10-Q/A 1 scndq.txt AMENDMENT NO. 1 U.S. Securities and Exchange Commission Washington, D.C. 20549 Form 10-QSB/A Amendment No. 1 (Mark One) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal period ended October 31, 2005 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT For the transition period from __________________ to ______________ Commission file number: 1-14219 Transnational Financial Network, Inc ------------------------------------------------------------------------------- (Exact name of small business issuer as specified in its charter) California 94-2964195 (State or other jurisdiction of incorporation or organization) (IRS Employer Identification No.) 401 Taraval Street, San Francisco, CA 94116 ------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (415) 242-7800 ------------------------------------------------------------------------------- (Registrant's telephone number) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ____ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (Check one): Large accelerated filer Accelerated filer Non-accelerated filer X Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes _X No ____ APPLICABLE ONLY TO CORPORATE ISSUERS State the number of shares outstanding of each of the issuer's classes of common equity as of December 9, 2005. 6,791,360 TRANSNATIONAL FINANCIAL NETWORK, INC. October 31, 2005 UNAUDITED Explanatory Paragraph This Amendment No. 1 to our Quarterly Report on Form 10-QSB for the quarter ended October 31, 2005 initially filed with the Securities and Exchange Commission on December 15, 2005 is being filed to reflect restatements of Transnational Financial Network's (TFN) Condensed Balance Sheets as of October 31, 2005 and April 30, 2005, the related Condensed Statements of Operations for the three months and six months ended October 31, 2005 and 2004, and the related Condensed Statements of Cash Flows for the six months ended October 31, 2005 and 2004. These restatements reflect the effects of adjustments for the accounting related to various matters detailed in Note 9 to the Condensed Financial Statements. These restatements reflect adjustments for transactions related to the proper accounting for mortgage-related financial instruments under FAS 133. Except with respect to these matters, the Financial Statements in this Form 10-QSB/A do not reflect any events that have occurred after the Form 10-QSB for the quarter ended October 31, 2005 was filed. TABLE OF CONTENTS PART I. FINANCIAL INFORMATION Page Item 1. Financial Statements Condensed Balance Sheets as of October 31, 2005 (Unaudited) and April 30, 2005 F-2 Condensed Statements of Operations for the six months ended October 31, 2005 and 2004 F-3 Condensed Statements of Cash Flow for the six months ended October 31, 2005 and 2004 F-4 Notes to the Condensed Financial Statements F-5 - F-9 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations MD - 1 - MD - 17 Item 3. Controls and Procedures O-1 Part II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8K O-1 Signatures O-2

F-1 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS TRANSNATIONAL FINANCIAL NETWORK, INC. CONDENSED BALANCE SHEETS As of October 31, 2005 and April 30, 2005 October 31, 2005 April 30, 2005 ---------------- -------------- (As Restated) (As Restated) (unaudited) ASSETS Cash and cash equivalents $ 3,604,077 $ 3,058,140 Restricted cash 1,025,000 1,020,000 Short-term mortgage related receivables, net of allowance for early loan payoff penalties of $20,406 and $18,313 respectively 868,505 639,550 Mortgage loans held for sale 890,130 1,721,450 - Goodwill 1,257,789 1,257,789 Property and equipment, net of accumulated depreciation of $940,794 and $904,678, respectively 107,989 94,999 Fair value of derivative financial instruments 52,467 14,905 Other assets 316,384 313,234 ----------- ----------- TOTAL ASSETS $ 8,122,341 $ 8,120,067 =========== ========= LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Accrued interest payable $ 76,097 $ 62,184 Accounts payable and other liabilities 585,564 682,411 Income taxes payable 336 336 Fair value of derivative financial instruments 51,273 56,136 Subordinated debt 3,737,700 3,737,700 ----------- ----------- TOTAL LIABILITIES 4,450,970 4,538,767 ----------- ----------- STOCKHOLDERS' EQUITY Preferred stock, no par value: 2,000,000 shares authorized; no shares issued or outstanding - - Common stock, no par value: 20,000,000 shares authorized; 6,791,360 shares issued and outstanding at October 31, 2005 and April 30, 2005 respectively. 13,559,038 13,559,038 Accumulated deficit (9,887,667) (9,977,738) ----------- ---------- TOTAL STOCKHOLDERS' EQUITY 3,671,371 3,581,300 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 8,122,341 $ 8,120,067 ========= =========

