SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

_________________

FORM 10-Q/A
Amendment No.1

_________________

|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2007

|_| 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: 0-28325

TMSF HOLDINGS, INC.
(Exact name of registrant as specified in its charter)

Delaware
(State of other jurisdiction of incorporation or organization)

_________________

87-0642252
(I.R.S. Employer Identification No.)

660 South Figueroa St. 9th Floor Los Angeles, CA 90017
(Address of principal executive office)

(213) 234-2400
(Registrant’s telephone number, including area code)

_________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No | |

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. 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 | | No |X|

As of September 30, 2007, there were 15,000,000 shares of common stock outstanding ($0.001 par value).

TABLE OF CONTENTS

		Pa	ge
		Nu	mber
	EXPLANATORY NOTE		1
PART I	FINANCIAL INFORMATION

Item 1	Financial Statements
	Consolidated Balance Sheets as of June 30, 2007 (restated) (unaudited)
	and December 31, 2006		1

	Consolidated Statements of Income (Loss) for the three months and six months ended
	June 30, 2007 (restated) (unaudited) and 2006 (unaudited)		2

	Consolidated Statements of Cash Flows for the six months
	ended June 30, 2007 (restated) (unaudited) and 2006 (unaudited)		3

	Notes to the Restated Consolidated Financial Statements (unaudited)		4

Item 2	Management Discussion and Analysis of Financial Condition
	and Results of Operations		16

Item 3	Quantitative and Qualitative Disclosures
	About Market Risk		44

Item 4	Controls and Procedures		45

PART II	OTHER INFORMATION

Item 1	Legal Proceedings		46

Item 1A	Risk Factors		46

Item 2	Unregistered Sales of Equity Securities and Use of Proceeds		46

Item 3	Defaults Upon Senior Securities		46

Item 4	Submission of Matters to a Vote of Securities Holders		46

Item 5	Other Information		46

Item 6	Exhibits		46

Table of Contents

EXPLANATORY NOTE

We are filing this amendment to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2007 to amend and restate our financial statements as of and for the three and six months ended June 30, 2007. The restatement is to correct errors in the amounts of our non-current income tax payable and related provision for income taxes. The effect is a decrease in the non-current income tax payable at June 30, 2007 of $5,592,875 and a decrease in the provision for income taxes of $5,592,875 for the three and six months ended June 30, 2007. The following sections of this Form 10-Q/A have been revised to reflect the restatement: Part I - Item I - Financial Statements and Part I - Item II - Management's Discussion and Analysis of Financial Condition and Results of Operations. Accordingly, readers should not rely upon our previously filed financial statements and other financial information as of and for the three and six months ended June 30, 2007.

TMSF HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 2007 (unaudited) and December 31, 2006

ASSETS
	June 30, 2007 (restated)	December 31, 2006
	(Unaudited)
Current assets
Cash and cash equivalents	$11,027,574	$14,969,140
Mortgage loans held for sale	25,354,570	93,593,135
Mortgage loans to be repurchased	87,225,821	50,510,160
Reserve for impairment of mortgage loans	(14,553,000)	(15,175,866)
Prepaid expenses	1,174,394	580,030
Warehouse receivables	2,311,191	6,601,869
Other receivables and employee advances
(net of $208,125 and $208,125, respectively,
of allowance for bad debts)	343,658	263,551
Real estate owned (net of $1,500,000, and $1,966,637,
respectively, of loss reserves)	3,643,657	4,967,362
Income tax receivable	1,183,860	163,691
Deferred tax asset - current	-	7,894,622
Total current assets	117,711,725	164,367,694

Restricted cash	1,923,834	297,530
Loans held for investment (net of $3,035,000, and $0, respectively, of loss reserves)	36,758,876	-
Property and equipment (net of $1,462,117, and $1,156,315,
respectively, of accumulated depreciation)	781,607	880,078
Deferred tax asset - non-current	-	35,623
Deposits and other assets	221,896	197,723
TOTAL ASSETS	$157,397,938	$165,778,648

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities
Warehouse lines of credit	$52,676,496	$85,209,074
Obligations to repurchase mortgage loans	87,225,821	50,510,160
Accounts and other payables	8,863,520	7,605,455
Accrued expenses	830,863	1,168,366
Subordinated note payable	3,000,000	3,000,000
Total current liabilities	152,596,700	147,493,055
Income taxes payable	5,682,539	-

TOTAL LIABILITIES	158,279,239	147,493,055

Stockholders’ equity (deficit)
Preferred stock, $0.001 par value
100,000 shares authorized,
no shares issued and outstanding	-	-
Common stock, $0.001 par value
30,000,000 shares authorized,
15,000,000 shares issued and outstanding	15,000	15,000
Additional paid-in capital	3,285,971	3,242,402
Retained earnings (accumulated deficit)	(4,182,272)	15,028,191

Total stockholders’ equity (deficit)	(881,301)	18,285,593

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)	$157,397,938	$165,778,648

The accompanying notes are an integral part of these financial statements.

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TMSF HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
For the Three Months and Six Months Ended June 30, 2007 (unaudited) and 2006 (unaudited)

	Three Months Ended		Six Months Ended
	June 30,		June 30,
	2007 (restated)	2006	2007 (restated)	2006
	(unaudited)	(unaudited)	(unaudited)	(unaudited)
Loan income
Income (loss) from sale of mortgage loans	$(537,646)	$16,083,566	$12,499,800	$25,820,706
Mortgage interest income	1,306,096	5,214,604	5,806,538	8,818,317
Commission fee income	21,632	176,413	184,702	411,824

Total loan income	790,082	21,474,583	18,491,040	35,050,847

Costs of loan origination and sale of
mortgages

Commissions	384,500	4,725,987	3,293,884	7,174,010
Warehouse interest expense	1,341,924	4,685,121	5,446,550	7,729,908
Appraisals	205,482	509,279	620,170	891,709
Credit reports	23,970	59,817	76,280	105,248
Warehouse fees	80,458	84,047	137,929	135,081
Provision for impairment of
mortgage loans	14,266,538	139,473	17,707,993	1,022,651
Other costs	26,441	8,722	63,072	32,825

Total costs of loan origination
and sale of mortgages	16,329,313	10,212,446	27,345,878	17,091,432

Gross profit (loss)	(15,539,231)	11,262,137	(8,854,838)	17,959,415

Operating expenses

Salaries	2,689,877	6,027,864	7,585,424	10,970,865
General and administrative	1,427,157	1,986,377	2,817,059	3,547,703
Occupancy	145,802	210,527	345,697	428,613

Total operating expenses	4,262,836	8,224,768	10,748,180	14,947,181

Income (loss) from operations	(19,802,067)	3,037,369	(19,603,018)	3,012,234

Other income (expense)
Interest income (expense)	(122,757)	40,953	(186,916)	89,912
Other income (expense)	(7,466)	26,812	(7,210)	27,475
Income (loss) from sales of REO assets	771,190	-	1,092,661	213

Total other income (expense)	640,967	67,765	898,535	117,600

Income (loss) before provision
for income taxes	(19,161,100)	3,105,134	(18,704,483)	3,129,834

Provision for income taxes	289,154	1,283,318	505,980	1,300,348

Net income (loss)	$(19,450,254)	$1,821,816	$(19,210,463)	$1,829,486

Basic earnings (loss) per share	$(1.30)	$0.12	$(1.28)	$0.12

Diluted earnings (loss) per share	$(1.30)	$0.12	$(1.28)	$0.12

Basic weighted-average common
shares outstanding	15,000,000	15,000,000	15,000,000	15,000,000

Diluted weighted-average
common shares outstanding	15,000,000	15,612,928	15,000,000	15,896,488

The accompanying notes are an integral part of these consolidated financial statements.

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TMSF HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended June 30, 2007 (unaudited) and 2006 (unaudited)

	Six Months Ended June 30,
	2007 (restated)	2006
	(unaudited)	(unaudited)
Cash flows from operating activities
Net income (loss)	$ (19,210,463)	$ 1,829,485
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
Depreciation and amortization	(305,802)	223,797
Provision for impairment of
mortgage loans	(1,089,502)	464,541
Provision for impairment of
loans held for investment	3,035,000	-
Share based compensation expense	43,569	80,419
Options granted for consulting services	-	16,500
(Increase) decrease in
Mortgage loans held for sale	68,238,565	(22,796,881)
Loans held for investment	(39,793,876)	-
Mortgage loans to be repurchased	(36,715,661)	(11,653,025)
Prepaid expenses	(594,362)	(228,193)
Other receivables and employee advances, net	(80,107)	206,040
Warehouse receivables	4,290,678	(2,517,060)
Deposits and other assets	(24,173)	(359,335)
Income tax receivable	(1,020,169)	-
Deferred tax asset	7,930,245	-
Income taxes payable	5,682,539	-
Increase (decrease) in
Accounts and other payables	1,258,065	1,921,393
Obligation to repurchase mortgage loans	36,715,661	11,653,025
Accrued expenses	(337,506)	945,704
Accrued income taxes	-	(965,321)

Net cash provided by (used in) operating activities	28,022,701	(21,178,911)

Cash flows from investing activities

Decrease (increase) in restricted cash	(1,626,304)	168,021
Net proceeds from real estate owned	1,790,342	(1,063,191)
Purchase of property and equipment	404,273	(256,849)

Net cash provided by (used in) in investing activities	568,311	(1,152,019)

Cash flows from financing activities
Warehouse lines of credit, net	(32,532,578)	20,477,168

Net cash provided by (used in) financing activities	(32,532,578)	20,477,168

Net decrease in cash and cash equivalents	(3,941,566)	(1,853,762)

Cash and cash equivalents, beginning of period	14,969,140	10,247,233

Cash and cash equivalents, end of period	$ 11,027,574	$ 8,393,471

Supplemental disclosures of cash flow information

Interest paid	$ 5,985,875	$ 4,164,855

Income taxes paid	$ 74,919	$ 2,265,683
Income tax refund received	$ 12,161,554	$ -

The accompanying notes are an integral part of these consolidated financial statements.

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NOTE 1 — ORGANIZATION AND LINE OF BUSINESS

General

TMSF Holdings, Inc. and subsidiaries (the “Company”) is a financial holding company that previously operated as Little Creek, Inc. In November 2002, the Company acquired The Mortgage Store Financial, Inc. and changed its name to TMSF Holdings, Inc. Prior to the acquisition of The Mortgage Store Financial, Inc., Little Creek, Inc. had no significant operational activity. The Mortgage Store Financial, Inc. was incorporated on August 25, 1992. The Company (as defined in Note 3) is licensed by the California Department of Corporations and respective agencies in 39 other states. The Company is principally engaged in the origination and purchase of residential mortgage loans. Generally, such loans are subsequently sold to financial institutions or to other entities that sell such loans to investors as a part of secured investment packages. The Company has obtained approval from the Department of Housing and Urban Development to act as a non-supervised mortgagee.

In August 2003, the Company formed a new subsidiary, CPV Limited, Inc. The sole purpose of this subsidiary is to hold real estate properties repossessed by the Company.

In September 2005, the Company formed a new subsidiary, TMSF REIT, Inc. The purpose of this subsidiary was to become the new holding company of The Mortgage Store Financial, Inc. upon completion of the Company’s plan of reorganization.

On August 4, 2006 the Company’s Board of Directors unanimously decided to terminate the plan to reorganize its business operations to allow it to qualify and elect to be taxed as a real estate investment trust, effective August 3, 2006. The Board determined that because of unfavorable market conditions, the Company would not be able to satisfy the conditions precedent to the consummation of the reorganization.

NOTE 2 — RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS

The Company has restated financial statements as of and for the three and six months ended June 30, 2007. The restatement is to correct errors in the amounts of our non-current income tax payable and related provision for income taxes. The effect is a decrease in the non-current income tax payable at June 30, 2007 of $5,592,875 and a decrease in the provision for income taxes of $5,592,875 for the three and six months ended June 30, 2007.

Based on the foregoing, the Company has determined the effect of the correction of this error on its previously issued financial statements for the three and six months ended June 30, 2007, as presented below.

TMSF HOLDINGS, INC. AND SUBSIDIARIES
EFFECT OF RESTATEMENT
CONSOLIDATED BALANCE SHEET
June 30, 2007 (unaudited)

	As originally reported	Restatements	As restated
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Total current liabilities	$152,596,700	-	$152,596,700
Income taxes payable	11,275,414	$ (5,592,875)	5,682,539
TOTAL LIABILITIES	163,872,114	(5,592,875)	158,279,239
Stockholders’ equity (deficit)
Retained earnings (accumulated deficit)	(9,775,147)	5,592,875	(4,182,272)
Total stockholders’ equity (deficit)	(6,474,176)	5,592,875	(881,301)
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)	$157,397,938	$ -	$157,397,938

TMSF HOLDINGS, INC. AND SUBSIDIARIES
EFFECT OF RESTATEMENT
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
For the Three Months and Six Months Ended June 30, 2007 (unaudited)

	Three Months Ended			Six Months Ended
	As originally reported	Restatements	As restated	As originally reported	Restatements	As restated
Income (loss) before provision
for income taxes	$(19,161,100)	-	$(19,161,100)	$(18,704,483)	-	$(18,704,483)
Provision for income taxes	5,882,029	$(5,592,875)	289,154	6,098,855	$(5,592,875)	505,980
Net income (loss)	$(25,043,129)	$(5,592,875)	$(19,450,254)	$(24,803,338)	$(5,592,875)	$(19,210,463)
Basic earnings (loss) per share	$(1.67)	$(0.37)	$(1.30)	$(1.65)	$(0.37)	$(1.28)
Diluted earnings (loss) per share	$(1.67)	$(0.37)	$(1.30)	$(1.65)	$(0.37)	$(1.28)

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TMSF HOLDINGS, INC. AND SUBSIDIARIES
EFFECT OF RESTATEMENT
CONSOLIDATED STATEMENT OF CASH FLOWS
For the six months ended June 30, 2007 (unaudited)

	As originally reported	Restatements	As Restated
Cash flows from operating activities
Net income (loss)	$ (24,803,338)	$ 5,592,875	$ (19,210,463)
(Increase) decrease in
Deferred tax asset	19,205,659	(11,275,414)	7,930,245
Income taxes payable	-	5,682,539	5,682,539
Net cash provided by (used in) operating activities	28,022,701	-	28,022,701
Cash flows from investing activities
Net cash provided by (used in) in investing activities	568,311	-	568,311
Cash flows from financing activities
Net cash provided by (used in) financing activities	(32,532,578)	-	(32,532,578)
Net decrease in cash and cash equivalents	(3,941,566)	-	(3,941,566)
Cash and cash equivalents, beginning of period	14,969,140	-	14,969,140
Cash and cash equivalents, end of period	$ 11,027,574	$ -	$ 11,027,574

NOTE 3 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying consolidated financial statements of TMSF Holdings, Inc. (the “Company”) are unaudited, other than the consolidated balance sheet at December 31, 2006, and reflect all material adjustments, consisting only of normal recurring adjustments, which management considers necessary for a fair statement of the Company’s financial position, results of operations, and cash flows for the interim periods. The results of operations for the current interim periods are not necessarily indicative of the results to be expected for the entire fiscal year.

These consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnotes normally included in the financial statements prepared in accordance with generally accepted accounting principles in the United States of America have been condensed or omitted pursuant to these rules and regulations. These consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K, as filed with the SEC for the year ended December 31, 2006.

Going Concern

The financial statement included in this filing have been prepared in conformity with generally accepted accounting principles that contemplate the continuance of the Company as a going concern. The financial statements do not reflect any adjustments relating to the recoverability of assets and satisfaction of liabilities that might be necessary should the Company be unable to continue as a going concern. The Company’s continuation as a going concern is dependent upon its ability to maintain adequate liquidity to meet its obligations on a timely basis, to comply with the terms of its financing and settlement agreements as may be required, and ultimately to attain profitability. The Company’s management is attempting to manage its liquidity but there is no assurance the Company will have sufficient liquidity to fund its operations and pay its obligations or to continue as a going concern.

Along with several other industry competitors, the Company terminated most of the loan products it offered in July 2007 due to investor concerns and a destabilized secondary mortgage market . In August 2007, in light of the continued and widely publicized volatility in the secondary markets, the Company suspended funding of all loan products it offered and currently the Company does not have any plans to originate these types of loans in the near future. The Company does expect this decision to have a material impact on its financial condition and results of operations. There can be no assurance that the Company will have the financial resources necessary to fund the downsized operation if and until the secondary market stabilizes.

The Company currently has no outstanding balances on any warehouse line nor does the Company have any availability to fund any loan on any warehouse facility. All warehouse facilities have been terminated. In addition to the suspension of all loans, the Company has taken steps to significantly reduce operating expenses which include staff reductions and relocation of the Company’s main office to smaller quarters. Should the market conditions continue to deteriorate, we may take further steps including the orderly liquidation of the business.

Principles of Consolidation

The consolidated financial statements include the accounts of TMSF Holdings, Inc. and its wholly owned subsidiaries, The Mortgage Store Financial, Inc., and CPV Limited, Inc. All significant inter-company accounts and transactions have been eliminated in consolidation.

Mortgage Loans to be Repurchased

The Company maintains mortgage loan purchase and sale agreements with various mortgage bankers. The agreements provide for conditions, whereby the Company may be required to repurchase mortgage loans for various reasons, among which include:

         (a) a mortgage loan is originated in violation of the mortgage banker's requirements,
         (b) the Company breaches any terms of the agreement,
         (c) an early payment default occurs, or
         (d) the borrower has made a material misrepresentation in their loan application.

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NOTE 3 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

At June 30, 2007, the Company was obligated to repurchase 350 loans representing an aggregate balance of $87.2 million. As of June 30, 2007 and December 31, 2006, the Company had reserves for impaired mortgage loans of $14.6 million and $15.2 million, respectively.

The secondary mortgage market tightened starting in the fourth quarter of 2006. The mortgage banking industry as a whole experienced reduced pricing on the sales of their portfolios and increased scrutiny of compliance to the various normal and customary representations and warranties mortgage originators give the investment community in these agreements. As a result of certain breaches to the purchase and sale agreements, investors requested the Company to repurchase certain loans. The Company in many cases is given the option to indemnify the investor for any losses they incur on the loans subject to a repurchase request versus actually repurchasing the loan.

In accordance with generally accepted accounting priciples, mortgage loans to be repurchased are recorded as the aggregate of the unpaid principal balance, premium on sale, accrued interest, and corporate advances.

Reserve for Impairment of Mortgage Loans

The Company calculates loss allowances for impaired mortgage loans based on historic data related to frequency and severity of losses, which are reviewed and updated quarterly to reflect actual loss performance and other market data. The Company uses a rate of repurchase demands received on loans sold with limited recourse. The severity of loss is estimated based on actual historical losses and expected recoveries from insurance policies related to borrower and broker fraud and misrepresentation.

Losses incurred in settlements of repurchase demands and losses resulting from the disposition on repurchased mortgage loans are charged off against the loss reserve and should there be any recoveries under insurance policies, those recoveries will be credited back to the reserve.

On October 28, 2007 the Company received notification from the agency representing the insurance carrier informing the Company that each claim submitted under the Contingent Mortgage Impairment Repurchase Protection policy has been denied. The aggregate limits of liability for the carrier is $4,000,000 annual aggregate. The Company believes that it is covered under the policy and will take the steps necessary to protect its claim against the carrier. Due to the uncertainties of the claim, the Company has established additional reserves of $4.0 million.

Real Estate Owned

Real estate owned is foreclosed real property held for sale, and recorded at the aggregate lower of cost or fair value, less estimated costs to sell. These values are periodically reviewed and written-down if necessary. Costs of holding real estate and related gains and losses on disposition are included in the cost of loan origination and sales of mortgage loans.

At June 30, 2007, the Company owned 12 properties, eight of which were in escrow to be sold. The Company’s basis in these properties (cost plus expenses incurred) was approximately $3.6 million, not including the senior mortgages on three of the properties aggregating approximately $1.6 million. Management has estimated the proceeds on the sale of these properties, based upon current listing prices or contract sales prices on properties in escrow, at approximately $2.1 million (after satisfying the senior mortgages) resulting in a required loss reserve of $1.5 million. The Company classifies these properties as held for sale and expects to dispose of the properties within one year.

Loans Held for Investment

On July 26, TMS completed a micro-securitization with Bayview Financial which will be accounted for as a financing. As of June 30, 2007, 153 loans had been identified to be included in the transaction, with an aggregate principal balance of approximately $35.3 million. At the measurement date, the Company reclassified those loans from “held for sale” to “held for investment.”

Additionally, management has elected to classify the Company’s equity funded loans as held for investment. Such loans aggregated approximately $3.8 million. At the measurement date, the Company reclassified those loans from “held for sale” to “held for investment.”

Management believes its estimated reserve requirement of $3.0 million is adequate based upon the current status of the loan portfolio.

Accounting for Servicing of Financial Assets

In March 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 156, “Accounting for Servicing of Financial Assets (SFAS 156),” which provides an approach to simplify efforts to obtain hedge-like (offset) accounting. SFAS 156 amends FASB Statement No. 140, with respect to the accounting for separately recognized servicing assets and servicing liabilities. SFAS 156 (1) requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract in certain situations; (2) requires that a separately recognized servicing asset or servicing liability be initially measured at fair value, if practicable; (3) permits an entity to choose either the amortization method or the fair value method for subsequent measurement for each class of separately recognized servicing assets or servicing liabilities; (4) at initial adoption permits a one-time reclassification of available-for-sale securities to trading securities by an entity with recognized servicing rights, provided the securities reclassified offset the entity’s exposure to changes in the fair value of the servicing assets or liabilities; and (5) requires separate presentation of servicing assets and servicing liabilities subsequently measured at fair value in the balance sheet and additional disclosures for all separately recognized servicing assets and servicing liabilities. SFAS 156 is effective for all separately recognized servicing assets and liabilities as of the beginning of an entity’s fiscal year that begins after September 15, 2006, with earlier adoption permitted in certain circumstances. SFAS 156 also describes the manner in which it should be initially applied. The Company adopted SFAS 156 on January 1, 2007, however, management believes that for loans originated by the Company, the value of servicing rights for the short period prior to their sale to takeout investors is not material to the consolidated financial statements as of June 30, 2007 and no corresponding asset or liability has been recorded.

Income Taxes

The Company files a consolidated federal income tax return and a combined state return in California. Separate returns are filed in other jurisdictions as required. Deferred income taxes are recognized for the tax consequences in future years of differences between the tax basis of assets and liabilities and their carrying value in the financial statements at each period end, based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. The provision for income taxes represents the tax payable for the period, if any, and the change during the period in deferred tax assets and liabilities.

