entered into the servicing system. A portion of
                not
                boarded loans has been included in the appropriate delinquency categories
                based on information provided by the seller-servicer. The remaining
                portion of not boarded loans, for which information has not been
                entered
                into our servicing system, is shown in the not boarded
                category.




22


***Notes
      Receivable Portfolio***




At
      September 30, 2006, our notes receivable portfolio, which consists of purchased
      loans, included approximately 28,100 loans with an aggregate unpaid principal
      balance (“UPB”) of $1.17 billion and a net UPB of $1.11 billion (after allowance
      for loan losses of $55 million), compared with approximately 23,684 loans with
      an aggregate UPB of $970 million and a net UPB of $903 million (after allowance
      for loan losses of $67 million) as of December 31, 2005. Impaired loans comprise
      and will continue to comprise a significant portion of our portfolio. Many
      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:




**September
                30, 2006**
            
            **December
                31, 2005**Performing
                loans
            
            $
            716,294,477
            
            $
            536,974,892Allowance
                for loan losses
            
            
            8,219,839
            
            
            14,266,781Total
                performing loans,net
                of allowance for loan losses
            
            
            708,074,638
            
            
            522,708,111Impaired
                loans
            
            
            266,679,937
            
            
            244,986,933Allowance
                for loan losses
            
            
            47,141,285
            
            
            43,691,572Total
                impaired loans,net
                of allowance for loan losses
            
            
            219,538,652
            
            
            201,295,361Not
                yet boarded onto servicing system
            
            
            182,376,537
            
            
            188,037,218Allowance
                for loan losses
            
            
            -
            
            
            9,317,802Not
                yet boarded onto servicing system,net
                of allowance for loan losses
            
            
            182,376,537
            
            
            178,719,416Total
                notes receivable, net
                of allowance for loan losses
            
            
            1,109,989,827
            
            
            902,722,888*Accretable
                Discount
            
            
            13,864,871
            
            
            11,360,617*Nonaccretable
                Discount
            
            
            49,143,267
            
            
            23,981,013Total
                Notes Receivable,net
                of allowance for loan losses and accretable/nonaccretable
                discounts
            
            $
            1,046,981,689
            
            $
            867,381,258


__________________




*
            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 to be
                collected.


23


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 September 30, 2006 of $182,376,537.




**September
                30, 2006**
            
            **December
                31, 2005***Performing
                Loans:*Fixed-rate
                Performing Loans
            
            $
            600,769,766
            
            $
            393,982,311Adjustable
                Performing Loans
            
            
            107,304,872
            
            
            128,725,800*Total
                Performing Loans*
            
            $
            708,074,638
            
            $
            522,708,111*Impaired
                Loans:*Fixed-rate
                Impaired Loans
            
            $
            178,712,801
            
            $
            167,093,004Adjustable
                Impaired Loans
            
            
            40,825,852
            
            
            34,202,357*Total
                Impaired Loans*
            
            $
            219,538,653
            
            $
            201,295,361Total
                Notes
            
            $
            927,613,291
            
            $
            724,003,472*Accretable
                Discount
            
            $
            13,864,871
            
            $
            11,360,617*Nonaccretable
                Discount
            
            $
            39,694,604
            
            $
            13,953,006Total
                Notes Receivable,net
                of allowance for loan losses and accretable/nonaccretable discounts,excluding
                loans not boarded onto servicing systems
            
            $
            874,053,816
            
            $
            698,689,849





***Loan
      Acquisitions***




We
      purchased approximately $215.0 million in assets (principally residential
      single-family first and second lien loans) during the third quarter of 2006,
      compared with approximately $121.6 million in assets (principally residential
      single-family first and second lien loans) during the third quarter of 2005.
      For
      the nine months ended September 30, 2006, we purchased $452.3 million of loans
      as compared with $315.2 million for the same period in 2005. The following
      table
      sets forth the amounts and purchase prices of our mortgage loan acquisitions
      during the three and nine months ended September 30, 2006 and September 30,
      2005:




**Three
                Months Ended September 30,**
            
            **Nine
                Months Ended September 30,****2006**
            
            **2005**
            
            **2006**
            
            **2005**Number
                of loans
            
            3,650
            
            2,329
            
            14,058
            
            7,491Aggregate
                unpaid principal balance at acquisition
            
            $
            215,021,204
            
            $
            121,637,069
            
            $
            452,311,109
            
            $
            315,220,868Purchase
                price
            
            $
            201,280,078
            
            $
            117,734,210
            
            $
            417,334,296
            
            $
            291,141,892Purchase
                price percentage
            
            
            94
            %
            
            97
            %
            
            92
            %
            
            92
            %Percentage
                of 1stliens
            
            
            5
            %
            
            32
            %
            
            9
            %
            
            36
            %Percentage
                of 2ndliens
            
            
            93
            %
            
            68
            %
            
            90
            %
            
            64
            %Percentage
                of Other
            
            
            2%*
            
            
            -
            
            
            1
            %
            
            -


__________________


*
            Represents
                $5.0 million of REO that was acquired in the third quarter of
                2006.


24


***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
      basis, servicing-released for cash. The following table sets forth our
      dispositions of purchased loans during the three and nine months ended September
      30, 2006 and September 30, 2005:




**Three
                Months Ended September 30,**
            
            **Nine
                Months Ended September 30,****2006**
            
            **2005**
            
            **2006**
            
            **2005****Sale
                of Performing Loans**Aggregate
                unpaid principal balance
            
            $
            3,784,126
            
            $
            6,236,508
            
            $
            3,784,126
            
            $
            13,573,871Gain
                on sale
            
            $
            94,862
            
            $
            644,985
            
            $
            94,862
            
            $
            1,263,866**Sale
                of Non-Performing Loans**Aggregate
                unpaid principal balance
            
            $
            -
            
            $
            -
            
            $
            161,149
            
            $
            23,491,405*Gain
                on sale
            
            $
            -
            
            $
            -
            
            $
            69,049
            
            $
            47,021Total
                gain on sale
            
            $
            94,862
            
            $
            644,985
            
            $
            163,911
            
            $
            1,310,887


__________________


*  Sale
      of
      credit card portfolio. The carrying value of this portfolio was $1.2
      million.




***Tribeca’s*** **Loan
      Originations**




The
      following table sets forth Tribeca’s loan originations, as well as dispositions,
      during the three and nine months ended September 30, 2006 and September 30,
      2005.