F-2 See accompanying notes to these financial statements. TRANSNATIONAL FINANCIAL NETWORK, INC. CONDENSED STATEMENTS OF OPERATIONS For the Periods Ending October 31, 2005 and 2004 (Unaudited) For the 3 Months Ended 10-31 For the 6 Months Ended 10-31 ---------------------------- ---------------------------- 2005 2004 % Chg 2005 2004 % chg ---- ---- ----- ---- ---- ----- As Restated As Restated As Restated As Restated Revenue: Net Gain on Sale of Loans $1,394,892 $1,355,058 2.9% $3,291,919 $2,458,199 33.9% Production Income 1,524,186 1,074,001 41.9% 3,019,037 2,432,722 24.1% Other Income 49,721 20,899 137.9% 70,004 50,424 38.8% ------ ------- ------ ------- Total Revenue 2,968,799 2,449,958 21.2% 6,380,960 4,941,345 29.1% Direct Expenses: Commissions & Production Incentives 921,874 657,892 40.1% 1,965,627 1,484,771 32.4% Production Expenses 208,319 152,140 36.9% 417,099 306,596 36.0% Early Loan Payoff Penalties - 15,000 nm 15,000 18,500 -18.9% Pair-Off Fees 1,500 nm 3,000 nm ------ ------ Total Direct Expenses 1,130,193 826,532 36.7% 2,397,726 1,812,867 32.3% Interest Income (Expenses): Interest Income from loans in warehouse 353,418 254,586 38.8% 821,788 492,471 66.9% Interest Expense on loans in warehouse (309,237) (206,974) 49.4% (714,978) (371,901) 92.2% Warehouse transaction fees (31,700) nm (77,174) nm --------- Net warehouse interest income (expense) 12,481 47,612 -73.8% 29,636 120,570 -75.4% Interest Expense - Subordinated Debt (87,081) (39,890) 118.3% (174,162) (99,205) 75.5% Net Interest Income (Expense) (74,600) 7,722 nm (144,526) 21,365 nm Gross Profit on Mortgage Activities 1,764,006 1,631,148 8.2% 3,838,708 3,149,843 21.9% Indirect Expenses: Salaries & Benefits 1,221,904 895,453 36.5% 2,340,700 1,846,062 26.8% General & Administrative 520,847 550,879 -5.5% 1,107,125 1,110,340 -0.3% Occupancy 175,502 174,406 0.6% 350,143 348,215 0.6% Depreciation and Amortization 17,960 17,244 4.2% 36,116 36,100 0.0% Total Indirect Expenses 1,936,213 1,637,982 18.2% 3,834,084 3,340,717 14.8% Other Interest Income (Expense) 24,649 6,275 nm 43,022 5,887 nm Change in fair value of financial instruments (4,754) 30,115 nm 42,425 58,609 -27.6% ------ ------ ------ ------ ------ Total Other Income (Expense) 19,895 36,390 -45.3% 85,447 64,496 32.5% Net Operating Income (Loss) $(152,312) $29,556 nm $90,071 $(126,378) nm Basic net income (loss) per share $(0.02) $0.00 $0.01 ($0.02) Fully diluted income (loss) per share $(0.02) $0.00 $0.01 ($0.02) Weighted-average shares outstanding Basic 6,791,360 6,794,787 6,791,360 6,794,787 Diluted 6,791,360 6,806,234 6,795,905 6,794,787

F-3 See accompanying notes to these financial statements. TRANSNATIONAL FINANCIAL NETWORK, INC. CONDENSED STATEMENTS OF CASH FLOWS For the Six Months Ended October 31, 2005 and 2004 (Unaudited) 2005 2004 ------------------ ----------------- (As Restated) (As Restated) Cash flows from operating activities: Net income (loss) $ 90,071 $ (126,378) Adjustments to reconcile net (loss) income to net cash provided (used) by operating activities: Depreciation & amortization 36,116 36,100 Provision for early loan payoffs 18,500 Changes in Restricted Cash Requirement (5,000) 900,000 Fair Value of Financial Instruments (42,425) (58,609) Net effect of changes in assets and liabilities: Other assets (3,150) 63,399 Accrued interest payable 13,913 (6,672) Accounts payable and other liabilities (96,847) (129,345) - Net effect of changes in mortgage lending activities: Short-term mortgage related receivable (228,955) (119,992) Mortgage loans originated for sale (230,456,551) (192,323,930) Proceeds from sales of mortgage loans 231,287,871 191,308,646 --------------- --------------- Net cash provided (used) by operating activities: 595,043 (438,281) --------------- ---------------- Cash flows from investing activities: Purchases of property and equipment (49,106) (8,069) Proceeds from Securities Held to Maturity 915,234 --------------- --------------- Net cash (used) provided by investing activities: (49,106) 907,165 --------------- --------------- Cash flows from financing activities: Borrowing on Subordinated debt 144,000 Repayments on Subordinated debt (400,000) Warehouse Payable - Net of Borrowings 159,263 Payment on Settlement payable - (564,603) Payment on Capital Leases obligations - (12,245) Repurchase Common Stock - (37,198) --------------- --------------- Net cash (used) by financing activities: - (710,783) --------------- --------------- Net increase (decrease) in unrestricted cash and cash equivalents 545,937 (241,899) Unrestricted cash and cash equivalents, beginning of period 3,058,140 1,585,034 --------------- --------------- Unrestricted cash and cash equivalents, end of period $ 3,604,077 $ 1,343,135 =============== =============== Interest paid $ 813,044 $ 490,984 Income taxes paid $ -0-- $ 20,918

F-4 See accompanying notes to these financial statements. Note 1 - Description of Operations and Summary of Significant Accounting Policies The accompanying financial statements of Transnational Financial Network, Inc. (the "Company") as of and for the six-month periods ended October 31, 2005 and 2004 are unaudited and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and financial disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. Accordingly, these unaudited condensed financial statements should be read in conjunction with the audited financial statements included in the Company's Form 10-KSB for the year ended April 30, 2005, in addition to our most recently filed Form 8-K relating to non-reliance on previous financial statements as well as Note 9 - Restatements. These unaudited statements include all adjustments, consisting only of normal recurring accruals, which are, in the opinion of management, considered necessary for a fair presentation of financial position and results of operations. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. The results of operations of the Company for the six-months ended October 31, 2005 and 2004 are not necessarily indicative of the results to be expected for the full year. The Company operates in one business segment - mortgage banking. Note 2 - Summary of Significant Accounting Policies Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make certain estimates and assumptions, including the depreciable lives of assets, the fair value of goodwill and financial derivatives, and the realizable portion of deferred tax assets, that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Statement of Cash Flows - For purposes of the statement of cash flows, the Company considers cash equivalents to be short-term, highly liquid investments used in its cash management activities and generally having a remaining maturity of three months or less from the date of purchase. Income Taxes - The Company uses the asset and liability method in accounting for deferred income taxes. Deferred tax assets and liabilities are calculated by applying applicable tax laws to the differences between the financial statement base and the tax base of assets and liabilities. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. Stock-Based Compensation - The Company follows Accounting Principles Board (APB) 25 in accounting for its employee stock options. The disclosure provisions of Statement of Financial Accounting Standards (SFAS) 148 have been incorporated into these financial statements and accompanying footnotes. The following table illustrates the effect on net income (loss) that would have resulted if the Company had applied the fair value recognition provisions of Financial Accounting Standard No. 123, Accounting for Stock-Based Compensation, as amended by SFAS 148, Accounting for Stock-Based Compensation - Transition and Disclosure, to stock-based employee compensation: F-5 Transnational Financial Network, Inc. Notes to Financial Statements (Continued) Three Months Ended Six Months Ended ------------------ ---------------- October 31 October 31 October 31 October 31 2005 2004 2005 2004 ---- ---- ---- ---- As Restated As Restated As Restated As Restated Net (loss) income: As reported (152,312) 29,556 90,071 (126,378) Deduct: fair value amount 0 (41,380) 0 (98,187) --------- --------- --------- -------- Pro forma (152,312) (11,824) 90,071 (224,565) Basic (loss) income per common share: As reported (0.02) 0.00 0.01 (0.02) Deduct: fair value amount 0.00 0.00 0.00 (0.01) ---- ---- ---- ------ Pro forma (0.02) 0.00 0.01 (0.03) Diluted (loss) income per common share: As reported (0.02) 0.00 0.01 ( 0.02) Deduct: fair value amount 0.00 (0.00) 0.00 (0.01) ---- ------ ---- ------- Pro forma (0.02) 0.00 0.01 (0.03)