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NOTE 3 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

In July 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes— an Interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes.” FIN 48 prescribes a recognition threshold and measurement attributes for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Company adopted the provisions of FIN 48 effective January 1, 2007, however, there was no impact on the Company’s consolidated financial position.

Earnings per Share

The Company follows SFAS No. 128, “Earnings per Share”, and related interpretations for reporting earnings per share. SFAS No. 128 requires dual presentation of basic earnings per share (“basic EPS”) and diluted earnings per share (“diluted EPS”). Basic EPS excludes dilution and is computed by dividing net income or loss by the weighted average number of common shares outstanding during the reporting period. Diluted EPS reflects the potential dilution that could occur if stock options were exercised using the treasury stock method.

For the three months ended June 30, 2007 and 2006 the Company had basic and diluted EPS as follows:

	Three Months Ended June 30,
	2007 (restated)			2006
	Net Loss	Shares	Per-Share Amount	Net Income	Shares	Per-Share Amount
Net income (loss), weighted
average shares outstanding
and basic EPS	$ (19,450,254)	15,000,000	$ (1.30)	$ 1,821,816	15,000,000	$ 0.12
Effect of dilutive securities:
Dilutive stock options	-	-	-	-	612,928	-
Net income (loss), weighted
average shares outstanding
and diluted EPS	$ (19,450,254)	15,000,000	$ (1.30)	$ 1,821,816	15,612,928	$ 0.12

For the six months ended June 30, 2007 and 2006 the Company had basic and diluted EPS as follows:

	Six Months Ended June 30,
	2007 (restated)			2006
	Net Loss	Shares	Per-Share Amount	Net Income	Shares	Per-Share Amount
Net income (loss), weighted
average shares outstanding
and basic EPS	$ (19,210,463)	15,000,000	$ (1.28)	$ 1,829,486	15,000,000	$ 0.12
Effect of dilutive securities:
Dilutive stock options	-	-	-	-	896,488	-
Net income (loss), weighted
average shares outstanding
and diluted EPS	$ (19,210,463)	15,000,000	$ (1.28)	$ 1,829,486	15,896,488	$ 0.12

Stock-Based Compensation

Effective January 1, 2006, the Company adopted SFAS 123R using the modified prospective method, which required the Company to record compensation expense for all awards granted after the date of adoption, and for the unvested portion of previously granted awards that remained outstanding at the date of adoption. Prior to the adoption, the Company disclosed compensation expense on a pro forma basis in the notes to the financial statements in accordance with the provisions of Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”).

The Company continues to use the Black-Scholes option pricing model to determine the estimated fair value for stock-based awards. The use of the Black-Scholes model requires the use of extensive actual employee exercise behavior data and the use of a number of complex assumptions including expected volatility, risk-free interest rate, forfeitures, and expected dividends. The assumptions used to value options granted as of June 30, 2007 and 2006 are as follows:

	Three Months Ended		Six Months Ended
	June 30, 2007 (unaudited)	June 30, 2006 (unaudited)	June 30, 2007 (unaudited)	June 30, 2006 (unaudited)
Risk-free interest rate	4.3% - 5.0%	4.3% - 5.0%	4.3% - 5.0%	4.3% - 5.0%
Expected term (in years)	1 - 10	1 - 10	1 - 10	1 - 10
Expected dividend yield	0.0%	0.0%	0.0%	0.0%
Expected volatility	80.0% - 120.0%	99.0% - 120.0%	80.0% - 120.0%	99.0% - 120.0%

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NOTE 3 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

The following table summarizes the impact of the adoption of SFAS No. 123R on stock-based compensation costs for employees in our consolidated statement of income for the three months and six months ended June 30, 2007 and 2006 using the Black-Scholes model:

	Three Months Ended		Six Months Ended
	June 30, 2007 (unaudited)	June 30, 2006 (unaudited)	June 30, 2007 (unaudited)	June 30, 2006 (unaudited)
Employee stock-based compensation in:
Cost of sales	-	-	-	-
Sales and marketing expense	-	-	-	-
General and administrative	$13,713	$42,851	$43,569	$80,419
Total employee stock-based compensation in
operating expenses	13,713	42,851	43,569	80,419
Total employee stock-based compensation	$13,713	$42,851	$43,569	$80,419

Estimates

The preparation of these consolidated financial statements 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 consolidated financial statements and the reported amounts of income and expenses during the reporting periods. Actual results could differ from those estimates.

Major Customers

During the three months and six months ended June 30, 2007 and 2006, the Company sold 25.8%, 19.1%, and 18.5%, and 26.3%, 23.4%, and 15.2%, and 25.7%, 21.0%, and 15.5%, and 29.1%, 19.4%, and 13.4%, respectively, of its mortgage loans to three institutional investors.

Impact of Recently Issued Accounting Statements

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS 157”), which defines fair value, provides a framework for measuring fair value, and expands the disclosures required for fair value measurements. SFAS 157 applies to all accounting pronouncements that require fair value measurements. It does not require any new fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007. Accordingly, the Company will adopt SFAS 157 commencing in the first quarter of 2008. The Company is currently assessing the potential impact of SFAS 157 on its consolidated financial statements.

In February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial Assets and Liabilities – Including an amendment of FASB Statement No. 115 (“SFAS 159”). SFAS 159 permits entities to choose to measure certain financial assets and liabilities at fair value. Unrealized gains and losses, arising subsequent to adoption, are reported in earnings. SFAS 159 is effective for fiscal years beginning after November 15, 2007. Accordingly, the Company will adopt SFAS 159 commencing in the first quarter of 2008. The Company is currently assessing the impact of SFAS 159 on its consolidated financial statements.

Note 4 — CONCENTRATION OF CREDIT RISK

Uninsured Cash

The Company maintains cash and cash equivalents at several financial institutions. From time to time, the balances in these accounts exceed the Federal Deposit Insurance Corporation’s insured amount.

Loans Originated

The Company sells its mortgages within a short period after origination and does not maintain any servicing portfolio. The pricing that the Company receives for the sale of its mortgage loans reflects the characteristics of products such as loan program type, borrowers’ credit score, and region. The related risks associated with the Company’s mortgage loans held for sale are limited to fluctuations in interest rates which affect those mortgages that are not committed in a purchase transaction at any given time.

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The following table sets forth information concerning the Company’s mortgage loan production by borrower credit scores for the three months and six months ended June 30, 2007 and 2006.

	Three Months Ended June 30,				Six Months Ended June 30,
	2007		2006		2007		2006
Credit Score	Amount	%	Amount	%	Amount	%	Amount	%
> 709	$32,630,944	42.98%	$193,852,021	32.56%	$159,542,524	36.96%	$305,159,123	31.63%
680 - 709	24,453,163	32.21%	149,558,397	25.12%	107,303,110	24.86%	230,082,276	23.85%
660 - 679	10,380,340	13.67%	110,693,021	18.59%	83,486,557	19.34%	179,837,088	18.64%
640 - 659	5,298,953	6.98%	81,095,684	13.62%	50,949,681	11.80%	141,940,699	14.71%
620 - 639	3,165,376	4.17%	53,748,073	9.03%	28,560,356	6.62%	93,487,895	9.69%
600 - 619	0	0.00%	4,580,500	0.77%	769,100	0.18%	8,642,855	0.90%
580 - 599	0	0.00%	1,421,425	0.24%	815,745	0.19%	4,953,930	0.51%
550 - 579	0	0.00%	0	0.00%	0	0.00%	0	0.00%
520-549	0	0.00%	354,500	0.06%	0	0.00%	354,500	0.04%
500-519	0	0.00%	0	0.00%	0	0.00%	231,000	0.02%
‹ 500	0	0.00%	0	0.00%	180,000	0.04%	0	0.00%

TOTAL	$75,928,776	100.00%	$595,303,621	100.00%	$431,607,073	100.00%	$964,689,366	100.00%

The following table sets forth the percentage of all loans originated or purchased by region for the three months and six months ended June 30, 2007 and 2006.

	Three Months Ended June 30,				Six Months Ended June 30,
Geographic	2007		2006		2007		2006
Distribution	Amount	%	Amount	%	Amount	%	Amount	%
CALIFORNIA	$58,038,019	76.4%	$421,802,091	70.9%	$324,204,271	75.1%	$666,560,944	69.1%
SOUTH ⁽²⁾	8,763,795	11.5%	58,701,188	9.9%	39,124,613	9.1%	104,876,860	10.9%
MIDDLE ATLANTIC⁽³⁾	1,314,200	1.7%	20,857,408	3.5%	14,578,405	3.4%	35,413,569	3.7%
MIDWEST ⁽⁴⁾	262,500	0.3%	15,537,902	2.6%	4,764,960	1.1%	27,870,150	2.9%
WEST ⁽⁵⁾	5,980,812	7.9%	48,414,156	8.1%	38,828,029	9.0%	81,154,028	8.4%
SOUTHWEST ⁽⁶⁾	941,550	1.2%	26,787,976	4.5%	9,478,895	2.2%	43,680,710	4.5%
NEW ENGLAND ⁽⁷⁾	627,900	0.8%	3,202,900	0.5%	627,900	0.1%	5,133,105	0.5%

TOTAL	$75,928,776	100%	$595,303,621	100%	$431,607,073	100%	$964,689,366	100%

_________________

(1)     Percentages may not sum because of rounding.
(2)      Alabama, Arkansas, Florida, Georgia, Kentucky, Louisiana, Mississippi, Missouri, North Carolina, South Carolina, Tennessee, Virginia, and West Virginia.
(3)     D.C., Delaware, Maryland, New Jersey, and Pennsylvania.
(4)     Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Nebraska, North Dakota, Ohio, South Dakota, and Wisconsin.
(5)     Alaska, Colorado, Hawaii, Idaho, Montana, Nevada, Oregon, Utah, Washington, and Wyoming.
(6)     Arizona, New Mexico, Oklahoma, and Texas.
(7)     Connecticut, Maine, Massachusetts, and Rhode Island.

The following table sets forth selected information about the Company's total loan production and purchases for the three months and six months ended June 30, 2007 and 2006.

	Three Months Ended June 30,				Six Months Ended June 30,
	2007		2006		2007		2006
	Amount	%	Amount	%	Amount	%	Amount	%
Alt-A	$69,272,572	91.2%	$580,206,855	97.5%	$413,856,739	95.9%	$937,412,262	97.2%
Other non-conforming	921,704	1.2%	10,939,044	1.8%	5,308,359	1.2%	17,061,582	1.8%
Subprime ⁽¹⁾	-	0.0%	2,305,722	0.4%	135,525	0.0%	4,692,972	0.5%
Total non-conforming	70,194,276	92.4%	593,451,621	99.7%	419,300,623	97.1%	959,166,816	99.4%

Conforming	5,734,500	7.6%	1,852,000	0.3%	12,306,450	2.9%	5,522,550	0.6%

TOTAL	$75,928,776	100%	$595,303,621	100%	$431,607,073	100%	$964,689,366	100%

_________________

(1) Subprime loans are, generally, loans made to borrowers with a weighted average credit score of 620 or less or have had more than one delinquent mortgage payment during the preceding 12 months.

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Note 5 – LOSS RESERVES

The Company calculates the provision for losses for impaired mortgage loans based on its volume of loan sales, historic rate of default and expected severity of loss. The Company provides for losses on real estate owned (REO) based on the estimated sales prices of each property (from full appraisals or broker price opinions) less estimated selling expenses. Provision for losses for impaired mortgage loans and REO are charged to cost of sales in the Company’s consolidated statements of income. The following table summarizes the changes to reserves for the six months ended June 30, 2007.

	Reserve for Impaired Mortgage Loans	Reserve for Loans Held for Investment	Reserve for REO	Total Reserve
Balance - December 31, 2006	$15,175,866	-	$1,966,637	$17,142,503
Provision for losses	2,710,000	-	409,984	3,119,984
Charge-offs against reserve	(6,468,007)	-	(384,282)	(6,852,289)
Balance - March 31, 2007	$11,417,859	-	$1,992,339	$13,410,198
Provision for losses	11,000,481	3,035,000	502,429	14,537,910
Charge-offs against reserve	(7,865,340)	-	(994,768)	(8,860,108)

Balance - June 30, 2007	$14,553,000	$3,035,000	$1,500,000	$19,088,000

Note 6 – REAL ESTATE OWNED

As of June 30, 2007 and December 31, 2006, the Company had 12 and 18 properties with a book value of $3.6 million and $5.0 million net of loss reserves of $1.5 million and $2.0 million, respectively, recorded as real estate owned. Senior mortgages payable to third parties related to these properties aggregated to $1.6 million and $3.4 million, as of June 30, 2007 and December 31, 2006, respectively and were included in accounts and other payables in the consolidated balance sheets. The Company classifies these properties as held for sale and expects to dispose of the properties within one year.

Note 7 — WAREHOUSE LINES OF CREDIT

Lehman Brothers

During February 2004, the Company secured a warehouse line of credit with Lehman Brothers Bank with a maximum purchase amount of $30 million. The credit facility is structured as a repurchase agreement whereby the financial institution may, at its sole discretion, purchase mortgage loans from the Company. During April 2005 and September 2005, the maximum purchase amount was increased to $75 million and $100 million, respectively. In April 2006, this facility was further increased to $200 million. Under the terms of this warehouse agreement, interest accrues at LIBOR plus a pricing spread between 1.00% and 1.375% per annum, which is dependent on the specific investor type and the mortgage loan category.

In addition, under the warehouse facility the Company must maintain a balance in a separate restricted cash account as a pledge for amounts funded by the warehouse lender. The Company shall ensure that at all times the balance in the cash account is no less than the greater of (a) $100,000 and (b) the aggregate of all cash amounts allocated for all mortgage loans originated on this line of credit. At June 30, 2007, the pledged amounts for this warehouse facility aggregated $0.

In February 2006, this agreement was amended to increase the aging period for loans to be carried through this facility from 90 to 180 days. The interest rate on these aged loans was also changed to one month LIBOR plus a 5% margin. Furthermore, subject to certain restrictions up to 10% of this facility may be used to carry any other loan originated by the Company through other financing facilities which is aged beyond the permissible aging period (Aged Loans), or which the Company had sold to an investor and has been requested to repurchase (Breach Loans). The Company will be required to make additional pay-downs periodically for Aged and Breach Loans retained on this sub-section of the facility.

This facility had a one year term and was renewable with the consent of both parties. The warehouse line of credit contains financial and non-financial covenants of which management believes the Company was in compliance with as of March 31, 2007. The facility expired on April 10, 2007 and the parties agreed to an extension to April 17, 2007. On April 17, 2007, all loans secured under the facility were moved to a new warehouse facility with another lender – refer to discussion of warehouse line with Terwin Mortgage Warehouse.

Washington Mutual

In March 2004, the Company secured a committed warehouse line of credit with Washington Mutual Bank in the amount of $10 million. The unpaid amount of each advance outstanding bears interest from the date of such advance until paid in full at a rate of interest equal to the lesser of the maximum rate allowed by law and a floating rate of interest equal to 1 month LIBOR plus a margin between 1.75% and 2.50% per annum, dependent on the type of loan funded. This facility was subsequently reduced to $4 million in August 2005. The warehouse line of credit contains financial and non-financial covenants of which management believes the Company was in compliance with as of June 30, 2007, except for the minimum tangible net worth, current ratio, and debt to net worth ratio.

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Note 7 — WAREHOUSE LINES OF CREDIT (Continued)

In July 2004, the Company entered into an Early Purchase Agreement with Washington Mutual Bank whereby certain qualifying loans are acquired by the institution immediately upon origination. Under terms of this agreement the Company retains the right to service the notes. As a condition of acquisition of loans by the financial institution, the Company assigns commitments by takeout investors to purchase the notes with servicing rights released at later dates. The price that loans under this agreement are acquired by the financial institution will be 98% of the takeout investor’s price, not to exceed the original note amount. Loan originations under provisions of this facility are recognized as sales of loans and are not reflected on the Company’s balance sheet. Upon receipt of funds from takeout investors, the financial institution releases its interest in the loan and transfers excess funds pertaining to the servicing rights to the Company. Loans which are not purchased by a takeout investor within 90 days are subject to recalculation of the acquisition price. After an additional 90 days, such aged loans become defective and must be repurchased by the Company.

As of June 30, 2007, this Early Purchase facility had a maximum purchase commitment of $300 million at any time. Upon purchase of loans by takeout investors, the unused facility up to the maximum commitment may be re-used by the Company to originate new loans. This Early Purchase Agreement meets all criteria under SFAS No. 140 for the purpose of defining “transfer of financial assets”. As of June 30, 2007, $11.8 million of the commitment limit was utilized. Although SFAS 156 requires that all separately recognized servicing assets and liabilities be initially measured at fair value, management believes that for loans originated through this facility, the value of servicing rights for the short period prior to their sale to takeout investors is not material to the consolidated financial statements as of June 30, 2007 and no corresponding asset or liability has been recorded. In addition, this Early Purchase Facility has certain financial and non-financial covenants of which management believes the Company was in compliance with as of June 30, 2007, except for the minimum tangible net worth, current ratio, and debt to tangible net worth ratio.

Terwin Mortgage Warehouse

In April 2007, the Company secured a committed warehouse line of credit with Terwin Mortgage Warehouse in the amount of $25 million. The unpaid amount of each advance outstanding bears interest from the date of such advance until paid in full at a rate of interest equal to the lesser of the maximum rate allowed by law and a floating rate of interest equal to 1 month LIBOR plus a margin between 2.25% and 3.25% per annum, dependent on the type of loan funded. This facility was subsequently increased to $50 million in June 2007. The warehouse line of credit contains financial and non-financial covenants of which management believes the Company was in compliance with as of June 30, 2007, except the put back ratio covenant.

Impac Warehouse Lending Group

In June 2007, the Company secured a committed warehouse line of credit with Impac Warehouse in the amount of $50 million. The unpaid amount of each advance outstanding bears interest from the date of such advance until paid in full at a rate of interest equal to the lesser of the maximum rate allowed by law and a floating rate of interest equal to 1 month LIBOR plus a margin between 2.00% and 4.00% per annum, dependent on the type of loan funded. The warehouse line of credit contains financial and non-financial covenants of which management believes the Company was in compliance with as of June 30, 2007 except for minimum tangible net worth and net income requirement.

No waivers were requested by the Warehouse providers due to the very limited funding requirements of the Company. Subsequently, all loans on all the Company’s warehouse lines were sold into the secondary mortgage market. The Company currently has no outstanding balances on any warehouse line nor does the Company have any availability to fund any loan on any warehouse facility. All warehouse facilities have been terminated.

Note 8 – SUBORDINATED NOTE PAYABLE

In December 2006 the Company issued a Subordinated Note Payable to Genesis Financial Services Fund, LLC in the principal sum of $10 million. At June 30, 2007 the Company had drawn down $3 million of the total. The note is due and payable on December 28, 2011. The simple interest rate on the note is the prime rate plus a margin of 7% and is payable monthly. The note is redeemable subject to certain fees and carries certain financial and non-financial covenants of which management believes the Company was in compliance with as of June 30, 2007, except for the minimum tangible net worth for which a waiver has been received, the annual net income covenant, interest coverage covenant and loan charge-off ratio, for which the lender has provided forbearance through September 30, 2007. As such, the note is classified as a current liability.

On September 27, 2007, the Company entered in a forbearance agreement with the Lender whereby for consideration of a principal reduction payment of $875,000.00 Lender agreed to forbear from exercising its rights and remedies arising under the Note Payable Documents from the existing defaults until February 1, 2008. New defaults by the Company under the Note Payable Documents that are currently unknown to Lender or occur after September 27, 2007 are excluded from the forbearance and the Lender’s right to immediately commence exercising rights and remedies as a result thereof are not affected by the forbearance agreement. The remaining balance of the Subordinated Debt Payable is $2,125,000.00.

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Note 9 — COMMITMENTS AND CONTINGENCIES

LA Business Tax

The Company was informed in January 2004 that the city of Los Angeles (“City’) had assessed an additional $136,550 in business tax for the years 2001 through 2003. The Company contested this assessment on the grounds that the City assessment is 1) based on the Company’s entire revenue including fees collected by the Company on behalf of third parties, such as commissions and escrow impounds; and 2) based on the Company’s nationwide revenue and not only on revenue generated from transactions that occurred within the City.

The Company retained legal counsel as consultants and an administrative hearing was held on May 11, 2004. Subsequently, in August 2004 the Company provided additional information to examiners with regards to items in dispute. In April 2005 the City conducted a review audit and requested further information which was provided to them.

Subsequently, the City has agreed to exclude third party fees from gross receipts, and in principal to allow apportionment outside the City of Los Angeles. However, the apportionment process has not been finalized at this date. In order to stop the continued assessment of interest prior to finalization of the apportionment process, we paid $52,396 as of June 30, 2007. The Company has currently received a request for payment of interest and penalty for a sum of $32,129 for previous sums negotiated. However, the Company believes that this amount is erroneous and is currently negotiating the correct apportionment amount with the City which may result in the waiver of the mentioned sum or the payment of the full amount.

Operating Leases

The Company leased its previous office facilities from a shareholder, which expired in November 2005. In September 2005, the Company entered into a sublease agreement for its new corporate and administrative offices at a new location in Los Angeles, California, with lease payments commencing on December 1, 2005, which expired on May 31, 2007. In May 2007, the Company entered into a sublease agreement for its new corporate and administrative offices at a new location in Los Angeles, California, with lease payments commencing on June 1, 2007. This lease will expire on November 30, 2008. Future minimum lease payments under this new non-cancelable operating lease as of June 30, 2007 are $111,141.

Future minimum lease payments under all of its operating leases, including the above and separate equipment leases, at June 30, 2007 were as follows:

	Operating Lease
Remainder of 2007	$154,092
2008	278,591
2009	43,062
2010	4,628
2011	256
Total minimum lease payments	$480,629

Legal Proceedings

From time to time, the Company is party to various legal proceedings incidental to its business. In the opinion of management, none of these items, individually or in the aggregate, would have a significant effect on the consolidated financial position, result of operations, cash flows, or liquidity of the Company.

Note 10 — INCOME TAXES

The Company adopted the provisions of FIN 48 effective January 1, 2007. The implementation of FIN 48 did not have an impact on the Company’s consolidated financial position. As of January 1, 2007, there were no unrecognized tax benefits.