**Three
                Months Ended September 30,**
            
            **Nine
                Months Ended September 30,****2006**
            
            **2005**
            
            **2006**
            
            **2005**Number
                of loans originated
            
            376
            
            476
            
            1,320
            
            1,349Original
                principal balance
            
            $
            91,679,220
            
            $
            106,058,640
            
            $
            296,092,427
            
            $
            299,365,677Average
                loan amount
            
            $
            243,828
            
            $
            222,812
            
            $
            224,312
            
            $
            221,917Originated
                as fixed
            
            $
            11,813,000
            
            $
            11,347,840
            
            $
            22,292,900
            
            $
            28,624,745Originated
                as ARM*
            
            $
            79,866,220
            
            $
            94,710,800
            
            $
            273,799,527
            
            $
            270,740,932Number
                of loans sold
            
            
            235
            
            
            69
            
            
            379
            
            
            254Aggregate
                face value
            
            $
            51,510,266
            
            $
            14,276,617
            
            $
            85,304,214
            
            $
            50,879,175Gain
                on sale
            
            $
            1,349,724
            
            $
            229,906
            
            $
            1,686,520
            
            $
            1,136,139Gain
                on sale percentage
            
            
            2.62
            %
            
            1.61
            %
            
            1.98%**
            
            
            2.23
            %


__________________


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


**
            In
                the nine months ended September 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.





During
      the third quarter of 2006, we sold $40.4 million of newly originated Liberty
      Loans to various investors on a whole loan basis for cash.




25


***Property
      Types of Originated Loans.*** At
      September 30, 2006, Tribeca’s portfolio consisted of $410.1 million of loans
      originated and held for investment and $7.7 million of loans held for sale.
      Tribeca’s portfolio of loans held for investment grew 10% to $410.1 million as
      of September 30, 2006, from $374.5 million at December 31, 2005. 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
                September 30, 2006**U**Property
                Types**U
            
            U**Principal
                Balance**U
            
            **Percentage
                of Total**
              U**Principal
                Balance**UResidential
                1-4 family
            
            $
            382,899,708
            
            
            93.36
            %Condos,
                co-ops, PUD dwellings
            
            
            25,194,828
            
            
            6.14
            %Manufactured
                homes
            
            
            83,824
            
            
            0.02
            %Multi-family
            
            
            132,745
            
            
            0.03
            %Commercial
            
            
            1,704,452
            
            
            0.42
            %Unsecured
                loans
            
            
            122,396
            
            
            0.03
            %Total
            
            $
            410,137,953
            
            
            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 nine months
      ended
      September 30, 2006 and the aggregate portfolio of loans originated and held
      for
      investment at September 30, 2006:




**Loans
                Originated****for
                Nine Months**
              **Ended
                September 30, 2006**
            
            **Loans
                Held for Investment**
              **at
                September 30, 2006****Location**
            
            **Principal**
              **Balance**
            
            **Percentage
                of Total**
              **Principal
                Balance**
            
            **Principal**
              **Balance**
            
            **Percentage
                of Total**
              **Principal
                Balance**New
                Jersey
            
            $
            95,686,394
            
            
            32.32
            %
            $
            125,154,721
            
            
            30.51
            %New
                York
            
            
            88,936,758
            
            
            30.04
            %
            
            126,248,264
            
            
            30.78
            %Pennsylvania
            
            
            20,720,525
            
            
            7.00
            %
            
            39,553,218
            
            
            9.64
            %Florida
            
            
            18,204,324
            
            
            6.15
            %
            
            22,363,934
            
            
            5.45
            %Maryland
            
            
            16,005,274
            
            
            5.40
            %
            
            17,266,272
            
            
            4.21
            %Massachusetts
            
            
            15,303,800
            
            
            5.17
            %
            
            20,430,005
            
            
            4.98
            %Virginia
            
            
            11,171,778
            
            
            3.77
            %
            
            14,419,407
            
            
            3.52
            %Connecticut
            
            
            9,363,850
            
            
            3.16
            %
            
            13,896,092
            
            
            3.39
            %California
            
            
            5,395,700
            
            
            1.82
            %
            
            9,702,213
            
            
            2.37
            %North
                Carolina
            
            
            3,206,200
            
            
            1.08
            %
            
            3,107,150
            
            
            0.76
            %All
                Others
            
            
            12,097,824
            
            
            4.09
            %
            
            17,996,677
            
            
            4.39
            %Total
            
            $
            296,092,427
            
            
            100.00
            %
            $
            410,137,953
            
            
            100.00
            %





26


***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 non-prime 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.




**September
                30, 2006****Contractual
                Delinquency**
            
            **Recency
                Delinquency****Days
                Past Due**
            
            **Amount**
            
            **%**
            
            **Amount**
            
            **%****Current**
            
            
            0
                - 30 days
            
            $
            216,035,089
            
            
            52
            %
            $
            258,941,831
            
            
            62
            %**Delinquent**
            
            
            31
                - 60 days
            
            
            34,456,168
            
            
            9
            %
            
            15,726,228
            
            
            3
            %61
                - 90 days
            
            
            1,670,042
            
            
            -
            
            
            12,060,222
            
            
            3
            %90+
                days
            
            
            58,328,911
            
            
            14
            %
            
            23,761,929
            
            
            6
            %U**Bankruptcy**U
            
            
            0
                - 30 days
            
            
            346,261
            
            
            -
            
            
            1,128,284
            
            
            -**Delinquent**
            
            
            31
                - 60 days
            
            
            55,736
            
            
            -
            
            
            691,050
            
            
            -61
                - 90 days
            
            
            -
            
            
            -
            
            
            316,180
            
            
            -90+
                days
            
            
            5,985,334
            
            
            1
            %
            
            4,251,817
            
            
            1
            %U**Foreclosure*******U
            
            
            0
                - 30 days
            
            
            139,768
            
            
            -
            
            
            2,980,346
            
            
            1
            %**Delinquent**
            
            
            31
                - 60 days
            
            
            608,168
            
            
            -
            
            
            297,511
            
            
            -61
                - 90 days
            
            
            -
            
            
            -
            
            
            2,543,476
            
            
            1
            %90+
                days
            
            
            100,177,922
            
            
            24
            %
            
            95,104,525
            
            
            23
            %**Total**
            
            $
            417,803,399
            
            
            100
            %
            $
            417,803,399
            
            
            100
            %**Total
                loans**
            
            
            **0
                - 30 days**
            
            $
            216,521,118
            
            
            52
            %
            $
            263,050,461
            
            
            63
            %


__________________




*
            $100.9
                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.


27





**December
                31, 2005****Contractual
                Delinquency**
            
            **Recency
                Delinquency****Days
                Past Due**
            
            **Amount**
            
            **%**
            
            **Amount**
            
            **z%****Current**
            
            
            0
                - 30 days
            
            $
            277,508,660
            
            
            72
            %
            $
            309,162,953
            
            
            80
            %**Delinquent**
            
            
            31
                - 60 days
            
            
            29,203,954
            
            
            8
            %
            
            15,606,343
            
            
            4
            %61
                - 90 days
            
            
            8,504,760
            
            
            2
            %
            
            7,192,915
            
            
            2
            %90+
                days
            
            
            23,073,068
            
            
            6
            %
            
            6,328,231
            
            
            2
            %U**Bankruptcy**U
            
            
            0
                - 30 days
            
            
            859,676
            
            
            -
            
            
            1,697,063
            
            
            -**Delinquent**
            
            
            31
                - 60 days
            
            
            341,989
            
            
            -
            
            
            101,250
            
            
            -61
                - 90 days
            
            
            279,669
            
            
            -
            
            
            66,490
            
            
            -90+
                days
            
            
            1,842,298
            
            
            -
            
            
            1,458,829
            
            
            -U**Foreclosure*******U
            
            
            0
                - 30 days
            
            
            -
            
            
            -
            
            
            2,659,754
            
            
            1
            %**Delinquent**
            
            
            31
                - 60 days
            
            
            606,737
            
            
            -
            
            
            1,113,952
            
            
            -61
                - 90 days
            
            
            669,889
            
            
            -
            
            
            638,318
            
            
            -90+
                days
            
            
            44,476,962
            
            
            12
            %
            
            41,341,564
            
            
            11
            %**Total**
            
            $
            387,367,662
            
            
            100
            %
            $
            387,367,662
            
            
            100
            %**Total
                loans**
            
            
            **0
                - 30 days**
            
            $
            278,368,336
            
            
            72
            %
            $
            313,519,770
            
            
            81
            %


__________________


*
            $45.8
                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.





