UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB

                     Annual Report Pursuant to Section 13 or
                15(d) of the Securities Exchange Act of 1934 for
                     the fiscal year ended December 31, 2001

                         Commission File Number 0-21912

                     First Chesapeake Financial Corporation
             (Exact name of registrant as specified in its charter)

           Virginia                                              54-1624428
(State or other jurisdiction of                               (I.R.S. Employer
incorporation or organization)                               Identification No.)

                               541 Hamilton Street
                          Allentown, Pennsylvania 18101
                    (Address of principal executive offices)

                                 (215) 755-5691
              (Registrant's telephone number, including area code)

        Securities registered pursuant to Section 12(b) of the Act: None

           Securities registered pursuant to section 12(g) of the Act:
                           Common stock, no par value

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

     Check if there is no disclosure  of  delinquent  filers in response to Item
405 of  Regulation  S-B  contained  in  this  form,  and no  disclosure  will be
contained,  to the best of the  registrant's  knowledge,  in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]

The issuer's revenues for its most recent fiscal year were: $6,058,878.

The aggregate market value of the issuer's voting stock held as of April 2, 2002
by nonaffiliates of the issuer was approximately $2,700,000.

As of December 31, 2001,  issuer had 9,936,164 shares of its no par common stock
outstanding.

Documents Incorporated by Reference:  None.

Transitional Small Business Disclosure Format.  Yes [  ] No [X]

                                     Page 1
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PART I

ITEM 1.  DESCRIPTION OF BUSINESS

Overview

         First  Chesapeake  Financial   Corporation  (the  "Company"  or  "First
Chesapeake") is a Virginia corporation which was formed in 1992 and discontinued
operations in 1997 following several years of unprofitable operations.

         In 1998, a new Board of  Directors  and new  management  re-established
operations  of the Company.  That year,  the Company  established a new mortgage
banking  subsidiary,  and  subsequently  in 1999,  2000 and 2001 the Company has
expanded its  mortgage  banking  operations  through  acquisitions  and internal
growth.

         It has been First Chesapeake's goal to develop a vertically  integrated
financial  services company that can provide mortgage  origination,  homeowner's
insurance,  title insurance,  home warranties,  among other financial  services,
consumer direct,  wholesale and through the Internet.  However, no assurance can
be given that the Company will be  successful  in its efforts to  implement  its
strategic plan.

Company History

         The Company was originally  incorporated  in Virginia in 1992 to engage
in the mortgage banking business. In 1997, the Company's management resigned and
the Company  closed all  mortgage  banking  operations  after  several  years of
substantial  losses.  Following  the 1997 removal of  management  and ceasing of
operations, in 1998 the Company elected a new Board of Directors,  installed new
management and commenced  implementation of a new strategic plan to re-establish
the Company as a provider of financial  services,  initially within the mortgage
banking segment.

         In the period from 1995 through 1997, the Company also invested in four
companies which were outside its core financial services business.  In 1998, the
newly-elected Board of Directors examined the Company's  non-financial  services
related  businesses and their viability within the Company's  overall  strategic
plan and  subsequently  decided to exit these  businesses.  As a result,  two of
these businesses ceased operations and two of these businesses were sold.

         In 1998,  the  Company's  Board of Directors  decided to refocus on the
financial   services   business,   initially  through  the  creation  of  a  new
wholly-owned  mortgage  banking  subsidiary and adoption of an  acquisition  and
expansion  strategy to create a national retail and wholesale  mortgage  banking
business.

         In the 3rd quarter of 1998, the Company formed First Chesapeake Funding
Corporation  ("FC  Funding"),  a  wholly-owned  subsidiary to perform  wholesale
mortgage banking operations.

         In the 1st quarter of 1999, the Company  established  First  Chesapeake
Acquisition  Corporation  ("FC  Acquisition")  and  commenced  its first  retail
mortgage  banking  operation  through  formation of a  wholly-owned  subsidiary,
Collateral  One Mortgage  Corporation  ("Collateral  One"),  to acquire  certain
assets of Mortgage  Concepts,  Inc.,  an  established  originator  of  primarily
subprime and alternate  documentation  residential  mortgage loans  operating in
five central and Midwestern  states. In the 2nd quarter of 1999,  Collateral One
concluded  the  Mortgage  Concepts,  Inc.  acquisition  and the  Company  opened
additional retail mortgage banking operations in South Carolina and Florida.

         In the 1st quarter of 2000, the company discontinued  operations at its
FC  Funding  wholesale  mortgage  banking  subsidiary  and  closed  two  Florida
locations.

         In the 1st quarter of 2001, the company acquired Family First Mortgage,
Inc., a Fort Lauderdale, FL originator of residential mortgage loans.



                                     Page 2
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         In  addition  to these  business  activities,  the  Company  intends to
aggressively  seek  out and  pursue  other  synergistic  business  opportunities
(whether early stage or mature) and investments  within the mortgage banking and
related financial services  industries.  However, no assurance can be given that
the Company will be  successful  in its efforts to acquire  profitable  business
opportunities and investments.

Forward Looking Statements

         This Form  10-KSB  contains  certain  forward-looking  statements  with
respect to the financial  condition,  results of operations  and business of the
Company.   These   forward-looking   statements   involve   certain   risks  and
uncertainties.  When used in this Annual Report on Form 10-KSB or future filings
by the Company with the  Securities  and Exchange  Commission,  in the Company's
press  releases  or  other  public  or  shareholder  communications,  or in oral
statements made with the approval of an authorized  executive officer, the words
or phrases  "will likely  result",  "are  expected  to",  "will  continue",  "is
anticipated",  "estimate",  "project",  "believe",  or similar  expressions  are
intended  to  identify  "forward-looking  statements"  within the meaning of the
Private Securities  Litigation Reform Act of 1995. The Company wishes to caution
readers not to place  undue  reliance  on any such  forward-looking  statements,
which speak only as of the date made, and to advise readers that various factors
including regional and national economic conditions, changes in levels of market
interest  rates,  credit  risks  of  lending  activities,  and  competitive  and
regulatory  factors could affect the Company's  financial  performance and could
cause the Company's actual results for future periods to differ  materially from
those anticipated or projected.

         The  Company  does  not  undertake  and   specifically   disclaims  any
obligation to publicly release the results of any revisions which may be made to
any  forward-looking  statements  to reflect the  occurrence of  anticipated  or
unanticipated events or circumstances after the date of such statements.

Mortgage Banking Business

         First  Chesapeake  is a financial  services  company  providing a broad
array of residential  mortgage products and related products and services to its
customers through its wholly owned mortgage banking subsidiaries.

         The  Company  offers a full menu of  residential  mortgage  products to
customers  ranging from prime credit  borrowers  seeking  conventional or FHA/VA
loans  to  less  credit-worthy   customers  who  qualify  for  non-conventional,
alternate  documentation  and/or  subprime  loans  through  both its  retail and
wholesale  operations.  Retail  operations  originate  loans  directly  from the
consumer,  while  wholesale  operations  provide an efficient  market for retail
mortgage loans originated by the Company's retail operations, as well as through
purchase of loans from third party loan originators.

         The Company  funds its  mortgage  banking  activities  in part  through
warehouse  lines of  credit,  and its  ability  to  continue  to  originate  and
wholesale residential mortgages is dependent upon continued access to capital on
acceptable  terms.  Borrowings  under these  lines are repaid with the  proceeds
received by the Company from the sale of the loans to  institutional  investors.
The Company's  committed  warehouse  lines at December 31, 2001 and 2000 allowed
the Company to borrow up to $2 million.  The  existing  warehouse  lines  expire
within  the  next  twelve  months,  but are  generally  renewable,  however,  no
assurances are given that the Company can renew its warehouse lines or that such
renewals  can be made on  equal or more  favorable  terms  to the  Company.  The
Company  sells its  originated  and  purchased  loans,  including  all servicing
rights, for cash to institutional  investors,  usually on a non-recourse  basis,
with proceeds applied to reduce the corresponding warehouse lines outstanding.

         At  December  31,  2001,  the  Company's  mortgage  banking  operations
consisted of sixteen offices in nine states, and applications  pending to expand
into five  additional  states with the goal to expand  nationwide  through  both
internal  growth and  acquisition.  The Company  currently  originates  loans in
Indiana,  Kentucky,  Missouri, North and South Carolina,  Tennessee, New Jersey,
Maryland  and  Florida,   with   applications  for  approval  pending  in  Ohio,
Pennsylvania, Connecticut, New York, and Delaware.

         The Company's strategy is to offer a full range of mortgage products to
borrowers of various credit levels and  distribute  these loans in a risk averse


                                     Page 3
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manner  through  either  bulk  secondary  market  sales,  loan sales to specific
institutional  investors, or brokering of individual loans to "niche" investors.
Through this  strategy,  the Company  anticipates  profitability  and  continued
expansion with reduced exposure to interest rate and credit risks.

         The Company derives  revenues from fees charged upon the origination of
mortgage loans, premiums received on the sale of mortgage loans, interest earned
during the period the Company  holds the  mortgage  loans for sale,  and various
"junk" fees associated with retail and wholesale mortgage banking.

         The  Company  also  anticipates  deriving an  increased  portion of its
revenues from its  participation in various joint venture or strategic  alliance
partnerships with groups offering title insurance,  property/casualty insurance,
life and disability insurance, and home warranty products.

Competition

         The  Company's  financial  services  businesses  are faced with a large
group of competitors.  The mortgage banking business is highly competitive,  and
consists of several  well-capitalized  national  firms and  thousands of smaller
loan brokers. The Company believes,  however,  that there is the opportunity for
the  Company's  mortgage  banking  subsidiaries  to grow and gain market  share.
However,  many of the Company's  competitors  are  considerably  larger and have
financial resources that are substantially greater than those of the Company.

Regulation

         Mortgage  banking  is a highly  regulated  industry.  The  industry  is
subject to the rules and regulations of, and  examinations by HUD, FNMA,  FHLMC,
FHA,  GNMA  and  the  VA  and  state  regulatory  authorities  with  respect  to
originating,  processing,  underwriting,  selling and  securitizing  residential
mortgage  loans.  In addition,  there are other  federal and state  statutes and
regulations  affecting  such  activities.  These rules and  regulations  require
originators to obtain or maintain licenses,  establish  eligibility criteria for
mortgage loans, prohibit discrimination,  provide for inspections and appraisals
of properties, require credit reports on prospective borrowers, regulate payment
features and, in some cases, fix maximum interest rates,  fees and loan amounts.
Failure to comply with these requirements can lead to a loss of approved status,
demands for  indemnification  or loan  repurchases,  class  action law suits and
administrative  enforcement  actions.  There  can  be  no  assurance  that  more
restrictive laws, rules and regulations will not be adopted in the future, which
could make  compliance  more difficult or expensive,  and restrict the Company's
ability to  originate  or sell  mortgage  loans,  further  limit or restrict the
amount of interest and other charges  earned from loans  originated or purchased
by the Company,  or otherwise  adversely affect the business or prospects of the
Company.

Seasonality

         The mortgage banking industry is generally  subject to seasonal trends.
These  trends  reflect the general  pattern of resales of homes which  typically
peak  during  the  spring  and  summer.  Mortgage  refinancings  tend to be less
seasonal and more closely tied to overall interest rates.