The Company and its subsidiaries files income tax returns in the U.S. Federal jurisdiction and various state jurisdictions and the Company is currently being audited by the IRS for the 2004 and 2005 tax years. Management believes that its accrual for tax liabilities is adequate for all open audit years based on its assessment of many factors including past experience and interpretation of tax law. This assessment relies on estimates and assumptions and may involve a series of complex judgments about future events. With a few exceptions, the Company is no longer subject to U.S. Federal, state or local income tax examinations by tax authorities for the years before 1999. It is possible that Federal, state or local examinations will be settled during the next twelve months. On the basis of present information, it is the opinion of the Company’s management that any assessment resulting from the current audits will not have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.

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NOTE 10 — INCOME TAXES (Continued)

The following table presents the current tax provision for Federal and state income taxes for the six months ended June 30, 2007 and 2006, at an effective tax rate of -2.7%:

	For the Six Months Ended June 30,
	2007 (restated)	2006
Current
Federal	$505,980	$984,587
State	-	315,761

Provision for income taxes	$505,980	$1,300,348

As of January 1, 2007, the Company did not have any unrecognized tax benefits. As of June 30, 2007, the Company has provided reserve for the following uncertain tax positions due to the following facts:

The Company does not anticipate receiving a tax benefit from the net operating loss in 2007 as the Company ceased to actively participate in the mortgage loan business.
The Company has filed amended 2006, 2005, and 2004 tax returns and received federal tax refunds of $12.1 million and California State tax refund of $1.2 million in June and July 2007, respectively. As the amended tax returns are subject to further inspection from the tax authorities, the Company has recorded the amounts as non-current tax payable.

Income tax expense differs from the amounts computed by applying the United States Federal income tax rate of 34.0% to income taxes as a result of the following for the six months ended June 30, 2007 and 2006:

	For the Six Months Ended June 30,
	2007 (restated)		2006
	Amount	Percentage of pretax income	Amount	Percentage of pretax income

Federal tax on pretax income at statutory rates	$(6,359,524)	34.0%	$1,064,143	34.0%
State tax, net of Federal benefit	(1,212,719)	6.5%	208,402	6.7%
Valuation allowance for deferred tax assets	5,037,088	(26.9)%	-	-
FIN 48 liability adjustment	5,682,539	(30.4)%	-	-
Other	(2,641,404)	(14.1)%	27,803	0.9%

Total	$505,980	(2.7)%	$1,300,348	41.5%

Note 11 — STOCK OPTIONS

At June 30, 2007, the Company had one stock-based employee compensation plan (the “Plan”). Below is a summary of option activity under the Plan for the periods presented:

Options	Shares	Weighted Average Exercise Price	Average Contractual Term Remaining	Aggregate Intrinsic Value

Balance at December 31, 2006	1,970,000	$1.27
Options granted	-	-
Options exercised	-	-
Options cancelled	7,500	$2.00
Options expired	-	-
Balance at March 31, 2007	1,962,500	$1.27	0.13 - 8.80	$1,438,855
Options granted	-	-
Options exercised	-	-
Options cancelled	154,500	$2.28
Options expired	30,000	$1.40
Balance at June 30, 2007	1,778,000	$1.18	0.95-8.63	$1,087,360
Exercisable at June 30, 2007	1,637,725	$1.04	0.95-8.63	$ 651,462

Compensation cost on non-vested options	$378,225
Weighted average period for non-vested options	7.82 - 8.63

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Consulting Expenses

During the three months and six months ended June 30, 2007 and 2006, the Company paid $0 and $0, and $112,500 and $225,000, respectively, for consulting expenses to companies owned by shareholders. The Company also paid $0 and $0, and $90,000 and $180,000, respectively, for consulting expenses to a relative of a shareholder during the three months and six months ended June 30, 2007 and 2006. Furthermore, during the three months and six months ended June 30, 2007 and 2006, the Company paid consulting expenses of $15,000 and $30,000 and $15,000 and $25,000, to outside directors, respectively.

Lease Expenses

The Company pays for certain vehicle operating expenses on behalf of certain officers. Lease payments made for these officers for the three months and six months ended June 30, 2007 and 2006 were $2,117 and $5,129 and $21,551 and $28,902, respectively.

Mortgage Loans to Employees

During the normal course of its business the Company may provide mortgage loans to its employees and related parties at prevailing market rates. During the six months ended June 30, 2007 and 2006, the Company funded $424,000 and $1,048,705, respectively, in mortgage loans to a director and persons related to officers. All loans were subsequently sold in the secondary market at comparable margins. At June 30, 2007 the Company did not hold any mortgage loans made to its directors, officers, or executive level employees.

Note 13 — SUBSEQUENT EVENTS

Going Private. TMSF Holdings, Inc., plans to terminate its public reporting obligations under the federal securities laws by taking the Company private as a result of consummating a short form merger with TMSF Merger Corporation, a corporation recently formed to consummate the merger (the “Merger”). After the registration of our common stock is terminated, we will no longer be subject to the reporting and related obligations under these laws and we will cease to file certain reports with the Securities and Exchange Commission. This will also result in the termination of the quotation of our common stock on the over-the-counter, pink sheets (“OTC Pink Sheets”).

The Company’s majority stockholders (consisting of Raymond Eshaghian, Massoud Yashouafar, Solyman Yashouafar, Hamid Joseph Nourmand and Doris Nourmand) will contribute their shares, representing approximately 93% of the outstanding shares of the Company’s common stock to TMSF Merger Corporation (Parent). Thereafter, each share of the Company’s common stock not owned by TMSF Merger Corporation or stockholders of the Company who properly exercise statutory appraisal rights applicable under Delaware law will be converted into the right to receive $0.45 in cash. Shares held by stockholders who exercise and perfect their statutory appraisal rights will be converted into the right to receive an amount determined to be fair value by the court in the appraisal proceeding. The purpose of the Merger is to provide a source of liquidity to the public stockholders and to enable Parent to acquire all of the outstanding equity interests in the Company and eliminate the expenses and potential liabilities associated with operating a public company. There is no commitment or agreement in place that obligates the Company to proceed or complete the planned Merger. The Company may postpone or abandon its plans to complete the Merger at any time before any such transaction is consummated.

SUMMARY TERM SHEET

PURPOSE OF MERGER

Immediately before the Merger, Parent will own approximately 93% of the Company’s common stock. The purpose of the Merger is to provide a source of liquidity to the public stockholders and to enable Parent to acquire all of the outstanding equity interests in the Company and eliminate the expenses and potential liabilities associated with operating a public company.

CONTRIBUTION AND MERGER

The following steps have been, or are expected to be, taken before the Merger referred to in this information statement.

Parent is a Delaware corporation recently organized by the Filing Persons to hold all of the shares of Company’s common stock beneficially owned by the Filing Persons. Before October 3, 2007, the Filing Persons, or entities controlled by the Filing Persons, conveyed to Parent 13,944,100 shares of Company’s common stock in exchange for 13,944,100 shares of Parent’s common stock, par value $0.001 per share.

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It is anticipated that on or about October 11, 2007, the Filing Persons’ shares of the Company’s common stock, as transferred to Parent, will represent approximately 93% of the Company’s outstanding common stock. On or after October 11, 2007, and after the above-described contribution of the shares, Parent proposes to cause the Company to merge with Parent as a means of acquiring all of the shares of Company’s common stock not owned by Parent and to provide a source of liquidity to holders of those shares.

Each share of the Company’s common stock outstanding immediately before the Merger and after the contribution, other than shares held by the Parent and stockholders who exercise their dissenters’ rights of appraisal, by virtue of the Merger will be converted into the right to receive $0.45. Shares held by stockholders who exercise and perfect their statutory appraisal rights will be converted into the right to receive an amount determined to be fair value by the court in the appraisal proceeding. All shares of the Company’s common stock held by the Parent immediately before the Merger will be cancelled in the Merger and the Filing Persons will receive new shares of stock from the Company. Immediately following the Merger, the Filing Persons will own 100% of the outstanding capital stock of the Company. The Merger will have the effect of cashing out in full all other holders of the Company’s common stock outstanding immediately before consummation of the Merger.

PRINCIPAL TERMS OF THE MERGER

General. Parent intends to cause the Company to merge with Parent on or about October 11, 2007 pursuant to a “short form” merger. As a result of the “short form” merger, each share of the Company’s common stock not owned by Parent will be converted into the right to receive $0.45 in cash. Shares held by stockholders who exercise and perfect their statutory appraisal rights will be converted into the right to receive an amount determined to be fair value by the court in the appraisal proceeding. Parent will not be required to enter into a merger agreement with the Company and Parent is not required to seek the approval of the directors of the Company for any aspect of the transaction contemplated hereby, however such approval has been obtained. Stockholders of the Company will not be entitled to vote their shares with respect to the Merger. The Merger will become effective upon the filing of a Certificate of Ownership executed by the Parent, which Parent is authorized to file to consummate the contemplated short form merger under Delaware law.

Merger Consideration.The consideration in the Merger will be $0.45 per share in cash (the “Merger Price”).

Company Shares Outstanding.As of October 11, 2007, a total of 15,000,000 shares of the Company’s common stock were outstanding.

Payment for Shares.Parent will pay you for your shares of Company common stock promptly after the effective date of the Merger. Instructions for surrendering your stock certificates will be set forth in a Notice of Merger and Appraisal Rights and a Letter of Transmittal, which will be mailed to stockholders of record of the Company within 10 calendar days following the date the Merger becomes effective and should be read carefully. Please do not submit your stock certificates before you have received these documents. Sending us your stock certificates with a properly signed Letter of Transmittal will waive your appraisal rights described below.

Source and Amount of Funds.The total amount of funds necessary to make cash payments to stockholders in connection with the Merger and for related expenses is estimated to be approximately $472,500. The Parent intends to use borrowed funds to make cash payments to the stockholders to be cashed out in the Merger and to pay related fees and expenses. The Parent will obtain the necessary funds from the Filing Persons in the form of an unsecured loan. At present, no plans or arrangements have been made by Parent or the Filing Persons with respect to the repayment or the refinancing of this loan.

EFFECTS OF THE MERGER

Completion of the Merger will have the following consequences:

The Company and Parent will be combined into a single, privately held entity;

Immediately after the Merger, the Filing Persons will own 100% of the outstanding capital stock of the Company. Accordingly, only the Filing Persons will have the opportunity to participate in the future earnings and growth, if any, of the Company. Similarly, only the Filing Persons will face the risk of losses generated by the Company’s operations or the decline in value of the Company after the Merger;

The shares of Company common stock will no longer be publicly traded. In addition, the combined entity will not be subject to the reporting and other disclosure requirements of the Securities Exchange Act of 1934, including requirements to file annual and other periodic reports; and

Subject to the exercise of statutory appraisal rights, each of your shares will be converted into the right to receive $0.45 in cash, without interest.

Industry Operating Environment - Along with several other industry competitors, the Company terminated most of the loan products it offered in July 2007 due to investor concerns and a destabilized secondary mortgage market . In August 2007, in light of the continued and widely publicized volatility in the secondary markets, the Company suspended funding of all loan products it offered and currently the Company does not have any plans to originate these types of loans in the near future. The Company does expect this decision to have a material impact on its financial condition and results of operations. There can be no assurance that the Company will have the financial resources necessary to fund the downsized operation if and until the secondary market stabilizes.

On July 24, 2007, the Company executed an agreement with Bayview Financial for the micro securitization (“Bayview asset-backed securities”) totaling approximately $36 million

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

The following discussion should be read in conjunction with our consolidated financial statements and notes thereto appearing elsewhere in this quarterly report on Form 10-Q.

This quarterly report may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements with regard to descriptions of our plans or objectives for future operations, products or services, and forecasts of our revenues, earnings or other measures of economic performance. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include the words “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate,” or words of similar meaning, or future or conditional verbs such as “will,” “would,” “should,” “could,” or “may.”

Forward-looking statements, by their nature, are subject to risks and uncertainties. A number of factors — many of which are beyond our control — could cause actual conditions, events or results to differ significantly from those described in the forward-looking statements and reported results should not be considered an indication of our future performance. Some of these risk factors, include, among others certain credit, market, operational, liquidity and interest rate risks associated with our business and operations, changes in business and economic conditions, accounting estimates and judgments and legislation including the Sarbanes-Oxley Act of 2002. These risk factors are not exhaustive, and additional factors that could have an adverse effect on our business and financial performance are set forth under “Risk Factors” and elsewhere in this quarterly report.

Forward-looking statements speak only as of the date they are made. We do not undertake to update forward-looking statements to reflect circumstances or events that occur after the date forward-looking statements are made.

General

We are a financial holding company that, through our wholly owned subsidiary The Mortgage Store Financial, Inc., was engaged as a nationwide mortgage banker to originate, finance, and sell conforming and non-conforming mortgage loans secured by single-family residences until August 2007, when all lending operations ceased.

Prior to ceasing operations, to the extent we could, we originated our loans primarily through independent mortgage brokers across the United States and, to a lesser extent, through our direct sales force in our retail offices. To the extent that a secondary market existed, we primarily sold our loans in whole loan transactions and did not retain any interest in the servicing of the loans.

Financing, Revenues, and Interest Rate Management

Prior to ceasing our operations in August 2007, our business model relied primarily on our ability to originate mortgage loans and sell those loans on a servicing-released basis in the secondary mortgage market at prices that result in a competitive operating margin. Our primary components of revenue have been gains from the sales of loans, which is the excess of the sale price of the loan over its outstanding principal balance reduced by the direct costs of originating the loan, mortgage interest income, and loan origination fees.

The Mortgage Store maintains revolving warehouse lines of credit and repurchase agreements, which we collectively refer to as our warehouse facilities, to finance the origination of mortgage loans prior to sale. We recognize interest income on loans held for sale and interest expense on any associated warehouse facility throughout the period preceding the sale of the loans. Gains or losses on loan sales are recognized when we surrender control over the loans, generally on the settlement date, based upon the difference between the proceeds received from the sale and the net carrying value of the loans. The proceeds from the sales are used to repay our warehouse facilities, fund new originations, and grow our operations.

Currently, The Mortgage Store is an interim loan servicer, meaning that it services all of its loans on a temporary basis. The Mortgage Store will typically service loans for purchasers of its loans for a period of up to 90 days after the sale date, at which time the servicing is transferred to the purchaser. Monies from the loans sold to non-affiliated buyers are typically received within a period between 30 and 60 days from origination.

Mortgage loans enter our integrated team origination process through our wholesale channel, which solicits business from mortgage brokers, and our retail channel, which markets directly to the general public. Our wholesale channel currently has approximately 5,000 approved brokers of which approximately 600 actively conducted businesses with us during the six months ended June 30, 2007. For the three months and six months ended June 30, 2007 and 2006, we originated approximately $75.9 million and $431.6 million, $595.3 million and $964.7 million of mortgage loans, respectively, of which approximately 94.1% and 95.6%, and 92.9% and 91.3%, respectively, were generated through our wholesale channel and approximately 4.4% and 3.0%, and 7.1% and 8.7%, respectively, were generated through our retail channel. Our business and profitability are sensitive to movements in interest rates. The level of total origination activity in the mortgage industry at large, which includes both conforming and non-conforming mortgage loans, has decreased as higher interest rates make home buying more costly for consumers and refinancing of existing mortgages less attractive to current borrowers, and nationally, a general slowdown for new home sales; we expect this trend to continue for the foreseeable future.

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The mortgage industry is highly competitive. As a result, we are not able to originate loans at rates higher than market rates. We primarily operate in the non-conforming sector and our borrowers typically have a combination of risk characteristics for which we can charge a higher interest rate than those for conforming loans. Our borrowers tend to engage more in cash-out refinances than rate or term refinances for conforming mortgage loans and borrowing activity is generally less sensitive to increases in interest rates. The Alt-A and subprime markets have historically had higher percentages of cash-out refinances because of the borrowers’ characteristics, and because borrowers are accustomed to paying a higher interest rate than is available on conforming loans. Borrowers in these categories tend to use the equity in their property to fund other consumer needs, including debt consolidation and major consumer purchases.

Revenue Model

Primary Components of Revenues and Expenses in the Mortgage Loan Business

Income from the sales of mortgage loans. To the extent we originate loans:

The components of income from the sales of mortgage loans include:

the premium, which is the excess cash selling price over the outstanding principal balance of the mortgage loan sold. The amount of the premium is affected by market conditions, loan type, credit quality, interest rate and other factors negotiated between us and institutional purchasers;
the portion of the points and fees paid by the borrower that we retain; and
mortgage servicing rights, MSRs, the capitalized value of which is an asset that represents the present value of future receipts, net of costs, to service the loans. We base this estimate on various assumptions, including expected cost to service and estimated prepayment rates.

Income from the sales of mortgage loans is reduced by the direct costs that are incurred to originate mortgage loans, such as the premium yield adjustments or the amounts paid to brokers for brokering the loans for us, and a provision for losses for loan repurchases.

Mortgage interest income. Our primary interest-earning assets are the mortgage loans that we have originated and are held for sale. We earn interest from the time we originate the mortgage loan until we sell the mortgage loan in the secondary market.

Expenses. Our primary components of expenses are expected to be interest expense on our warehouse facilities and other debt issued, general and administrative expenses and payroll and related expenses arising from our origination business. As our loan production increases, we would generally expect to hire additional employees and we would also expect our variable expenses to increase. Also, we may incur additional marketing and advertising expenses to achieve our production goals. We would also expect to incur higher expenses in years where we open additional retail branches, which would result in increased office rent, equipment rent and insurance costs. There are also increased expenses that are associated with being a public company, such as investor relations responsibilities and compliance with the requirements set forth by Sarbanes-Oxley, the Commission, and others.

Critical Accounting Policies

We established various accounting policies that apply accounting principles generally accepted in the United States of America in the preparation of our historical financial statements. Certain accounting policies require us to make significant estimates and assumptions that may have a material impact on certain assets and liabilities or our results of operations, and we consider these to be critical accounting policies in our historical operations. The estimates and assumptions we used are based on historical experience and other factors, which we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates and assumptions, which could have a material impact on the carrying value of assets and liabilities and our results of operations.

Pursuant to our critical accounting policies the following reflect significant judgments by management:

Accounting for income taxes;
Income from sales of mortgage loans;
Provision for impairment of mortgage loans;
Mortgage loans held for sale;
Real estate owned;
Stock-based compensation.

Accounting for income taxes. As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves us estimating our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items, such as deferred revenue, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheets.

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Income from sales of mortgage loans. To date, income from sales of mortgage loans has consisted primarily of cash gains that resulted from loan sales. Historically, we have sold all of our loans on a servicing released basis. In the future, however, we may decide to retain the servicing rights to any loans we sell, in which case we would also record non-cash sales related to the value of those servicing rights. Gains or losses resulting from loan sales are recorded at the time of sale. At the closing of a sale, mortgage loans held for sale and the related warehouse debt are removed from our books and the gain or loss recorded. Accordingly, our financial results are significantly impacted by the timing of loan sales. If we hold a significant pool of loans at the end of a reporting period, those loans will remain on our balance sheet, along with the related debt used to fund the loans. The revenue that we generate from those loans will not be recorded until the subsequent reporting period when we sell the loans. A number of factors influence the timing of our loan sales, including the current market demand, liquidity needs, and our strategic objectives. We have, from time to time, delayed the sale of loans to a later period, and may do so again in the future.

Under the terms of the early purchase facility with Washington Mutual Bank, FA, or Washington Mutual, we sell certain qualifying loans to Washington Mutual immediately upon origination, subject to a commitment by a takeout investor to purchase those loans within 90 days of the sale to Washington Mutual. We retain the right to service the loans. We recognize gain or loss from this transaction to the extent of the difference between the price at which loans are acquired by Washington Mutual and the outstanding principal balance of the loans plus costs to originate the loans. We recognize additional revenue (loss) equal to the difference between the takeout investor’s price and the acquisition price by Washington Mutual at the time that it releases its interest to the takeout investor. Although this transaction is treated as a sale and the loans are not held on our balance sheet, we may face losses due to changes in the value of servicing rights for such loans because we have retained the servicing rights. Due to the short term nature of the holding period, any revenue the Company receives for servicing the loan is deemed not material and is not recorded separately from interest income in the income statements.

Provision for impairment of mortgage loans. We make market valuation adjustments on certain non-performing loans, loans that we are obligated to repurchase, other loans we hold for sale, and real estate owned. These adjustments are based upon our estimate of expected losses and are based upon the value that we could reasonably expect to obtain from a sale. An allowance for losses on non-performing loans held for sale, and loans sold that we are obligated to repurchase, and an allowance for real estate owned are recorded in an amount sufficient to maintain adequate coverage for probable losses on such loans and property. As of June 30, 2007 and December 31, 2006, the reserve for losses on loans held for sale, which includes previously repurchased loans, and loans sold which we are obligated to repurchase, the reserve for loans held for investment, and the reserve for losses on real estate owned were $14.6 million, $3.0 million, and $1.5 million, and $15.2 million, $0, and $2.0 million, respectively. Our estimate of expected losses could increase or decrease if our actual loss experience or repurchase activity is different than originally estimated, or if economic factors change the value we could reasonably expect to obtain from a sale. In particular, if the frequency of repurchased demands increases, if actual losses increase, or if values reasonably expected to be obtained from a sale decrease, the provision for losses would increase. Any increase in the provision for losses would adversely affect our results of operations.

Mortgage loans held for sale. Mortgage loans held for sale are carried at the lower of cost or estimated fair value. Points and fees collected at loan closing and related direct origination costs are deferred until the related loan is sold. Interest income is recognized under the accrual method and is suspended on loans delinquent 90 days or more, or earlier if the collection of interest appears doubtful.

The estimated fair value of mortgage loans held for sale could decrease if interest rates increased. Any decrease in the fair value would adversely affect our results of operations and the assets we carry on our consolidated balance sheets.

Mortgage loans held for investment. Loans are classified as held-for-investment based on management’s intent and ability to hold the loans for the foreseeable future or to maturity. Loans held for investment are carried at amortized cost reduced by a valuation allowance for estimated credit losses incurred in the portfolio as of the balance sheet date. A loan’s cost includes its unpaid principal balance along with unearned income, comprised of fees charged to borrowers offset by incremental direct origination costs for loans originated by the Company or any premiums or discounts paid for loans purchased.