There were no options granted during the quarter ended October 31, 2005. There were 29,000 options granted during the quarter ended October 31, 2004. As mentioned in Note 6 below, the Board of Directors on March 10, 2005, elected to accelerate the vesting of all outstanding options as of that date. All outstanding options were fully vested as of April 30, 2005. Reclassification - With the reexamination of the application of SFAS 133 and related pronouncements to our operations, we have made the following changes to the form of our presentation: - On the Balance Sheet, we show both the asset and liability amounts related to SFAS 133 calculations with respect to mortgage-related financial instruments. In the past we netted these two figures against one another and showed only the net amount. - On the Statement of Operations, we have moved back to the presentation form we used prior to April 30, 2005. I.e., we now report a separate category of Other Income (Expense) below the operating income line wherein we report both non-warehouse interest income and changes in fair value of financial instruments. Note 3 - Financing Facilities As of October 31, 2005, the Company had a maximum mortgage loan financing capacity of $75 million through two master sale agreements, or warehouse lines of credit. Under these arrangements, the lending financial institutions purchase a 100% loan participation interest in each loan upon the Company obtaining a firm forward sale delivery commitment from investors and upon the financial institutions' approval of the loan based on their underwriting criteria. The Company recognizes income from loans transferred under these lines as a gain on sale immediately upon the purchase and funding of the loans by the financial institutions. In connection with these agreements, the Company may be required to repurchase certain loans that, subsequent to acquisition by the financial institutions, fail to meet certain representations and warranties set forth in the agreements at the date of the sale. During the six-month period ended October 31, 2005 the Company was required to repurchase three loans in the total amount of $395,500. All of the loans were refinanced by the borrowers and the Company recovered its entire principal, as well as the direct and F-6 Transnational Financial Network, Inc. Notes to Financial Statements (Continued) carrying costs associated with these loans. During the six-month period ended October 2004, the Company was required to repurchase one loan in the amount of $295,548. Loan interest charges incurred in connection with the purchase of loans are estimated and recognized as a reduction in sales proceeds immediately upon the loan being transferred. Loan interest expense is calculated based on the number of days the loan remains with the financial institution, until it is ultimately resold to a third party investor. During the intervening period the Company sub-services the loans on behalf of the financial institutions. The first master sale agreement provides a credit facility of $15 million as of October 31, 2005. Under this arrangement, an additional bulge capacity of $20 million is available if needed, bringing the total capacity under this arrangement to $35 million. The Company has not used this interim bulge capacity to date. Interest on the $15 million portion of the line is at the Prime Rate or 3.99%, whichever is higher. Prime was 6.75% at October 31, 2005. Interest on the remaining $20 million of the line is 0.05% higher than that charged on the $15 million portion. The rate paid by the Company on this line as of October 31, 2005 was 6.75%. The Company is required to maintain a non-interest bearing cash collateral deposit with this lender of $1,000,000, which has been included as restricted cash in the balance sheets. The second master sale agreement provides a credit facility of $40 million as of October 31, 2005. Interest on the facility is at 1 month LIBOR plus a margin ranging from 1.875% to 2.50%. The rate paid by the Company on this line as of October 31, 2005 was between 6.08% and 6.58%. The Company is required to maintain a non-interest bearing cash collateral deposit with this lender of $25,000, which has been included as restricted cash in the balance sheets. These two master sale agreements are each for a one-year period and are typically renewed annually. However, the agreements give each party the right to terminate the agreement upon 30 days' written notice. These financing facilities have various customary covenants including minimum liquidity, profitability and net worth requirements, and limitations on other indebtedness. If we fail to comply with any of these covenants or otherwise default, the lender has the right to terminate the facility and require immediate repayment that may require sale of the collateral at less than optimal terms. As of October 31, 2005 the Company was not in compliance with its quarterly net income financial covenant but anticipates compliance prior to its fiscal year end, April 30, 2006. The CEO and the President of the Company have both personally guaranteed the above financing facilities. Note 4 - Goodwill Goodwill is attributable to the purchase of the Company's Campbell branch (formerly LRS, Inc.) in 1999. Note 5 - Subordinated Debt As of October 31, 2005, the Company had a total of $3,737,700 of subordinated debentures outstanding. In January, 2005, we received $2,687,700 of convertible subordinated debt that is due on January 12, 2015, bears interest at 8.50% and is convertible into common shares at $1.00 per share. The remaining $1,050,000 of subordinated debt bears interest at 10%, and has maturities ranging from October 31, 2006 to October 1, 2007. Subordinated debt interest expense of $87,081 and $39,890 was incurred in the three-month periods ended October 31, 2005 and 2004, respectively. Note 6 - Stock Option Programs and Warrants to Purchase Common Stock On March 10, 2005, the Board of Directors of the Company accelerated the vesting of all outstanding options, such that on that date, all outstanding options are fully vested. The Company accelerated the vesting of the options principally to avoid the administrative complexities of required disclosures associated with SFAS 123. The Board of Directors continues to evaluate the situation with respect to future option issuance. The acceleration of options resulted in the immediate vesting of options to purchase 228,989 shares of the Company's common stock. Using the intrinsic value method for valuing these accelerated employee options, compensation expense of $2,010 was recognized in the year ended April 30, 2005. Using F-7 Transnational Financial Network, Inc. Notes to Financial Statements (Continued) the fair value method for valuing these accelerated independent contractors' options, an additional $4,402 in expense was recognized in the year ended April 30, 2005. Information about stock options outstanding as of October 31, 2005 is summarized as follows: Weighted Weighted Average Average Average Exercise Exercise Range of Remaining Price of Price of Exercise Options Contractual Options Options Options Prices Outstanding Life in Years Outstanding Exercisable Exercisable $0.22 - $1.00 692,345 6.04 $0.73 692,345 $0.73 $1.01 - $2.45 243,201 7.23 $1.24 243,201 $1.24 $7.50 258,000 3.53 $7.50 258,000 $7.50 ------- ------- 1,193,546 6.15 $2.30 1,193,546 $2.30 ========= =========