Environmental Matters

         In the course of its  business,  the Company  takes title (for security
purposes)  or may  foreclose  on  residential  properties  securing its mortgage
loans.  To date, the Company has not been required to perform any  investigation
or remediation  activities,  nor has it been subject to any environmental claims
relating to these activities. There can be no assurance, however, that this will
remain the case in the future.

Employees

         As  of  December  31,  2001,  the  Company  had  approximately   eighty
employees,  including  two  full-time  staff at the  Company's  headquarters  in
Allentown,  Pennsylvania.  None of the Company's  employees are  represented  by
unions. The Company considers its relations with its employees to be good.


                                     Page 4
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ITEM 2.  DESCRIPTION OF PROPERTY

         The Company's corporate and administrative  headquarters are located in
Allentown,  PA, which comprise  approximately 1,000 square feet of leased office
space.  Until its sale in December  2000,  the  Company's  subsidiary,  National
Archives,  leased approximately 25,000 square feet of office and warehouse space
in a Philadelphia, PA property. Both of the above leased properties are owned by
entities  controlled by the Company's Chief Executive Officer,  and are extended
on a month to month basis to each entity with no current rental payments.

         The Company's  subsidiary,  Collateral One, leases approximately 25,000
square feet of office space at locations in Louisville,  KY, Lexington,  KY, St.
Louis,  MO,  Indianapolis,  IN,  Charlotte,  NC,  Raleigh,  NC,  Nashville,  TN,
Greensboro,  NC, Columbia, SC, Memphis, TN, Fairfax, VA and Fort Lauderdale,  FL
under  leases  which are all short term in nature with  aggregate  annual  lease
payments of approximately $386,000.

         Management  believes that the Company's current facilities are suitable
and adequate for its business as well as to meet its near term expansion plans.

ITEM 3.  LEGAL PROCEEDINGS

         Periodically,  the Company and its subsidiaries become parties to legal
proceedings  incidental  to its  business.  In the opinion of  management,  such
matters are not expected to have a material impact on the financial  position of
the Company.

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

         The Company held its annual meeting on December 27, 2001. At the annual
meeting,  the shareholders  elected Mark Mendelson,  Mark Glatz, Paul Dandridge,
James Greenfield,  Vincent Muratore, Pasquale Nestico and John Papandon to serve
on the Board of Directors. At the annual meeting, the shareholders also approved
the amendment of the Company's 1999 Incentive  Stock Option Plan to increase the
maximum  number of shares of Common Stock which may be subject to Stock  Options
granted under the Plan from 1,500,000 to 2,500,000 shares. No other matters were
voted upon.

                                     Page 5
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PART II

ITEM 5.           MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

         The  Company's  common  stock is not listed on any  exchange.  However,
market  quotes for the Company's  common stock (under the symbol  "FCFK") may be
obtained from the National  Association of Securities  Dealers  through the NASD
OTC Bulletin Board, its automated system for reporting  non-NASDAQ  quotes.  The
following table sets forth, for the indicated calendar periods, the high and low
bid prices (as  reported by the OTC  Bulletin  Board) for the  Company's  common
stock through December 31, 2001:

                                                        Bid Price
                                                        ---------
                                                  High             Low
                                                  ----             ---
         2000
         First Quarter                          $ 4.50           $ 1.13
         Second Quarter                           3.06             0.63
         Third Quarter                            2.31             0.63
         Fourth Quarter                           0.88             0.50

         2001
         First Quarter                          $ 0.69           $ 0.30
         Second Quarter                           0.52             0.27
         Third Quarter                            0.51             0.21
         Fourth Quarter                           0.51             0.16


         The prices set forth in this table represent quotes between dealers and
do not include  commissions,  mark-ups or  mark-downs,  and may not  necessarily
represent actual transactions.

         As of  December  31,  2001,  there  were 385  stockholders  of  record;
however,   the  Company  believes  there  were  approximately  1,000  beneficial
stockholders of the Company's common stock.

         The Company has never  declared or paid a dividend on its common  stock
and management expects that the substantial  portion of the Company's  earnings,
if any, for the foreseeable future will be retained for expansion or development
of the Company's business. The decision to pay dividends,  if any, in the future
is within the  discretion  of the Board of  Directors  and will  depend upon the
Company's  earnings,  its capital  requirements,  financial  condition and other
relevant factors such as loan covenants or other contractual obligations.

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

GENERAL

         The following discussion should be read in conjunction with the audited
financial statements and the notes thereto included elsewhere in this report.

Overview

         First Chesapeake Financial  Corporation and subsidiaries (the "Company"
or "First Chesapeake") is a Virginia corporation which ceased operations in 1997
following several years of unprofitable operations.

         In 1998, a new Board of  Directors  and new  management  re-established
operations  of the Company.  That year,  the Company  established a new mortgage
banking  subsidiary,  and  subsequently  in 1999,  2000 and 2001 the Company has
expanded its  mortgage  banking  operations  through  acquisitions  and internal
growth.

         It has been First Chesapeake's goal to develop a vertically  integrated
financial  services company that can provide mortgage  origination,  homeowner's
insurance,  title insurance,  home warranties,  among other financial  services,


                                     Page 6
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consumer direct,  wholesale and through the Internet.  However, no assurance can
be given that the Company will be  successful  in its efforts to  implement  its
strategic plan.

Plan of Operation - Mortgage Banking Business

         First  Chesapeake  is a financial  services  company  providing a broad
array of residential  mortgage products and related products and services to its
customers through its wholly owned mortgage banking subsidiaries.

         The  Company  offers a full menu of  residential  mortgage  products to
customers of ranging from prime credit borrowers seeking  conventional or FHA/VA
loans  to  less  credit-worthy   customers  who  qualify  for  non-conventional,
alternate  documentation  and/or  subprime  loans  through  both its  retail and
wholesale  operations.  Retail  operations  originate  loans  directly  from the
consumer,  while  wholesale  operations  provide an efficient  market for retail
mortgage loans originated by the Company's retail  operations as well as through
purchase of loans from third party loan originators.

         The Company  funds its  mortgage  banking  activities  in part  through
warehouse  lines of  credit,  and its  ability  to  continue  to  originate  and
wholesale residential mortgages is dependent upon continued access to capital on
acceptable  terms.  Borrowings  under these  lines are repaid with the  proceeds
received by the Company from the sale of the loans to  institutional  investors.
The Company's  committed  warehouse  lines at December 31, 2001 and 2000 allowed
the Company to borrow up to $2 million.  The  existing  warehouse  lines  expire
within  the  next  twelve  months,  but are  generally  renewable,  however,  no
assurances are given that the Company can renew its warehouse lines or that such
renewals  can be made on  equal or more  favorable  terms  to the  Company.  The
Company  sells its  originated  and  purchased  loans,  including  all servicing
rights, for cash to institutional  investors,  usually on a non-recourse  basis,
with proceeds applied to reduce corresponding warehouse line outstandings.

         At  December  31,  2001,  the  Company's  mortgage  banking  operations
consisted of sixteen offices in nine states, and applications  pending to expand
into five  additional  states with the goal to expand  nationwide  through  both
internal  growth and  acquisition.  The Company  currently  originates  loans in
Indiana,  Kentucky,  Missouri, North and South Carolina,  Tennessee, New Jersey,
Maryland  and  Florida,   with   applications  for  approval  pending  in  Ohio,
Pennsylvania, Connecticut, New York, and Delaware.

         The Company's strategy is to offer a full range of mortgage products to
borrowers of various credit levels and  distribute  these loans in a risk averse
manner  through  either  bulk  secondary  market  sales,  loan sales to specific
institutional  investors, or brokering of individual loans to "niche" investors.
Through this  strategy,  the Company  anticipates  profitability  and  continued
expansion with reduced exposure to interest rate and credit risks.

         The Company derives  revenues from fees charged upon the origination of
mortgage loans, premiums received on the sale of mortgage loans, interest earned
during the period the Company  holds the  mortgage  loans for sale,  and various
fees associated with retail and wholesale mortgage banking.

         The  Company  also  anticipates  deriving an  increased  portion of its
revenues from its  participation in various joint venture or strategic  alliance
partnerships with groups offering title insurance,  property/casualty insurance,
life and disability insurance, and home warranty products.

Financial Condition

         Assets of the Company increased from $3,039,000 at December 31, 2000 to
$3,671,000  at December 31, 2001,  an increase of  $632,000.  This  increase was
primarily  due to a $458,000  net  increase in goodwill  arising from the Family
First  acquisition,  a $301,000  increase  in cash,  and  increases  in accounts
receivable,  fixed  assets  and other  assets,  partially  offset by a  $220,000
reduction in mortgage loans held for resale.

         At December 31, 2001,  assets  consisted of cash of $375,000,  accounts
receivable of $189,000,  acquisition-related  goodwill of  $2,699,000,  mortgage
loans held for resale of $97,000,  $84,000 of fixed assets and $228,000 of other
assets. At December 31, 2000, assets consisted of  acquisition-related  goodwill
of  $2,241,000,  mortgage  loans  held for  resale of  $317,000,  cash and other
current  assets of $251,000,  as well as $67,000 of fixed assets and $163,000 of
other assets.

                                     Page 7
<PAGE>

         Liabilities   decreased  from   $3,971,000  at  December  31,  2000  to
$3,284,000  at December 31, 2001  primarily as a result of repayment of $815,000
under the note payable - bank and reduction in the warehouse note payable - bank
of $223,000, partially offset by a new $250,000 bank time note.

         At December 31, 2001, liabilities consisted of a note payable to a bank
of  $1,292,000,  a bank time note of $250,000,  other notes  payable of $43,000,
payables and accruals of $924,000,  warehouse notes payable of $126,000, $53,000
of  subordinated  debentures,  $281,000 of deferred  amounts due  officers,  and
$220,000 of liabilities of discontinued subsidiaries.

         At December 31, 2000, liabilities including bank debt of $2,107,000 and
other debt of $85,000 associated with the Collateral One acquisition,  warehouse
notes  payable to banks of  $349,000,  accounts  payable and  accruals  totaling
$681,000,  $75,000 of subordinated  debentures,  $400,000 of deferred amount due
officers of the Company and $273,000 of liabilities of discontinued operations.

         Stockholders'  equity increased by $1,320,000 from negative $931,000 at
December 31, 2000 to $388,000 at December 31, 2001,  resulting  from the sale of
$1,487,000  of Preferred  Stock,  the issuance of $62,000 of common stock to two
creditors  of the Company in lieu of cash and the issuance of $508,000 of common
stock under the Family First  acquisition  (as more fully described in Note D of
the financial  statements) and partially  offset by the loss of $737,000 for the
period.

          At December 31, 2001,  the Company had current  assets of $661,000 and
current liabilities of $1,667,000, including the $250,000 time note and $324,000
current portion of the bank loan payable in 2002.


Results of Operations

Current Year Performance and Earnings Outlook

         The Company incurred a loss of $737,000 for the year ended December 31,
2001. This loss is a result of a $666,000  operating  profit for the established
Collateral One operations more than offset by $472,000 of start-up losses at the
recently acquired Florida operation and other expansion, in addition to interest
and related costs ($346,000), depreciation and amortization ($225,000) and other
corporate expenses ($707,000).