**Other
      Real Estate Owned**




The
      following table sets forth our real estate owned, or OREO portfolio, and OREO
      sales during the three and nine months ended September 30, 2006 and September
      30, 2005:




**Three
                Months Ended September 30,**
            
            **Nine
                Months Ended September 30,****2006**
            
            **2005**
            
            **2006**
            
            **2005**Other
                real estate owned
            
            $
            22,717,436
            
            $
            16,576,369
            
            $
            22,717,436
            
            $
            16,576,369OREO
                as a percentage of total assets
            
            
            1.45
            %
            
            1.44
            %
            
            1.45
            %
            
            1.44
            %OREO
                sold
            
            $
            6,096,869
            
            $
            8,571,344
            
            $
            21,927,070
            
            $
            24,458,300Gain
                on sale
            
            $
            70,056
            
            $
            535,308
            
            $
            1,312,339
            
            $
            1,191,691





28


**Results
      of Operations**




***Three
      Months Ended September 30, 2006 Compared to Three Months Ended September 30,
      2005***




***Overview.*** The
      Company had a net loss of $564,000 for the third quarter of 2006, compared
      with
      net income of $1.7 million for the third quarter of 2005, a decrease of 134%.
      Revenues increased by 38% to $42.5 million for the three months ended September
      30, 2006, from $30.9 million for the three months ended September 30, 2005.
      The
      Company had a loss per common share for the three months ended September 30,
      2006 of $0.07 both on a diluted and basic basis, compared to earnings per share
      of $0.22 on a diluted basis and $0.23 on a basic basis for the three months
      ended September 30, 2005. During the third quarter of 2006, we acquired S&D
      loans with an aggregate face amount of $215.0 million and we originated $91.7
      million of non-prime loans. We increased the size of our total portfolio of
      net
      notes receivable, loans held for sale, loans held for investment and OREO at
      September 30, 2006 to $1.47 billion from $1.25 billion at the end of 2005.
      Correspondingly, our total debt outstanding grew to $1.50 billion at September
      30, 2006 from $1.26 billion at December 31, 2005, and from $1.09 billion at
      September 30, 2005. As a result of the increase of our total debt, and the
      impact of the rise in short-term interest rates since mid-2005 on our
      interest-sensitive borrowings, interest expense (inclusive of amortization
      of
      deferred financing costs and success fees) increased by $11.5 million, or 59%,
      during the third quarter of 2006 compared with the same period in 2005. Our
      average cost of funds during the three months ended September 30, 2006 increased
      to 8.13% from 6.86% during the three months ended September 30, 2005. At
      September 30, 2006, the weighted average interest rate of borrowed funds was
      8.10%. Collection, general and administrative expenses increased $3.5 million,
      or 52%, to $10.4 million during the three months ended September 30, 2006,
      from
      $6.9 million for the same period in 2005. The increase in collection, general
      and administrative expenses reflected for the most part the growth of the
      Company during the past twelve months, as total assets increased 36% from
      September 30, 2005. The provision for loan losses increased $629,000 to $1.7
      million in the three months ended September 30, 2006, principally due to higher
      than expected default rates in certain pools of loans purchased in mid-2004.
      Gains on loan sales increased by $570,000 to $1.4 million in the three months
      ended September 30, 2006, due to an increase in the aggregate volume of loans
      sold. Stockholders’ equity increased 3% to $49.0 million at September 30, 2006
      from $47.6 million at December 31, 2005. Stockholders’ equity was $49.3 million
      at June 30, 2006.




***Revenues.*** Revenues
      increased by $11.6 million, or 38%, to $42.5 million during the third quarter
      of
      2006, from $30.9 million during the same period in 2005. 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 $11.3 million or 46%, to $35.9 million during the three
      months ended September 30, 2006 from $24.6 million during the three months
      ended
      September 30, 2005. The increase in interest income reflected the significant
      increase in the portfolio of gross notes receivable and loans held for
      investment, partially offset by an increase in non-accrual loans held for
      investment, during the three months ended September 30, 2006 compared to the
      three months ended September 30, 2005.




Purchase
      discount earned decreased by $486,000, or 15%, to $2.7 million during the third
      quarter of 2006 from $3.1 million during the third quarter of 2005. This
      decrease resulted primarily from the increase in the average purchase price
      of
      portfolios relative to unpaid principal at acquisition of portfolios purchased
      during the second half of 2005 and the first nine months of 2006, which resulted
      in less purchase discount available for accretion of discount compared with
      portfolios purchased in prior years, coupled with a lower balance of purchase
      discount available for accretion from pre-2005 acquisitions. We received $66.5
      million of principal payments from notes receivable during the three months
      ended September 30, 2006 compared with $70.8 million of principal payments
      during the same period in 2005.




29


Gain
      on
      sale of notes receivable decreased by $550,000, or 85%, to $95,000 for the
      three
      months ended September 30, 2006 from $645,000 for the three months ended
      September 30, 2005. The Company sold a total of $3.8 million in performing
      notes
      receivable during the three months ended September 30, 2006, as compared to
      a
      total of $6.2 million of performing notes receivable during the three months
      ended September 30, 2005.




Gain
      on
      sale of originated loans increased by $1.1 million, or 487%, to $1.3 million
      during the three months ended September 30, 2006, from $230,000 during the
      three
      months ended September 30, 2005. The Company sold $51.5 million of originated
      loans during the three months ended September 30, 2006, compared with $14.3
      million of loans during the three months ended September 30, 2005. The average
      gain on loans sold increased from 1.61% during the third quarter of 2005 to
      2.62% during the third quarter of 2006. In the third quarter of 2006, the
      Company began a program to sell a substantial portion of newly originated
      Liberty Loans on a whole loan, servicing-released basis.




Gain
      on
      sale of OREO decreased by $465,000, or 87%, to $70,000 during the three months
      ended September 30, 2006, from $535,000 during the three months ended September
      30, 2005. We sold 106 OREO properties with an aggregate carrying value of $6.1
      million during the third quarter of 2006, as compared to 125 OREO properties
      in
      the aggregate amount of $8.6 million during the third quarter of
      2005.