As of October 31, 2005, the Company had options outstanding under the programs described herein. The Company has two stock option plans: the 1998 Stock Compensation Plan ("1998 Plan") for employees and the 2000 Stock Incentive Plan ("2000 Plan") for directors, officers and other employees which replaced the 1998 Plan in February 2000. Options issued and outstanding from the 1998 Plan will continue to be honored, but no additional options may be issued under the 1998 Plan. As October 31, 2005, there were a total of 18,000 share options outstanding under the 1998 Plan, all with an exercise price of $7.50 per option, which expire in June 2009. In March 1999, four Directors of the Company were granted 240,000 non-qualifying options to purchase common stock at an exercise price of $7.50 per share. The options were vested on the grant date and expire ten years from the date of issuance. Of the total grant, 180,000 options may be exercised only in the event of a change in control as defined in the option agreement. There are no forfeiture provisions associated with the options granted, accordingly, the option granted to three of the four directors who subsequently resigned remain outstanding until they are exercised or expire. In June 2002, the Board of Directors of the Company unanimously granted to Joseph Kristul, the Chief Executive Officer of the Company, an option to purchase 300,000 shares of the Company's common stock at an exercise price of $0.73 per share. The shares will be unregistered. The options are vested as of April 30, 2005 and as noted above expire in four years. Under the 2000 Plan, a total of 750,000 shares were initially reserved. The share reserve increases by 4% of total common shares outstanding each year, beginning on January 1, 2001. The maximum annual increase in the share reserve is limited to 400,000 shares. Accordingly, the following table is a roll forward of the share reserve limit through October 31, 2005: Number of Options Initially Reserved 750,000 January 1, 2001 171,172 January 1, 2002 205,503 January 1, 2003 270,407 January 1, 2004 272,640 January 1, 2005 271,654 -------- Reserve amount at October 31, 2005 1,941,376 F-8 Transnational Financial Network, Inc. Notes to Financial Statements (Continued) The table below summarizes aggregate activity for all options programs for the three-month period ended October 31, 2005: All Programs ------------------------------------ Weighted Average Stock Exercise Options Price Outstanding at April 30, 2005 1,193,546 $2.30 Grants and Adjustments - - Forfeitures - - ----------- ------- Outstanding at October 31, 2005 1,193,546 $2.30 =========== ======= As of October 31, 2005, there were 45,000 warrants to purchase shares of the Company's common stock outstanding. The exercise prices of the warrants ranged from $0.55 to $7.50. Note 7 - Basic and Diluted Net Income (Loss) Per Share Basic net income (loss) per share is based on net income (loss) divided by the weighted-average common shares outstanding. Diluted net income (loss) is computed based on the weighted-average number of common shares outstanding adjusted for potentially dilutive securities, which include stock options, warrants and contingently convertible subordinated debt. The computations of basic and diluted net income per share are as follows: Three Months Ended Six Months Ended ------------------ ---------------- October 31 October 31 October 31 October 31 2005 2004 2005 2004 ---- ---- ---- ---- Net (loss) income $ (152,312) $ 29,556 $ 90,071 $ (126,378) Weighted average of shares outstanding 6,791,360 6,794,787 6,791,360 6,794,787 Basic net (loss) income per share $ (0.02) $ 0.00 $0.01 $ (0.02) Effect of dilutive options - 11,447 4,545 - Diluted weighted average of shares outstanding 6,791,360 6,806,234 6,795,905 6,794,787 Diluted net income (loss) per share $ (0.02) $ 0.00 $ 0.01 $ (0.02)