         As discussed previously, the Company is implementing its strategic plan
of  developing  a  retail  and  wholesale  mortgage  banking  operation  through
acquisition  and  internal  growth  as a step  toward  developing  a  vertically
integrated  financial  services company that can provide  mortgage  origination,
homeowner's  insurance,  title  insurance  and  home  warranties,   among  other
financial  services,  consumer  direct,  wholesale  and  through  the  Internet.
However,  there are no assurances  that the Company will be able to successfully
implement all aspects of its strategic plan.

Comparison of Year Ended December 31, 2001 to Year Ended December 31, 2000

         The Company incurred a loss of $737,000 for the year ended December 31,
2001 as  compared  to a loss of  $831,000  for the same  period  in  2000.  This
decrease  in  the  amount  of  loss  is a  result  of  improved  profits  of the
established  Collateral One operation of $667,000,  offset by $472,000  start-up
losses at the recently acquired Florida operation and other expansion as well as
costs of  corporate  operations,  including  $346,000 of interest  and  dividend
expense and $225,000 of depreciation  and  amortization  of goodwill  associated
with the acquisitions.

         Total  revenues  for the year  ended  December  31,  2001  amounted  to
$6,059,000  representing  an  increase  of  $1,994,000  when  compared to 2000's
revenues of  $4,065,000.  The  increase in revenue is primarily a result of both
internal  growth of the  company's  Collateral  One  operation  and new revenues
arising from the Florida  acquisition and recent expansions.  Total expenses for
2001  amounted to  $6,792,000  as compared to $4,954,000 in 2000, an increase of


                                     Page 8
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$1,838,000,  and was also  attributable  to is attributable to growth within the
Company's  Collateral  One  subsidiary  and  start-up  expenses  of the  various
expansion  operations  growth and  expansion of the Company's  mortgage  banking
operations.

Liquidity and Capital Resources

         The   Company's   primary   liquidity   requirements   have   been  the
establishment, funding and expansion of its mortgage banking operations.

         The Company  funds its  mortgage  banking  activities  in part  through
warehouse  lines of  credit,  and its  ability  to  continue  to  originate  and
wholesale  residential mortgages may be somewhat dependent upon continued access
to capital on acceptable terms. Borrowings under these lines are repaid with the
proceeds  received  by the Company  from the sale of the loans to  institutional
investors.  The Company's committed warehouse lines at December 31, 2001 allowed
the Company to borrow up to $2 million.  The  warehouse  lines expire within the
next twelve  months,  but are generally  renewable,  however,  no assurances are
given that the Company can renew its  warehouse  lines or that such renewals can
be made on equal or more favorable  terms to the Company.  The Company sells its
originated  and purchased  loans,  including all servicing  rights,  for cash to
institutional investors,  usually on a non-recourse basis, with proceeds applied
to reduce corresponding warehouse line outstandings.

         In 1998,  the Company raised  $635,000  under a subordinated  debenture
offering.  In 1999, the Company  borrowed  $2,107,000 from a bank secured by the
personal  guarantees  of several  officers and  directors of the Company and one
outside  investor to partially  finance the Collateral One  acquisition  and for
working  capital needs.  In 1999-2000,  the Company also raised $660,000 under a
private  placement of common stock to partially  finance a payment due under the
Collateral One acquisition and for other general  corporate  purposes.  In 2001,
the  Company  raised  an  additional  $1,487,000  under a private  placement  of
Preferred  Stock and borrowed  $250,000 from a bank (as more fully  described in
footnotes  to the  financial  statements).  While the  Company  believes  it can
continue to attract the necessary capital to provide the liquidity  necessary to
pursue new business  opportunities,  no  assurance  can be given that it will in
fact be able to do so.

         Cash and cash  equivalents at December 31, 2001 amounted to $375,000 as
compared to $74,000 at December 31, 2000, or an increase of $301,000.

         During 2001, the Company's  operating  activities  utilized $506,000 as
compared to utilizing $57,000 in 2000. The cash utilized by operating activities
during 2001 resulted  primarily from the Company's net loss for the period being
offset by adjustment  for non-cash  expenses of  depreciation  and  amortization
totaling  $230,000 and  issuance of $75,000 of  preferred  stock as repayment of
amounts due an officer of the Company.

         Investing  activities  in 2001  utilized  $86,000 for the Family  First
acquisition and $46,000 for equipment purchases, and were negligible in 2000.

         Financing activities provided $939,000 of capital during 2001 primarily
through the sale of $1,487,000 of preferred stock during year, the $250,000 bank
time note,  and the issuance of $62,000 of common stock to two  creditors of the
Company in lieu of cash,  offset by reduction in the bank loan by $815,000,  and
reduction in other notes  payable of $43,000.  During the  comparable  period of
2000,  financing  activities  provided $60,000 of capital  primarily through the
placement  of $175,000 of common  stock offset by repayment of $121,000 of notes
payable to the sellers of Collateral One.

         As of December 31, 2001,  the Company had cash and cash  equivalents of
$375,000.  The  Company  is  seeking  additional  capital  infusion  to fund its
operations,  reduce its bank debt, and implement its expansion plans.  While the
Company  believes it can attract the necessary  capital to provide the liquidity
necessary to pursue new business  opportunities,  no assurance can be given that
it will in fact be able to do so.


                                     Page 9
<PAGE>

ITEM 7.  FINANCIAL STATEMENTS

         See the  Audited  Financial  Statements  set  forth  at the end of this
report.

ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE

         In a report on Form 8-K dated April 26,  2001 the  Company  announced a
change in  Registrant's  certifying  accountant from Grant Thornton LLP to Gross
Kreger & Passio, L.L.C. as of April 23, 2001. The Company's Form 8-K dated April
26, 2001 is incorporated by reference.


PART III

ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
         COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

         The  names,  positions,  ages  and  backgrounds  of the  directors  and
executive officers of the Company at December 31, 2001 are set forth below.

Name                      Age    Position and Background
----                      ---    -----------------------
Mark Mendelson            45    Chairman  of the  Board of  Directors  and Chief
                                Executive  Officer.  Mr.  Mendelson  has  been a
                                Director of the Company since August 1996. Since
                                1984,  Mr.  Mendelson has served as Chairman and
                                Chief  Executive  Officer of Hampton Real Estate
                                Group,   Inc.,   a   diversified   real   estate
                                brokerage,   development,  and  management  firm
                                specializing   in  commercial  and   residential
                                properties  throughout  the United  States.  Mr.
                                Mendelson is a former director and past chairman
                                of  the  Audit   Committee   of  Equimark   Bank
                                Corporation  (currently  known as  Integra)  and
                                sits on the  boards  of a  variety  of civic and
                                philanthropic institutions.

Paul A. Dandridge         74    Director.  Mr.  Dandridge  is  an  attorney  and
                                former City of Philadelphia  Judge who currently
                                services  as  Chairman  of  Philadelphia  Health
                                Management  Corporation,  a  non-profit,  public
                                health  organization  committed to improving the
                                health  of  the  community.  Mr.  Dandridge  was
                                elected  to  fill  a  vacancy  on the  Board  of
                                Directors in September 2000.

Mark Glatz                39    Director and Chief Financial Officer.  Mr. Glatz
                                is experienced in finance,  banking,  and a wide
                                array  of  industries,  and  holds a  degree  in
                                accounting  and an MBA in financial  management.
                                Mr. Glatz has served as Chief Financial  Officer
                                of the Company since July 1998.

James Greenfield          49    Director and  Secretary.  Mr.  Greenfield  is an
                                attorney with  experience  in private  practice,
                                emphasizing  municipal law, real estate matters,
                                and   complex    commercial    litigation    and
                                arbitration.

Vincent Muratore          55    Director.   Mr.   Muratore  has  over  30  years
                                mortgage banking experience, having successfully
                                grown  organizations  of over $3.0  billion  and
                                $1.5  billion  of annual  loan  volume  prior to
                                joining the  Company as a senior  officer of the
                                mortgage banking operations.

Pasquale Nestico, M.D.    55    Director.  Dr. Nestico is a practicing physician
                                certified in cardiology and internal medicine as
                                well  as  an  extensively   published   clinical
                                professor of medicine at both Allegheny Hospital
                                (formerly  Hahnemann  University)  and Jefferson
                                Medical College.



                                    Page 10
<PAGE>

John Papandon             39    Director.   Mr.  Papandon  is  an  attorney  and
                                Certified  Public   Accountant  with  a  Masters
                                degree in taxation  with 15 years  experience in
                                the accounting industry.

         Directors are elected at each annual meeting of stockholders  and serve
until the next annual  meeting.  The bylaws of the Company  require a minimum of
seven  Directors.  Executive  officers are elected  annually at a meeting of the
Board of Directors and, subject to individual contractual arrangements, serve at
the pleasure of the Board of Directors.

Resignation of Board Members

         On May 10, 2000,  Jay  Vederman  resigned as a Director of the Company.
Mr. Vederman had served as a Director since November 1999.

         Matthew  Coppolino  served as a Director from July 1998 until his death
in June 2000.

         In  September  2000,  the  Board of  Directors  terminated  Richard  N.
Chakejian,   Jr.  as  an  officer  and  employee  of  the  Company  and  certain
subsidiaries.  In December 2000, Mr. Chakejian withdrew his name from nomination
to the Board of Directors prior to the annual meeting of shareholders.

Compliance with Section 16(a) of the Securities Exchange Act

         Section 16 (a) of the  Securities  Exchange Act requires the  Company's
officers  and  directors,  and persons who own more than ten percent  (10%) of a
registered  class  of the  Company's  equity  securities,  to  file  reports  of
ownership on Forms 3, 4 and 5 with the  Securities  and Exchange  Commission and
the National  Association of Security Dealers.  Officers,  directors and greater
than ten percent  (10%)  beneficial  owners are  required by SEC  regulation  to
furnish the Company with copies of all Forms 3, 4 and 5 they file.  Based solely
on the Company's review of the copies of such forms it has received, the Company
believes  that all its  officers,  directors  and greater than ten percent (10%)
beneficial owners are in compliance with all filing  requirements  applicable to
them with  respect to  transactions  during the fiscal year ended  December  31,
2001.

ITEM 10.  EXECUTIVE COMPENSATION

Compensation of Directors

         In December  1999,  the Executive  Compensation  Committee and Board of
Directors authorized the optional conversion of accrued Outside Director fees to
stock  options  under the 1999 ISO Plan.  The  options are  immediately  vested,
exercisable at $1.20 per share (since  repriced to $0.80 per share),  and expire
on December  29,  2004.  The then  Outside  Directors  elected to convert  their
accrued directors fees into a total of 39,000 shares under the 1999 ISO Plan.

         During 2000 the Company  awarded  80,000  option  shares to the Outside
Directors  of the Company at  exercise  prices  ranging  from $0.55 to $0.80 per
share and  expiration  dates from June 30, 2005 to  December  29, 2005 under the
1999 ISO Plan.  Specifically,  20,000  option  shares were  awarded each to Paul
Dandridge, James Greenfield, Pasquale Nestico and John Papandon.