Prepayment
      penalties and other income (principally late charges and other servicing fees)
      increased by $682,000, or 39%, to $2.4 million during the three months ended
      September 30, 2006 from $1.8 million during the corresponding period last year.
      This increase was primarily due to an increase in prepayment penalties received
      as a result of accelerated loan pay offs, principally of originated loans
      (Liberty Loans) during the three months ended September 30, 2006, as compared
      with the corresponding period in 2005. This was primarily attributable to the
      increased size of both our portfolio of purchased loans and loans held for
      investment, combined with an increase in prepayments of loans held for
      investment (Liberty Loans). Increased late charges resulting primarily from
      the
      growth in the size of our loan portfolios also contributed to the
      increase.




***Operating
      Expenses.*** Operating expenses increased by $15.6 million, or 56%, to $43.5 million during
      the third quarter of 2006 from $27.8 million during the same period in 2005.
      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 $11.2 million, or 61%, to $29.5 million during the three
      months ended September 30, 2006, from $18.3 million during the three months
      ended September 30, 2005. This increase was the result of the increase in total
      debt, which was $1.50 billion as of September 30, 2006 as compared with $1.09
      billion as of September 30, 2005, reflecting additional borrowings to fund
      the
      growth in total assets during this period. In addition, our average cost of
      funds during the three months ended September 30, 2006 increased to 8.13% from
      6.86% during the three months ended September 30, 2005, reflecting the continued
      rise in short-term interest rates and its effect on our interest-rate sensitive
      borrowings. Included in interest expense in the third quarter of 2006 was the
      cost of interest rate caps purchased at the end of August 2006, which accounted
      for approximately $103,000 of the increase.




Collection,
      general and administrative expenses increased by $3.5 million, or 52%, to $10.4
      million during the three months ended September 30, 2006, from $6.9 million
      during the corresponding period in 2005, principally reflecting the growth
      of
      the Company and the increase in total assets, particularly the volume of
      acquisitions and loan originations and an approximately 38% increase in the
      number of loans serviced. Collection, general and administrative expenses as
      a
      percentage of average assets increased from 2.50% during the three months ended
      September 30, 2005 to 2.75% during the three months ended September 30, 2006.
      Salaries and employee benefits expenses increased by $1.6 million, or 65%,
      reflecting an increase in the number of employees, incentive awards, restricted
      stock and stock option expenses incurred during the third quarter of 2006.
      We
      ended the third quarter of 2006 with 232 employees as compared to 206 at the
      end
      of the third quarter of 2005. The cost of outside services, such as appraisals
      and title searches, incurred in servicing delinquent loans increased by
      $350,000, or 194%, to $530,000 during the three months ended September 30,
      2006
      compared to $181,000 for the three months ended September 30, 2005 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 $451,000, or 43%, to $1.5 million from
      $1.0 million during the same period last year. Professional fees increased
      by
      $345,000, or 72%, to $821,000 from $476,000 due to increased audit, tax,
      consulting and recruitment fees. All other general and administrative expenses,
      including loan portfolio acquisition costs, increased by $798,000, or 29%,
      to
      $3.5 million from $2.7 million during the three months ended September 30,
      2005
      due to an increase in portfolios purchased and considered for purchase compared
      to the same period last year.




30


The
      provision for loan losses increased by $629,000, or 58%, to $1.7 million during
      the three months ended September 30, 2006, from $1.1 million during the three
      months ended September 30, 2005. This increase was primarily due to higher
      than
      expected default rates experienced in certain pools of loans purchased in
      mid-2004.




Amortization
      of deferred financing costs increased by $318,000 or 26%, to $1.6 million during
      the third quarter of 2006 from $1.2 million during the third quarter of 2005.
      This increase resulted primarily from the growth in debt to fund the expansion
      of the portfolio of loans acquired and originated, and principally the increased
      pace of Liberty Loan portfolio prepayments during the third quarter of 2006
      that
      caused a corresponding increase in the pay down of senior debt.




Depreciation
      expenses decreased by $79,000, or 22%, to $287,000 in the third quarter of
      2006.
      During the same period last year, the Company wrote off certain leasehold
      improvements related to our prior corporate office location that we
      vacated.




Our
      pre-tax income decreased by $4.0 million, or 133%, to a loss of $995,000 during
      the three months ended September 30, 2006, from income of $3.0 million during
      the three months ended September 30, 2005 for the reasons set forth
      above.




During
      the three months ended September 30, 2006, the Company had a tax benefit of
      $431,000 as compared to a tax provision of $1.4 million during the three months
      ended September 30, 2005. Due to the loss incurred during the third quarter
      of
      2006, there was no tax provision compared with a 45% effective tax rate for
      the
      three months ended September 30, 2005.




***Nine
      Months Ended September 30, 2006 Compared to Nine Months Ended September 30,
      2005***




***Overview.*** The
      Company had a net loss of $167,000 for the first nine months of 2006, compared
      with net income of $6.4 million for the first nine months of 2005, a decrease
      of
      103%. Revenues increased by 38% to $121.6 million for the nine months ended
      September 30, 2006, from $88.1 million for the nine months ended September
      30,
      2005. Loss per common share for the nine months ended September 30, 2006 was
      $0.02 both on a diluted and a basic basis, compared to earnings per common
      share
      of $0.91 and $1.01 for the nine months ended September 30, 2005, respectively.
      During the first nine months of 2006, we acquired S&D loans with an
      aggregate face amount of $452.3 million and we originated $296.1 million of
      non-prime loans. We increased the size of our total portfolio of net notes
      receivable, loans held for sale, loans held for investment and OREO at September
      30, 2006 to $1.47 billion from $1.25 billion at the end of 2005, and from $1.06
      billion at September 30, 2005. Correspondingly, our total debt outstanding
      grew
      to $1.50 billion at September 30, 2006 from $1.26 billion at December 31,
      2005, and from $1.09 billion at September 30, 2005. As a result of the increase
      of our total debt, and the impact of approximately a 400 basis point rise in
      short-term interest rates since mid-2004 on our interest-sensitive borrowings,
      interest expense (inclusive of amortization of deferred financing costs and
      success fees) increased $34.8 million, or 69%, to $85.5 million, during the
      first nine months of 2006, compared with the same period in 2005. Our average
      cost of funds during the nine months ended September 30, 2006 increased to
      7.85%
      from 6.39% during the nine months ended September 30, 2005. At September 30,
      2006, the weighted average interest rate of borrowed funds was 8.10%.
      Collection, general and administrative expenses increased $7.3 million, or
      34%,
      to $28.8 million, during the nine months ended September 30, 2006 from $21.5
      million for the same period in 2005. The increase in collection, general and
      administrative expenses reflected for the most part the growth of the Company
      during the past twelve months as total assets increased 36% from September
      30,
      2005. The provision for loan losses increased $3.4 million to $6.7 million
      in
      the nine months ended September 30, 2006, principally due to higher default
      rates experienced in certain pools of loans purchased in mid-2004. Stockholders’
equity increased 3% to $49.0 million at September 30, 2006 from $47.6 million
      at
      December 31, 2005.