Real estate owned. Properties held for sale are stated at the lower of cost or fair value, less estimated selling costs. Real estate acquired in settlement of loans, or REO, generally results when property collateralizing a loan is foreclosed upon or is otherwise acquired in satisfaction of the loan. A property’s fair value is based on the net amount that we could reasonably expect to receive for the asset in a current sale between a willing buyer and a willing seller, that is, other than in a forced or liquidation sale. Adjustments to the carrying value of real estate acquired through foreclosure are made through valuation allowances and charge-offs recognized through a charge to earnings. When the Company forecloses on a subordinated deed of trust, the senior borrowing is recorded as mortgage loans payable until such time the property is disposed of and the senior mortgage loan is paid off. Recovery of the carrying value of real estate is dependent to a great extent on economic, operating, and other conditions that may be beyond our control. A decrease in real estate values may adversely affect our results of operations and the value of assets we carry on our consolidated balance sheets.

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Stock-based compensation. In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment,” (“SFAS 123R”). This Statement requires companies to expense the estimated fair value of stock options and similar equity instruments issued to employees over the requisite service period. SFAS 123R eliminates the alternative to use the intrinsic method of accounting provided for APB 25, which generally resulted in no compensation expense recorded in the financial statements related to the grant of stock options to employees if certain conditions were met.

Effective for the first quarter of fiscal 2006, the Company adopted SFAS 123R using the modified prospective method, which required the Company to record compensation expense for all awards granted after the date of adoption, and for the unvested portion of previously granted awards that remained outstanding at the date of adoption.

The Company uses the Black-Scholes option pricing model to determine the estimated fair value for stock-based awards. The use of the Black-Scholes model requires the use of extensive actual employee exercise behavior data and the use of a number of complex assumptions including expected volatility, risk-free interest rate, forfeitures, and expected dividends.

Financial Highlights for the Quarters Ended June 30, 2007 and 2006

Net income (loss). For the three months and six months ended June 30, 2007 and 2006 we had income (loss) before provision for income taxes of approximately $(19.2) million and $(18.7) million, and $3.1 million and $3.1 million, respectively. Net income (loss) was approximately $(19.4) million and $(19.2) million, and $1.8 million and $1.8 million, respectively, or approximately $(1.30) and $(1.28), and $0.12 and $0.12 per basic common share, respectively, and $(1.30) and $(1.28), and $0.12 and $0.12 per diluted common share, respectively.

Loan originations. For the three months and six months ended June 30, 2007 and 2006, we funded approximately $75.9 million and $431.6 million, and $595.3 million and $964.7 million, respectively. Purchase money mortgages accounted for approximately 47.6% and 52.0%, and 57.1% and 58.3% of our originations during the three months and six months ended June 30, 2007 and 2006, respectively. Our wholesale channel, which originates loans through independent mortgage brokers, accounted for approximately 94.1% and 95.6%, and 92.9% and 91.3% of our origination during the three months and six months ended June 30, 2007 and 2006, respectively.

During the three months and six months ended June 30, 2007 and 2006 we originated mortgage loans in 17 and 30, and 33 and 36 states, respectively. Loans originated in California constituted approximately 76.4% and 75.1%, and 70.9% and 69.1%, respectively, of our total mortgage loan originations during those periods. Our loan originations in California decreased approximately by 86.2% and 51.4% for the three months and six months ended June 30, 2007 compared to the same period in 2006.

Income from sales of mortgage loans. For the three months and six months ended June 30, 2007 and 2006, we sold mortgage loans of approximately $147.5 million and $605.1 million, and $538.5 million and $884.0 million, respectively. Income (loss) from sales of mortgage loans was approximately $(0.5) million and $12.5 million, and $16.1 million and $25.8 million during the three months and six months ended June 30, 2007 and 2006, respectively. The weighted average premium (discount) collected from sales of loans during the three months and six months ended June 30, 2007 and 2006 was approximately (0.44)% and 1.69%, and 2.60% and 2.52%, respectively.

Cash and cash equivalents — Our cash and cash equivalents at June 30, 2007 and December 31, 2006 was approximately $11.0 million and $15.0 million, respectively.

Warehouse lines of credit — As of June 30, 2007, we had four warehouse facilities to fund our loan originations with three financial institutions for a total funding capacity of approximately $404 million. This included an early purchase facility with Washington Mutual with a maximum commitment amount of $300 million. At June 30, 2007 the cost of borrowing on these warehouse facilities was a variable rate equal to one-month LIBOR plus a margin ranging between approximately 1.0% and approximately 4.0%.

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Results of Operations

Results of operations for the three months and six months ended June 30, 2007 and 2006 (dollars in thousands).

	Three Months Ended June 30,		Six Months Ended June 30,
	2007	2006	2007	2006
	(unaudited)	(unaudited)	(unaudited)	(unaudited)
Loan income	Amount	Amount	Amount	Amount
Income from sale of mortgage loans	$(538)	$16,083	$12,500	$25,821
Mortgage interest income	1,306	5,215	5,806	8,818
Commission fee income	22	176	185	412
Total loan income	790	21,474	18,491	35,051

Costs of loan origination and sale of
mortgage loans
Commissions	385	4,726	3,294	7,174
Warehouse Interest expense	1,342	4,685	5,447	7,730
Provision for impairment of
mortgage loans	14,266	139	17,708	1,023
Other closing expenses	336	662	897	1,165
Total costs of loan origination
and sale of mortgage loans	16,329	10,212	27,346	17,092

Gross profit (loss)	(15,539)	11,262	(8,855)	17,959

Operating expenses
Salaries	2,690	6,028	7,585	10,971
Occupacy	146	211	346	429
General and administrative	1,427	1,986	2,817	3,548
Total operating expenses	4,263	8,225	10,748	14,948

Income (loss) from operations	(19,802)	3,037	(19,603)	3,011

Other income (expense)	641	68	899	118

Income (loss) before provision
for income taxes	(19,161)	3,105	(18,704)	3,129
Provision for (benefit from) income taxes	289	1,283	506	1,300
Net income (loss)	$(19,450)	$1,822	$(19,210)	$1,829

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Following table sets forth the results of operations as a percentage of total loan income for the three and six months ended June 30, 2007 compared to the same periods in 2006.

	Three Months Ended June 30,		Six Months Ended June 30,
	2007	2006	2007	2006
	(unaudited)	(unaudited)	(unaudited)	(unaudited)
Loan income	Amount	Amount	Amount	Amount
Income from sale of mortgage loans	(68.0)%	74.9%	67.6%	73.7%
Mortgage interest income	165.3%	24.3%	31.4%	25.1%
Commission fee income	2.7%	0.8%	1.0%	1.2%
Total loan income	100.0%	100.0%	100.0%	100.0%

Costs of loan origination and sale of
mortgage loans
Commissions	48.7%	22.0%	17.8%	20.5%
Warehouse Interest expense	169.8%	21.8%	29.5%	22.1%
Provision for impairment of
mortgage loans	1805.7%	0.7%	95.7%	2.9%
Other closing expenses	42.6%	3.1%	4.9%	3.3%
Total costs of loan origination
and sale of mortgage loans	2066.8%	47.6%	147.9%	48.8%

Gross profit (loss)	(1966.8)%	52.4%	(47.9)%	51.2%

Operating expenses
Salaries	340.5%	28.1%	41.0%	31.3%
Occupacy	18.4%	1.0%	1.9%	1.2%
General and administrative	180.6%	9.2%	15.2%	10.1%
Total operating expenses	539.5%	38.3%	58.1%	42.6%

Income (loss) from operations	(2506.3)%	14.1%	(106.0)%	8.6%

Other income (expense)	81.1%	0.3%	4.9%	0.3%

Income (loss) before provision
for income taxes	(2425.2)%	14.4%	(101.1)%	8.9%
Provision for income taxes	36.6%	6.0%	2.7%	3.7%
Net income (loss)	(2461.8)%	8.4%	(103.9)%	5.2%

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Loan income

Total loan income. Total loan income decreased by 96.3% and 47.2% to $0.8 million and $18.5 million for the three months and six months ended June 30, 2007 from $21.5 million and $35.1 million for the three months and six months ended June 30, 2006, respectively. This decrease was due primarily to decreases in originations and in income from sales of mortgage loans and mortgage interest income.

Income from sales of mortgage loans. Income from sales of mortgage loans for the three months and six months ended June 30, 2007 decreased by 103.3% and 51.6% to $(0.5) million and $12.5 million from $16.1 million and $25.8 million for the three months and six months ended June 30, 2006, respectively, due to destabilized secondary mortgage market. Total loan sales decreased by 72.6% and 31.5% to $147.5 million and $605.1 million for the three months and six months ended June 30, 2007 compared to $538.5 million and $ 884.0 million for the three months and six months ended June 30, 2006, respectively. This decrease was due primarily to a 120.4% and 20.1% decrease in weighted average premium for loans sales to (0.44)% and 1.69% for the three months and six months ended June 30, 2007 from 2.13% and 2.12% for the three months and six months ended June 30, 2006, respectively.

Mortgage interest income. Mortgage interest income decreased by 75.0% and 34.2% to $1.3 million and $5.8 million for the three months and six months ended June 30, 2007 from $5.2 million and $8.8 million for the three months and six months ended June 30, 2006, respectively. The decrease in interest income was due primarily to a decrease in loans held for sale for the three months and six months ended June 30, 2007 compared to 2006.

Commission fee income. We earn commission fees on loans that we broker out to other lenders. The mortgage origination fees earned by us for retail loans that our loan officers originate are recognized at the time of sale of those mortgage loans and are included in the income from sale of mortgage loans. Commission fee income for the three months and six months ended June 30, 2007 and 2006 was $0.02 million and $0.2 million, and $0.2 million and $0.4 million, respectively.

Cost of loan originations

Total cost of loan origination and sales of mortgage loans. Total cost of loan origination and sales of mortgage loans increased by 59.9% and 60.0% to $16.3 million and $27.3 million for the three months and six months ended June 30, 2007 from $10.2 million and $17.1 million for the three months and six months ended June 30, 2006, respectively. The increase was primarily due to increased provision for impairment of mortgage loans. Total cost of origination and sales as a percentage of total loan income increased to 2066.8% and 147.9% for the three months and six months ended June 30, 2007 compared to 47.6% and 48.8% for the three months and six months ended June 30, 2006, respectively. This increase was primarily due to a decrease in origination volume and total loan income and an increase in provision for impairment on mortgage loans.

Commissions. Commissions for the three months and six months ended June 30, 2007 decreased by 91.9% and 54.1% to $0.4 million and $3.3 million from $4.7 million and $7.2 million in the three months and six months ended June 30, 2006, respectively. This decrease was primarily due to a decrease in loan sales as result of lower origination volume. Commissions, which are primarily a pricing rebate paid by us, are recognized at the time of sale to correspond with the recognition of income from the sale of the same loan. The commissions paid for loans which are held for sale are included in the value of loans held for sale as a prepaid commission on our balance sheet. Commissions for the three months and six months ended June 30, 2007 and 2006 as a percentage of loan income were 48.7% and 17.8%, and 22.0% and 20.5%, respectively.

Warehouse interest expense. Warehouse interest expense for the three months and six months ended June 30, 2007 decreased by 72.3% and 29.5% to $1.3 million and $5.4 million from $4.7 million and $7.7 million for the three months and six months ended June 30, 2006, respectively. The decrease in interest expense was primarily due to the decrease in our volume of borrowing. The weighted average number of days we held loans before sale during the three months and six months ended June 30, 2007 and 2006 was 71 and 59, and 53 and 55 days, respectively.

Provision for impairment of mortgage loans. At June 30, 2007 and 2006 there were 350 and 103 loans with an aggregate principal balance, plus accrued interest, of $87.2 million and $21.7 million, respectively, that we had been requested to repurchase by our investors. During the three months and six months ended June 30, 2007 and 2006, we recorded provisions of $14.3 million and $17.7 million, and $0.1million and $1.0 million, respectively, for losses on impaired of loans we were obligated to repurchase. The increase was mainly a result of increased repurchase requests and a higher estimated loss severity.

The secondary mortgage market tightened starting in the fourth quarter of 2006. The mortgage banking industry as a whole experienced reduced pricing on the sales of their portfolios and increased scrutiny of compliance to the various normal and customary representations and warranties mortgage originators give the investment community in these agreements. As a result of certain breaches to the purchase agreements, investors requested the Company repurchase certain loans. The Company in many cases is given the option to indemnify the investor for any losses they may realize on the loans found to be subject to a repurchase request versus actually repurchasing the loan.

Other closing expenses. Other closing expenses related to the closing of loans, including credit check expenses, appraisal and appraisal review fees and other closing expenses, decreased by 49.2% and 23.0% to $0.3 million and $0.9 million for the three months and six months ended June 30, 2007 from $0.7 million and $1.2 million for the three months and six months ended June 30, 2006, respectively. This decrease was primarily due to a decrease in originations.

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Operating expenses

Total operating expenses. Total operating expenses decreased by 48.2% and 28.1% to $4.2 million and $10.7 million for the three months and six months ended June 30, 2007 from $8.2 million and $14.9 million for the three months and six months ended June 30, 2006, respectively. The decrease was primarily the result of lower salaries, wages, and benefits expense, and decreases in other variable operating expenses associated with the decrease in mortgage loan originations.

Salaries. Salaries decreased by 55.4% and 30.9% to $2.7 million and $7.6 million for the three months and six months ended June 30, 2007 from $6.0 million and $11.0 million for the three months and six months ended June 30, 2006, respectively. The decrease was primarily due to decrease in number of employees.

Occupancy. Occupancy expense decreased by 30.7% and 19.3% to $0.1 million and $0.3 million for the three months and six months ended June 30, 2007 from $0.2 million and $0.4 million for the three months and six months ended June 30, 2006, respectively. The decrease was due to fewer offices in 2007 and lower rent on new corporate offices.

General and administrative. General and administrative expenses decreased by 28.2% and 20.6% to $1.4 million and $2.8 million for the three months and six months ended June 30, 2007 from $2.0 million and $3.5 million for the three months and six months ended June 30, 2006, respectively. This decrease was due primarily to a decrease in consulting fees paid to related parties.

Provision for income taxes. Provision for income taxes decreased to $0.3 million and $0.5 million for the three months and six months ended June 30, 2007 from $1.3 million and $1.3 million for the three months and six months ended June 30, 2006, respectively. This decrease was a result of accrual of tax liability on uncertain tax position related to the income tax refund and a loss before taxes of $19.2 million and $18.7 million for the three months and six months ended June 30, 2007 compared to income before taxes of $3.1 million and $3.1 million for the three months and six months ended June 30, 2006, respectively.

Liquidity and capital resources

As a mortgage banking company, our primary cash requirements include the funding of (1) mortgage loan originations, including principal, as well as origination costs such as commissions and broker premiums, (2) interest expense on and repayment of principal on warehouse facilities, (3) operational expenses, and (4) tax payments. We fund these cash requirements with cash received from (1) borrowings under warehouse facilities, (2) loan sales, (3) mortgage interest collections on loans held for sale, (4) points and fees collected from the origination of loans, and (5) sales of equity and debt securities. The following table sets forth information about our cash flows for the periods indicated:

	Six months ended June 30,
	2007	2006
	(dollars in millions)
Loans originated for sale	$ (431.6)	$ (964.7)
Proceeds from sales	605.1	884.0
Other	(145.5)	101.9

Net cash provided by (used) in operations	$28.0	$ (21.2)

We use warehouse facilities to finance a significant portion of our loan originations on a short-term basis. To the extent possible, it is our intention to maximize our allowable leverage ratio, defined as our total liabilities divided by our stockholders’ equity, for our warehouse financing.

In the past, we have financed our operations through increased warehouse borrowing, additional capitalization, and cash income generated from our operations. In the future, our business strategy will depend on our ability to secure sufficient warehouse facilities to fund loans. Currently, we do not have plans to originate any loans in the near future and as such we have no need for a warehouse financing facility. Our ability to secure future warehouse facilities will in the future depend on numerous factors including, our net worth, our business strategy and our ability to locate a source of financing. We cannot guarantee that we will have the ability to locate and secure future warehouse financing.

Warehouse and Repurchase Facilities

As of June 30, 2007, we had four warehouse facilities with three financial institutions. After funding the loans, we typically sell our mortgage loans within 30 to 60 days of origination and pay off the warehouse facilities with the sale proceeds.

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One of our warehouse facilities is structured as a repurchase agreement, where the financial institution will provide the funds for origination of loans and will hold the collateral until we repurchase the loans to sell them to a buyer. Under the terms of such agreement, the buyer of the loan (take-out investor) would send the proceeds directly to the warehouse lender, where the principal borrowing plus accrued interest and fees are deducted before the balance is forwarded to us. The other warehouse facilities are uncommitted lines, meaning the financial institutions, or lenders, are not obligated to fund up to the maximum uncommitted amount. All of our current warehouse facilities also contain a sub-limit for “wet” funding, which is the funding of loans for which the collateral custodian has not yet received all of the related loan documents. Additionally, our current warehouse facilities contain sub-limits for particular product types, collateral types, delinquency, aging, and other limitations. Our warehouse facilities are secured by the loans we originate. Although all of our warehouse facilities mature in the next twelve months, we expect to renew and extend the maturity of our warehouse facilities in the ordinary course of business. Our warehouse facilities bear interest at a spread over one month LIBOR, which was 5.32% as of June 30, 2007. The following is a summary by lender as of June 30, 2007.

	Committed Amount	Uncommitted Amount	Total Facility Amount	Maximum Portion Available for Wet Funding	Outstanding Principal Balance⁽³⁾	Expiration Date
	(dollars in thousands)
Warehouse Lender
Impac Warehouse	$50,000	$0	$50,000	$15,000	$2,748	June 14, 2008
Terwin Mortgage Warehouse	$50,000	$0	$50,000	$40,000	$49,450	April 17, 2008
Washington Mutual Bank, FA ⁽¹⁾	4,000	0	4,000	1,400	742	August 1, 2008
Washington Mutual Bank, FA ⁽²⁾⁽⁴⁾	300,000	0	300,000	105,000	11,794	August 1, 2008

Total	$404,000	$0	$404,000	$161,400	$64,734

_________________

(1) Warehousing Credit and Security Agreement
(2) Early Purchase Facility
(3) As of March 31, 2007
(4) Outstanding balance is off balance sheet

Impac Warehouse Lending Group Warehouse Facility. On June 14, 2007, we entered into a new repurchase facility with Impac Warehouse Lending Group with a maximum commitment of $50 million. This facility had a one year term and a cost of borrowing equal to the one-month LIBOR rate plus a spread between 2.0% and 4.0%. As of June 30, 2007, we had an outstanding balance of $2.7 million on this facility.

Terwin Mortgage Warehouse Facility. On April 17, 2007, we entered into a new repurchase facility with Terwin Mortgage Warehouse with a maximum commitment of $50 million. This facility had a one year term and a cost of borrowing equal to the one-month LIBOR rate plus a spread between 2.25% and 3.25%. As of June 30, 2007, we had an outstanding balance of $49.5 million on this facility.

Washington Mutual Warehouse Facility. We have a $4 million revolving credit facility with Washington Mutual. The cost of borrowing under this agreement is equal to one-month LIBOR plus a spread between 1.0% and 1.25% based on type of loan and period of time for which the loan is subject to the facility. As of June 30, 2007, we had an outstanding balance of 0.7 million on this facility.

Washington Mutual Early Purchase Facility. We have an early purchase facility with Washington Mutual pursuant to which certain qualifying loans are acquired by Washington Mutual immediately upon origination. Under terms of this purchase agreement we retain the right to service the mortgage loans. As a condition of the acquisition of a mortgage loan by Washington Mutual, we assign to Washington Mutual the related commitment by a takeout investor to purchase the mortgage loan on a servicing released basis at a specified future date within 90 days of origination. Under this facility, the acquisition price for a mortgage loan is the lesser of 98% of the related takeout investor's purchase price or the original principal balance of the loan. If loans purchased under this facility are not sold to the takeout investor within 90 days they become "aged" and are subject to revaluation of the acquisition price. After an additional 90 days the loans become defective and the Company is required to repurchase them. Loan financings under this facility meet the criteria under SFAS No. 140 for the "transfer of financial assets" and therefore are accounted for as sales. Although SFAS 156, requires that all separately recognized servicing assets and liabilities be initially measured at fair value, management believes that for loans originated through this facility, the value of servicing rights for the short period prior to their sale to takeout investors is not material to the consolidated financial statements as of June 30, 2007 and no corresponding asset or liability has been recorded. Accordingly, the loans are not reflected in the consolidated balance sheets. Upon receipt of funds from a takeout investor, Washington Mutual releases its interest in the related loan and transfers excess funds related to the servicing rights to us. Loans for which a commitment from a takeout investor is not obtained within 90 days are transferred to our other warehouse facility with Washington Mutual described above. As of June 30, 2007, this early purchase facility had a maximum revolving purchase commitment of $300 million. As of June 30, 2007, we had utilized $11.8 million of this facility's maximum commitment. The mortgage interest income from loans originated through this facility from the time of funding to the date of their sale to a takeout investor was not material to the financial statements as of June 30, 2007 and therefore no asset or non-cash revenue has been recognized.

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Each warehouse facility provides the lender with the right to reevaluate the loan collateral that secures our outstanding borrowings at any time. In the event the lender determines that the value of the loan collateral has decreased, it has the right to initiate a margin call. A margin call would require us to provide the lender with additional collateral or to repay a portion of the outstanding borrowings.

Our warehouse facilities are currently obligations of The Mortgage Store and we are currently negotiating amendments to the agreements governing our warehouse facilities and expect to enter into such amendments as soon as practicable. We may not be able to negotiate such amendments in a manner sufficient to successfully execute our business plan. Our inability to access the capital markets could have a negative impact on our growth.

Off-Balance Sheet Arrangements

In July 2004, we entered into an early purchase facility with Washington Mutual where qualifying loans are purchased by Washington Mutual immediately upon funding, provided that we retain the right to service and resell the loans to a takeout investor for a period of 90 days. Loan originations under provisions of this facility are recognized as sales of loans and are not reflected on our balance sheet. For loans that we originate through this facility, we recognize the origination fee and other lender fees at the time of funding and all corresponding commissions and fees to be paid are recognized immediately. If a loan is not purchased by a takeout investor within 90 days of the sale under the early purchase facility, we are required to repurchase those loans and the loans are put back on our balance sheet. As of June 30, 2007, loans with an aggregate warehouse liability of $11.8 million were subject to this off-balance sheet arrangement. Based on historical experience, total mortgage loans repurchased pursuant to a breach of this takeout investor requirement would not have a material impact to our statements of operation, and therefore have not been accrued for as a liability on our consolidated balance sheets. If we were to breach the takeout investor requirement and did not have sufficient funds to repurchase the related loans under this facility, that breach might trigger cross-defaults in our other warehouse facilities and have a material adverse effect on our business. In addition, if loan originations under provisions of this facility are not recognized as sales of loans and are required to be reflected on our balance sheet, we may breach financial covenants triggering defaults under our warehouse facilities which may have a material adverse effect on our business. Moreover, failure to obtain sales treatment under this facility may require us to restate our prior financial statements which may have a material adverse effect on our business.