         In 2001  the  Company  awarded  40,000  option  shares  to the  Outside
Directors of the Company at exercise  price of $0.50 per share and an expiration
date of December 1, 2006 under the 1999 ISO Plan.  Specifically,  10,000  option
shares were awarded each to Paul Dandridge,  James Greenfield,  Pasquale Nestico
and John Papandon.

Compensation of Executive Officers

         The following table sets forth,  for the three years ended December 31,
2001,  certain  information  as to the  total  remuneration  paid to each of the
Company's  executive  officers  whose  total  annual  salary and bonus  exceeded
$100,000 for services in all capacities:


                                    Page 11
<PAGE>
<TABLE>
<CAPTION>
                                                               Annual Compensation
                                                               -------------------       Other        All Other
         Name                                               Salary          Other        Reimb.     Compensation
         Principal Position (F1)                 Year       (F2)            (F3)          (F4)          (F5)
         -----------------------                 ----       ----            ----          ----          ----

<S>                                              <C>        <C>             <C>         <C>           <C>
         Mark Mendelson                          2001       $120,000        $      0    $24,000       $12,000
         Chairman and CEO                        2000       $120,000        $      0    $24,000       $12,000
                                                 1999       $120,000        $      0    $12,000       $12,000

         Richard N. Chakejian, Jr. (F6)          2001       $      0        $      0    $     0       $     0
                                                 2000       $      0        $      0    $     0       $     0
                                                 1999       $      0        $  9,515    $     0       $     0

         Mark E. Glatz                           2001       $120,000        $      0    $24,000       $12,000
         Chief Financial Officer                 2000       $120,000        $      0    $24,000       $12,000
                                                 1999       $120,000        $      0    $12,000       $12,000
</TABLE>
        (F1)    No other  executive  officer had  compensation  whose salary and
                bonus exceeded $100,000.
        (F2)    All  current  salaries  to  the  executive   officers,   Messrs.
                Mendelson and Glatz, have been deferred.
        (F3)    Includes amounts converted to subordinated debentures in 1998.
        (F4)    Includes   perquisites,   including  automobile  and  incidental
                expense allowance.
        (F5)    Includes premiums paid or reimbursed for health,  disability and
                life (where the spouse is the beneficiary) insurance.
        (F6)    In September 2000, the Board of Directors  terminated Richard N.
                Chakejian,  Jr. as an officer  and  employee  of the Company and
                certain subsidiaries.

Employment Agreements

         There  are no  employment  agreements  with the  above-named  executive
officers.

Stock Option Plans

         In May 1992, the Board of Directors  adopted an Incentive  Stock Option
Plan  (the  "1992  Plan").  Pursuant  to the 1992  Plan,  500,000  shares of the
Company's common stock were made available for awards.  The 1992 Plan allows for
Incentive  Stock Options  intended to qualify as Incentive  Stock Options within
the  meaning  of  Section  422 of the  Internal  Revenue  Code of 1986,  and for
Nonqualified  Stock Options not intended to qualify as Incentive  Stock Options.
Incentive  Stock  Options  may be  granted  only to  employees  of the  Company.
Non-qualified  Stock Options may be granted to employees as well as non-employee
directors and consultants to the Company. Exercise prices under the Plan must be
at fair  market  value per  share at date of grant or, in the case of  Incentive
Stock Options  granted to employees who own more than 10% of the voting power of
all classes of stock of the Company,  at 110% of the fair market value per share
at date of grant.

         In 1999, 1992 Plan options to purchase 150,000 shares were exercised by
holders;  no 1992 Plan options were  exercised in 1998.  In 1999,  the remaining
50,000 shares expired unexercised, and there are no outstanding shares under the
1992 plan. In November 2000, the Board of Directors  approved the termination of
the 1992 Plan.

         In July 1998,  the Board of  Directors  adopted a  Non-Qualified  Stock
Option Plan (the "1998 Plan").  Pursuant to the 1998 Plan,  1,000,000  shares of
the Company's common stock were made available for awards.  The 1998 Plan allows
for  Nonqualified  Stock  Options  not  intended to qualify as  Incentive  Stock
Options within the meaning of Section 422 of the Internal  Revenue Code of 1986.
Non-qualified  Stock Options may be granted to employees as well as non-employee
directors and consultants to the Company. Exercise prices under the Plan must be
at fair market value per share at date of grant.

         In July 1998,  the Executive  Compensation  Committee  awarded  500,000
option shares under 1998 Plan to three executive officers of the Company.



                                    Page 12
<PAGE>

         In July 1998, the Board of Directors awarded 30,000 option shares under
the 1998 Plan to three outside directors of the Company.

         In February  1999,  the Company  issued 100,000 option shares under the
1998 Plan at an exercise  price of $2.00 per share and 100,000  1998 Plan option
shares at an exercise price of $5.00 per share as partial  compensation to seven
individuals,  including three executive officers,  one subsidiary  officer,  two
Outside Directors of the Company and one unaffiliated individual, for personally
guaranteeing a $1,500,000 bank loan to the Company.

         In November  1999,  the Company  issued 200,000 option shares under the
1998 Plan at an  exercise  price of  $0.875  per  share as  compensation  to the
Chairman of the Company,  for personally  guaranteeing and providing  additional
collateral to secure an incremental $600,000 bank loan to the Company.

         In August 2000,  options to purchase 10,000 shares of common stock were
exercised under the 1998 Plan. In June 2000, the Board of Directors approved the
termination of the 1998 Plan.

         In December 1999 the  shareholders of the Company approved an Incentive
Stock Option Plan (the "1999 ISO Plan").  In December 2001, the  shareholders of
the Company  approved an increase in the number of  authorized  shares under the
1999 ISO Plan from 1,500,000 to 2,500,000 shares. Pursuant to the 1999 ISO Plan,
1,500,000  shares of the Company's  common stock were made available for awards.
The 1999 Plan  allows  for  Incentive  Stock  Options  intended  to  qualify  as
Incentive Stock Options ("ISOs") pursuant to Section 422 of the Internal Revenue
Code of 1986,  as  amended  (the  "Code"),  or they may be  Non-Qualified  Stock
Options  ("NSOs").  Exercise  prices under the Plan must be at no less than fair
market  value  per share at date of  grant,  and shall  expire no more than five
years from date of issuance.

         In December 1999 the Company  awarded  550,000  option shares under the
1999 ISO Plan to certain officers of the Company at exercise prices of $0.80 per
share and expiration dates of December 29, 2004.

         In December  1999 the Company  awarded a total of 29,500  option shares
under the 1999 ISO Plan to 18  employees  of the Company in grants  ranging from
500 option shares to 10,000 option shares at exercise  prices ranging from $0.80
to $1.50 and expiration dates between July 9, 2004 and December 31, 2004.

         In December  1999 the Company  awarded  39,000  option shares under the
1999 ISO Plan to certain Outside  Directors of the Company at exercise prices of
$0.80 per share and expiration dates of December 29, 2004.

         In May 2000, the Company awarded 2,000 option shares under the 1999 ISO
Plan to an employee  of the  Company at  exercise  prices of $0.80 per share and
expiration dates of May 19, 2005.

         In June 2000 the Company  awarded  50,000  option shares under the 1999
ISO Plan to certain Outside Directors of the Company at exercise prices of $0.80
per share and expiration dates of June 30, 2005.

         In December 2000 the Company  awarded  550,000  option shares under the
1999 ISO Plan to certain officers of the Company at exercise prices of $0.55 per
share and expiration dates of December 29, 2004.

         In December  2000 the Company  awarded  30,000  option shares under the
1999 ISO Plan to certain Outside  Directors of the Company at exercise prices of
$0.80 per share and expiration dates of December 29, 2004.

         In December 2000, the Company  repriced all stock options issued in the
preceding  twelve  months to an  exercise  price of $0.80 per share.  A total of
559,000 1999 ISO Plan option shares were repriced, of which 450,000 were held by
certain executive  officers,  and 86,000 were held by certain outside directors.
All other terms of the options remained unchanged.

         In March 2001 the Company  awarded 250,000 option shares under the 1999
ISO Plan to an officer of the  Company  under the  acquisition  of Family  First
Mortgage Co., at exercise prices of $0.60 per share and expiration date of March
31, 2006.



                                    Page 13
<PAGE>

         During 2001, the Company awarded a total of 427,000 option shares under
the 1999 ISO Plan to fourteen individual employees or managers of the Company at
exercise  prices of $0.50 to $0.75 per share and  expiration  dates ranging from
December 1, 2005 to December 1, 2006.

         In December 2001 the Company  awarded  450,000  option shares under the
1999 ISO Plan to certain officers of the Company at exercise prices of $0.50 per
share and expiration dates of December 1, 2006.

         In December  2001 the Company  awarded  40,000  option shares under the
1999 ISO Plan to certain Outside  Directors of the Company at exercise prices of
$0.50 per share and expiration dates of December 1, 2006.

         No 1999 ISO Plan options have been exercised as of this date.

         In 1998,  the  Company  issued  $635,000  of  convertible  subordinated
debentures.  Up to 20% of the subordinated  debenture notes are convertible,  at
any time at option of the holder,  into the Company's common stock at a price of
$2.00 per share.  The  $635,000  includes  $350,000 of  subordinated  debentures
issued to certain officers of the Company in exchange for a similar reduction in
amounts due officers.

         In  November  1999,  the  Company  offered to convert up to 100% of the
convertible  subordinated  debentures  into Company common stock at a conversion
price of $1.50 per share.  Holders of $560,000 of debentures  elected to convert
their holdings into 373,333 shares of common stock,  including conversion of all
debentures  held by officers of the Company.  At December  31, 2001,  $53,000 of
convertible  subordinated debentures remain outstanding under the original terms
and conditions of the issuance.

         Other  than  the  November  1999  conversions,  none  of the  remaining
subordinated debenture options have been exercised as of this date.