For the three months ending October 31, 2005 and for the six months ending October 31, 2004, the effect of potentially dilutive securities in the calculation of net loss per share was anti-dilutive. Potentially dilutive securities were 4,166,772 and 726,166 as of October 31, 2005 and 2004, respectively. Note 8 - Fair Value of Financial Instruments A summary of the total contract value of the Company's exposure to off-balance sheet credit risk as of October 31, 2005 and April 30, 2005, including financial instruments whose contract amount represents credit risk only is as follows: October 31, 2005 April 30, 2005 Commitments to extend credit $ 27,874,715 $ 21,772,820 Mandatory forward delivery commitments 3,471,550 2,741,500 Commitments to extend credit are contractual agreements entered into with customers to fund mortgage loans, which remain valid as long as there is no violation of any condition established in the contract. These commitments generally have fixed expiration dates or other termination clauses. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company is exposed to credit risk on its mandatory forward delivery commitments when the Company's position in these instruments becomes positive (i.e. "in-the-money") and the Company is a net creditor to the counter party to the agreement. If the Company cannot deliver the agreed-upon loans into the commitment F-9 Transnational Financial Network, Inc. Notes to Financial Statements (Continued) by the expiration date, the Company is subject to a financial penalty ("pair-off fee"). Note 9 - Restatements As disclosed in a Form 8-K filing dated February 23, 2006, pursuant to internal management review, our management, audit committee, and outside independent accountant, Burr, Pilger & Mayer, LLP have concluded that our accounting for the fair value of financial instruments pursuant to SAB 105, which we adopted at the end of fiscal year 2004, and SFAS 133 has been incorrect. There were two errors detected. First, there was an error in the underlying worksheets calculating the change in value of our locked pipeline of mortgage loan commitments to borrowers. This error resulted in a reversal of the sign of the change in value the Locked Pipeline. Second, we did not properly account for the derivative value of the Best Efforts loan locks we secure with secondary market investors upon making loan commitments to borrowers. We report the "Fair value of derivative financial instruments" as an asset or liability on our balance sheet. The change in this amount from period to period is included in our statement of operations. These matters affect our Annual Report on Form 10-KSB for the years ended April 30, 2004 and 2005 and our Quarterly Reports on Form 10-QSB for the quarters ended July 31, October 31, 2004 and 2005 and our Quarterly Report on Form 10-QSB for the quarter ended January 31, 2005. Upon completion of this filing of our Form 10-Q/A for the period ended October 31, 2005, we will file the following amended filings: o Form 10-KSB for the year ended April 30, 2005 with amended financial reports for the fiscal year ended April 30, 2004. o Form 10-QSB for the quarter ended July 31, 2005 with amended financial reports for the comparable prior year period. Within this current filing, we are restating the balance sheet at October 31, 2005 and 2004 and the results of operations for the quarter and six months ended October 31, 2005 and 2004 and the balance sheet for April 30, 2005. The effects of these restatements are immaterial to Revenues, Assets, Liabilities and Equity. Because of the volatility of our net income, the restatements are material on percentage basis to net income. The table below presents the changes to the Statement of Operations for the second quarter and six months for the period ended October 31, 2005 and the changes to the balance sheet for the period ending October 31, 2005 and 2004 and April 30, 2005. Second Quarter ended October 31, 2005 Six Months ended October 31, 2005 ------------------------------------- --------------------------------- As Reported Restated % Chg. As Reported Restated % Chg. ----------- -------- ------ ----------- -------- ------ Changes in fair value of financial instruments $ (38,836) $ (4,754) 87.8% $ 32,111 $ 42,425 32.2% Net Loss $ (186,394) $ (152,312) -18.3% $ 79,757 $ 90,071 12.9% Earnings per Share $ (0.03) $ (0.02) 0.0% $ 0.01 $ 0.01 -22.2%

Second Quarter ended October 31, 2004 Six Months ended October 31, 2004 ------------------------------------- --------------------------------- As Reported Restated % Chg. As Reported Restated % Chg. ----------- -------- ------ ----------- -------- ------ Changes in fair value of financial instruments $ 33,000 $ 30,115 -8.7% $(124,900) $ 58,609 146.9% Net Loss $ 32,441 $ 29,556 -8.9% $(309,887) $(126,378) -59.2% Earnings per Share $ 0.00 $ 0.00 0.0% $(0.05) $(0.02) -60.0%

F-10 Transnational Financial Network, Inc. Notes to Financial Statements (Continued) Balance Sheet Items at: October 31, 2005 As Reported Restated %Chg ---------------- ----------- -------- ---- Fair Value of financial Instruments- Asset - 52,467 nm (Liability) (15,385) (51,273) nm ------- -------- -- Net (15,385) 1,194 -107.8% Accumulated Deficit 9,904,246 9,887,667 .2% Balance Sheet Items at: April 30, 2005 As Reported Restated % Chg ---------------------------------------- -------- ----- Fair value of financial instruments- Asset - $14,905 (Liability) $(47,496) $(56,136) ------- ------- Net $(47,496) $(41,231) -13.2% Accumulated Deficit $9,984,003 $9,977,738 nm Balance Sheet Items at October 31, 2004 As Reported Restated %Chg ---------------- ----------- -------- Fair value of financial instruments- Asset $50,100 $70,627 41.0% Liability - (7,840) nm ------- ------- Net $50,100 $62,787 25.3% Accumulated Deficit $6,395,195 $6,382,508 -0.2% F-11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the condensed financial statements and the notes thereto included as Item 1 of this Report. The discussion of results and trends does not necessarily imply that these results and trends will continue. The Management's Discussion and Analysis of Financial Condition and Results of Operations and other sections of the Form 10-QSB contain forward-looking information. The forward-looking information involves risks and uncertainties that are based on current expectations, estimates, and projections about the Company's business, management's beliefs and assumptions made by management. Words such as "expects", "anticipates", "intends", "plans", "believes", "seeks", "estimates", and variations of such words and similar expressions are intended to identify such forward-looking information. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking information due to numerous factors, including, but not limited to, availability of financing for operations, successful performance of internal operations, impact of competition and other risks detailed below, as well as those discussed elsewhere from time to time in the Company's Securities and Exchange Commission filings and reports. In addition, general economic and market conditions and growth rates could affect such statements. QUARTER AND SIX MONTHS ENDED OCTOBER 31, 2005 COMPARED TO QUARTER AND SIX MONTHS ENDED OCTOBER 31, 2004 For the recently ended quarter, year-over-year revenues increased 21%, gross profits increased 8% and net income swung from a profit of about $30,000 to a loss of $152,000. For the six months, revenues increased 29%, gross profits increased 22% and net income swung from a loss of about $126,000 to a profit of $90,000. The following table shows the Company's wholesale and retail production trends by fiscal quarter for the last nine fiscal quarters: TABLE 1 ORIGINATION VOLUMES ($ millions) Quarter Ended 10-31-05 7-31-05 4-30-05 1-31-05 10-31-04 7-31-04 4-3-04 1-31-04 10-31-03 ------------- -------- ------- ------- ------- -------- ------- ------ ------- ------ Wholesale $ 100 $ 130 $ 84 $ 91 $ 94 $ 98 $ 128 $ 103 $ 135 Retail 69 79 71 72 64 83 144 88 183 ------ ------ ----- ------- ------ ------- ------- ------- ------ Total $ 169 $ 209 $ 155 $ 163 $ 158 $ 181 $ 272 $ 191 $ 318 ====== ====== ===== ====== ======= ======= ======= ======= ======