Contractual Obligations and Commercial Commitments

The following tables summarize our contractual obligations under our financing arrangements by payment due date and commitments by expiration dates as of June 30, 2007.

	Payments Due by Period (dollars in thousands)
	Total	Less than one year	One to three years	Three to five years	After five years
	(unaudited)	(unaudited)	(unaudited)	(unaudited)	(unaudited)
Warehouse facility - line of credit	$ 52,940	$ 52,940	-	-	-
Warehouse facility - repurchase agreements	11,794	11,794	-	-	-
Subordinated note	3,000	3,000	-	-	-
Operating leases	481	154	$327	-	-
Total contractual obligations	$68,215	$67,888	$327	-	-

Commitments and Contingencies

We are a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of our borrowers. These financial instruments primarily represent commitments to originate and sell loans. These instruments involve, to varying degrees, elements of interest rate risk and credit risk in excess of the amount recognized on our consolidated balance sheet. We believe the credit risk is mitigated by our evaluation of the creditworthiness of potential borrowers on a case-by-case basis. Currently we do not hedge the interest rate risk on our commitments to originate loans.

In the ordinary course of business, we provide representations and warranties to purchasers of the mortgage loans we originate. Under certain circumstances, we could become liable to repurchase loans if there has been a breach of the representations and warranties. Additionally, in some cases we may refund the premium paid by the buyers if a loan is prepaid in full within a certain amount of time from the date of sale (generally within six months). We record a reserve for potential repurchases and premium refunds, which is charged to gain on sale of loans. The reserve represents our estimate of the total losses we expect to occur and is considered by management to be adequate based upon the evaluation of the potential exposure related to the loan sale agreements over the life of the associated loans sold.

We record every repurchase demand as an obligation to repurchase. Many demands, however, are subsequently withdrawn or rescinded by the buyers once the deficiencies are cured. Typically a repurchase demand arising from early payment default that is resolved either by re-pricing the loan, where the buyer receives a discount and keeps the note without further recourse from early payment defaults, or by indemnifying the buyers against future losses. Once a loan is re-priced or the demand is rescinded we reduce our obligation accordingly. When we can not reach an agreement on re-pricing or we believe that we could mitigate losses more efficiently, we may repurchase the loan and hold it until its disposition. In certain cases, we may agree with the buyer that their servicer continues the foreclosure process of seriously delinquent loans and we reimburse the buyer for their actual loss after sales of the property. Our policy is to reserve for losses on loans that we are required to repurchase or are holding on our balance sheets.

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The following table summarizes the outstanding obligations to repurchase loans and loss reserves at respective dates.

	Obligations to Repurchase Loans
	(dollars in thousands)
	June 30, 2007	December 31, 2006
	(unaudited)
Obligations to repurchase	$87,226	$50,510

Reserve for impairment of mortgage loans	$14,553	$ 15,176

Inflation

Virtually all of our assets and liabilities are financial in nature. As a result, interest rates and other factors influence our performance far more than does inflation. Interest rates normally increase during periods of high inflation (or in periods when the Federal Reserve Bank attempts to prevent inflation) and decrease during periods of low inflation. Our financial statements are prepared in accordance with Generally Accepted Accounting Principles (GAAP) and our financial position and results of operations are measured with reference to historical cost or fair market value without considering inflation.

Newly Issued Accounting Pronouncements

In February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial Assets and Liabilities – Including an amendment of FASB No. 115 (“SFAS 159”). SFAS 159 permits entities to choose to measure certain financial assets and liabilities at fair value. Unrealized gains and losses, arising subsequent to adoption, are reported in earnings. SFAS 159 is effective for fiscal years beginning after November 15, 2007. Accordingly, the Company will adopt SFAS 159 commencing in the first quarter of 2008. The Company is currently assessing the impact of SFAS 159 on its consolidated financial statements.

Industry Overview

In the third quarter and fourth quarters of 2006, the non-prime mortgage market in which the Company operates was characterized by increased competition for loans and customers which simultaneously lowered profit margins on loans and caused lenders to be more aggressive in making loans to relatively less qualified customers. By the end of 2006, the non-prime mortgage industry was clearly being negatively impacted. The sustained pricing competition and higher risk portfolios of loans reduced the appetite for loans among whole loan buyers, who offered increasingly lower prices for loans, thereby shrinking profit margins for non-prime lenders. In addition, the higher levels of credit risk taken on by non-prime lenders resulted in higher rates of delinquency in the loans held for investment and an increasing frequency of early payment defaults and repurchase demands on loans that had been sold. These trends accelerated during the first quarter of 2007, and the industry experienced a period of turmoil which has continued into the second and third quarters of 2007.

During the first eight months of 2007, a number of significant industry events occurred, including the following:

New Century announced that it would restate results for the nine months ended September 30, 2006 to account for losses on defaulted loans that it was obligated to repurchase (February 7th);

HSBC Holdings PLC, one of the world’s largest banks and non-prime lenders, announced an increase in its bad debt charge for 2006, which it attributed to problems in its U.S. non-prime mortgage lending division (February 8th);

Credit-Based Asset Servicing and Securitization LLC (“C-BASS”) and Fieldstone Investment Corporation (“Fieldstone”) announced that they had entered into a definitive merger agreement under which C-BASS would acquire all of Fieldstone’s outstanding common stock (February 16th);

ACC Capital Holdings, the parent company of Ameriquest Mortgage Company and Argent Mortgage Company, two large non-prime mortgage originators, announced that it had secured additional capital from Citi’s Markets and Banking Division and its majority shareholder, and that Citi had agreed to become the company’s primary warehouse lender and had acquired an option to buy the company’s wholesale mortgage business (February 28th);

Fremont General Corp. (“Fremont”), another significant non-prime mortgage originator, announced that it would exit its non-prime real estate lending operations and that it was in discussions with various parties regarding the sale of this business (March 2nd);

The New York Stock Exchange suspended trading of New Century’s common stock based on uncertainties concerning its liquidity position (March 12th);

Fieldstone announced that it had amended its previously announced merger agreement with C-BASS to reduce the price of Fieldstone’s common stock to $4.00 per share (March 16th);

People's Choice Home Loan, Inc., another significant non-prime mortgage originator, filed for bankruptcy protection (March 20th);

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Fremont sold approximately $4.0 billion of non-prime residential real estate loans and entered into exclusive negotiations with the same institution to sell most of its residential real estate business (March 21st);

New Century filed for bankruptcy protection (April 2nd);

NovaStar Financial, another significant non-prime mortgage originator, initiated a formal process to explore strategic alternatives and received $100 million in financing (April 11th);

First Horizon National Corp. blamed difficulty selling mortgages in the secondary market and increased repurchase requests for its decision to shutter its subprime business (April 20th);

H&R Block Inc. announced the sale of Option One Mortgage Corp. (“Option One”), another large non-prime mortgage originator, to an affiliate of Cerberus Capital Management with a transaction value equal to Option One’s tangible net assets as of the date of closing less $300 million (April 20th);

WMC, a unit of General Electric Co., announced that it would cut 771 jobs (April 20th);

Standard & Poor’s Ratings Service placed its credit ratings on 612 classes of residential mortgage-backed securities backed by U.S. non-prime collateral on “credit watch” with negative implications because of poor collateral performance, expectation of increasing losses on the underlying collateral pools, the consequent reduction of credit support, and changes that will be implemented with respect to the methodology for rating new transactions (July 10);

Moody’s Investors Service downgraded 399 residential mortgage-backed securities and placed an additional 32 residential mortgage-backed securities under review for possible downgrade based on higher than anticipated rates of delinquency in the underlying collateral compared to current credit enhancement levels (July 10);

General Electric Co. announced plans to sell WMC Mortgage Corp, its three-year-old U.S. non-prime mortgage unit (July 12);

NovaStar Financial, Inc. announced an investment of $48.8 million by MassMutual and Jefferies Capital Partners as part of a commitment to raise $150 million in new equity to complete its formal process of exploring strategic alternatives (July 16);

Bear Stearns announced the collapse of two of its hedge funds that had invested in non-prime mortgage securities (July 18);

Countrywide Financial Corp.‘s second-quarter net income fell 33% because of softening home prices. Countrywide cut its 2007 earnings estimate because it expects a challenging second half, including difficulty in the housing and mortgage markets (July 24);

American Home Mortgage Investment Corp. announced a delayed payment of its quarterly cash dividend on the company’s common stock and anticipated delaying payment of its quarterly cash dividends on its preferred stock in order to preserve liquidity until it obtains a better understanding of the impact that current market conditions in the mortgage industry and the broader credit market will have on the company’s balance sheet and overall liquidity. American Home Mortgage said that the unprecedented disruption in the credit markets in the past few weeks caused major write-downs of its loan and security portfolios and consequently has caused significant margin calls with respect to its credit facilities (July 28);

MGIC Investment Corporation announced that it had concluded that the value of its investment in C-BASS had been materially impaired because the market for non-prime mortgages had experienced significant turmoil beginning in February 2007, with market dislocations accelerating to unprecedented levels beginning in approximately mid-July 2007 (July 30); and

American Home Mortgage announced that it was unable to borrow on its credit facilities to fund its lending obligations of approximately $300 million on July 30 and that it did not anticipate funding approximately $450 to $500 million of lending obligations on July 31 (July 31).

American Home Mortgage file for bankruptcy protection (August 6);

HomeBanc files for bankruptcy protection (August 10);

Aegis Mortgage files for bankruptcy protection (August 10);

NovaStar Financial suspends loan originations (August 17);

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Countrywide Financial Corp., facing “unprecedented disruptions” to its funding operations, tapped an $11.5 billion credit line (August 16);

Capital One shuts down its GreenPoint Mortgage subsidiary, cutting 1,900 jobs (August 20), and

Lehman Brothers announced the closing of its subprime subsidiary, BNC Mortgage LLC (August 22)

The combination of these events with the continued heavy repurchase demands from whole loan purchasers experienced during this period created a cycle beginning with a significant increase in the amount of distressed loans for sale in the market. This increase in loan supply reduced whole loan prices, providing a basis for warehouse line providers to mark down the collateral value of loans held in inventory and, as a result, to place margin calls on non-prime lenders. These increased margin calls resulted in more distressed sales which, in turn, put further downward pressure on whole loan sale prices, regenerating the cycle with escalating negative results.

All of these general market conditions may affect the performance of the mortgage loans originated by us in the quarter and, even if they do not affect performance, have and continue to adversely affect our operations, earnings, originations and common stock price.

The Company also had significant cash outlays in 2007 to (1) repurchase loans sold to third parties during 2007 and earlier years and/or (2) enter into settlement agreements with these third parties agreeing to pay them certain amounts over time in lieu of paying the obligation at the time of notification. When whole pools of mortgage loans are sold, the third party has recourse against the Company for certain borrower defaults. The cash the Company must have on hand to repurchase these loans is much higher than the principal amount of the loan as the Company generally must reimburse the investor for the remaining unpaid principal balance, any premium recapture, any unpaid accrued interest and any other out-of-pocket advances in accordance with the loan sale agreement.

Conditions in the secondary markets, which began to stabilize in the second quarter of 2007, have worsened early in the third quarter as investor concerns increase over asset quality and a weakening of the United States housing market. As a result of the many uncertainties in the non-prime mortgage market (i.e. home price depreciation, home sales, credit quality, interest rates), the capital markets remain very volatile and less liquid and, at times have been and may in the future be effectively unavailable to the Company. The Company believes the existing conditions in the secondary markets are unprecedented since the Company’s inception and, as such, inherently involve significant risks and uncertainty. As a result, subsequent to the end of the second quarter the Company has been forced to further alter its business strategies and operations in response to market conditions.

Industry Overview – Company’s Response

Due to the fact that the Company cannot sell the loans it originates at favorable prices, or at times at all, the Company has drastically reduced its staff, and suspended its mortgage origination business. The Company requires substantial cash to fund its business. We must originate loans at a profit in order to maintain our credit facilities and successfully fund our operations. Unless the secondary market returns to more rational levels, the Company’s survival is doubtful. The survival of our downsized operation is entirely dependent upon a return of a stabilized non-prime secondary market, the Company’s ability to attract loan origination personnel if the market stabilizes and the ability of the Company to locate third party investors to purchase the newly originated products. There can be no assurances that these events will occur or will be sufficient to fund our downsized operations. The Company cannot currently predict if the market conditions will ever return to a level under which mortgage loans can be originated and sold at a profit.

The Company’s liquidity position was also severely impacted because of the 2007 market disruptions. To the extent that the Company’s lenders further reduce the value of the mortgage assets securing its warehouse repurchase agreements or otherwise reduce the amount the Company can borrow against its assets, the Company could be subject to additional margin calls and the amounts it can borrow could be reduced, which could materially adversely affect the Company’s liquidity.

As a result of the implementation of tighter origination guidelines, the Company’s origination volumes have substantially decreased in the first and second quarter of 2007. The Company expects that its third quarter origination volume will be significantly lower than in the second quarter and that its cost to fund loans will significantly increase in the third quarter. In addition, the Company may experience additional mark-to-market losses on its mortgage loans held for sale which would likely result in further margin calls under its financing facilities. The Company may not have the necessary resources to satisfy further margin calls.

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Industry-wide tightening of underwriting guidelines and increases in interest rates may decrease refinancing opportunities for existing borrowers, which may result in fewer loans and increased defaults by borrowers, particularly those facing a resetting of their existing loan to a higher monthly payment. If borrower defaults continue or increase, the Company’s financial condition, liquidity and business prospects will be further adversely affected. Along with several other industry competitors, the Company terminated most of the products it offered in July 2007 due to investor concerns. In August 2007, in light of the continued and widely publicized volatility in the secondary markets, the Company suspended funding of all loan products it offered and currently the Company does not have any plans to originate these types of loans in the near future. The Company does expect this decision to have a material impact on its financial condition and results of operations. There can be no assurance that the Company will have the financial resources necessary to fund the downsized operation if and until the secondary market stabilizes. During the second quarter, the secondary mortgage markets have deteriorated, become more unpredictable and volatile, making it more difficult to sell loans to investors. In addition, because housing prices have declined, default and credit losses have increased; investors are requiring higher returns, reducing the value of our mortgage loans. As a result, the loans have not performed up to expectations, the fair value of mortgage loans has deteriorated and the prices at which investors are willing to purchase our loan production has severely declined. The underlying reason for the deterioration of industry conditions appears to be initially based on the relatively poor performance of loans originated in 2006. This decline in performance has led to a lack of confidence by investors and lenders and their reluctance to invest/lend as aggressively. These market conditions have also increased the Company’s loss severities during the second quarter. Many nonprime mortgage lenders were impacted by reduced liquidity and as a result, were required to scale back or cease operations. Most market participants responded to changes in the marketplace with changes in product offering and tightening of underwriting guidelines.

These market conditions required us to focus on preserving liquidity. We have received a significant amount of margin calls from our lenders.We cannot make any assurances we will satisfy margin calls received in the future.

At this point, the Company is not funding any loans. In addition to the suspension of all loans, the Company has taken steps to significantly reduce operating expenses which include staff reductions and relocation of the Company’s main office to smaller quarters. Should the market conditions continue to deteriorate, we may take further steps including the orderly liquidation of the business.

In connection with the challenges facing the non-prime lending industry, several of our competitors have recently stopped originating loans or sought protection under bankruptcy laws. Unless the values of our mortgage products cease their decline, and we are able to obtain new sources of liquidity and waivers and modification of the covenants in our credit facilities, we may suffer a similar fate.

RISK FACTORS

In addition to the other information in this quarterly report on Form 10-Q, the following factors should be considered in evaluating us and our business.

We may not be able to obtain the cash required to execute our business plan.

We require a significant amount of cash to fund our mortgage loan originations, to pay our mortgage loan origination expenses and to hold our mortgage loans pending sale. We also need cash to meet our working capital requirements, debt repayment obligations and other cash needs. We may also require cash to meet margin calls under the terms of our warehouse facilities if there is a decline in the market value of the mortgage loans that collateralize our indebtedness under our warehouse facilities and we may require cash for any loan repurchase obligations that we may have.

To the extent we fund loans, we expect that our primary sources of cash to fund our operations will consist of:

our warehouse facilities;
repurchase agreements;
the net interest income we receive from our mortgage loan portfolio;
our operating profits;
the proceeds from the sale or repayment of our mortgage loans; and
the net proceeds from any offerings of our equity or other debt securities.

We cannot assure you that we will be able to generate the amount of cash required to successfully execute our business plan. Our inability to access the capital markets could have a negative impact on our operations and ability to generate income. We have significantly downsized our mortgage operations as of the date of this filing we are not accepting any new loan applications. Prolonged continuation of such a period may significantly jeopardize our future operations and existence as a going concern.

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We depend on our warehouse facilities to execute our business plan and our inability to access funding could have a material adverse effect on our results of operations, financial condition, and business.

Our ability to fund our mortgage loans depends to a large extent upon our ability to secure warehouse financing on acceptable terms. The Mortgage Store currently funds the mortgage loans it originates through warehouse facilities under which it is the borrower. We can provide no assurance that we will be successful in establishing sufficient warehouse facilities either by increasing the amounts available under existing warehouse facilities or by the addition of new warehouse facilities. The majority of The Mortgage Store’s current warehouse facilities contain a sub-limit for “wet” funding, which is the funding of loans for which the collateral custodian has not yet received the related loans documents. Substantially all of our mortgage loans are initially “wet” funded. As of June 30, 2007, the aggregate amount of funds available to “wet” fund loans under the warehouse facilities was approximately $161.4 million.

As of June 30, 2007, we financed substantially all of our existing loans through three warehouse facilities with two financial institutions. Each of our existing warehouse facilities is renewable for one-year terms. Because our warehouse facilities are short-term commitments of capital, the lenders may respond to market conditions, which may favor an alternative investment strategy for them, making it more difficult for us to secure continued financing. If we are not able to renew our existing warehouse facilities or arrange for new financing on terms acceptable to us, or if we default on our covenants or are otherwise unable to access funds under any of these facilities, we will have to curtail our mortgage loan origination activities. This would result in decreased revenues and profits from mortgage loan sales.

It is possible that the lenders that provides us with financing, either under our existing warehouse facilities or under any new warehouse facilities, could experience changes in their ability to advance funds to us, independent of our performance or the performance of our mortgage loans. In addition, if the regulatory capital requirements imposed on our lenders change, they may be required to significantly increase the cost of the warehouse facilities they provide to us. Our lenders also may revise their eligibility requirements for the types of residential mortgage loans they are willing to finance or the terms of such financings, based on, among other factors, the regulatory environment and their management of perceived risk, particularly with respect to assignee liability. Financing of equity based lending, for example, may become more difficult in the future. Moreover, the amount of financing we receive under our mortgage loan warehouse facilities is directly related to the lender’s valuation of the mortgage loans that secure the outstanding borrowings. Our current mortgage loan warehouse facilities grant the respective lender the absolute right to reevaluate the market value of the mortgage loans that secure our outstanding borrowings at any time. In the event a lender determines that the value of the mortgage loans has decreased, it has the right to initiate a margin call. A margin call would require us to transfer additional mortgage loans to such lender without any advance of funds from the lender for such transfer of mortgage loans or to repay a portion of the outstanding borrowings. Any such margin call could have a material adverse effect on our results of operations, financial condition, and business.

In July 2004, we entered into an early purchase facility with Washington Mutual where qualifying loans are purchased by Washington Mutual immediately upon funding, provided that we retain the right to service and resell the loans to a takeout investor for a period of 90 days. Loan originations under provisions of this facility are recognized as sales of loans and are not reflected on our balance sheet. For loans that we originate through this facility, we recognize the origination fee and other lender fees at the time of funding and all corresponding commissions and fees to be paid are recognized immediately. If a loan is not purchased by a takeout investor within 90 days of the sale under the early purchase facility, we are required to repurchase those loans and the loans are put back on our balance sheet. If we were to breach the takeout investor requirement and did not have sufficient funds to repurchase the related loans under this facility, that breach might trigger cross-defaults in our other warehouse facilities and have a material adverse effect on our business. In addition, if loan originations under provisions of this facility are not recognized as sales of loans and are required to be reflected on our balance sheet, we may breach financial covenants triggering defaults under our warehouse facilities which may have a material adverse effect on our business. Moreover, failure to obtain sales treatment under this facility may require us to restate our prior financial statements which may have a material adverse effect on our business.

Our existing warehouse facilities contain covenants that restrict our operations and may inhibit our ability to grow our business and increase revenues.

Our existing warehouse facilities contain extensive restrictions, covenants, and representations and warranties that, among other things, require us to satisfy specified financial, asset quality, loan eligibility, and loan performance tests. If we fail to meet or satisfy any of these covenants or representations and warranties, we would be in default under these agreements and our lenders could elect to declare all amounts outstanding under the agreements to be immediately due and payable, enforce their respective interests against collateral pledged under such agreements and restrict our ability to make additional borrowings. Our existing agreements also contain cross-default provisions, so that if a default occurs under any one agreement, the lenders under our other agreements could also declare a default.

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The covenants and restrictions in our warehouse facilities may restrict our ability to, among other things:

incur or guarantee additional debt;
make certain investments or acquisitions;
make distributions on or repurchase or redeem capital stock;
engage in mergers or consolidations;
finance mortgage loans with certain attributes;
reduce liquidity below certain levels;
grant liens;
incur operating losses for more than a specified period;
enter into transactions with affiliates; and
hold mortgage loans for longer than established time periods.

These restrictions may interfere with our ability to obtain financing or to engage in other business activities, which may significantly harm our business, financial condition, liquidity and results of operations.

We have operated under waivers provided by lenders with respect to certain covenants on our credit facilities. A failure to obtain such waivers can result in the lender’s ability to accelerate repayment.

Certain of our reverse repurchase agreements contain numerous representations, warranties and covenants, including requirements to maintain a certain minimum net worth, to maintain minimum equity ratios, to maintain certain profitability levels and other customary debt covenants. Events of default under these facilities can constitute a material breach of representations and warranties and as such allows the lenders to pursue certain remedies which may constitute a cross default under other agreements. Such acts may cause us to lose the ability to access these financing facilities or to lose the right to a timely liquidation of any assets on such facilities. There can be no assurance that we can continue to obtain such waivers and as such the lenders will have the right to accelerate our repayment obligations which may have an adverse impact on our ability to fund mortgage loans and to be profitable.