    Option activity under the above plans is summarized following:
<TABLE>
                                                                December 31,
                                                      -------------------------------
                                                            2001                2000
                                                            ----                ----
<S>                                                    <C>                 <C>
         Outstanding options at beginning of year      1,977,500           1,548,500

         1999 ISO Plan options granted                 1,167,000             652,000
         1999 ISO Plan options exercised                     -0-                 -0-
         1999 ISO Plan options cancelled                 148,500            (103,000)

         1998 Plan options granted                           -0-                 -0-
         1998 Plan options exercised                         -0-             (10,000)
         1998 Plan options cancelled                         -0-             (10,000)

         1992 Plan options exercised                         -0-                 -0-
         1992 Plan options cancelled                         -0-                 -0-

         Outstanding options at end of year            2,996,000           1,977,500
                                                       =========           =========

         Exeercise prices:
                 Low                                       $0.50               $0.55
                 High                                      $5.00               $5.00

         Latest expiration date                      December 1,        December 31,
                                                            2006                2005
</TABLE>

                                    Page 14
<PAGE>

Option/SAR Grants in Last Fiscal Year

         The following table sets forth, for the period ended December 31, 2001,
certain  information as to the Option/SAR  grants to the  above-named  executive
officers in the last fiscal year:
<TABLE>
<CAPTION>

                                        Number of
                                        Securities       % of Total
                                        Underlying     Options/SARs to    Exercise or           Latest
                                       Options/SARs     Employees in       Base Price         Expiration
         Name                            Granted         Fiscal Year       ($/share)             Date
         ----                            -------         -----------       ---------             ----

<S>                                      <C>                 <C>             <C>                    <C>
         Mark Mendelson                  225,000             19%             $0.50         December 1, 2006
         Mark Glatz                      225,000             19%             $0.50         December 1, 2006

         The following  table presents  information  concerning each exercise of
stock  options  during the fiscal  year ended  December  31, 2001 by each of the
named  executive  officers and the value of unexercised  options at December 31,
2001:
<CAPTION>
                                                                       Number of Shares        Value of
                                                                       Underlying              Unexercised
                                    Shares                             Unexercised             In-the-Money
                                    Acquired                           Options at FY-End       Options at FY-End
                                    on                 Value           Exercisable/            Exercisable/
          Name                      Exercise           Realized        Unexercisable           Unexercisable
          ----                      --------           --------        -------------           -------------

          Mark Mendelson                   0               $-0-        1,325,000/-0-              $-0-/-0-
          Mark E. Glatz                    0               $-0-          795,000/-0-              $-0-/-0-


ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following  table sets forth  certain  information  regarding the  beneficial
ownership  of the  Company's  common  stock as of  December  31, 2001 by i) each
person  known by the  Company to own  beneficially  5% of such  stock,  ii) each
Director of the Company, iii) each executive officer of the Company, and iv) all
Directors and executive officers of the Company as a group. Other than as listed
in the below  notes,  the  address  for each of the listed  individuals  is: 541
Hamilton Street, Allentown, Pennsylvania 18101.
<CAPTION>

                                                                  Number of Shares         Percent
         Name of Beneficial Owner (F1)                          Beneficially Owned        of Total
         -----------------------------                          ------------------        --------

         Mark Mendelson (F2), (F3)............................           5,326,877           41.2%
         John E. Dell (F2)  ..................................             450,000            3.5%
         Richard N. Chakejian, Jr. (F4).......................             804,834            6.2%
         Mark E. Glatz (F5)...................................           1,692,832           13.1%
         Paul Dandridge (F6)..................................              30,000            0.2%
         James Greenfield (F7)................................             148,000            1.1%
         Vincent Muratore (F8) ...............................           1,033,500            8.0%
         Pasquale Nestico (F6)................................             103,334            0.8%
         John Papandon (F7)      .............................             148,000            1.1%
                                                                        ----------            ----
         All Directors and officers as a group................           8,482,543           65.6%

         Total number of (fully diluted) shares...............          12,937,464          100.0%

                                    Page 15
<PAGE>

</TABLE>
NOTES:
(F1)    Unless otherwise  indicated,  each person has sole voting and investment
        powers with respect to the shares
(F2)    Consists of 450,000  shares of common stock owned by Mr. Dell subject to
        an  irrevocable  voting  trust  which  is voted  by Mr.  Mendelson;  c/o
        Gallagher  Broidy & Butler,  Attn:  Thomas P.  Gallagher,  212  Carnegie
        Center, Suite 402, Princeton, NJ 08540
(F3)    Includes  options to purchase  550,000  shares under the Company's  1998
        Plan and 775,000 shares under the Company's 1999 ISO Plan
(F4)    In  September  2000,  the  Board  of  Directors  terminated  Richard  N.
        Chakejian,  Jr. as an officer  and  employee  of the Company and certain
        subsidiaries; includes options to purchase 20,000 shares under 1998 Plan
(F5)    Includes  options to purchase 120,000 shares under 1998 Plan and 675,000
        shares under the 1999 ISO Plan
(F6)    Includes options to purchase 30,000 shares under 1999 ISO Plan
(F7)    Includes  options to purchase  30,000  shares under 1998 Plan and 48,000
        shares under 1999 ISO Plan
(F8)    Includes 500,000 shares which are subject to a purchase price adjustment
        following an acquisition;  includes  options to purchase  250,000 shares
        under the 1999 ISO Plan


ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         There  are no  family  relationships  among  any of  the  Directors  or
executive officers of the Company or its subsidiaries.

         The  Company  currently  utilizes  approximately  1,000  square feet of
office  space in a property  owned by an entity  controlled  by Mark  Mendelson,
Chairman  of  the  Board  and  Chief  Executive   Officer.   NAI  also  utilized
approximately  25,000  square feet of office and  warehouse  space in a property
controlled by Mr.  Mendelson  until sale of that subsidiary in December 2000. No
current  rental  payments are made by the Company under either lease,  which are
extended on a month to month basis to the company.

         All future  transactions with officers,  Directors or five percent (5%)
stockholders  of the Company will be approved by the  independent  disinterested
members of the Company's Board of Directors and be on terms no less favorable to
the Company than could otherwise be obtained from unaffiliated third parties.

                                    Page 16
<PAGE>

PART IV

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

(a)      (3) List of Exhibits Required by Item 601 Of Regulation S-B

      Exhibit #
      ---------
        1.1     Revised Form of Underwriting  Agreement  between the Company and
                Hibbard Brown & Company, Inc. (1)
        3.1     Restated Articles of Incorporation of the Company. (1)
        3.2     By-laws of the Company. (1)
        3.3     Form of Stock Certificate. (1)
        9.1     Irrevocable  Voting  Proxy dated March 9, 1994  between  John E.
                Dell and Max E. Gray (2)
        9.2     Appointment of Mark Mendelson as of January 1, 1998 as holder of
                Irrevocable  Voting  Proxy dated March 9, 1994  between  John E.
                Dell and Max E. Gray.
        10.1    1992 Stock Option Plan. (1)
        10.2    Agreement  between the Company and Lester W. Salzman  dated June
                5, 1998 (3).
        10.3    Share Purchase Agreement dated as of January 1, 1999 between the
                Company and Richard N. Chakejian, Sr. (3).
        10.4    Warehouse  Loan  Agreement  dated March 1999 between the Company
                and Priority Bancorp, Inc. (3).
        10.5    Participation  Agreement  dated May 25, 1999 between the Company
                and Sterling Bank and Trust. (3).
        2.1     Asset  Purchase  Agreement  dated February 9, 1999 with Mortgage
                Concepts,  Inc.,  William Everslage and Jeffrey Houk, as amended
                (4).
        2.2     Loan Agreement dated February 5, 1999 with Crusader Bank (4).
        2.3     Third  Amendment to the Asset Purchase  Agreement dated February
                9, 1999 between the Company and Mortgage Concepts, Inc. (5)
        2.4     Amendment  to  Loan  Agreement  dated  November  10,  1999  with
                Crusader Bank. (5)
        10.6    Forbearance Agreement dated February 2, 2001 between the Company
                and Crusader Bank. (6)
        10.7    Fourth  Amendment to the Asset Purchase  Agreement  dated August
                31, 2000 between the Company and Mortgage Concepts, Inc. (6)
        10.8    Asset Purchase and Sale Agreement dated December 1, 2000 between
                Iron Mountain Records  Management,  Inc. and National  Archives,
                Inc. (6)
        10.9    Crusader Bank Pledge  Agreement and Forbearance  Agreement dated
                February 5, 2001
        21
                (a)     National  Archives,  Inc.,  incorporated in the state of
                        Pennsylvania (60%)
                (b)     Premiere Quality Foods, Inc.,  incorporated in the state
                        of Virginia (100%)
                (c)     Premiere Chemicals,  Inc.,  incorporated in the state of
                        Virginia (100%)
                (d)     First Chesapeake  Funding  Corporation,  incorporated in
                        the state of Virginia (100%)
                (e)     First Chesapeake Acquisition  Corporation,  incorporated
                        in the state of Virginia (100%)
                (f)     Collateral One Mortgage Corporation, incorporated in the
                        state of Virginia (100%)
         ---------------------------

        (1)     Incorporated  by  reference  to  the  correspondingly   numbered
                exhibit to the Registration  Statement on Form S-1, Registration
                No.  33-59726,  filed by the  Company  with the  Securities  and
                Exchange  Commission (the  "Commission")  on March 18, 1993, and
                Amendments  Nos. 1, 2, 3 and 4 thereto filed with the Commission
                on May 19, June 25, July 8 and July 15, 1993, respectively.

        (2)     Incorporated  by  reference  to  the  correspondingly   numbered
                exhibit to the  Company's  Annual  Report on Form 10-KSB for the
                year ended  December 31, 1993 filed with the Commission on March
                31, 1994.



                                    Page 17
<PAGE>

        (3)     Incorporated  by  reference  to  the  correspondingly   numbered
                exhibit to the  Company's  Annual  Report on Form 10-KSB for the
                year ended December 31, 1998 filed with the Commission on August
                24, 1999.

        (4)     Incorporated  by  reference  to  the  correspondingly   numbered
                exhibit to the Company's  Current  Report on Form 8-K filed with
                the Commission on September 17, 1999.

        (5)     Incorporated  by  reference  to  the  correspondingly   numbered
                exhibit to the  Company's  Annual  Report on Form 10-KSB for the
                year ended  December 31, 1999 filed with the  Commission  on May
                12, 2000.

        (6)     Incorporated  by  reference  to  the  correspondingly   numbered
                exhibit to the  Company's  Annual  Report on Form 10-KSB for the
                year ended  December 31, 1999 filed with the Commission on April
                30, 2001.

(b)      Reports on Form 8-K.

         In a report on Form 8-K dated March 31, 2001 the Company announced that
on January 31, 2001,  National Archives,  Inc., a 60% subsidiary of the Company,
completed the sale of  essentially  all of its assets to Iron  Mountain  Records
Management, Inc. under an Asset Purchase and Sale Agreement dated as of December
1, 2000.  Assets consist primarily of accounts  receivable,  long term contracts
with customers,  certain computer  hardware and software,  customer deposits and
non-competition  agreements. Cash on hand and certain fixed assets consisting of
shelving  and racking for  inventory  were  excluded  from the  transaction.  In
addition, National Archives, Inc. and Mark Mendelson, an officer and director of
the Company, each entered in Noncompetition and Confidentiality  Agreements with
the  Purchaser.  The sale price was  $195,000,  subject to adjustment if certain
financial  benchmarks as outlined in the  Agreement are not attained.  The price
was paid in cash in two payments which were delivered to the Company on December
4, 2000 and January 31, 2001.  Effective December 1, 2000, the Purchaser entered
into a seven month lease  agreement  for  National  Archives'  Philadelphia,  PA
warehouse premises with Oregon Avenue Associates,  Inc., a company  wholly-owned
by Mark Mendelson, an officer and Director of the Company.


         In a report on Form 8-K dated April 26,  2001 the  Company  announced a
change in  accountant  from Grant  Thornton LLP to Gross Kreger Passio LLP as of
that date. The reports of Grant Thornton LLP on the financial statements for the
fiscal years ended  December 31, 1998 and 1999  contained no adverse  opinion or
disclaimer  of opinion and were not  qualified  or  modifies as to  uncertainty,
audit scope or  accounting  principal,  except that their report for each fiscal
year contained an explanatory  paragraph  regarding the substantial  doubt about
the  Company's  ability to  continue as a going  concern.  The  Company's  Audit
Committee   recommended   and  approved  the  decision  to  change   independent
accountants.  In connection with its audits for the two most recent fiscal years
and through April 23, 2001, there have been no disagreements with Grant Thornton
LLP on any matter of accounting  principles or  practices,  financial  statement
disclosure, or auditing scope or procedure, which disagreements, if not resolved
to the  satisfaction  of Grant  Thornton  LLP,  would have  caused  them to make
reference  thereto in their report on the financial  statements  for such years.
Grant  Thornton  LLP has  furnished a letter  addressed  to the  Securities  and
Exchange Commission stating that it agrees with the above statements.