31


***Revenues.*** Revenues
      increased by $33.5 million, or 38%, to $121.6 million during the first nine
      months of 2006, from $88.1 million during the same period in 2005. 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 $33.2 million or 46%, to $104.6 million during the nine
      months ended September 30, 2006 from $71.4 million during the nine months ended
      September 30, 2005. The increase in interest income reflected the significant
      increase in the portfolio of gross notes receivable and loans held for
      investment, partially offset by an increase in loans held for investment that
      were on non-accrual, during the nine months ended September 30, 2006 compared
      to
      the nine months ended September 30, 2005.




Purchase
      discount earned decreased by $1.4 million, or 17%, to $6.9 million during the
      first nine months of 2006 from $8.3 million during the first nine months of
      2005. This decrease resulted primarily from the increase in the purchase price
      of portfolios relative to unpaid principal at acquisition of portfolios
      purchased during 2005 and 2006, particularly in the second half of 2005, which
      resulted in less purchase discount available for accretion of discount compared
      with portfolios purchased in prior years, coupled with a lower balance of
      purchase discount available for accretion from pre-2005 acquisitions. We
      received $207.5 million of principal payments from notes receivable during
      the
      nine months ended September 30, 2006 compared with $202.8 million of principal
      payments during the same period in 2005.




Gain
      on
      sale of notes receivable decreased by $1.1 million, or 87%, to $164,000 for
      the
      nine months ended September 30, 2006 from $1.3 million for the nine months
      ended
      September 30, 2005. The Company sold $3.8 million in performing notes receivable
      and $161,000 of non-performing notes receivable during the nine months ended
      September 30, 2006, as compared to a total of $13.6 million of performing notes
      receivable and credit card receivables with a face amount of $23.5 million
      during the nine months ended September 30, 2005.




Gain
      on
      sale of originated loans increased by $550,000, or 48%, to $1.7 million during
      the nine months ended September 30, 2006, from $1.1 million during the nine
      months ended September 30, 2005. The Company sold $85.3 million of originated
      loans during the nine months ended September 30, 2006, of which $7.5 million
      were loans that were originated specifically for sale to investors, but, for
      various reasons, did not meet investor requirements and therefore were sold
      at a
      loss, compared with $50.9 million of loans sold during the nine months ended
      September 30, 2005. The average gain on loans sold decreased from 2.23% during
      the first nine months of 2005 to 1.98% during the first nine months of 2006
      due
      to the sale of $7.5 million of loans at a loss. Excluding the $7.5 million
      of
      loans sold referred to above, the average gain on loans sold was 2.27% for
      the
      first nine months of 2006.




32


Gain
      on
      sale of OREO increased by $121,000, or 10%, to $1.3 million during the nine
      months ended September 30, 2006, from $1.2 million during the nine months ended
      September 30, 2005. We sold 391 OREO properties with an aggregate carrying
      value
      of $21.9 million during the first nine months of 2006, as compared to 378 OREO
      properties in the aggregate amount of $24.5 million during the first nine months
      of 2005. The increase in the number of properties sold reflected the growth
      in
      our OREO inventory due to both an increase in foreclosures as our notes
      receivable portfolio grew and the purchase of loans during the past two years
      that were already in the foreclosure process.




Prepayment
      penalties and other income (principally late charges and other servicing fees)
      increased by $2.2 million, or 45%, to $7.0 million during the nine months ended
      September 30, 2006 from $4.8 million during the corresponding period last year.
      This increase was primarily due to an increase in prepayment penalties received,
      as a result of accelerated loan pay offs, principally from originated loans
      (Liberty Loans), during the nine months ended September 30, 2006, as compared
      with the corresponding period in 2005. This also was attributable to the
      increased size of both our portfolio of purchased loans and loans held for
      investment, combined with continued relatively low mortgage interest rates.
      Increased late charges resulting primarily from the growth in the size of our
      loan portfolios also contributed to the increase.




***Operating
      Expenses.*** Operating expenses increased by $45.6 million, or 60%, to $121.9 million during
      the first nine months of 2006 from $76.3 million during the same period in
      2005.
      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 $34.1 million, or 71%, to $81.9 million during the nine
      months ended September 30, 2006, from $47.8 million during the nine months
      ended
      September 30, 2005. This increase was the result of the increase in total debt,
      which was $1.50 billion as of September 30, 2006 as compared with $1.09 billion
      as of September 30, 2005, reflecting additional borrowings to fund the growth
      in
      total assets during this period. In addition, our average cost of funds during
      the nine months ended September 30, 2006 increased to 7.85% from 6.39% during
      the nine months ended September 30, 2005, reflecting the continued rise in
      short-term interest rates and its effect on our interest-rate sensitive
      borrowings.




Collection,
      general and administrative expenses increased by $7.3 million, or 34%, to $28.8
      million during the nine months ended September 30, 2006, from $21.5 million
      during the corresponding period in 2005. Collection, general and administrative
      expenses as a percentage of average assets decreased from 2.81% during the
      nine
      months ended September 30, 2005 to 2.66% during the nine months ended September
      30, 2006, while the Company’s total assets increased by 36% since September 30,
      2005. Salaries and employee benefits expenses increased by $4.7 million, or
      62%,
      reflecting an increase in the number of employees and stock option and
      restricted stock expenses for certain senior managers recognized in the first
      nine months of 2006. We ended the first nine months of 2006 with 232 employees
      as compared to 206 at the end of the first nine months of 2005. During the
      nine
      months ended September 30, 2006, the cost of stock option and restricted stock
      and related expenses for certain senior executives totaled $1.4 million,
      compared with $378,000 for the nine months ended September 30, 2005. Legal
      fees,
      principally relating to increased activity with respect to foreclosures,
      increased by $940,000, or 31%, to $4.0 million from $3.0 million during the
      same
      period last year. The cost of outside services, such as appraisals and title
      searches, incurred in servicing delinquent loans increased by $719,000, or
      163%,
      to $1.2 million from $440,000 during the nine months ended September 30, 2006
      compared to the nine months ended September 30, 2005 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.
      Professional fees increased by $560,000, or 32%, from $1.7 million during the
      first nine months of 2005 due to increased audit, tax, consulting and recruiting
      fees. Other general and administrative expenses, including loan portfolio
      acquisition costs, increased by $436,000, or 5%, to $9.2 million from $8.7
      million during the nine months ended September 30, 2005 principally due to
      the
      direct costs associated with portfolios purchased and portfolios considered
      for
      purchase compared to the same period last year.




33


The
      provision for loan losses increased by $3.4 million, or 102%, to $6.7 million
      during the nine months ended September 30, 2006, from $3.3 million during the
      nine months ended September 30, 2005. This increase was primarily due to a
      larger portfolio of notes receivable and higher than expected default rates
      experienced in certain pools of loans purchased in mid-2004.




Amortization
      of deferred financing costs increased by $650,000, or 22%, to $3.6 million
      during the first nine months of 2006 from $2.9 million during the first nine
      months of 2005. This increase resulted primarily from the growth in debt to
      fund
      the expansion of the portfolio of loans acquired and originated, and the
      increased pace of Liberty Loan portfolio prepayments during the first nine
      months of 2006 that caused a corresponding increase in the pay down of senior
      debt.