Any significant margin calls under our financing facilities would adversely affect our liquidity and may adversely affect our financial results.

During periods of disruption in the financial markets, the mortgage industry may experience substantial turmoil as a result of a lack of liquidity in the secondary markets. At such times, investors may be unwilling to purchase loans due to various reasons including, but not limited to, market uncertainty and narrowing spreads compared to treasury rates.

As a result, during these periods, many mortgage originators, including us, may be unable to access the secondary markets on favorable terms. This may result in some companies declaring bankruptcy. Some companies, like us, may be required to sell loans on a whole loan basis to repay short-term borrowings. However, the large amount of mortgages available for sale on a whole loan basis may create an oversupply and affect the pricing offered for these mortgages, which in turn may reduce the value of the collateral underlying the financing facilities. Therefore, many providers of financing facilities may initiate margin calls. Margin calls may result when our lenders evaluate the market value of the collateral securing our financing facilities and require us to provide them with additional equity or collateral to secure our borrowings. As of June 30, 2007, we had a total margin call of $4.6 million from our warehouse lines. We have received a significant amount of margin calls from our lenders and continue to receive margin calls due to the current market environment, we intend to satisfy these margin calls; however, we cannot make any assurances we will satisfy margin calls received in the future. We also cannot provide any assurances that we will not receive additional margin calls in the future.

Our financing facilities are short-term borrowings and in the event of a market disruption, many traditional providers of financing facilities may be unwilling to provide facilities on favorable terms, or at all. Our current financing facilities continue to be short-term borrowings and we expect this to continue. If we cannot renew or replace maturing facilities, we may have to sell, on a whole loan basis, the mortgages securing these facilities, which, depending upon market conditions may result in substantial discount in proceeds we receive on sale.

Our delinquency ratios, our performance, and financial condition may be adversely affected by the performance of third party servicers who service our mortgages.

Historically, The Mortgage Store has sold its mortgage loans on a servicing released basis. We do not expect to have significant servicing operations in the future and we will need to contract with a servicer to service our mortgage loans. We cannot assure you that we will be able to contract with a suitable servicer or if we do so that the servicer will continue servicing our mortgage loans. If we are unable to engage a servicer, in addition to providing the servicing of the mortgage loans, we could be required to make advances for delinquent payments and other servicing related costs, which could have a negative effect on our results of operations and financial condition.

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We sell servicing rights or contract with third-parties for the servicing of all mortgages, and intend to do so for those loans in any future securitizations. Our operations are subject to risks associated with inadequate or untimely servicing. Poor performance by servicing or servicing department may result in greater than expected delinquencies and losses on our mortgages. A substantial increase in our delinquency or foreclosure rate could adversely affect our ability to access the capital and secondary markets for our financing needs.

Representations and warranties and protections against early payment default made by us in our loan sales may subject us to liability.

We transfer and intend to transfer mortgages acquired and originated by us to third parties in exchange for cash. The purchaser will have recourse against us with respect to the breach of the standard representations and warranties made by us at the time such mortgages are transferred. While we generally have recourse against our customers for any such breaches, there can be no assurance of our customers’ abilities to honor their respective obligations. Also, we engage in whole loan sales pursuant to agreements that generally provide for recourse by the purchaser against us in the event of a breach of one of our representations or warranties, any fraud or misrepresentation during the mortgage origination process, or upon early default on such mortgage. We generally limit the potential remedies of such purchasers to the potential remedies we receive from the customers from whom we acquired or originated the mortgages. In some cases, however, the remedies available to a purchaser of mortgages from us may be broader than those available to us against the sellers of the mortgages and should a purchaser enforce its remedies against us, we may not always be able to enforce whatever remedies we have against our customers. Furthermore, if we discover, prior to the sale or transfer of a loan, that there is any fraud or misrepresentation with respect to the mortgage and the originator fails to repurchase the mortgage, then we may not be able to sell the mortgage or we may have to sell the mortgage at a discount. As of June 30, 2007, we had $87.2 million in outstanding repurchase obligations. We cannot make any representation that in the future there will not be any additional repurchase requests made to us by our third party investors.

In the ordinary course of our business, we are subject to claims made against us by borrowers arising from, among other things, losses that are claimed to have been incurred as a result of alleged breaches of fiduciary obligations, misrepresentations, errors and omissions of our employees, officers and agents (including our appraisers), incomplete documentation and our failure to comply with various laws and regulations applicable to our business. Any claims asserted against us may result in legal expenses or liabilities that could have a material adverse effect on our results of operations or financial condition.

There has been an increase in production of our loan product which is characterized as “interest only” and option-ARM loans. There have been recent announcements by federal regulators concerning interest-only loan programs, option-ARM loan programs and other ARM loans with deeply discounted initial rates and/or negative amortization features. There is increasing public policy debate focused on the rapid increase in the use of loans with interest-only features that require no amortization of principal for a protracted period or loans with potential negative amortization features, such as option payment ARMs. Already one rating agency (Standard & Poor’s) has required greater credit enhancements for securitization pools that are backed by option-ARMs. These changes could make the product less available as financing options and hence this could have a material affect on the value of such products.

A prolonged economic downturn or recession would adversely affect our financial results.

The United States economy has undergone in the past and may undergo in the future, a period of economic slowdown, which some observers view as a recession. An economic downturn or a recession may have a significant adverse impact on our operations and our financial condition. For example, a reduction in new mortgages may adversely affect our ability to maintain or expand our long-term mortgage portfolio, our principal means of generating earnings. In the case of our mortgage operations, a decline in mortgage origination activity may result in fewer loans that meet the criteria for purchase or sale, thus resulting in a reduction in interest income and fees and gain on sale of loans. Concentration of our mortgage loan originations in certain geographic areas, such as California, increases our exposure to the economic and natural hazard risks associated with those areas and could have a material adverse effect on our business, financial condition, and results of operations. Our business may be significantly harmed by a slowdown in the economy of California, where we conduct a significant amount of business. We may also experience larger than previously reported losses on our long-term mortgage due to a higher level of defaults or foreclosures or higher loss rates on our mortgages should there be a period of economic slowdown.

Concentration of our mortgage loan originations in certain geographic areas, such as California, increases our exposure to the economic and natural hazard risks associated with those areas and could have a material adverse effect on our business, financial condition, and results of operations. Our business may be significantly harmed by a slowdown in the economy of California, where we conduct a significant amount of business.

We do not set limitations on the percentage of our long-term mortgage origination for properties located in any one area (whether by state, zip code or other geographic measure). Concentration in any one area increases our exposure to the economic and natural hazard risks associated with that area. Since inception, a significant portion of the mortgage loans we have originated have been secured by property in California. For the three months and six months ended June 30, 2007 and 2006 approximately 76.4% and 75.1%, and 70.9% and 69.1% by loan amount respectively, of the loans we originated were collateralized by property located in California. An overall decline in the economy or the residential real estate market, or the occurrence of a natural disaster that is not covered by standard homeowners’ insurance policies, such as an earthquake or wildfire, in California could decrease the value of mortgaged properties in California. This, in turn, would increase the risk of delinquency, default or foreclosure on mortgage loans in our portfolio or that we have sold to others. This could restrict our ability to originate or sell mortgage loans or cause losses in our investment portfolio, and significantly harm our business, financial condition, liquidity and results of operations.

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Furthermore, certain areas, such as California, may suffer a greater amount of natural hazards. If borrowers are not insured for natural disasters, which are typically not covered by standard hazard insurance policies, then they may not be able to repair the property or may stop paying their mortgages if the property is damaged. This would cause increased foreclosures and decrease our ability to recover losses on properties affected by such disasters. This would have a material adverse effect on our results of operations or financial condition.

The residential mortgage origination business is a cyclical industry, and it has recently been at a relatively depressed level and is expected to decline in subsequent years, which could reduce our current levels of loan origination and our ability to generate net income in the future.

The residential mortgage origination business historically has been a cyclical industry, enjoying periods of strong growth and profitability followed by periods of shrinking volumes and industry-wide losses. Our historical performance may not be indicative of results in a rising interest rate environment, and our results of operations may be materially adversely affected if interest rates rise.

Current and anticipated deterioration in the housing market will adversely effect our results of operations by resulting in lower loan volumes, lower loan prices and increased loss severities.

During the second quarter of 2007 the mortgage industry and the residential housing market continued to deteriorate as home prices declined. The difficulty that arose as a result of this has spread across various mortgage sectors, including the market in which we operate. A continued decline, or a lack of increase in real estate values, may result in additional increases in delinquencies and losses on our mortgage inventory both held for sale and held for investment. Deterioration and decline in the housing industry can also adversely affect sales in the secondary mortgage market as investors may have concerns about mortgage payment defaults thereby adversely decreasing the price in the secondary market of loans that we own, originate and acquire. Furthermore, changes in market conditions may cause us to re-evaluate our strategy regarding certain assets that could result in additional valuation adjustments relating to our loan portfolio and real estate owned. If market conditions continue to deteriorate, we may need to continue to reassess the market value of loans held for sale, the loss severities of loans in default and the net realizable value of our real estate owned, which may result in additional write-offs in the future, and future margin calls.

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

We face intense competition from finance, investment banking companies, banking companies, mortgage Real Estate Investment Trusts (REITs) , internet-based lending companies with relatively low entry barriers and, to a growing extent, from traditional bank and thrift lenders that have entered the non-conforming mortgage industry. As we seek to expand our business further, we will face a significant number of additional competitors, many of whom will be well established in the markets we seek to penetrate. Many of our competitors are much larger than we are, have better name recognition than we do, and have far greater financial and other resources.

We also compete with federally chartered institutions and their subsidiaries that operate in a multi-state market environment. Federal statutes and rules governing federally chartered banks and thrifts allow those entities to engage in mortgage lending in multiple states on a substantially uniform basis and without the need to comply with state licensing and other laws including state and local “anti-predatory lending” laws affecting mortgage lenders. Federal regulators have expressed their position that these preemption provisions benefit mortgage subsidiaries of federally chartered institutions as well. In January 2004, the Comptroller of the Currency finalized preemption rules that confirm and expand the scope of this Federal preemption for national banks and their operating subsidiaries. Such Federal preemption rules and interpretations generally have been upheld in the courts. In addition, such federally chartered institutions and their subsidiaries have defenses under Federal law to allegations of noncompliance with such state and local laws that are unavailable to us. Moreover, at least one national rating agency has announced that, in recognition of the benefits of Federal preemption, it will not require additional credit enhancement by federally chartered institutions when they issue securities backed by mortgages from a state with predatory lending laws. As a non-federally chartered entity, we will continue to be subject to such rating agency requirements arising from state or local lending-related laws or regulations should we issue public mortgage securities. Accordingly, as a mortgage lender that is generally subject to the laws of each state in which we do business, except as may specifically be provided in Federal rules applicable to all lenders (such as the Fair Credit Reporting Act, Real Estate Settlement Procedures Act or Truth in Lending Act), unlike those competitors, we are generally subject to all state and local laws applicable to mortgage lenders in each jurisdiction where we lend, including new laws directed at nonconforming mortgage lending. This disparity may have the effect of giving those federally chartered institutions legal and competitive advantages.

The government-sponsored entities Fannie Mae and Freddie Mac have a size and cost-of-funds advantage that allows them to purchase mortgage loans with lower rates and fees than we are willing to offer. While the government-sponsored entities presently do not have the legal authority to originate mortgage loans, including non-conforming mortgage loans, they do have the authority to buy mortgage loans. A material expansion of their involvement in the market to purchase non-conforming mortgage loans could change the dynamics of the industry by virtue of their sheer size, pricing power and the inherent advantages of a government charter. In addition, if, as a result of their purchasing practices, these government-sponsored entities experience significantly higher-than-expected losses, such experience could adversely affect the overall investor perception of the non-conforming mortgage industry.

The intense competition in the non-conforming mortgage sector has also led to rapid technological developments, evolving industry standards, and frequent releases of new products and enhancements. As mortgage products are offered more widely through alternative distribution channels, such as the internet, we may be required to make significant changes to our existing retail and wholesale structure and information systems to compete effectively. Our inability to continue enhancing our existing internet capabilities, or to adapt to other technological changes in the industry, could significantly harm our business, financial condition, liquidity, and results of operations.

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Competition in the industry can take many forms, including interest rates and costs to originate a mortgage loan, less stringent underwriting standards, convenience in obtaining a mortgage loan, type of mortgage loans, customer service, amount and term of a mortgage loan and marketing and distribution channels. Increased competition could have the effect of:

lowering gains that may be realized on our mortgage loan sales;
lowering the interest rates, origination points and fees we are able to charge borrowers or otherwise affecting mortgage loan terms;
reducing the volume of our mortgage loan originations;
lowering the value of our mortgage loans held for sale;
increasing our costs of originating and selling mortgage loans;
increasing our costs in connection with providing customer service and marketing;
increasing the demand for our experienced personnel and, therefore, the possibility that our personnel may be recruited by our competitors; and
lowering the industry standard for non-conforming underwriting guidelines by, for example, providing for less stringent LTV ratio requirements as competitors attempt to increase or maintain market share in the face of increased competition.

The need to maintain mortgage loan volume in this competitive environment creates a risk of price competition in the non-conforming mortgage market. Any increase in these pricing and underwriting pressures could reduce the volume of our mortgage loan originations and sales and significantly harm our business, financial condition, liquidity, and results of operations.

The expected cyclical decline in the mortgage industry’s overall level of originations following 2006 may lead to increased competition for the remaining loans. We cannot assure you that we will be able to continue to compete effectively in the markets we serve and our results of operations, financial condition, and business could also be materially adversely affected to the extent our competitors significantly expand their activities in our markets.

A reduction in the demand for our loan products may adversely affect our operations.

The availability of sufficient mortgages meeting our criteria is dependent in part upon the size and level of activity in the residential real estate lending market and, in particular, the demand for residential mortgages, which is affected by:

interest rates;
national economic conditions;
residential property values; and
regulatory and tax developments.

If our mortgage originations decline, we may have:

decreased economies of scale;
higher origination costs per loan;
reduced fee income; and
smaller gains on the sale of mortgages.

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

While in recent years, we have experienced rapid growth due to the current market conditions we are restructuring our workforce and streamlining our operations. We have instituted a cost reduction strategy to align our cost structure to our revenues. This has resulted in lay offs and cost reductions and may result in further such actions depending on future market conditions. This has placed, and will continue to place, certain pressures on our management, administrative, operational, and financial infrastructure. As of June 30, 2007 and December 2006, we had 104 and 342 salaried employees, respectively, in addition to 107 and 101 commission-based employees, respectively. The decrease in the size of our operations may make it more difficult for us to ensure that we originate quality mortgage loans and that we service them effectively. We will need to attract and hire additional sales and management personnel in an intensely competitive hiring environment to preserve and increase our market share. At the same time, we will need to continue to adjust and our financial, operational and managerial systems and controls. We also intend to continue to grow our business in the future, which could require capital, systems development and human resources beyond what we currently have. As a result of these pressures, we cannot assure you that we will be able to:

meet our capital needs;
achieve our desired leverage level;
expand our systems effectively;
allocate our human resources optimally;
identify and hire qualified employees;
successfully securitize our mortgage loans;
satisfactorily perform our servicing obligations; or
incorporate effectively the components of any businesses that we may acquire in our effort to achieve growth.

The failure to manage our operations effectively would significantly harm our business, financial condition, liquidity, and results of operations.

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

We depend upon our wholesale account executives and retail mortgage loan officers to attract borrowers by, among other things, developing relationships with financial institutions, other mortgage companies and brokers, real estate agents, borrowers, and others. We believe that these relationships lead to repeat and referral business. The market for skilled executive officers, account executives, and loan officers is highly competitive and historically has experienced a high rate of turnover. In addition, if a manager leaves our company there is an increased likelihood that other members of his or her team will follow. Competition for qualified account executives and loan officers may lead to increased hiring and retention costs. We cannot guarantee that we will be able to attract or retain qualified personnel at reasonable costs or at all. If we are unable to attract or retain a sufficient number of skilled executive officers, account executives, or loan officers, we will be unable to effectuate our business strategy. Further, due to deterioration of the secondary markets we may be unable to retain our employees and their services.

If we are unable to maintain and expand our network of independent brokers, our loan origination business may decrease.

A significant majority of our originations of mortgage loans come from independent brokers. For the six months ended June 30, 2007, approximately 600 brokers, from a list of over 5,000 approved brokers, submitted loans to us; no broker represented more than 5% of our loan originations. Our brokers are not contractually obligated to do business with us. Further, our competitors also have relationships with our brokers and actively compete with us in our efforts to expand our broker networks. Accordingly, we cannot assure you that we will be successful in maintaining our existing relationships or expanding our broker networks, the failure of which could significantly harm our business, financial condition, liquidity, and results of operations.

An interruption in or breach of our information systems may result in lost business.

We rely heavily upon communications and information systems to conduct our business. As we implement our growth strategy and increase our volume of mortgage loan origination, that reliance will increase. Any failure or interruption or breach in security of our information systems or the third-party information systems on which we rely could cause underwriting or other delays and could result in fewer mortgage loan applications being received as well as slower processing of applications we do receive. While we have not experienced material failures or interruptions in the past, we cannot assure you that such failures or interruptions will not occur or if they do occur that they will be adequately addressed by us or the third parties on which we rely. The occurrence of any such failures or interruptions could significantly harm our business.

The success and growth of our business will depend upon our ability to adapt to and implement technological changes.

Our mortgage loan origination business is currently dependent upon our ability to effectively interface with our brokers, borrowers and other third parties and to effectively and efficiently process loan applications and closings. The origination process is becoming more dependent upon technological advancement, such as the ability to process applications over the internet, accept electronic signatures, and provide process status updates instantly, as well as, other customer-expected conveniences that are cost-efficient to our process. Implementing and maintaining this new technology and becoming proficient with it may also require significant capital expenditures.

We are currently using our I-Serve automated system for the purpose of origination and processing of loan files. Any substantial interruptions in this system or our inability to adjust it for our future use may adversely effect our operations.

Our mortgage products may expose us to greater credit risks.

We are an originator of primarily Alt-A mortgages, and to a lesser extent, subprime mortgages. These are non-conforming mortgages that generally do not qualify for purchase by government-sponsored agencies such as Fannie Mae and Freddie Mac. Our operations may be negatively affected due to these mortgages. Credit risks associated with these mortgages may be greater than those associated with conforming mortgages. The interest rates on these mortgages are often higher than those charged for conforming loans in order to compensate for the higher risk and lower liquidity. Lower levels of liquidity may cause us to hold loans or other mortgage-related assets supported by these loans that we otherwise would not hold. By doing this, we assume the potential risk of increased delinquency rates and/or credit losses as well as interest rate risk. Additionally, the combination of different underwriting criteria and higher rates of interest leads to greater risk, including higher prepayment rates and higher delinquency rates and/or credit losses. We also have interest only and option-ARM loan programs that allow a borrower to pay only the stated interest or less than the stated interest, respectively, attributable to their loan for a set period of time. If there is a decline in real estate values borrowers may default on these types of loans since they have not reduced their principal balances, which, therefore, could exceed the value of their property. In addition, a reduction in property values would also cause an increase in the LTV ratio for that loan which could have the effect of reducing the value of that loan.

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There has been an increase in the production of our loan products which are characterized as interest only and option-ARM loans. There have been recent announcements by Federal regulators concerning interest-only loan programs, option-ARM loan programs and other ARM loans with deeply discounted initial rates and/or negative amortization features. There is increasing public policy debate focused on the rapid increase in the use of loans with interest-only features that require no amortization of principal for a protracted period or loans with potential negative amortization features, such as option payment ARMs. One rating agency (Standard & Poor’s) has required greater credit enhancements for securitization pools that are backed by option-ARMs. These changes could make the product less available as financing options and hence this could have a material affect on the value of such products.

Originations of “No Income Documentation/No Verified Assets” loans may expose us to a higher risk of delinquencies, foreclosures, and losses.

We have experienced a rapid increase in our originations of “No Income Documentation/No Verified Assets” loans as we have focused on marketing these new products. In making these loans we generally place the most significant emphasis on the value of the property relative to the amount of the loan, rather than on a determination of the borrower’s ability to repay the loan from salary or savings. While the risk of losing one’s home is a powerful incentive to make scheduled mortgage payments, it is possible that a borrower simply does not have enough money to meet loan obligations and the lack of verification may thus make it more likely that a borrower will default on the loan. In this regard, the Mortgage Bankers Association of America, or MBAA, issued “Housing and Mortgage Markets: An Analysis” on August 23, 2005 in which it raised the issue of the relationship between borrower default and lack of verification of a borrower’s ability to repay a loan. It referenced other studies finding an increasing volume of stated income and no income lending in the Alt-A market. The MBAA suggested that this could indicate that these lending practices are extending beyond the intended creditworthy clientele and noted anecdotal evidence that some brokers or lenders are using the stated income programs to qualify borrowers who would not qualify under standard underwriting. When layered with other risk factors, the report comments that such lending practices are a risk factor that could lead to increases in default and loss rates in certain areas if unfavorable economic circumstances occur.

Lending to our type of borrowers based on our underwriting guidelines may expose us to a higher risk of delinquencies, foreclosures, and losses.

The vast majority of loans we originate are underwritten generally in accordance with standards designed for non-conforming residential mortgages. Our market includes borrowers who may be unable to obtain mortgage financing from conventional mortgage sources. Mortgages made to such borrowers based on these underwriting standards generally entail a higher risk of delinquency and higher potential losses than mortgages made to borrowers who qualify for conventional mortgage sources. Delinquency, foreclosures and losses generally increase during economic slowdowns or recessions. The actual risk of delinquencies, foreclosures and losses on mortgages made to our borrowers based on our underwriting guidelines could be higher under adverse economic conditions than those currently experienced in the mortgage lending industry in general.

Many of the mortgage loans we make are underwritten under “limited” or no documentation program, which generally place the most significant emphasis on the LTV ratio based on the full value of the property and not on a determination of a borrower’s ability to repay the loan. On May 16, 2005, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of Thrift Supervision, and the National Credit Union Administration jointly issued “Credit Risk Management Guidance for Home Equity Lending.” The guidance promotes sound credit risk management practices for institutions engaged in home equity lending, both home equity lines of credit and closed-end home equity loans. Among other risk factors, the guidance cautions lenders to consider all relevant risk factors when establishing product offerings and underwriting guidelines, including a borrower’s income and debt levels, credit score (if obtained), and credit history, as well as the loan size, collateral value, lien position, and property type and location. It stresses that prudently underwritten home equity loans should include an evaluation of a borrower’s capacity to adequately service the debt, and that reliance on a credit score is insufficient because it relies on historical financial performance rather than present capacity to pay. While not specifically applicable to loans originated by us, the guidance is instructive of the regulatory climate covering low and no documentation loans.