REVENUE ANALYSIS In the second quarter, our overall Revenues increased 18%, higher than the 7% increase in our total mortgage originations. The two principal factors why our year-over-year revenue comparisons in the second quarter differ from our 7% increase in the dollar value of loans are: 1. Production Income increased by 42%. Production Income is heavily driven by loan unit volume, rather than loan dollar volume. We experienced a 25% increase in our wholesale loan unit volume and a 23% increase in our retail loan unit volume year-over-year. This loan unit volume growth is largely the result of our increased expansion in the Arizona and Kansas markets where our average loan sizes are approximately half of what they have historically been in our established territories of the San Francisco Bay area and Southern California. MD-1 2. We received about $184,000 less in foward commmitment payout fees in the recently ended quarter than in the previous year, thus limiting the increase in our Gain on Sale of Loans to only 1%, about a 7% reduction. Our established markets in Northern and Southern California may be beginning to experience the effects of higher interest rates. These effects are being manifest in loan volumes being under pressure and average loan sizes possibly diminishing as interest rates increases lower loans' affordability. In the first six months of our current fiscal year, Revenues increased by 30%, higher than our 7% increase in the dollar value of our total mortgage originations. Here are the major reasons why: 1. Our Gain on Sale of Loans increased 35% in the first six months of the year, with nearly the entire gain having occurred in our first quarter. As explained in our last report, this was the result of a loan mix shift toward higher margin types of loans. Clearly, this mix shift effect on our year-over-year results waned substantially in the second quarter. 2. The geographic mix of our loans is shifting to markets (Arizona and Kansas) with lower average loan sizes as we expand in these markets and hold ground in our established markets. Thus Production Income for the first half increased 24% year-over-year, largely reflecting the effects in the second quarter, explained above. As we noted in our last two reports, about half way through our last fiscal year, we set up a wholesale origination operation (Alt Funding) that operates in parallel to our existing one. The purpose is to focus on a different market segment than the Alt-A borrowers of our traditional focus. This market is for borrowers with lower credit scores, but higher than what normally sees in sub-prime mortgage lending. We consider them to be Alt-A-Minus borrowers. We initially set this operation up on a pilot basis in our Arizona office, and are rolling it out to our other markets. The growth in our Alt Funding business has two effects on the types of loans we originate. First, since they are smaller, on average, than our traditional business, our average loan size is declining. This is shown in the MD&A Appendix in Table 11. Second, the average credit scores of our loans are going down in parallel. Specifically, the percentage of our loans (by principal loan balance) where the borrower's FICO score is 700 or above has declined from 64.8% to 49.4% over the last year. The most significant increase occurred among borrowers with FICO scores in the 600 to 649 range, rising from 6.1% to 16.6% in the same period of time. This is shown below in Table 2, a condensation of Table 15 in the MD&A Appendix. TABLE 2 CONDENSED WHOLESALE FICO SCORE DISTRIBUTION Quarter Ended 10/31/05 07/31/05 04/30/05 01/31/05 10/31/04 ------------- -------- -------- -------- -------- -------- Above 700 49.4% 54.3% 54.6% 57.4% 64.8% 650-699 30.0 31.9 27.6 35.4 28.6 600-649 16.6 12.3 11.8 5.9 6.1 550-599 2.6 0.2 3.0 0.4 0.2 Below 550 1.2 0.2 2.1 0.2 0.0 Not available 0.2 1.1 0.9 0.7 0.3 --- ----- ----- ---- ----- Total 100.0% 100.0% 100.0% 100.0% 100.0%

The large year-over-year improvements in our Gain on Sale of Loans margin are beginning to diminish, and year-over-year comparisons may be increasingly affected by the timing of Forward Commitment Payout Fees (Table 4) received. MD-2 TABLE 3 WHOLESALE GAIN ON SALE MARGIN (Basis Points) Quarter Ended 10-31-05 7-31-05 4-30-05 1-31-05 10-31-04 7-31-04 4-30-04 1-31-04 10-31-03 ------------- -------- ------- ------- ------- -------- ------- ------- ------- -------- ~~Gain on Sale 136 146 142 119 145 126 106 140 133~~

TABLE 4 FORWARD COMMITMENT PAYOUT FEES RECEIVED ($ 000's) Quarter Ended 10-31-05 7-31-05 4-30-05 1-31-05 10-31-04 7-31-04 4-30-04 1-31-04 10-31-03 ------------- -------- ------- ------- ------- -------- ------- ------- ------- -------- ~~Fees Received $ 87 $125 $ 98 $ 105 $271 $ 0 $ 51 $ 335 $ 528~~