Depreciation
      expenses increased by $70,000, or 9%, to $850,000 in the first nine months
      of
      2006, principally due to leasehold improvements related to the Company’s new
      office facility in New Jersey and the addition and upgrading of computer
      hardware and software during 2005 and the nine months ended September 30,
      2006.




Our
      pre-tax income decreased by $12.1 million, or 102%, to a loss of $292,000 during
      the nine months ended September 30, 2006 from $11.8 million during the nine
      months ended September 30, 2005 for the reasons set forth above.




During
      the nine months ended September 30, 2006, the Company had a tax benefit of
      $126,000 due to the loss incurred as compared to a tax provision of $5.4 million
      during the nine months ended September 30, 2005. The effective tax rate for
      the
      nine months ended September 30, 2005 was 46%.




**Liquidity
      and Capital Resources**




***General***




During
      the three months ended September 30, 2006, we purchased 3,650 loans, consisting
      primarily of first and second mortgages, with an aggregate face value of $215.0
      million at an aggregate purchase price of $201.3 million, or 94% of face value.
      During the nine months ended September 30, 2006, we purchased 14,058 loans
      with
      an aggregate face value of $452.3 million at an aggregate purchase price of
      $417.3 million, or 92% of face value. All acquisitions acquired were funded
      through borrowings under our master credit facility.




During
      the three and nine months ended September 30, 2006, we originated $91.7 million
      and $296.1 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 after transfer to portfolio. 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 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.




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 from time to time and we sell
      loans that we originate specifically for sale into the secondary market on
      a
      regular basis. In addition to our regular sales of loans into the secondary
      market, in the third quarter of 2006, we sold $40.4 million of newly originated
      Liberty Loans to various investors for cash on a whole loan basis.




34


As
      a
      result of the growth of the loan portfolios and our balance sheet, management
      has begun 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 begun
      to
      seek additional term debt funding alternatives with banks and other financial
      institutions in order to expand our borrowing capabilities.




***Short-term
      Investments.*** The
      Company’s short-term investment portfolio includes U.S. treasury bills and
      investment-grade commercial paper. 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 September 30, 2006, the
      Company had short-term investments of $16.8 million, consisting principally
      of
      investment-grade commercial paper and U.S. treasury bills.




***Cost
      of Funds.*** As of
      September 30, 2006, we had total borrowings of $1.50 billion, of which $1.43
      billion was under our term loan facilities and an aggregate of $63.5 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 September 30, 2006, approximately $6.6 million of our term
      debt accrues interest at a rate of prime plus a margin of 0.50% to 1.75%, $927.0
      million accrues interest at the FHLB 30-day LIBOR advance rate plus 2.5%, $496.9
      million accrues interest at the FHLB 30-day LIBOR advance rate plus 3.0%,
      $377,000 accrues interest at the FHLB 30-day LIBOR advance rate plus 3.375%
      and
      $870,000 accrues interest at the FHLB 30-day LIBOR advance rate plus 3.875%.
      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 September 30,
      2006, compared with a rate of 6.75% at December 31, 2005. At September 30,
      2006,
      the weighted average interest rate on senior debt under our master credit
      facilities was 8.11%. The weighted average interest rate on senior debt at
      December 31, 2005 and September 30, 2005 was 7.28% and 6.98%,
      respectively.





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




Liquidity
      represents our ability to obtain cost effective 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.




At
      September 30, 2006, we had cash and cash equivalents of $5.1 million compared
      with $3.9 million at December 31, 2005. Restricted cash of $26.3 million and
      $17.0 million at September 30, 2006 and December 31, 2005, respectively, was
      restricted under our credit agreements and lockbox facility with our primary
      lead lending bank, Sky Bank. Restricted cash increased $9.3 million from
      December 31, 2005 due principally to an increase in cash collected in September,
      which was held in anticipation of a corresponding paydown of debt required
      on
      the fifth of the next month.




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.




35


Net
      cash
      provided by operating activities was $1.9 million as of September 30, 2006,
      compared with cash provided of $9.4 million during the nine months ended
      September 30, 2005. The decrease in cash provided by operating activities during
      the nine months ended September 30, 2006 was due primarily to a decline in
      the
      Company’s net income of $6.6 million, from net income of $6.4 million for the
      nine months ended September 30, 2005 to a net loss of $167,000 for the nine
      months ended September 30, 2006.




Net
      cash
      used in investing activities was $228.5 million in the nine months ended
      September 30, 2006, compared to $259.6 million of cash used in the nine months
      ended September 30, 2005. The decrease in cash used during the nine months
      ended
      September 30, 2006 was primarily due to increases in principal collections
      of
      notes receivable and loans held for investment of $123.8 million and an increase
      in the proceeds from sale of loans held for investment of $52.4 million, which
      was partially offset by an increase in both the purchase of notes receivable
      of
      $126.2 million and the origination of loans held for investment of $19.5
      million.




Net
      cash
      provided by financing activities decreased to approximately $227.8 million
      during the nine months ended September 30, 2006, from $252.8 million provided
      by
      financing activities during the nine months ended September 30, 2005. The
      decrease resulted primarily from increased repayments of outstanding notes
      payable and financing agreements of $154.0 million (the result of increased
      prepayments of both notes receivable and loans held for investment), which
      was
      partially offset by increases in the proceeds of notes payable and financing
      agreements of $140.4 million.




**Borrowings**




As
      of
      September 30, 2006, the Company owed an aggregate of $1.50 billion under several
      credit facilities with our lender. 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).




***Senior
      Debt Facility***




***General.*** ** On
      October 13, 2004, the Company, and its finance subsidiaries, entered into a
      Master Credit and Security Agreement with Sky Bank, an Ohio banking corporation,
      which we refer to as our lender. Under this master credit facility, we request
      loans to finance the purchase of residential mortgage loans or refinance
      existing outstanding loans. The facility does not include a commitment to
      additional lendings, which are therefore subject to our lender’s discretion as
      well as any regulatory limitations to which our lender is subject. The facility
      expires on October 13, 2006. This facility was extended to January 31,
      2007.




36


***Interest
      Rates and Fees.*** Interest
      on the 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 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





Upon
      each
      closing of a subsidiary loan after June 23, 2006, we are required to pay an
      origination fee equal to 0.50% of the amount of the subsidiary loan unless
      otherwise agreed to by our lender and our finance subsidiary. For loans funded
      between July 1, 2005 and June 23, 2006, the origination fee paid was 0.75%
      of
      the amount of the subsidiary loan, and for loans funded prior to July 1, 2005,
      the origination fee paid was 1% of the amount of the subsidiary loan unless
      otherwise agreed to by our lender and the subsidiary. Upon repayment of
      subsidiary loans, our lender is generally entitled to receive a fee (referred
      to
      as a success fee) equal to the lesser of (i) 0.50% or with respect to
      certain subsidiaries whose loans were originated before 1996, 1% of the original
      principal balance of the subsidiary loan or (ii) 50% of the remaining cash
      flows
      of the pledged mortgage loans related to such subsidiary loan as and when
      received by the relevant subsidiary after the repayment of the subsidiary loan.
      In connection with certain subsidiary loans, we and our lender have agreed
      to
      specified minimum fees and fee waivers.