Further, any material decline in real estate values increases the LTV ratios of mortgages previously made by us, thereby weakening collateral coverage and increasing the possibility of a loss in the event of a borrower default. Any sustained period of increased delinquencies, foreclosures or losses after the mortgages are sold could adversely affect the pricing of our future loan sales and our ability to sell our mortgages in the future. In the past, certain of these factors have caused revenues and net earnings of many participants in the mortgage industry, including us, to fluctuate from quarter to quarter.

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

When we originate mortgage loans, we rely heavily upon information supplied by third parties including the information contained in the mortgage loan application, property appraisal, title information, and employment and income documentation. If any of this information is intentionally or negligently misrepresented and such misrepresentation is not detected prior to mortgage loan funding, the value of the mortgage loan may be significantly lower than expected. Whether a misrepresentation is made by the loan applicant, the mortgage broker, another third party, or one of our own employees, we generally bear the risk of loss associated with the misrepresentation. A mortgage loan subject to a material misrepresentation is typically not sellable or subject to repurchase if it is sold prior to detection of the misrepresentation. The persons and entities that make such material misrepresentation are often difficult to locate and it is often difficult to collect any monetary losses that we have suffered from them.

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While we have recently started to insure the appraised value of the properties we issue loans on and insure for misrepresentations and fraud contained in our loan documents to limit our losses, we cannot assure you that these insurances will shield us against all possible losses, or that all such losses will be covered by the insurances that we have obtained. In addition, we can not assure you that our controls and processes that are designed to help us identify misrepresented information in our loan operations will detect all misrepresented information in our loan originations. We are subject to losses due to fraudulent and negligent acts in other parts of our operations. If we experience a significant number of such fraudulent or negligent acts, our business, financial condition, liquidity, and results of operations would be significantly harmed.

We are exposed to environmental liabilities, with respect to properties that we take title to upon foreclosure, that could increase our costs of doing business and harm our results of operations.

In the course of our activities, we may foreclose and take title to residential properties and become subject to environmental liabilities with respect to those properties. The laws and regulations related to environmental contamination often impose liability without regard to responsibility for the contamination. We may be held liable to a governmental entity or to third parties for property damage, personal injury, investigation and clean-up costs incurred by these parties in connection with environmental contamination, or may be required to investigate or clean up hazardous or toxic substances, or chemical releases at a property. The costs associated with investigation or remediation activities could be substantial. Moreover, as the owner or former owner of a contaminated site, we may be subject to common law claims by third parties based upon damages and costs resulting from environmental contamination emanating from the property. If we ever become subject to significant environmental liabilities, our business, financial condition, liquidity, and results of operations would be significantly harmed.

Interest rate fluctuations may adversely affect our operating results and the market values of our mortgage loans held for sale.

Our operations, as a mortgage loan originator, may be adversely affected by rising interest rates. Interest rates have been low over the past few years; however increases in interest rates may discourage potential borrowers from refinancing mortgages, borrowing to purchase homes or seeking second mortgages. These effects could decrease the amount of mortgages available to be originated by our mortgage operations which could adversely affect our operating results. If short-term interest rates exceed long-term interest rates, there is a higher risk of increased loan prepayments, as borrowers may seek to refinance their fixed and adjustable rate mortgages at lower long-term fixed interest rates. Rising interest rates may also increase delinquencies, foreclosures and losses on our adjustable rate mortgages.

We are subject to the risk of rising mortgage interest rates between the time we commit to originate or purchase mortgages at a fixed price through the issuance of individual or other interest rate-locks and the time we sell those mortgages. An increase in interest rates will generally result in a decrease in the market value of mortgages that we have committed to purchase at a fixed price, but have not been sold or have not been properly hedged. As a result, we may record a smaller gain, or even a loss, upon the sale of those mortgage loans.

Increases in interest rates might cause the fair market value of our mortgage loans to decline. Our fixed-rate mortgage loans generally will be more negatively affected by increases in interest rates than will our adjustable-rate mortgage loans. In accordance with GAAP, we will be required to reduce the carrying value of our mortgage loans held for sale by the amount of any decrease in the fair value of such assets compared to amortized cost. If unrealized losses in fair value occur, we will have to either reduce current earnings or reduce stockholder’s equity without immediately affecting current earnings. In each case, our net book value will decrease to the extent of any realized or unrealized losses in fair value, and could have a material adverse effect on our results of operations, financial condition, and business.

When interest rates rise, the interest rates that we pay to finance our mortgage loan originations may rise faster than the interest rates on our mortgage loans, which could cause the net interest income generated by our mortgage loan portfolio to decrease.

The potential for negative amortization in the Pay Option ARM product could have an adverse effect on our credit.

The Pay Option ARM loan is a unique adjustable-rate mortgage that can provide the borrower with up to four payment options each month and an introductory rate of interest, or start rate, that is usually much lower than the loan’s fully-indexed interest rate and will last from one month to five years, depending on the type of Pay Option ARM selected by the borrower. The minimum monthly payment is a fully amortizing payment based on the start rate and is the lowest payment that the borrower may select, which means that any other payment option, such as interest only, will not be available in any month that it is less than the minimum payment. After an initial introductory period, the interest rate can adjust monthly based on movements in the index. The minimum monthly payment, however, adjusts no more frequently than annually and each annual payment adjustment cannot exceed, in amount, a specified percentage of the previous year’s minimum monthly payment. As a result, depending on how the interest rate adjusts, the minimum monthly payment may not be sufficient to pay all the interest that accrued during the previous month. When this occurs and the borrower selects the minimum payment option, the unpaid interest is added to the principal balance. This is called negative amortization. Holding mortgage loans with negative amortization creates risks for our business through the increased amounts of debt owed on a borrower’s mortgage loan without any corresponding determination that the borrower is capable of paying such increased amount. The increased amount of debt may make it more likely that a borrower may be delinquent or default in payments after payment caps are no longer in effect because the increased principal amount of the mortgage loan and corresponding interest payment due on such amounts may be larger than a borrower’s ability to repay such amounts. In addition, unless the value of the property increases in an amount at least equal to the amount of the negative amortization, the increased debt owed may be insufficient to satisfy the original LTV or CLTV ratios for such property and, following a foreclosure, the value we realize upon a sale of such a property may not be sufficient to satisfy the increased debt owed to us as a result of negative amortization. If credit risks associated with the Pay Option ARM were to increase in severity, our earnings could be adversely affected.

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Increased levels of early prepayments of mortgages may accelerate our expenses and decrease our net income.

Mortgage prepayments generally increase on our ARMs when fixed mortgage interest rates fall below the then-current interest rates on newly originated ARMs. Prepayments on mortgages are also affected by the terms and credit grades of the mortgages, conditions in the financial markets, housing appreciation and general economic conditions. If the prepayment rates for our mortgage loans are higher than expected, our results of operations may be significantly harmed. When a borrower pays off a mortgage loan prior to the loan’s scheduled maturity, the impact on us depends upon when such payoff or “prepayment” occurs. Our prepayment losses generally occur after we sell (or securitize in the future) our mortgage loans and the extent of our losses depends on when the prepayment occurs. If the prepayment occurs within 12 to 18 months following a whole mortgage loan sale, we may have to reimburse the purchaser for all or a portion of the premium paid by the purchaser for the mortgage loan, again resulting in a loss of our profit on the mortgage loan.

Prepayment rates on mortgage loans vary from time to time and tend to increase during periods of declining interest rates. We seek to minimize our prepayment risk through a variety of means, including originating a significant portion of mortgage loans with prepayment penalties with terms of two to five years. No strategy, however, can completely insulate us from prepayment risks, whether arising from the effects of interest rate changes or otherwise. See “Regulatory and Legal Risks” below for a discussion of statutes related to prepayment penalties.

We may be subject to losses on mortgages for which we do not obtain credit enhancements.

We do not obtain credit enhancements such as mortgage pool or special hazard insurance for all of our mortgages and investments. Generally, we require mortgage insurance on any mortgage with an LTV ratio greater than 80%. During the time we hold mortgages for investment, we are subject to risks of borrower defaults and bankruptcies and special hazard losses that are not covered by standard hazard insurance. If a borrower defaults on a mortgage that we hold, we bear the risk of loss of principal to the extent there is any deficiency between the value of the related mortgaged property and the amount owing on the mortgage loan and any insurance proceeds available to us through the mortgage insurer. In addition, since defaulted mortgages, which under our financing arrangements are mortgages that are generally 60 to 90 days delinquent in payments, may be considered ineligible collateral under our borrowing arrangements, we could bear the risk of being required to own these loans without the use of borrowed funds until they are ultimately liquidated or possibly sold at a loss.

Market Risk

The Company is involved in the real estate loans market. Changes in interest rates or other market conditions within the real estate loans market may have a significant effect on the volume and profitability of the business of the Company.

We carry interest-sensitive assets on our balance sheet that are financed by interest-sensitive liabilities. Since the interval for re-pricing of the assets and liabilities is not matched, we are subject to interest-rate risk. A sudden, sustained increase or decrease in interest rates would affect our net interest income, as well as the fair value of our mortgage loans held for sale. Additionally, there has been an increase in production of loan products which we characterize as “interest-only,” “option-ARM,” and “subprime loans.” There is increasing public policy debate over loans with interest-only features that require no amortization of principal for a protracted period, loans with potential negative amortization features, such as option payment ARMs, and loans with lower credit scores, such as subprime. There is a risk that this debate will lead to the enactment of laws which limit our ability to continue producing these loan products at our present levels, or which augment the risks of legal liability that we face in connection with such loan products. Further, one rating agency has required greater credit enhancements for securitization pools that are backed by option-ARMs. Actions such as this by rating agencies can impact the profitability of originating or dealing in these loan products.

Declining real estate values could harm our operations.

We believe the risks associated with our business will be more acute during periods of declining real estate values. Declining real estate values will likely reduce our level of new mortgage loan originations, since borrowers often use increases in the value of their existing homes to support the refinancing of their existing mortgage loans or the purchase of new homes at higher levels of borrowings. Furthermore, declining real estate values will likely reduce our volume of refinancings and debt consolidation loans as the level of home equity available to secure such loans will be reduced. A cash-out refinancing occurs when a borrower obtains a new mortgage loan in an amount that exceeds the existing balance on the current mortgage in order to refinance the original mortgage and receive additional cash for other uses such as paying down or off consumer debt with a higher interest rate than on the mortgage loan. For the three and six months ended June 30, 2007, approximately 52.4% and 48.0%, by loan amount, of our loan originations were refinancings and debt consolidation loans. In addition, declining real estate values significantly increase the likelihood that we will incur increased foreclosures and losses on our loans in the event of default. Therefore, any sustained period of declining real estate values could adversely affect both our net interest income from loans in our portfolio, as well as our ability to originate and sell loans, which would significantly harm our revenues, results of operations, financial condition, business prospects and our ability to make distributions. We are currently experiencing acute depreciation in real estate values. Such sustained depreciation can severely affect our operations.

Second mortgages expose us to greater credit risks.

Our security interest in the property securing second mortgages is subordinated to the interest of the first mortgage holder. Second mortgages also have a higher CLTV ratio than the first mortgage. Upon foreclosure, if the value of the property is equal to or less than the amount needed to repay the borrower’s obligation to the first mortgage holder our second mortgage loan will not be repaid.

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Current conditions in the secondary market could materially impact our finances, earnings and our business operations

As a result of the unprecedented uncertainty and disruption in the capital markets and secondary mortgage markets we are making changes in our business strategies and operations. The reduced liquidity and investor demand for mortgage loans and mortgage backed securities, and the increased yield requirements for such instruments, may continue or get worse in the future. We have suspended the origination and purchase of all loans. Traditionally we have sold all our loans to the secondary markets. The current disruption in that market caused by, among other things, an increased default rate on residential mortgage loans, an increase in the number of ratings downgrades with respect to bonds issued in connection with securitization of loans, the lack of liquidity in the bond market and the financial condition of many companies that typically participate in this market have negatively affected our ability to access the secondary market for our mortgage loans. This, coupled with the lack of a market for the sale of whole loans, and the fact that if such sales are negotiated they may be on terms and conditions less favorable or profitable than they have historically been, has also adversely affected the securitization market. As a result we cannot assure you that we will have purchasers for our loans on terms and conditions that will be profitable to us at all. An inability to obtain long term funding for our mortgage loans on attractive terms or a continued weakness in the markets demand for our mortgage loans or securities would harm our results of operations, financial condition, liquidity and business prospects and could result in defaults under our short term financing arrangements for such assets. Realigning our operations with these changes in the market could substantially decrease our loan originations. Furthermore, we could be forced to sell assets on unfavorable terms or to seek additional means to reduce losses or raise funds, including without limitation reducing, eliminating or disposing of our mortgage origination, mortgage purchasing, or other operations.

We may change our policies in ways that harm our financial condition or results of operations.

Our investment and financing policies with respect to other activities, including our growth, debt, capitalization, distributions and operating policies are determined by our Board of Directors. Our Board of Directors may change these policies at any time without a vote of our stockholders. A change in these policies might harm our financial condition, results of operations or business prospects.

We are exposed to potential risks from recent legislation with respect to internal controls under Section 404 of the Sarbanes-Oxley Act of 2002.

While we believe that we currently have adequate internal control procedures in place, we are evaluating our internal control systems to allow management to report on, and our independent auditors to attest to, our internal controls over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act of 2002. During this process, we will identify what might be deemed to be potential control deficiencies and will establish a process to investigate and, as appropriate, remediate such matters before the required deadline. We like all other public companies, are incurring additional expenses and taking significant amounts of management’s time in an effort to comply with Section 404. Although we have made this project a top priority, we cannot assure you that all potential control deficiencies will be remediated before the mandated deadline or that we will receive an unqualified opinion from our external auditors regarding our internal controls over financial reporting.

We now have a policy of not making loans to directors, officers or stockholders beneficially owning 3% or more of our outstanding stock (Major Stockholder) that do not fall within the ordinary course of business of making loans secured by residential (properties with four or fewer units) real estate. Thus, it will be our policy not to extend funds or make loans of any type other than residential real estate loans to our officers, directors, or Major Stockholders, which loans include but are not limited to personal loans, loans secured by multi-family properties, and loans secured by commercial real estate.

Compliance with proposed and recently enacted changes in securities laws and regulations are likely to increase our costs and until shares of our stock are listed on a national securities exchange you may not get the full protections afforded by the Sarbanes-Oxley Act.

The Sarbanes-Oxley Act of 2002 and rules and regulations promulgated by the SEC and the national securities exchanges have increased the scope, complexity and cost of corporate governance, reporting and disclosure practices. We believe that these rules and regulations will make it more costly for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These rules and regulations could also make it more difficult for us to attract and retain qualified members of management and our Board of Directors, particularly to serve on our audit committee.

Because shares of our common stock are not listed on any national securities exchange, we currently are not subject to the rules such exchanges have adopted in connection with Sarbanes-Oxley. Accordingly, you may not get the full protection afforded shareholders by those rules, such as the independence requirements for members of our board’s audit committee.

If we fail to maintain effective systems of internal control over financial reporting and disclosure controls and procedures, we may not be able to accurately report our financial results or prevent fraud, which could cause current and potential shareholders to lose confidence in our financial reporting, adversely affect the trading price of our securities or harm our operating results.

Effective internal control over financial reporting and disclosure controls and procedures are necessary for us to provide reliable financial reports and effectively prevent fraud and operate successfully as a public company. Any failure to develop or maintain effective internal control over financial reporting and disclosure controls and procedures could harm our reputation or operating results, or cause us to fail to meet our reporting obligations. We cannot be certain that our efforts to improve our internal control over financial reporting and disclosure controls and procedures will be successful or that we will be able to maintain adequate controls over our financial processes and reporting in the future. Any failure to develop or maintain effective controls or difficulties encountered in their implementation or other effective improvement of our internal control over financial reporting and disclosure controls and procedures could harm our operating results, or cause us to fail to meet our reporting obligations. If we are unable to adequately establish our internal control over financial reporting, our external auditors will not be able to issue an unqualified opinion on the effectiveness of our internal control over financial reporting.

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Ineffective internal control over financial reporting and disclosure controls and procedures could cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our securities or affect our ability to access the capital markets and could result in regulatory proceedings against us by, among others, the SEC. In addition, a material weakness in internal control over financial reporting, which may lead to deficiencies in the preparation of financial statements, could lead to litigation claims against us. The defense of any such claims may cause the diversion of management’s attention and resources, and we may be required to pay damages if any such claims or proceedings are not resolved in our favor. Any litigation, even if resolved in our favor, could cause us to incur significant legal and other expenses. Such events could harm our business, affect our ability to raise capital and adversely affect the trading price of our securities.

Our Chief Executive Officer and President owns a significant amount of our outstanding common stock and may significantly influence the management and policies of our company, in ways with which you may disagree.

Raymond Eshaghian, our Chief Executive Officer, President, Secretary and Chairman of our board of directors, directly and indirectly through others beneficially owns or controls over 60% of our outstanding shares of common stock, assuming the exercise of all options and warrants currently outstanding. Mr. Eshaghian is able to exercise significant influence over the election of our directors, and therefore, our management and policies, through his voting power. He may vote his or cause his affiliations to vote its shares of our common stock in ways with which you may disagree or which may be adverse to your interests as a stockholder, and this voting concentration may discourage, delay or prevent a change in control or acquisition of our company, even one that you believe is beneficial to you as a stockholder.

Loss of Mr. Eshaghian could result in a material adverse effect on our business.

Our future success depends to a significant extent on the continued services of Mr. Eshaghian. The loss of the services of Mr. Eshaghian could have a material adverse effect on our results of operations, financial condition, and business.

Regulatory Risks

Violation of various Federal, state and local laws may result in losses on our loans.

Applicable state and local laws generally regulate interest rates and other charges, require certain disclosure, and require licensing of the mortgage broker, lender and purchaser. In addition, other state and local laws, public policy and general principles of equity relating to the protection of consumers, unfair and deceptive practices and debt collection practices may apply to the origination, servicing and collection of our loans. Mortgage loans are also subject to Federal laws, including:

the Federal Truth-in-Lending Act and Regulation Z promulgated there under, which require certain disclosures to the borrowers regarding the terms of the loans;
the Equal Credit Opportunity Act and Regulation B promulgated there under, which prohibit discrimination on the basis of age, race, color, sex, religion, marital status, national origin, receipt of public assistance or the exercise of any right under the Consumer Credit Protection Act, in the extension of credit;
the Fair Housing Act, which prohibits discrimination in housing on the basis of race, color, national origin, religion, sex, familial status, or handicap, in housing-related transactions;
the Fair Credit Reporting Act, which regulates the use and reporting of information related to the borrower's credit experience;
the Fair and Accurate Credit Transaction Act, which regulates credit reporting and use of credit information in making unsolicited offers of credit;
the Gramm-Leach-Bliley Act, which imposes requirements on all lenders with respect to their collection and use of nonpublic financial information and requires them to maintain the security of that information;
the Real Estate Settlement Procedures Act, which requires that consumers receive disclosures at various times and outlaws kickbacks that increase the cost of settlement services;
the Home Mortgage Disclosure Act, which requires the reporting of public loan data;
the Telephone Consumer Protection Act and the Can Spam Act, which regulate commercial solicitations via telephone, fax, and the internet;
the Depository Institutions Deregulation and Monetary Control Act of 1980, which preempts certain state usury laws; and
the Alternative Mortgage Transaction Parity Act of 1982, which preempts certain state lending laws that regulate alternative mortgage transactions.

Violations of certain provisions of these Federal and state laws may limit our ability to collect all or part of the principal, or interest, on the loans and in addition could subject us to damages and could result in the mortgagors rescinding the loans whether held by us or subsequent holders of the loans. In addition, such violations may cause us to be in default under our credit and repurchase facilities and could result in the loss of licenses held by us.

Similarly, it is possible borrowers may assert that the loan forms we use or acquire, including forms for “interest-only” and “option-ARM” loans for which there is little standardization or uniformity, fail to properly describe the transactions they intended, or that our forms fail to comply with applicable consumer protection statutes or other Federal and state laws. This could result in liability for violations of certain provisions of Federal and state consumer protection laws and our inability to sell the loans and our obligation to repurchase the loans or indemnify the purchasers.

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New regulatory laws affecting the mortgage industry may increase our costs and decrease our mortgage origination and acquisition.

The regulatory environments in which we operate have an impact on the activities in which we may engage, how the activities may be carried out, and the profitability of those activities. Therefore, changes to laws, regulations or regulatory policies can affect whether and to what extent we are able to operate profitably. For example, recently enacted and proposed local, state and Federal legislation targeted at predatory lending could have the unintended consequence of raising the cost or otherwise reducing the availability of mortgage credit for those potential borrowers with less than prime-quality credit histories, thereby resulting in a reduction of otherwise legitimate Alt-A or subprime lending opportunities. Similarly, recently enacted and proposed local, state and Federal privacy laws and laws prohibiting or limiting marketing by telephone, facsimile, email and the internet may limit our ability to market and our ability to access potential loan applicants. For example, the Can Spam Act of 2003 establishes the first national standards for the sending of commercial email allowing, among other things, unsolicited commercial email provided it contains certain information and an opt-out mechanism. We cannot provide any assurance that the proposed laws, rules and regulations, or other similar laws, rules or regulations, will not be adopted in the future. Adoption of these laws and regulations could have a material adverse impact on our business by substantially increasing the costs of compliance with a variety of inconsistent Federal, state and local rules, or by restricting our ability to charge rates and fees adequate to compensate us for the risk associated with certain loans.

Some states and local governments and the Federal government have enacted, or may enact, laws or regulations that prohibit inclusion of some provisions in mortgage loans that have mortgage rates or origination costs in excess of prescribed levels, and require that borrowers be given certain disclosures prior to the consummation of such mortgage loans. Our failure to comply with these laws could subject us to monetary penalties and could result in the borrowers rescinding the mortgage loans, whether held by us or subsequent holders. Lawsuits have been brought in various states making claims against assignees of these loans for violations of state law. Compliance with some of these restrictions requires lenders to make subjective judgments, such as whether a loan will provide a “net tangible benefit” to the borrower. These restrictions expose lenders to risks of litigation and regulatory sanction no matter how carefully loans are underwritten and impact the way loans are underwritten. The remedies for violations of these laws are not based solely on actual harm to the consumer and can result in damages that exceed the loan balance. Liability for violations of HOEPA, as well as violations of many of the state and local equivalents, could extend not only to us, but to our secured warehouse lenders, institutional loan purchasers, securitization trusts that hold our loans and other assignees, regardless of whether such assignee knew of or participated in the violation.