GROSS PROFIT ANALYSIS Gross profits for the quarter just ended were5% higher than what we generated in the comparable quarter a year ago, less than the 18% increase in our revenues. The following factors held our gross profit growth back in the quarter: 1. Our Direct Expenses increased 37% while revenues increased 18%. This was driven by an increasingly competitive environment for individuals who can originate and process mortgage loans, forcing us to raise our compensation levels to recruit and retain people. 2. Our Net Interest Income/(Expense) showed a negative comparison, one that slowed our gross profit growth by 4 percentage points and reduced our Gross Profit Margin by 2 percentage points. The largest part of this was due to a $47,000 swing in our subordinated debt interest expense, reflective of the offering we completed in January of this year. Secondarily, but not unimportant to the trend, was the effect of generally higher interest rates, combined with a longer period of time our mortgages remain financed before they are purchased by investors increasing the overall cost of our warehouse financings. TABLE 5 GROSS PROFIT MARGIN TRENDS Quarter Ended 10-31-05 7-31-05 4-30-05 1-31-05* 10-31-04* 7-31-04* 4-30-04* 1-31-04* 10-31-03* ------------- -------- ------- ------- ------- -------- ------- ------- ------- -------- ~~Gross Profit Margin 59.4% 60.8% 57.6% 61.7% 65.2% 61.0% 52.3% 59.8% 52.0%~~

* - These margins are different than previously reported because we are now reporting Subordinated Debt Interest above the Gross Profit line going forward from January 31, 2005. INDIRECT EXPENSE ANALYSIS Our Indirect Expenses increased 21% on a year-over-year basis during the recently ended quarter. We have been suggesting since the Fall of last year that we believed we had reached a bottom in how low we could take our Indirect Expenses. As the table below clearly shows, this has been the case. The sole driver of our increasing Indirect Expenses in the last year has been the Salaries and Benefits paid to non-production personnel. These have increased for two reasons: MD-3 First, we have been expanding our operations in Arizona throughout this period of time and we opened an office in Overland Park, Kansas at the beginning of the recently ended quarter. This requires us to pay for support staff and guaranteed salary draws for production personnel in advance of seeing mortgage loan production and funding. Second, we are starting to experience inflationary pressures on compensation generally. TABLE 6 INDIRECT EXPENSE AND COMPONENTS ($ 000s) Quarter Ended 10-31-05 7-31-05 4-30-05 1-31-05 10-31-04 7-31-04 4-30-04 1-31-04 10-31-03 ------------- -------- ------- ------- ------- --------------------------- ------- -------- Total Indirect Exp. $1,936 $1,898 $1,823 $1,661 $1,638 $1,703 $1,771 $1,700 $1,800 Percent of Rev. 65.2% 55.6% 65.0% 75.6% 65.5% 68.3% 48.4% 57.7% 40.6% Selected Components: Salaries and Ben. $1,222 $1,119 $1,087 $949 $895 $951 $1,013 $1,032 $1,097 Percent of Rev. 41.2% 32.8% 38.8% 43.2% 36.5% 38.2% 27.7% 34.7% 24.7% Gen. and Admin. $521 $586 $515 $520 $551 $559 $559 $473 $503 Percent of Rev. 17.5% 17.2% 18.3% 23.7% 22.4% 22.5% 15.3% 16.1% 11.4%

OTHER COMMENTARY During the quarter just ended and in preparation for a change in our accounting system which we implemented November 1, 2005, we subjected our balance sheet to another round of detailed scrutiny beyond that which was done at our last year-end. We found a total of about $61,000 of various Accrued Payables and other liabilities (which had been previously expensed) that we determined are not subject to future payment. Approximately $25,000 of these other liabilities related to periods substantially prior to the end of our last fiscal year, and about $35,000 of these accrued liabilities related to the first quarter of this fiscal year. There is not a single line item on our Income Statement (Condensed Statement of Operations) where these accruals were reversed out. They show up in various revenue and expense line items, no one of which changes that line item materially, either in the current financial statements or in the periods when these accruals had been made. The net result is that our operating loss for the quarter, in the absence of these accrual reversals, would have been $213,644 instead of the the $152,312 loss actually shown. LIQUIDITY AND CAPITAL RESOURCES Our unrestricted and restricted cash position as of October 31, 2005, increased by $183,742 from what it was at the end of our last fiscal quarter, July 31, 2005. Management and the Company's board of directors believe this is a more appropriate figure to examine than unrestricted cash alone. The restricted cash is cash held on deposit with the Company's warehouse lenders and represent a management decision and strategy. We can negotiate for lower deposit requirements, but at the expense of other variables associated with the lending facility, including, but not limited to, nominal interest rate, per transaction fees, and loan haircuts. Hence, the total of unrestricted and restricted cash plus short-term (cash-like) investments is what we measure in evaluating our overall liquidity. The principal changes to our aggregate cash and investments positions during the year are shown in Table 7, "Simplified Sources/(Uses) of Cash," below. The statements of cash flows is included with the other financial statements in Item 1 of this filing. The sum of the cash flow from operations in Table 7 below is $5,000 higher than that shown in the statements of cash flows because Table 7 includes changes in all forms of cash, including restricted, while the statements of cash flows only addresses unrestricted forms of cash. The short-form table below is how management and the Company's board of directors monitor the Company's changes in cash and investments position. MD-4 TABLE 7 SIMPLIFIED SOURCES/(USES) OF CASH Change from Prior Period End Quarter Quarter Quarter Sources (Uses) 10-31-05 7-31-05 4-30-05 -------------------------------------------------------------------------------------------------------------------- Operating Cash Flows Income Statement Related Cash Flows Net Income/(Loss) $ (152,312) $ 242,384 $(3,256,815) Add back non-cash charges/(income) Depreciation & Amortization 17,960 18,156 21,054 Accrued liability write-down (61,332) Impairment of goodwill 0 0 2,714,516 Fair value of financial derivatives changes 4,754 (47,179) 69,540 Stock option expense 0 0 136,762 Deferred income taxes 0 0 291,365 Provision for early payoff penalties, net of payments 0 15,000 14,000 - Actual early payoff penalties paid (20,475) (1,850) (5,333) -------- ------- ------ Operational Cash Flows from the Income Statement $ (211,405) $226,511 $(14,911) Balance Sheet Related Cash Flows Mortgages held for sale $ 574,032 $ 257,288 $ (229,706) Short-term mortgage receivables (133,495) (88,135) (71,292) Other Assets 16,108 (19,258) 26,479 Accounts payable and other accrued liabilities (30,548) 8,945 121,958 -------- ----- ------- Operational Cash Flow from the Balance Sheet $ 426,097 $ 158,840 $ (152,561) Total Cash Flow Generated/(Used) in Operations $ 214,692 $ 385,351 $ (167,472) Financing Activity Cash Flows Issuance of subordinated debt $ 0 $ 0 $ 0 Repayments of subordinated debt 0 0 (250,000) Stock purchases 0 0 0 Settlement paid 0 0 0 Capital lease obligations change 0 0 (3,252) ------ ------ ------ Total Cash Flow from Financings Activities $ 0 $ 0 $ (253,252) Investing Activity Cash Flows Purchase of property and equipment $ (30,950) $ (18,156) $ (3,560) Total Cash Flow from Investing Activities $ (30,950) $ (18,156) $ (3,560) Net Change to Aggregate Cash $ 183,742 $ 367,195 $ (424,284)