                                    Page 18
<PAGE>

SIGNATURES

         In  accordance  with  Section  13 or 15(d)  of the  Exchange  Act,  the
Registrant  caused  this  report to be signed on its behalf by the  undersigned,
thereunto duly authorized.

Dated:  April 12, 2002              First Chesapeake Financial Corporation,
                                    a Virginia corporation

                                    By:  /s/ Mark Mendelson
                                       -----------------------
                                    Mark Mendelson, Chairman and Chief Executive
                                    Officer

                                    By: /s/ Mark E. Glatz
                                       -----------------------
                                    Mark E. Glatz, Director and Chief Financial
                                    Officer

         In accordance  with the Exchange Act, this report has been signed below
by the following  persons on behalf of the  Registrant and in the capacities and
on the dates indicated.
<TABLE>

Date                       Name and Title                              Signature
----                       --------------                              ---------
<S> <C>
April 12, 2002             Mark Mendelson, Chairman of                 /s/ Mark Mendelson
                           the Board and Chief Executive Officer       ------------------
                                                                       Mark Mendelson

April 12, 2002             Mark E. Glatz                               /s/ Mark E. Glatz
                           Director and Chief Financial Officer        -----------------
                                                                       Mark E. Glatz

April 12, 2002             Paul Dandridge                              /s/ Paul Dandridge
                           Director                                    ------------------
                                                                       Paul Dandridge

April 12, 2002             James Greenfield                            /s/ James Greenfield
                           Director and Secretary                      --------------------
                                                                       James Greenfield

April 12, 2002             Vincent Muratore                            /s/ Vincent Muratore
                           Director                                    --------------------
                                                                       Vincent Muratore

April 12, 2002             Pasquale Nestico                            /s/ Pasquale Nestico
                           Director                                    --------------------
                                                                       Pasquale Nestico

April 12, 2002             John Papandon                               /s/ John Papandon
                           Director                                    -----------------
                                                                       John Papandon

</TABLE>

                                    Page 19
<PAGE>

                       FINANCIAL STATEMENTS AND REPORT OF
                     INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT

             FIRST CHESAPEAKE FINANCIAL CORPORATION AND SUBSIDIARIES

                           December 31, 2001 and 2000



<PAGE>

                       FINANCIAL STATEMENTS AND REPORT OF
                     INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT

             FIRST CHESAPEAKE FINANCIAL CORPORATION AND SUBSIDIARIES

                           December 31, 2001 and 2000




                                    CONTENTS



REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT                              3

CONSOLIDATED FINANCIAL STATEMENTS

       CONSOLIDATED BALANCE SHEETS                                             4

       CONSOLIDATED STATEMENTS OF OPERATIONS                                   5

       CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)             6

       CONSOLIDATED STATEMENTS OF CASH FLOWS                                   7

       NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                              8

SUPPLEMENTAL INFORMATION AND INDEPENDENT AUDITOR'S
REPORT ON ADDITIONAL INFORMATION                                              14



                                       2
<PAGE>

                Report of Independent Certified Public Accountant

Board of Directors
First Chesapeake Financial Corporation

         We have audited the  consolidated  balance  sheets of First  Chesapeake
Financial Corporation,  a Virginia corporation (the Company) and Subsidiaries as
of  December  31,  2001 and  2000 and the  related  consolidated  statements  of
operations,  stockholders' (deficiency) equity and cash flows for the years then
ended.  These  consolidated  financial  statements are the responsibility of the
Company's  management.  Our  responsibility  is to  express  an opinion on those
consolidated financial statements based on our audit.

         We conducted our audits in accordance with auditing standards generally
accepted in the United States of America.  Those standards  require that we plan
and  perform  the  audit  to  obtain  reasonable  assurance  about  whether  the
consolidated  financial statements are free of material  misstatement.  An audit
includes  examining,  on a test  basis,  evidence  supporting  the  amounts  and
disclosures in the  consolidated  financial  statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall consolidated  financial statement
presentation.  We  believe  that our audit  provide a  reasonable  basis for our
opinion.

         In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
First Chesapeake Financial  Corporation and Subsidiaries as of December 31, 2001
and 2000,  and their  consolidated  results of operations and cash flows for the
year then ended, in conformity with accounting  principles generally accepted in
the United States of America.

/s/ Gross Kreger & Passio, L.L.C.

Philadelphia, Pennsylvania
April 2, 2002

                                       3
<PAGE>
<TABLE>
                                  First Chesapeake Financial Corporation and Subsidiaries

                                                CONSOLIDATED BALANCE SHEETS

                                                       December 31,


                                                                                     2001               2000
ASSETS
<S>                                                                                <C>              <C>
Cash and cash equivalents                                                          $ 374,595        $   74,031
Accounts receivable                                                                  188,775           177,270
Mortgage loans held for resale                                                        97,476           316,862
Furniture and equipment, net                                                          83,801            67,079
Goodwill                                                                           2,699,074         2,240,751
Other assets                                                                         227,514           163,132
                                                                                  ----------        ----------

Total assets                                                                      $3,671,235        $3,039,125
                                                                                  ==========        ==========


LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)

LIABILITIES
Note payable to bank - current portion                                              $323,800        $2,107,321
Warehouse note payable - bank                                                        125,685           348,586
Time note payable - bank                                                             250,000               -0-
Note payable - other                                                                  42,892            85,400
Accounts payable                                                                     426,376           448,277
Accrued expenses                                                                     498,030           233,022
Term note payable - bank                                                              22,117               -0-
Note payable to bank - long term portion                                             968,319               -0-
Dividends payable                                                                     72,773               -0-
Subordinated junior debentures                                                        53,000            75,000
Due to officers                                                                      280,572           400,006
Liabilities of discontinued operations                                               219,942           273,130
                                                                                  ----------        ----------

Total liabilities                                                                  3,283,506         3,970,742
                                                                                  ----------        ----------


STOCKHOLDERS' EQUITY (DEFICIENCY)
Convertible  preferred  stock;  no par value;  $1 stated  value per share;
     5,000,000   shares   authorized;   1,520,260   and  none  issued  and
     outstanding in 2001 and 2000                                                  1,486,852               -0-
Common stock; no par value;  20,000,000 shares  authorized;  9,936,164 and
     9,051,153 issued and outstanding in 2001 and 2000                            14,041,396        13,471,584
Accumulated deficit                                                              (15,140,519)      (14,403,201)
                                                                                  ----------        ----------

Total stockholders' equity (deficiency)                                              387,729         (931,617)
                                                                                  ----------        ----------

Total liabilities and stockholders' equity                                        $3,671,235        $3,039,125
                                                                                  ==========        ==========

</TABLE>

The accompanying notes are an integral part of these statements.

                                                       4
<PAGE>
<TABLE>
                                  First Chesapeake Financial Corporation and Subsidiaries

                                           CONSOLIDATED STATEMENTS OF OPERATIONS

                                                  Year ended December 31,



                                                                                          2001              2000
                                                                                          ----              ----
REVENUES
<S>                                                                                <C>               <C>
Sales                                                                              $ 5,694,994       $ 3,981,893
Interest and other income                                                              363,884             2,838
                                                                                   -----------       -----------

         Total revenues                                                            $ 6,058,878       $ 4,064,731

OPERATING EXPENSES
Compensation and employee benefits                                                   4,290,043         2,670,958
Professional fees                                                                       46,694           179,892
Occupancy                                                                              366,524           276,842
Depreciation and amortization                                                          224,810           202,281
Interest expense                                                                       346,497           474,291
Other operating expenses                                                             1,517,018         1,149,950
                                                                                   -----------       -----------

          Total expenses                                                             6,791,586         4,954,214
                                                                                   -----------       -----------

Loss from continuing operations                                                       (732,708)         (889,483)
Loss from discontinued operations                                                       (4,610)          (60,039)
Gain on sale of discontinued operations                                                    -0-           119,017
                                                                                   -----------       -----------

NET LOSS                                                                           $  (737,318)      $  (830,505)
                                                                                   ===========       ===========

Basic and diluted earnings per share
Continuing operations                                                                  $ (0.07)           $(0.12)
Discontinued operations                                                                   0.00              0.01

                                                                                       $ (0.07)           $(0.11)
                                                                                   ===========       ===========

Weighted average shares outstanding                                                  9,689,282         7,729,422
                                                                                   ===========       ===========
</TABLE>


The accompanying notes are an integral part of these statements.

                                                        5
<PAGE>
<TABLE>
                                  First Chesapeake Financial Corporation and Subsidiaries

                                CONSOLIDATED STATEMENT OF STOCKHOLDERS' (DEFICIENCY) EQUITY

                                          Years ended December 31, 2001 and 2000


                                                                                                 Total
                                                                                             stockholders'
                                            Common          Preferred       Accumulated       (deficiency)
                                             stock            stock           deficit            equity
                                             -----            -----           -------            ------

<S>                                        <C>               <C>            <C>                    <C>
Balance at December 31, 1999               $13,647,625       $         -    $ (13,572,696)         $ 74,929
                                                     -                 -                -                 -
Issuance of common stock                       775,000                 -                -           775,000
Exercise of common stock options                 6,000                 -                -             6,000
Cancellation of common stock                  (957,041)                -                -          (957,041)
Net loss                                             -                 -         (830,505)         (830,505)
                                           -----------       -----------    -------------          --------

Balance at December 31, 2000               $13,471,584       $       -0-    $ (14,403,201)       $ (931,617)
                                                                                                          -
Issuance of common stock                       569,812                 -                -           569,812
Issuance of preferred stock                          -         1,486,852                -         1,486,852
Net loss                                             -                 -         (737,318)         (737,318)
                                           -----------       -----------    -------------          --------

Balance at December 31, 2001               $14,041,396       $ 1,486,852    $ (15,140,519)        $ 387,729
                                           ===========       ===========    =============         =========
</TABLE>

The accompanying notes are an integral part of these statements.