Furthermore, various Federal and state laws impose significant privacy or customer information security obligations which may subject us to additional costs and legal risks and we cannot assure you that we will not be subject to lawsuits or compliance actions under such requirements. Similarly various state and Federal laws have been enacted to restrict unsolicited advertising using telephones, facsimile machines and electronic means of transmission. These laws and regulations could have a material adverse impact on our business by substantially increasing the costs of compliance or by subjecting us to lawsuits or compliance actions.

In addition to changes to legal requirements contained in statutes, regulations, case law, and other sources of law, changes in the investigation or enforcement policies of federal and state regulatory agencies could impact the activities in which we may engage, how the activities may be carried out, and the profitability of those activities. For example, various state and federal agencies have initiated regulatory enforcement proceedings against mortgage companies for engaging in business practices that were not specifically or clearly proscribed by law, but which in the judgment of the regulatory agencies were unfair or deceptive to consumers. Federal and state regulatory agencies might also determine in the future that certain of our business practices not presently proscribed by any law and not the subject of previous enforcement actions are unfair or deceptive to consumers. If this happens, it could impact the activities in which we may engage, how we carry out those activities, and our profitability. We might also be required to pay fines, make reimbursements, and make other payments to third parties for past business practices. Additionally, if an administrative enforcement proceeding were to result in us having to discontinue or alter certain business practices, then we might be placed at a competitive disadvantage vis-à-vis competitors who are not required to make comparable changes to their business practices. This competitive disadvantage could be most acute if the business practices that we are required to discontinue or change are not clearly proscribed by any federal or state law of general applicability.

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

The mortgage brokers and correspondents from which we obtain mortgages have parallel and separate legal obligations to which they are subject. While these laws may not explicitly hold the originating lenders or an acquirer of the loan responsible for the legal violations of mortgage bankers and brokers, Federal and state agencies have increasingly sought to impose such liability. Previously, for example, the United States Federal Trade Commission or (FTC) entered into a settlement agreement with a mortgage lender where the FTC characterized a broker that had placed all of its loan production with a single lender as the “agent” of the lender; the FTC imposed a fine on the lender in part because, as “principal,” the lender was legally responsible for the mortgage broker’s unfair and deceptive acts and practices. The United States Justice Department, various state attorneys general, and other state officials have sought to hold subprime mortgage lenders responsible for the pricing practices of their mortgage bankers and brokers, alleging that the mortgage lender was directly responsible for the total fees and charges paid by the borrower under the Fair Housing Act even if the lender neither dictated what the mortgage banker could charge nor kept the money for its own account. Accordingly, we may be subject to fines or other penalties based upon the conduct of our independent mortgage bankers, brokers or correspondents.

Regulation AB may create additional liabilities, costs and restrictions for our business.

On December 15, 2004, the Securities and Exchange Commission (SEC) approved the final regulations covering the registration, disclosure, communications, and reporting requirements for asset-backed securities (“Regulation AB”), which became effective January 1, 2006. The new rules contain several new disclosure requirements, including requirements to provide historical financial data with respect to either prior securitized pools of the same asset class or prior originations and information with respect to the background, experience and roles of the various transaction parties, including those involved in the origination, sale or servicing of the loans in the securitized pool. Moreover, annual assessments of compliance with enhanced servicing criteria by servicers and attestation reports from an independent registered public accounting firm must be obtained with respect to securitized pools of our mortgage loans.

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As a result of the implementation of Regulation AB, our loan sale agreements with third parties may require us to provide certain information with respect to ourselves and historical information with respect to the performance of our mortgage loans to such purchasers. Our failure to provide this information with respect to any of our mortgage loan products may result in a breach of a contractual obligation for which we provide an indemnification. In addition, if we are not able to provide such information, the number of potential purchasers of our mortgage loans may be limited or the transaction sizes of sales of our mortgage loans may be limited, each of which may have an adverse effect on the price we receive for our mortgage loans.

Regulation AB will increase our cost of doing business as we are required to develop systems and procedures to ensure that we do not violate any aspect of these new requirements.

The Federal banking agencies’ final guidance on nontraditional mortgage products may affect our ability to originate, buy or sell certain nontraditional mortgage loans.

On October 4, 2006, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of Thrift Supervision, and the National Credit Union Administration issued their final “Interagency Guidance on Nontraditional Mortgage Product Risks” (the “Guidance”). Nontraditional mortgage products are those which allow borrowers to defer payment of principal and sometimes interest. They include what are commonly referred to as “option-ARM” loans and interest-only loans. While we are not subject to regulation by these agencies or to the Guidance, it is possible the Guidance may have an adverse effect on our ability to buy or sell certain loans covered by the Guidance. However, some states regulatory agencies have and are adopting the guidance thereby making it applicable to us in certain circumstances. Further, this may also make it applicable to entities that sell loans to us or purchase loans from us. As a result, the Guidance may also negatively affect our loan origination volume and loan sales. It is also possible that the Guidance, or certain provisions within it, may be adopted as laws or used as guidance by Federal, state or local agencies and that those laws or guidance may be applied to us.

The Guidance addresses the portfolio risks and consumer protection issues that the Federal agencies believe investors and lenders face when making or investing in nontraditional mortgage loans. As a matter of portfolio risk management, the Guidance warns applicable financial institutions that loan terms should be analyzed to ensure a manageable risk level, utilizing sound underwriting standards including an evaluation of factors that may compound the risk, such as reduced documentation programs and the use of second lien mortgages. The analysis of repayment ability “should avoid over-reliance on credit scores as a substitute for income verification in the underwriting process” and should include an analysis of the borrower’s ability to make the payment when it increases to include amortization of the loan.

As a matter of consumer protection, financial institutions subject to the Guidance, when promoting or describing nontraditional mortgage products, are directed to ensure that they provide consumers with marketing materials and at application with information that is designed to help them make informed decisions when selecting and using these products. Lenders subject to the Guidance are instructed that the information they are to provide should apprise consumers of the risk that the monthly payment amounts could increase in the future, and explain the possibility of negative amortization.

While not directly applicable to us in all cases, the Guidance may affect our ability to make, buy or sell the nontraditional loans covered by the Guidance. Further, the Guidance is instructive of the regulatory climate concerning those loans and has been and may be adopted in whole or part by other agencies that regulate us. The Guidance reports that the Conference of State Bank Supervisors (“CSBS”) and the State Financial Regulators Roundtable (“SFRR”) are committed to preparing a model guidance document for state regulators of non-depository institutions such as us, which would be “similar in nature and scope” to the Guidance.

If we are required (either by a regulatory agency or by third-party originators or investors) to make changes to our business practices to comply with the Guidance, it might affect the business activities in which we may engage and the profitability of those activities. Our business could be adversely affected if, as a result of the Guidance, investors from which we purchase loans, or to whom we sell loans, change their business practices and policies relative to nontraditional mortgage products. For example, if entities from which we purchase loans are required to change their origination guidelines thereby affecting the volume, diversity, and quality of loans available for purchase by us, or if purchasers of mortgage loans are required to make changes to the purchasing policies, then our loan volume, ability to sell mortgage loans and profitability, could be adversely affected.

There has been an increase in production of loan products which we characterize as interest-only and option-ARM loans. There is increasing public policy debate over loans with interest-only features that require no amortization of principal for a protracted period and loans with potential negative amortization features, such as option payment ARMs. There is a risk that this debate will lead to the enactment of laws which limit our ability to continue producing these loan products at our present levels, or which augment the risks of legal liability that we face in connection with such loan products. Further, one rating agency has required greater credit enhancements for securitization pools that are backed by option-ARMs. Actions such as this by rating agencies can impact the profitability of originating or dealing in these loan products.

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New regulatory actions affecting the mortgage industry may increase our costs and decrease our mortgage acquisition.

In addition to changes to legal requirements contained in statutes, regulations, case law, and other sources of law, changes in the investigation or enforcement policies of Federal and state regulatory agencies could impact the activities in which we may engage, how the activities may be carried out, and the profitability of those activities. For example, state and Federal agencies have initiated regulatory enforcement proceedings against mortgage companies for engaging in business practices that were not specifically or clearly proscribed by law, but which in the judgment of the regulatory agencies were unfair or deceptive to consumers. For example, state attorneys general and other state officials representing various states entered into a Settlement Agreement with a large subprime mortgage company. The subject company agreed to pay a substantial amount in restitution to consumers and reimbursement to the states. The subject company also agreed to make changes to certain business practices, including the Company’s underwriting criteria and pricing policies. Many of the practices and policies are not specifically prohibited by any Federal or state laws but were alleged to be deceptive or unfair to consumers. The terms of this Settlement Agreement do not apply directly to us; however, Federal and state regulatory agencies and private parties might nevertheless expect mortgage companies including us, to make our business practices consistent with the provisions of the Agreement. If this happens, it could impact the activities in which we may engage, how we carry out those activities, our acquisition practices and our profitability. We might also be required to pay fines, make reimbursements, and make other payments to third parties for our business practices. Additionally, if an administrative enforcement proceeding were to result in us having to discontinue or alter certain business practices, then we might be placed at a competitive disadvantage vis-à-vis competitors who are not required to make comparable changes to their business practices.

Risks of Ownership of Our Common Stock

Because there historically has been a limited amount of trading in our common stock, there can be no assurance that our stock price will not decline.

Although our common stock trades on the OTC Bulletin Board, the public market for our common stock historically has not been very liquid and a regular trading market for the securities may not be sustained in the future. The OTC Bulletin Board is an inter-dealer, over-the-counter market that provides significantly less liquidity than the NASDAQ’s automated quotation system, or the NASDAQ Stock Market. Quotes for stocks included on the OTC Bulletin Board are not listed in the financial sections of newspapers, as are those for the NASDAQ Stock Market. Therefore, prices for securities traded solely on the OTC Bulletin Board may be difficult to obtain and holders of common stock may be unable to resell their securities at or near their original offering price or at any price.

Our common stock is considered a “penny stock,” and thereby be subject to additional sale and trading regulations that may make it more difficult to sell.

Our common stock is currently considered to be a “penny stock” because it does not qualify for one of the exemptions from the definition of “penny stock” under Section 3a51-1 of the Securities Exchange Act for 1934, as amended (the “Exchange Act”). Our common stock may be a “penny stock” if it meets one or more of the following conditions (i) the stock trades at a price less than $5.00 per share; (ii) it is NOT traded on a “recognized” national exchange; (iii) it is NOT quoted on the NASDAQ Stock Market, or even if so, has a price less than $5.00 per share; or (iv) is issued by a company that has been in business less than three years with net tangible assets less than $5 million. The principal result or effect of being designated a “penny stock” is that securities broker-dealers participating in sales of our common stock will be subject to the “penny stock” regulations set forth in Rules 15g-2 through 15g-9 promulgated under the Exchange Act. For example, Rule 15g-2 requires broker-dealers dealing in penny stocks to provide potential investors with a document disclosing the risks of penny stocks and to obtain a manually signed and dated written receipt of the document at least two business days before effecting any transaction in a penny stock for the investor’s account. Moreover, Rule 15g-9 requires broker-dealers in penny stocks to approve the account of any investor for transactions in such stocks before selling any penny stock to that investor. This procedure requires the broker-dealer to (i) obtain from the investor information concerning his or her financial situation, investment experience and investment objectives; (ii) reasonably determine, based on that information, that transactions in penny stocks are suitable for the investor and that the investor has sufficient knowledge and experience as to be reasonably capable of evaluating the risks of penny stock transactions; (iii) provide the investor with a written statement setting forth the basis on which the broker-dealer made the determination in (ii) above; and (iv) receive a signed and dated copy of such statement from the investor, confirming that it accurately reflects the investor’s financial situation, investment experience and investment objectives. Compliance with these requirements may make it more difficult and time consuming for holders of our common stock to resell their shares to third parties or to otherwise dispose of them in the market or otherwise.

Shares of our common stock available for future sale could have an adverse effect on our stock price.

Sales of a substantial number of shares of our common stock, or the perception that such sales could occur, could adversely affect prevailing market prices for our common stock. The issuance of additional shares of our common stock may be available for sale in the public markets. In addition, a substantial number of shares of our common stock may, pursuant to employee benefit plans, be issued or reserved for issuance from time to time and these shares of common stock may be available for sale in the public markets from time to time. We presently have 1,637,725 shares of our common stock subject to options that are immediately exercisable and an additional 170,275 shares subject to options that vest over the next five years. We cannot predict the effect that future sales of shares of our common stock will have on the market price of our common stock.

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The market price and trading volume of our common stock may be volatile.

The market price of our common stock may be highly volatile and be subject to wide fluctuations. In addition, the trading volume in our common stock may fluctuate and cause significant price variations to occur. We cannot assure you that the market price of our common stock will not fluctuate or decline significantly in the future. Some of the factors that could negatively affect our stock price or result in fluctuations in the price or trading volume of our common stock include:

issuance of new equity securities pursuant to a future offering;
actual or anticipated variations in our quarterly operating results or distributions;
changes in our cash flows from operations or earnings estimates or publication of research reports about us, if any, or the real estate industry;
changes in market interest rates;
changes in market valuations of similar companies;
competitive developments, including announcements by us or our competitors of new products or services or significant contracts, regulations, strategic partnerships, joint ventures or capital commitments;
adverse market reaction to any increased indebtedness we incur in the future;
additions or departures of key management personnel;
actions by institutional stockholders;
depth and liquidity of the market for our common stock;
speculation in the press or investment community; and
general market and economic conditions.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSERS ABOUT MARKET RISK

Market risks generally represent the risk of loss that may result from the potential change in the value of a financial instrument due to fluctuations in interest and foreign exchange rates and in equity and commodity prices. Our market risk relates primarily to interest rate fluctuations. We may be directly affected by the level of and fluctuations in interest rates, which affects the spread between the rates of interest received on our mortgage loans and the related financing rate. Our profitability could be adversely affected during any period of unexpected or rapid changes in interest rates, by impacting the value of loans held for sale.

The objective of interest rate risk management is to control the effects interest rate fluctuations have on the value of our assets and liabilities. Our management of interest rate risk is intended to mitigate the volatility of earnings associated with fluctuations in the unrealized gain (loss) of loans held for sale due to changes in the current market rate of interest.

As part of our interest rate management process, we may in the future use derivative financial instruments such as financial futures and options, interest rate swaps and financial forwards. We will designate certain derivative financial instruments used to hedge our mortgage loans held for sale as hedge instruments under SFAS No. 133. At trade date these instruments and their hedge relationship will be identified, designated and documented. For derivative financial instruments designated as hedge instruments, we will evaluate the effectiveness of these hedges against the mortgage loans being hedged to ensure that there remains a highly effective correlation in the hedge relationship. Since our concern with interest rates is the potential change in fair market value of the loans, we will treat these as fair value hedges under SFAS No. 133. Once the hedge relationship is established, the realized and unrealized changes in fair value of both the hedge instruments and mortgage loans will be recognized in the consolidated statements of operations in the period in which the changes occur. Any net amount recorded in the consolidated statements of operations will be referred to as hedge ineffectiveness.

For derivative financial instruments not designated as hedge instruments, realized and unrealized changes in fair value are recognized in the consolidated statements of operations in the period in which the changes occur or when such instruments are settled.

Interest Rate Simulation Sensitivity Analysis

Changes in market interest rates may affect our gain (loss) from sales of mortgage loans. At June 30, 2007 we held $33.3 million in loans that had not been committed for sale. Increases in interest rate would adversely affect revenue to be realized from uncommitted loans. Likewise, any decrease in interest rates would have a positive impact on the uncommitted loans.

The following table summarizes impact of -100 basis points (bps), -50 bps, +50 bps and +100 bps changes in the prevailing market rates on the pricing premiums we would collect from sales of these loans, compared to no change in prevailing rates. Since we do not recognize the revenue until loans are sold, the impact of interest rate change will be on our future income from uncommitted loans.

Change in interest rate (bps)	-100	-50	50	100

Change in income from sales of uncommitted loans (dollars in millions)	0.157	0.057	(0.235)	(0.782)

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Interest Rate Management

Our profits depend, in part, on the difference, or “spread,” between the effective rates of interest received by us on the loans we originate and the interest rates payable by us under our warehouse facilities. The spread can be adversely affected because of interest rate increases during the period from the date the loans are originated until the sale of such loans.

Since we historically have retained loans for a short period of time pending their sales, we have not engaged in hedging activities to date. However, in the future we may hedge our variable-rate mortgage loans, which may include forward sales of mortgage loans, interest rate caps and floors and buying and selling of futures and options on futures. The nature and quantity of hedging transactions will be determined by our management based on various factors, including market conditions and the expected volume of mortgage loan originations and purchases. No assurance can be given that any such hedging transactions will offset the risks of changes in the interest rates, and it is possible that there will be periods during which we may incur losses after accounting for our hedging activities.

Inflation

Inflation affects us most significantly in the area of loan originations by affecting interest rates. Interest rates normally increase during periods of high inflation (or in periods when the Federal Reserve Bank attempts to prevent inflation) and decrease during periods of low inflation.

ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures

As of June 30, 2007, we conducted an evaluation, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, including to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of June 30, 2007, our disclosure controls and procedures were effective.

Our management, under the supervision of our chief executive officer and chief financial officer, is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. Internal control over financial reporting includes policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company,(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company, and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.

A material weakness is a control deficiency, or combination of control deficiencies (within the meaning of Public Company Accounting Oversight Board Auditing Standard No. 2), that results in there being more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis by employees in the normal course of their assigned functions. Management has identified the following material weaknesses in our internal control over financial reporting as of December 31, 2005, which were subsequently remediated in 2006. As of December 31, 2006 and June 30, 2007, our disclosure controls and procedures were effective:

The Company did not maintain an effective control environment and specifically, elements of the Company's finance organization were not structured with sufficient resources to ensure the consistent execution of their responsibility to provide independent and pro-active leadership in the areas of monitoring of controls, disclosure reviews and financial reporting.
The Company did not maintain effective controls over the financial reporting process due to an insufficient complement of personnel with an appropriate level of accounting knowledge, experience and training in the application of GAAP commensurate with its financial reporting requirements and the complexity of the Company's operations and transactions. Additionally, the Company did not maintain effective controls to ensure there is adequate monitoring and oversight of the work performed by accounting and financial reporting personnel to ensure the accuracy and completeness of the consolidated financial statements in accordance with GAAP.
The Company did not maintain effective controls to ensure there are adequate analysis, documentation, reconciliation, and review of accounting records and supporting data.

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In response to the identified material weaknesses, our management, with oversight from our Audit Committee, has dedicated significant resources and engaged external consultants to support management in its efforts to improve our control environment. We intend to further expand our internal accounting and compliance capabilities by attracting additional talent and enhancing training in critical areas. These ongoing efforts are focused on implementing process changes to strengthen our internal control and monitoring activities. In light of the material weaknesses, we performed additional analyses and other procedures to ensure that our consolidated financial statements included in this quarterly report were prepared in accordance with GAAP. These measures included, among other things, expansion of our period-end closing procedures, including the consolidation process, and dedication of significant internal resources and external consultants to scrutinize account analyses and reconciliations at a detailed level. As a result of these and other expanded procedures, we concluded that the consolidated financial statements included in this quarterly report present fairly, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with GAAP.

(b) Changes in Internal Control Over Financial Reporting

Based on the evaluation of our management as required by paragraph (d) of Rule 13a-15 or 15d-15 of the Exchange Act, we believe that, other than as noted above, there were no changes in our internal control over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1: LEGAL PROCEEDINGS

None.

ITEM 1A: RISK FACTORS

In addition to the other information set forth in this report, you should carefully consider the factors discussed in ITEM 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2006, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K is not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

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.

ITEM 6: EXHIBITS

(a)  Exhibits 31.1 Certification of Chief Executive Officer pursuant to Securities Exchange Act Rule 13a-- 14(a).
31.2  Certification of Chief Financial Officer pursuant to Securities Exchange Act Rule 13a-- 14(a).
32.1  Certification pursuant to U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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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.

TMSF HOLDINGS, INC.

/s/ Daniel M. Rood
Daniel M. Rood
Chief Financial Officer
(Principal Financial Officer and duly authorized officer)
January 17, 2008

NOTE 2 — RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS

NOTE 3 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NOTE 3 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

NOTE 3 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

NOTE 3 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Note 4 — CONCENTRATION OF CREDIT RISK

Note 5 – LOSS RESERVES

Note 6 – REAL ESTATE OWNED

Note 7 — WAREHOUSE LINES OF CREDIT

Note 7 — WAREHOUSE LINES OF CREDIT (Continued)

Note 8 – SUBORDINATED NOTE PAYABLE

Note 9 — COMMITMENTS AND CONTINGENCIES

Note 10 — INCOME TAXES

NOTE 10 — INCOME TAXES (Continued)

Note 11 — STOCK OPTIONS

Note 12 — RELATED PARTY TRANSACTIONS

Note 13 — SUBSEQUENT EVENTS

SUMMARY TERM SHEET

PURPOSE OF MERGER

CONTRIBUTION AND MERGER

PRINCIPAL TERMS OF THE MERGER

EFFECTS OF THE MERGER

General

Financing, Revenues, and Interest Rate Management

Revenue Model

Primary Components of Revenues and Expenses in the Mortgage Loan Business

Critical Accounting Policies

Financial Highlights for the Quarters Ended June 30, 2007 and 2006

Results of Operations

Loan income

Cost of loan originations

Operating expenses

Liquidity and capital resources

Commitments and Contingencies

Inflation

Newly Issued Accounting Pronouncements

Industry Overview

RISK FACTORS

Risks Related to Our Business

Our mortgage products may expose us to greater credit risks.

Market Risk

Declining real estate values could harm our operations.

Second mortgages expose us to greater credit risks.

Regulatory Risks

Risks of Ownership of Our Common Stock

Interest Rate Simulation Sensitivity Analysis

Interest Rate Management

Inflation

(a) Evaluation of Disclosure Controls and Procedures

(b) Changes in Internal Control Over Financial Reporting

PART II. OTHER INFORMATION

SIGNATURES

TMSF HOLDINGS INC. 10-Q/A