Effective
      June 26, 2006, the success fee has been eliminated for all new subsidiary
      loans.




***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 facility contains affirmative, negative and financial covenants
      customary for financings of this type, including, among other things, a covenant
      that we and our subsidiaries together maintain a minimum net worth of at least
      $10 million. The facility contains events of default customary for facilities
      of
      this type (with customary grace and cure periods, as applicable). We believe
      that we are in compliance with such covenants as of September 30,
      2006.




***Security*** **.** ****** Our
      obligations under the master credit facility are secured by a first priority
      lien on loans acquired by us that are financed by proceeds of loans made to
      us
      under the facility. In addition, pursuant to a lockbox arrangement, our lender
      is entitled to receive all sums payable to us in respect of any of the
      collateral.




***Warehouse
      Facilities***




***Tribeca
      Warehouse*** **.** On
      October 18, 2005, our Tribeca subsidiary entered into a warehousing credit
      and
      security agreement with our lender, which replaced the facility as amended
      on
      April 7, 2004. The agreement provides for an increased commitment to $60 million
      effective October 18, 2005. In April 2006, our lender extended the maturity
      date
      of the warehousing credit and security agreement to April 30, 2007.




37


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
      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 warehouse facility, which
      is secured by substantially all of Tribeca’s personal property. As of September
      30, 2006, Tribeca had approximately $17.2 million available under this
      facility.




***Flow
      Warehouse*** **.** On
      August
      11, 2006, we entered into a new $40 million Flow Warehousing Credit and Security
      Agreement with our lenders to accumulate loans acquired by the Company’s Flow
      Acquisitions Group prior to consolidating such loans into term
      debt.




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
      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
      warehouse facility, which is secured by substantially all our personal property.
      As of September 30, 2006, we had approximately $22.5 million available under
      this facility.




***Tribeca
      Term Loans***




As
      of
      September 30, 2006, Tribeca, through its subsidiaries, had an aggregate of
      $373.2 million in outstanding term loans, which refinanced outstanding advances
      under the Tribeca warehouse facility. Each of the term loans is made pursuant
      and subject to the term loan and security between Tribeca and our lender and
      a
      term note. Interest on the loans is payable monthly at a floating rate equal
      to
      the highest Federal Home Loan Bank of Cincinnati 30-day advance rate published
      by Bloomberg under the symbol FHL5LBRI. The interest rate on Tribeca’s term
      loans is based on the same rate and margin matrix as loans made under the Master
      Credit Facility. In addition, upon the closing of each term loan, the applicable
      subsidiary-borrower pays an origination fee of approximately 0.50% of the amount
      of the loan, and pays certain other fees (referred to as success fees) at the
      termination of the applicable term loan. The unpaid balance of each term loan
      is
      amortized over a period of 20 years, but matures three years after the loan
      was
      made. Each term loan is subject to mandatory payment under certain
      circumstances. Each subsidiary-borrower is required to make monthly payments
      of
      the principal of its outstanding loan. Each term loan is secured by a lien
      on
      certain promissory notes and hypothecation agreements, as well as all monies,
      securities and other property held by, received by or in transit to our lender.
      The term loan agreements contain affirmative and negative covenants and events
      of default customary for financings of this type. We believe that we are in
      compliance with such covenants as of September 30, 2006.




On
      February 28, 2006, Tribeca and certain of its subsidiaries entered into a Master
      Credit and Security Agreement (the “Sky Loan”) with its lender Sky Bank,
      pursuant to which certain Tribeca subsidiaries may borrow funds to finance
      their
      acquisition of loans Tribeca previously financed under its warehouse line of
      credit with Sky and consolidate and refinance prior term loans made by Sky
      to
      such subsidiaries. The facility does not include a commitment for a specified
      number of lendings, which are therefore subject to Sky’s discretion, as well as
      any regulatory limitations to which Sky is subject. The facility terminates
      on
      February 28, 2008. Interest on the loans under the facility is payable monthly
      at a floating rate equal to the Federal Home Loan Bank of Cincinnati 30-day
      advance rate (“FHLBC Rate”) plus an applicable margin as follows:




38




**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





In
      addition, upon each closing of a subsidiary loan, Sky is entitled to receive
      an
      origination fee equal to 0.50% of the amount of such loan. Upon repayment of
      subsidiary loans, Sky is generally entitled to receive a fee (referred to as
      a
      success fee) equal to the lesser of (a) 50% of the remaining payments which
      are
      subsequently paid under the remaining pledged mortgage loans related to a
      satisfied subsidiary loan or (b) 0.50% of the original principal amount of
      the
      relevant subsidiary loan.




As
      of
      June 26, 2006, this success fee has been eliminated on all future
      fundings.




The
      unpaid principal balance of each loan will be amortized over a period of 20
      years, but matures three years after the date the loan was made. Tribeca’s
      subsidiaries are required to make monthly amortization payments and payments
      of
      interest on each of their outstanding loans.




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 $3,500,000 and rolling four-quarter pre-tax net income of $750,000. The
      facility contains events of default customary for facilities of this type.
      We
      believe that we are in compliance with such covenants as of September 30,
      2006.




Tribeca’s
      and the subsidiary borrowers’ obligations under the facility are secured by a
      first priority lien on loans acquired by Tribeca or such subsidiary that are
      financed or refinanced by proceeds of loans made to Tribeca or subsidiary
      borrowers under the facility. The collateral securing each loan
      cross-collateralizes all other loans made under the facility. In addition,
      pursuant to a lockbox arrangement, Sky is entitled to receive substantially
      all
      sums payable to Tribeca and any subsidiary borrower in respect of any of the
      collateral.




On
      February 28, 2006, upon execution and delivery of the Sky Loan, various
      outstanding term loan and security agreements between certain of Tribeca’s
      subsidiaries and Sky with respect to approximately $379,000,000 in indebtedness
      terminated and the loans outstanding thereunder are now under the Sky
      Loan.




On
      March
      24, 2006, Tribeca and one of Tribeca’s subsidiaries (the “Tribeca Subsidiary
      Borrower”) entered into a $100,000,000 Master Credit and Security Agreement (the
“BOS Loan”) with BOS (USA) Inc., an affiliate of Bank of Scotland. On March 26,
      2006, $98.2 million of proceeds of the BOS Loan were used to consolidate and
      refinance prior term loans made to certain Tribeca subsidiaries.




39


The
      outstanding balance of the BOS Loan was $80.1 million at September 30, 2006.
      Interest on the BOS Loan is payable monthly at a floating rate equal to the
      FHLBC 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





Upon
      repayment of the BOS Loan, BOS is entitled to receive a fee equal to the lesser
      of (a) 50% of the remaining payments which are subsequently paid under the
      remaining pledged mortgage loans related to the BOS Loan or (b) 0.50% of the
      original principal amount of the BOS Loan.