In summary form, this table says the following regarding the changes in the Company's aggregate cash resources in the recently ended quarter. MD-5 1. The Company lost about $211,000 in cash flow from income statement-related operations during the recently ended quarter. 2. The Company decreased the total of Mortgage Loans Held for Sale and Short-Term Mortgage-Related Receivables by about $440,000. This merely reflects timing differences in when pools of mortgages are sold and not some underlying change in policy, practice or strategy. 3. The Company spent about $30,950 on purchases of property and equipment during the quarter just ended. 4. The paying down of Accounts Payable and other Accrued Liabilities in the quarter resulted in the use of about $31,000 of cash. SUMMARY OF FINANCING FACILITIES The capital resources utilized by the Company to fund its mortgage lending activities are primarily provided by warehouse lenders that fund the mortgage loans through Master Sales Agreements ("warehouse facilities"). The size of the Company's warehouse facilities is based on the Company's net worth and cash resources. As of October 31, 2005, the Company had a total of two financing facilities for a maximum financing capacity of up to $75 million. The funding facilities have various financial and operational covenants with which the Company must comply, including the requirement that the Company maintain cash deposits with certain lenders as compensating balances. Collectively, these facilities currently require compensating balances of $1.025 million. More detailed data on these facilities is presented in Note 3 to the Financial Statements presented in Item 1. Our overall funding strategy is to use committed facilities, summarized as of October 31, 2005: TABLE 8 LOAN FACILITIES AND BALANCES Committed Outstanding Required Interest Rate Type of Facility Facility Balance Cash Deposit October 31, 2005 Maturity ---------------- ------------- -------------- ------------ ---------------- -------- Master sales agreement $35,000,000 $7,792,600 $1,000,000 6.75%(1) Annual or 30 days notice Master sales agreement 40,000,000 19,885,324 25,000 6.08-6.58%(2) Annual or 30 days notice ---------- -------------- ----------- Totals $75,000,000 $ 27,677,924 $1,025,000 =========== ============= ==========

(1) For the first $15 million of this facility, the contractual interest rate facility was 3.99% or Prime, whichever is greater. The rate for the next $20 million is 0.05% greater than the rate for the first $15 million. (2) The contractual interest rate on this facility is one month LIBOR plus a margin ranging from 1.875% to 2.50%. FUTURE NON-OPERATIONAL CASH REQUIREMENTS The Company has certain non-operational requirements for cash in the future. The material requirements are those for repayment of the subordinated debt issued in recent years to bolster our capital position. The schedule of maturities for these is as follows: TABLE 9 NON-OPERATIONAL CASH REPAYMENT REQUIREMENTS October 31, 2006 $ 50,000 March 31, 2007 $ 800,000 May 31, 2007 $ 200,000 January 12, 2015 $2,687,700 MD-6 OFF BALANCE SHEET RISKS The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit in the form of loans, and mandatory forward delivery commitments. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the balance sheet. The mandatory forward delivery commitments also involve the risk of nonperformance on the part of the Company. The Company manages these risks by entering into these agreements with major, well-known financial institutions. The contract amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments. The notional value of financial instruments, whose contract amounts represent credit and risk at the indicated dates, are as follows: TABLE 10 NOTIONAL VALUE OF FINANCIAL INSTRUMENTS October 31, April 30, 2005 2005 ----------------------------------- Commitments to extend credit $ 27,874,715 $ 21,772,820 Mandatory forward delivery commitments 3,471,550 2,741,500 MD-7 ITEM 3. CONTROLS AND PROCEDURES The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company's Securities Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to the Company's management, including its Chief Executive Officer, who also is Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. During the 90-day period prior to the date of this report, an evaluation was performed under the supervision and with the participation of the Company's management, including the Chief Executive Officer, who also is the Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based upon that evaluation, the Chief Executive Officer, and the Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect these controls, and no corrective actions taken with regard to significant deficiencies or material weaknesses in such controls, subsequent to the date of our most recent evaluation of internal controls. The conditions leading to the restatements referred to in this filing were discovered by management and the Audit Committee as part of their normal review processes. Management and the Audit Committee believe the errors that lead to the aforementioned restatements were neither significant nor material because the figures were immaterial by any reasonable standard, did not affect cash flows and did not affect the company's ability to conduct its business. Furthermore, the issues discovered revolved around relatively arcane accounting issues where there tends not be general agreement in its application. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS 31.1 Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (b) REPORTS ON FORM 8-K NONE SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Transnational Financial Network, Inc. Date: March 31, 2006 /s/ Joseph Kristul ----------------- ------------------------------------------ Joseph Kristul, Chief Executive Officer Date: March 31, 2006 /s/ Thomas Schott ----------------- ------------------------------------------ Thomas Schott, Chief Financial Officer

TRANSNATIONAL FINANCIAL NETWORK INC 10-Q/A