                                                      6
<PAGE>
<TABLE>
                                  First Chesapeake Financial Corporation and Subsidiaries

                                           CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                  Year ended December 31,

                                                                                                2001             2000
                                                                                                ----             ----
OPERATING ACTIVITIES
<S>                                                                                       <C>               <C>
Net loss                                                                                  $ (737,318)       $(830,505)
Adjustments to reconcile net loss to net cash used in operating activities:
       Increase (decrease) in deferred officers' compensation                                (44,434)         585,595
       Common stock issued (cancelled) as compensation                                           -0-         (123,291)
       Depreciation                                                                           29,314           36,610
       Amortization of goodwill and capitalized financing costs                              200,700          312,276
Decrease (increase) in accounts receivable                                                   (11,505)         (94,396)
Decrease (increase) in mortgage loans held for resale                                        219,386          594,188
Proceeds (repayment) of bank warehouse loans                                                (222,901)        (553,141)
Decrease (increase) in other assets                                                         (129,389)        (119,236)
Increase (decrease) in trade accounts payable                                                (21,901)        (108,839)
Increase (decrease) in accrued expenses                                                      265,008           81,003
Increase (decrease) in liabilities of discontinued subsidiaries                              (53,188)         162,930

Net cash provided (absorbed) by operating activities                                        (506,228)         (56,806)
                                                                                           ---------         --------

INVESTING ACTIVITIES
Purchase of fixed assets                                                                     (46,036)             -0-
Cash used in acquisition, net                                                                (86,216)             -0-
                                                                                           ---------         --------

Net cash provided (absorbed) by investing activities                                        (132,252)             -0-
                                                                                           ---------         --------

FINANCING ACTIVITIES
Repayment of note payable - bank                                                            (815,202)             -0-
Proceeds of bank time note                                                                   250,000              -0-
Equipment note payable - bank, net                                                            22,117              -0-
Repayment of notes payable                                                                   (42,508)        (120,780)
Repayment of subordinated debentures                                                         (22,000)             -0-
Increase in common stock                                                                      62,012          181,000
Increase in preferred stock                                                                1,411,852              -0-
Increase in preferred stock dividends payable                                                 72,773              -0-

Net cash provided (utilized) by financing activities                                         939,044           60,220
                                                                                           ---------         --------

NET INCREASE IN CASH AND CASH EQUIVALENTS                                                    300,564            3,414

Cash and cash equivalents at beginning of period                                             $74,031          $70,617
                                                                                           ---------         --------

CASH AND CASH EQUIVALENTS AT END OF PERIOD                                                  $374,595          $74,031
                                                                                            ========          =======

SUPPLEMENTAL CASH FLOW DISCLOSURES:

    Cash payments of interest expense                                                       $299,522         $189,808
    Non-cash transaction - conversion of amounts due officers to common stock                    -0-          600,000
    Non-cash transaction - conversion of amounts due officers to preferred stock              75,000              -0-
    Non-cash transaction - issuance of common stock for acquisition                          507,800              -0-
</TABLE>

The accompanying notes are an integral part of these statements.

                                                          7
<PAGE>
             First Chesapeake Financial Corporation and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           December 31, 2001 and 2000



NOTE A - ORGANIZATION AND BASIS OF PRESENTATION

    On May 18, 1992,  First Chesapeake  Financial  Corporation (the Company) was
    incorporated in the Commonwealth of Virginia as a mortgage banking company.

    The consolidated  financial  statements include the accounts of the Company,
    its  wholly  owned   subsidiaries,   Collateral  One  Mortgage   Corporation
    (Collateral One), First Chesapeake Funding  Corporation (FC Funding),  First
    Chesapeake  Acquisition  Corporation  (FC  Acquisition),  and  a  60%  owned
    subsidiary,   National  Archives,  Inc.  (NAI).  All  material  intercompany
    transactions and accounts have been eliminated in consolidation.

    Collateral  One was  incorporated  in February 1999 to acquire the assets of
    Mortgage  Concepts,  Inc.  (see  Note D) and  operate  as a retail  mortgage
    banking operation.

    FC Funding was incorporated in July 1998 to operate as a wholesale  mortgage
    banking unit; operations ceased in 2000.

    FC  Acquisition  was  incorporated  in February  1999 to operate as a retail
    mortgage banking unit; operations ceased in 1999.

    NAI provides  document  archive  services to the  government  and businesses
    primarily  located in the  Philadelphia  area. In 2000, the Company sold its
    interest in NAI.

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

    1.  Cash and Cash Equivalents

    For the purposes of the  consolidated  statements of cash flows, the Company
    considers all highly liquid  investments  with an initial  maturity of three
    months or less to be cash equivalents.

    2.  Furniture and Equipment

    Furniture and equipment are stated at cost less accumulated depreciation and
    amortization.   Depreciation   and   amortization   are  computed  by  using
    straight-line  methods over the  estimated  useful  lives of the  individual
    assets.  Ordinary  maintenance  and  repairs are  charged to  operations  as
    incurred.

    3.  Income Recognition

    Revenue from mortgage  origination is recognized  when the loans are sold to
    an investor and the Company has no further  obligation to fulfill.  To date,
    the majority of loans  originated has been sold (or will be sold in the case
    of loans held for sale) and servicing has been released.

    Gains or losses on loan  sales  are  recognized  at the time of sale and are
    determined  by the  difference  between net sales  proceeds and the carrying
    value of the loans sold.

    4.  Income Taxes

    From  inception  through  December  31,  2001,  the Company has incurred net
    operating losses and, accordingly, has made no provision for income taxes.


                                        8
<PAGE>


    5.  Basic and Diluted Loss Per Share

    The Company  follows the  provisions  of Statement  of Financial  Accounting
    Standards  (SFAS) No.  128,  "Earnings  per Share"  which  provides  for the
    calculation  of basic and diluted  earnings  per share.  Basic  earnings per
    share includes no dilution and is computed by dividing  income  available to
    common  shareholders  by  the  weighted  average  number  of  common  shares
    outstanding  for  the  period.  Diluted  earnings  per  share  reflects  the
    potential  dilution of  securities  that could occur if  securities or other
    contracts to issue common stock were  exercised  and  converted  into common
    stock.

    Shares  issuable for stock  options and warrants have been excluded from the
    computation  of loss per share for the years  ended  December  31,  2001 and
    2000, as their inclusion would the anti-dilutive.

    6.  Estimates

    The  preparation  of  financial  statements  in  conformity  with  generally
    accepted  accounting  principles  requires  management to make estimates and
    assumptions  that affect the reported  amounts of assets and  liabilities at
    the date of the financial  statements  and the reported  amounts of revenues
    and expenses during the reporting  period.  Actual results could differ from
    those estimates.

    7.  Stock-Based Compensation

    The Company  accounts for stock options under SFAS No. 123,  "Accounting for
    Stock-Based  Compensation,"  which  contains a fair  value-based  method for
    valuing  stock-based  compensation  that  entities may use,  which  measures
    compensation cost at the date of grant based on the fair value of the award.
    Compensation is then  recognized  over the service period,  which is usually
    the vesting period. Alternatively, the standard permits entities to continue
    accounting  for  employee  stock  options  and  similar   instruments  under
    Accounting  Principles  Board (APB)  Opinion No. 25,  "Accounting  for Stock
    Issued to  Employees."  Entities  that continue to account for stock options
    using APB Opinion No. 25 are required to make  pro-forma  disclosures of net
    income  and  earnings  per  share  as if  the  fair  value-based  method  of
    accounting  defined in SFAS No. 123 had been applied.  The  Company's  stock
    options plans are accounted for under APB Opinion No. 25.

NOTE C - FIXED ASSETS

    Fixed assets consist of the following:
                                                              December 31,
                                                          2001             2000
                                                          ----             ----

    Leasehold improvements                            $ 22,138         $ 22,138
    Furniture and fixtures                             191,379          183,129
    Machinery and equipment                            242,787          205,001
                                                       -------          -------
                                                       456,304          410,269
    Less accumulated depreciation and amortization    (372,503)        (343,189)
                                                      --------        ---------
                                                      $ 83,801         $ 67,079
                                                      ========         ========

    Depreciation and amortization  expense  associated with the fixed assets for
    the  years  ended  December  31,  2001  and 2000 was  $29,314  and  $36,610,
    respectively.

NOTE D - ACQUISITIONS AND RELATED DEBT

    On February 9, 1999, the Company acquired substantially all of the assets of
    Mortgage  Concepts,  Inc., an originator of primarily subprime and alternate
    documentation residential mortgage loans which now operates as the Company's
    Collateral One  subsidiary.  The purchase price was  $4,100,000,  subject to
    reduction if certain financial benchmarks, as outlined in the Asset Purchase
    Agreement,  were not attained by the subsidiary.  As of August 31, 2000, the
    Company  implemented  a  purchase  price  adjustment  and  restructured  the
    remaining amounts due the sellers of the assets of Mortgage  Concepts,  Inc.
    The purchase  price of  $4,100,000  was reduced to  $2,804,000 in accordance
    with the Asset Purchase Agreement,  and was amended to consist of $2,400,000
    of cash and  $404,000 of Company  common  stock.  The  acquisition  has been
    accounted for under the purchase method of accounting.



                                       9
<PAGE>

    Effective  March 31, 2001, the Company  acquired 100% of the stock of Family
    First  Mortgage,  Inc., a Fort  Lauderdale,  FL  originator  of  residential
    mortgage loans.  The purchase price was $250,000  payable in common stock of
    the Company,  plus the issuance into escrow of an additional  500,000 shares
    of Company  common stock to be released  after a period of time,  subject to
    attaining  certain  financial  benchmarks as outlined in the agreement.  The
    acquisition has been accounted for under the purchase method of accounting.

NOTE E - OTHER DEBT

    In 1998, the Company issued $635,000 of convertible subordinated debentures.
    Up to 20% of the subordinated  debenture notes are convertible,  at any time
    at option of the holder, into the Company's common stock at a price of $2.00
    per share. The $635,000 included $350,000 of subordinated  debentures issued
    to certain  officers of the Company in exchange  for a similar  reduction in
    amounts due to officers.  In November 1999,  the Company  offered to convert
    the  convertible  subordinated  debentures  into  Company  common stock at a
    conversion  price of $1.50 per share.  Holders  of  $560,000  of  debentures
    elected to convert  their  holdings  into  373,333  shares of common  stock,
    including all  debentures  held by officers of the Company.  At December 31,
    2001,  $53,000 of convertible  subordinated  debentures  remain  outstanding
    under the original terms and conditions of the issuance.

    In February 1999, the Company borrowed $1,500,000 from a bank; $1,200,000 of
    such  borrowings was used in conjunction  with the Mortgage  Concepts,  Inc.
    acquisition.  The loan,  guaranteed  by certain  officers of the Company and
    other  individuals,  bears  interest at prime plus 2%. In November 1999, the
    Company  borrowed  an  additional  $600,000  from the bank,  secured  by the
    personal  guaranty of the  Chairman of the Board of Directors of the Company
    to partially  finance a payment due the sellers of Mortgage  Concepts,  Inc.
    and for working  capital needs.  This loan also bears interest at prime plus
    2%. In connection with both these financings,  the Company entered into loan
    guaranty  agreements with the individuals  guaranteeing  the loans,  whereby
    such  individuals  received  shares and/or  options of the Company's  common
    stock as compensation for their guarantees.  In February 2001, the Bank loan
    was restructured to reduce the principal  balance by approximately  $800,000
    by June 2001 and approximately  $25,000 per month thereafter.  In June 2001,
    the term of the Bank loan was further  restructured  from a demand note to a
    term note maturing in January 2003. At December 31, 2001, the balance of the
    bank loan had been reduced to $1,292,119.

    In September 2001, a subsidiary of the Company  borrowed $25,000 from a bank
    for office and computer  equipment  for  expanding  operations.  The loan is
    secured by a pledge of the acquired equipment,  is guaranteed by the Company
    as well as by an officer of the Company.  The loan has a 24 month  repayment
    term which matures in September 2003 and bears a fixed interest rate of 9%.