The
      unpaid principal balance of the BOS Loan will be amortized over a period of
      20
      years, but matures on March 24, 2009. The Tribeca Subsidiary Borrower is
      required to make monthly amortization payments and payments of interest on
      the
      BOS Loan.




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 $3,500,000 and rolling four-quarter pre-tax net income of $750,000. The
      facility contains events of default customary for facilities of this
      type.




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 Sky Loan 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 Sky Loan are
      cross-collateralized.




***August
      2, 2006 Modifications to Sky Bank Financing
      Arrangements***




On
      August
      2, 2006, the Company received a letter from its lead lending bank (the “August
      Modification Letter”) modifying the Master Credit Facilities. Pursuant to the
      August Modification Letter, the interest rate to be charged by Sky Bank for
      all
      debt originated under the Master Credit Facilities before July 1, 2005 shall
      be
      lowered initially by at least 25 basis points no later than October 1, 2006
      and
      then by an additional 25 basis points no later than January 1, 2007. These
      rate
      reductions will occur according to the following schedule based on actions
      taken
      by the Federal Reserve, but will not in any event exceed a total of 50 basis
      points.




**Federal
                Reserve Action**
            
            **Change
                to Interest Rate Margin**
              **Charged
                by Sky Bank**If
                the Federal Reserve raises the federal funds rate by 25 basis points
                at its meeting on or about August 8, 2006
            
            Rate
                reduction of 25 basis points effective September 1,
                2006If
                the Federal Reserve raises the federal funds rate by 50 basis points
                at its meeting on or about August 8, 2006
            
            Rate
                reduction of 50 basis points effective September 1,
                2006If
                the Federal Reserve keeps the federal funds rate at its current standard
                or decreases such rate at its meeting on or about August 8,
                2006
            
            Rate
                reduction of 25 basis points effective October 1, 2006If
                the Federal Reserve raises the federal funds rate by 25 basis points
                or more at its meeting on or about September 20, 2006
            
            Rate
                reduction of 25 basis points effective October 1, 2006If
                the Federal Reserve keeps the federal funds rate at its current standard
                or decreases such rate at its meeting on or about September 20,
                2006
            
            Rate
                reduction of 25 basis points effective January 1,
                2007





40


The
      total
      amount of debt subject to the August Modification Letter, including participants
      debt, was approximately $496.9 million at September 30, 2006, all of which
      benefited from a 25 basis point reduction on October 1, 2006. The effective
      date
      of the additional 25 basis point reduction on approximately $51.3 million of
      the
      participant’s pre-July 1, 2005 debt is currently being negotiated.




***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, and 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 will be 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 September 30, 2006:




**Interest
                Rate Caps**
            
            **Notional
                Amount**
            
            **Expiration
                Date**
            
            **Premium
                Paid**
            
            **Fair
                Value**Cap
                1
            
            $
            300,000,000
            
            
            August
                31, 2007
            
            $
            101,000
            
            $
            44,051Cap
                2
            
            
            500,000,000
            
            
            August
                31, 2007
            
            
            60,000
            
            
            13,576Total
            
            $
            800,000,000
            
            
            
            
            $
            161,000
            
            $
            57,627





41


**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 $1.50 billion of borrowings under term loan
      and warehouse facilities outstanding at September 30, 2006, a 1% instantaneous
      and sustained increase in both FHLB and prime rates could increase quarterly
      interest expense by as much as approximately $3.7 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 September
      30, 2006 to August 30, 2007, the offsetting benefit of the Company’s interest
      rate caps could reduce the quarterly impact of a 1% instantaneous and sustained
      increase in both FHLB and prime rates by approximately $840,000, pre-tax. See
      Interest Rate Caps - “Liquidity and Capital Resources.”




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.




42


**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.




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.




**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 on such evaluation and as a result of the material
      weaknesses identified in the Company’s Annual Report on Form 10-K, the Company’s
      Chief Executive Officer and Chief Financial Officer have concluded that, as
      of
      September 30, 2006, the Company’s disclosure controls and procedures are not
      effective for gathering, analyzing and disclosing the information that the
      Company is required to disclose in reports filed under the Securities Act of
      1934.




**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 September 30, 2006 that have materially affected,
      or
      are reasonably likely to have a material effect on internal control over
      financial reporting.




The
      Company identified material weaknesses as defined by the Public Company
      Accounting Oversight Board (United States) with respect to the accounting and
      reporting matters discussed in Note 2 of the Consolidated Financial Statements
      included in the 2005 Annual Report filed on Form 10-K. Under the direction
      of
      the Company’s Chief Financial Officer, the Company is continuing to review its
      related systems of internal controls over financial reporting and is remediating
      its material weaknesses that have been previously disclosed in Item 9A of the
      2005 Annual Report filed on Form 10-K. Management continues to assess its
      controls over accounting policy and financial reporting matters, and has made
      considerable progress in implementing appropriate improvements.




43




**PART
      II**


**OTHER
      INFORMATION**








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




We
      are
      involved in routine litigation matters incidental to our business related to
      the
      enforcement of our rights under mortgage loans we hold, none of which is
      individually material. In addition, because we originate and service mortgage
      loans throughout the country, we must comply with various state and federal
      lending laws 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 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, 2005.
      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.




·
            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.




·
            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.




44


·
            The
                residential mortgage origination business is a cyclical industry,
                has
                recently been at its highest levels ever and may decline, 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 are secured
                by
                property in New York and New Jersey, and our operations could be
                harmed by
                economic downturns or other adverse events in these
                states.




·
            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 non-prime
                residential mortgage loans.




·
            We
                are subject to losses due to fraudulent and negligent acts on the
                part of
                loan applicants, mortgage brokers, 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.




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




·
            If
                we were to lose our Chairman, our operations could be adversely
                affected.




·
            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.




45


**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.




·
            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, 2005.


46


**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**




None.




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




None.




47


**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, 2005.10.30*
            Employment
                Agreement dated as of February 1, 2006 between Franklin Credit Management
                Corporation and William Sullivan.10.31*
            Flow
                Warehousing Credit and Security Agreement dated August 10, 2006 between
                Franklin Credit Management Corporation and Sky Bank.10.32*
            Rate
                Cap Transaction Agreement dated August 29, 2006 between LaSalle Bank
                National Association and Franklin Credit Management
                Corporation.10.33*
            Interest
                Rate Cap Transaction Agreement dated September 11, 2006 between HBOS
                Treasury Services and Franklin Credit Management Corporation.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.




48


**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.





U November
      14, 2006





FRANKLIN
                CREDIT MANAGEMENTCORPORATIONBy:U/s/
                ALEXANDER GORDON JARDINUAlexander Gordon JardinPresident and Chief 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 and Director
            UNovember
                14, 2006UAlexander
                Gordon Jardin(Principal
                Executive Officer)U/s/
                PAUL D. COLASONOU
            Executive
                Vice PresidentU
            November
                14, 2006Paul
                D. Colasono
            and
                Chief Financial Officer
            U(Principal
                Financial Officer)





49