    In December 2001, the Company borrowed $250,000 from a bank to repay amounts
    due to its  Collateral  One  subsidiary.  The  loan  is  secured  by cash of
    $250,000 and has a 3 month  repayment  term which  matures in March 2002 and
    bears a fixed interest rate of 7.50%.

    The  Company  has  warehouse  lines of credit  with  maximum  borrowings  of
    $2,000,000 at December 31, 2001 and 2000. At December 31, 2001, $125,685 was
    outstanding under the lines. At December 31, 2000,  $348,586 was outstanding
    under the lines.

NOTE F - INCOME TAXES

    The Company and its wholly owned subsidiaries file a consolidated income tax
    return.  The Company  incurred net operating  losses for federal  income tax
    purposes of approximately $700,000 and $800,000 for the years ended December
    31,  2001 and 2000,  respectively,  resulting  in total net  operating  loss
    carryforwards  of approximately  $11,000,000  which expire beginning in 2007
    through  2021,  if not utilized.  The  difference  between the Company's net
    operating  loss  carryforwards  for tax  and  financial  reporting  purposes
    results  primarily from temporary  differences  related to depreciation  and
    amortization.

    At December 31, 2001 and 2000,  the Company  recorded a valuation  allowance
    for the  total  amount of the net  deferred  tax  asset  which was  composed
    primarily of the net operating loss carryforwards.


                                       10
<PAGE>

NOTE G - STOCK OPTIONS

    In May 1992, the Board of Directors  adopted an Incentive  Stock Option Plan
    (the 1992 Plan).  Pursuant to the 1992 Plan, 500,000 shares of the Company's
    common  stock  were made  available  for  awards.  The 1992 Plan  allows for
    Incentive  Stock  Options  intended to qualify as  Incentive  Stock  Options
    within the meaning of Section 422 of the Internal  Revenue Code of 1986, and
    for  Non-qualified  Stock Options not intended to qualify as Incentive Stock
    Options.  Incentive  Stock  Options may be granted  only to employees of the
    Company. Non-qualified Stock Options may be granted to employees, as well as
    non-employee directors and consultants to the Company. Exercise prices under
    the 1992 Plan must be at fair market value per share at date of grant or, in
    the case of Incentive  Stock Options  granted to employees who own more than
    10% of the voting power of all classes of stock of the  Company,  at 110% of
    the fair market value per share at date of grant.

    In 1999,  1992 Plan  options to purchase  150,000  shares were  exercised by
    holders,  and the remaining  50,000 option shares were canceled by the Board
    of Directors of the Company.  There are no 1992 Plan options  outstanding at
    December 31, 1999.  In November  2000,  the Board of Directors  approved the
    termination of the 1992 Plan.

    In July 1998, the Board of Directors  adopted a  Non-Qualified  Stock Option
    Plan (the 1998  Plan).  Pursuant to the 1998 Plan,  1,000,000  shares of the
    Company's common stock were made available for awards.  The 1998 Plan allows
    for  Non-Qualified  Stock Options not intended to qualify as Incentive Stock
    Options  within the meaning of Section 422 of the  Internal  Revenue Code of
    1986.  Non-Qualified  Stock Options may be granted to employees,  as well as
    non-employee directors and consultants to the Company. Exercise prices under
    the 1998 Plan must be at fair  market  value per share at date of grant.  In
    1999,  400,000 1998 Plan option shares at exercise prices of $0.875 to $5.00
    were granted,  of which 290,000 were granted to certain  executive  officers
    and 40,000 were granted to certain outside directors.  In 1998, 530,000 1998
    Plan option  shares at an  exercise  price of $0.60 were  granted,  of which
    500,000 were granted to certain  executive  officers and 30,000 were granted
    to certain outside directors.  In June 2000, the Board of Directors approved
    the termination of the 1998 Plan.

    In December 1999 the shareholders of the Company approved an Incentive Stock
    Option Plan (the "1999 ISO Plan").  Pursuant to the 1999 ISO Plan, 1,500,000
    shares of the  Company's  common stock were made  available  for awards.  In
    December 2001, the  shareholders of the Company  approved an increase in the
    number  of  authorized  shares  under the 1999 ISO Plan  from  1,500,000  to
    2,500,000  shares.  The 1999 ISO Plan  allows for  Incentive  Stock  Options
    intended to qualify as Incentive  Stock  Options  pursuant to Section 422 of
    the Internal Revenue Code of 1986, as amended,  or they may be Non-Qualified
    Stock Options.  Exercise  prices under the Plan must be at no less than fair
    market value per share at date of grant,  and shall expire no more than five
    years from date of issuance.  In 2001,  a total of  1,108,500  1999 ISO Plan
    option  shares at  exercise  prices of $0.50 to $0.75 were  granted  (net of
    cancellations), of which 450,000 were granted to certain executive officers,
    and 40,000 were granted to certain outside directors.  In 2000, 652,000 1999
    ISO Plan option shares at exercise prices of $0.55 to $0.80 were granted, of
    which 550,000 were granted to certain  executive  officers,  and 80,000 were
    granted to certain outside directors. In December 2000, the Company repriced
    all stock options issued in the preceding twelve months to an exercise price
    of $0.80 per share.  A total of 559,000  1999 ISO Plan  option  shares  were
    repriced,  of which  450,000 were held by certain  executive  officers,  and
    86,000  were held by  certain  outside  directors.  All  other  terms of the
    options remained unchanged.

    Option activity under the above plans is summarized following:
<TABLE>
                                                                     December 31,
                                                           -------------------------------
                                                                 2001                2000
                                                                 ----                ----

<S>                                                         <C>                 <C>
         Outstanding options at beginning of year           1,977,500           1,548,500

         1999 ISO Plan options granted                      1,167,000             652,000
         1999 ISO Plan options exercised                          -0-                 -0-
         1999 ISO Plan options cancelled                      148,500            (103,000)

         1998 Plan options granted                                -0-                 -0-
         1998 Plan options exercised                              -0-             (10,000)
         1998 Plan options cancelled                              -0-             (10,000)



                                       11
<PAGE>

         1992 Plan options exercised                              -0-                 -0-
         1992 Plan options cancelled                              -0-                 -0-

         Outstanding options at end of year                 2,996,000           1,977,500
                                                            =========           =========

         Exercise prices:
                 Low                                            $0.50               $0.55
                 High                                           $5.00               $5.00

         Latest expiration date                           December 1,        December 31,
                                                                 2006                2005
</TABLE>

    Had compensation cost been determined based on the fair value of the options
    at the grant  date  consistent  with the  provisions  of SFAS No.  123,  the
    Company's  2001 and 2000 net loss and net loss per  share  would  have  been
    reported as follows:

                                                     2001                2000
                                                     ----                ----
         Net loss:
              As reported                       $(737,318)         $ (830,505)
              Pro forma                       $(1,150,766)       $ (1,113,288)

         Loss per share:
              As reported                          $(0.07)             $(0.11)
              Pro forma                            $(0.11)             $(0.14)


    The fair value of options  granted during 2001 and 2000 was estimated on the
    date of  grant  using  the  Black-Sholes  options  pricing  model  with  the
    following assumptions;  weighted average risk-free interest rate of 1.69% in
    2001 and 6.22% in 2000; no dividend yield; expected weighted average term of
    5 years; and volatility of 140% for 2001 and 2000.

    At December  31,  2001,  there were  2,996,000  options  outstanding  with a
    weighted  average  exercise  price of $0.823  and a  remaining  maturity  of
    approximately  3.4 years. At December 31, 2000, there were 1,977,500 options
    outstanding  with a weighted average exercise price of $0.97 and a remaining
    maturity of approximately 3.9 years.

NOTE H - STOCKHOLDERS' EQUITY

    On August 4, 1993, the Company  completed an initial public  offering of its
    securities  through the sale of 1,250,000 units at a purchase price of $8.00
    per unit. Each unit consisted of one share of the Company's common stock, no
    par  value,  one  Redeemable  Class A  Warrant  and one  Redeemable  Class B
    Warrant. The Class A and Class B Warrants expired unexercised in 1998.

    In May 1992,  the  Company  issued a warrant to purchase  500,000  shares of
    common stock at an exercise price of $2.00 per share. This warrant, together
    with 1,000,000 shares of common stock, was issued to a founding  stockholder
    of the Company for proceeds of $425,000. The Company had assigned a value of
    $50,000 to the warrant. The warrant expired unexercised during 1997, and the
    $50,000 was transferred to common stock.

    During 1997, the Company issued 500,000 shares of common stock to acquire an
    interest in a joint venture and 500,000 shares as compensation to an officer
    of the Company that joined the Company during 1997. The shares were recorded
    at the fair value of the  Company's  common  stock at the  respective  issue
    dates.

    During 1998, the Company issued 275,000 shares as compensation to an officer
    of the Company that joined the Company during 1998. The shares were recorded
    at the fair value of the  Company's  common stock at the issue date,  less a
    discount due to the restricted nature of the stock.

    During 1999, the Company issued 646,667 shares under a private  placement of
    common stock which raised a total of $485,000 of equity capital.



                                       12
<PAGE>

    During  1999,  holders of $560,000 of  convertible  subordinated  debentures
    elected to convert their  debentures  into 373,333  shares of Company common
    stock at a conversion price of $1.50 per share.

    During 1999,  the Company  issued 656,000 shares into escrow under an Escrow
    Agreement  with the sellers of the assets of Mortgage  Concepts,  Inc. which
    now operates as the Company's  Collateral  One  subsidiary.  The shares were
    released in 2000 and 2001 in accordance with the Escrow Agreement.

    In March 2000, the Company issued 66,667 shares under a private placement of
    common stock which raised a total of $175,000 of equity capital.

    In  June  2000,  the  Company  cancelled  275,000  shares  of  common  stock
    previously  issued to the  former  President  of its FC  Funding  subsidiary
    pursuant to the terms of an employment agreement.  The cancellation of these
    shares  resulted in a reduction of  compensation  expense of $123,291 during
    the period ended September 30, 2000.

    During 2000, the Company  cancelled 440,133 shares under an Escrow Agreement
    with the sellers of the assets of Mortgage Concepts, Inc. which now operates
    as the Company's Collateral One subsidiary.

    During  2000,  the Company  issued  108,669  shares to  participants  in the
    Company's 1999 and 2000 private placements of common stock equating to a 10%
    additional stock issuance to each participant.

    During 2000, the Company issued  1,578,947 shares to certain officers of the
    company in exchange for conversion of $600,000 of debt into common stock.

    In December 2000, the Company authorized a private placement of a minimum of
    $250,000 and a maximum of $2,500,000  of the Company's  Series B Convertible
    Preferred  Stock, no par value (the  "Preferred  Stock") at $1.00 per share.
    The  Preferred  Stock  bears  dividends  at a coupon  rate of 12-1/2% and is
    convertible  into common stock of the Company at a conversion price equal to
    the average bid price of the common stock for the trailing thirty days prior
    to date of written notice to convert,  but in any case at no less than $1.00
    per share.  At December  31, 2001,  the Company had  received  subscriptions
    totaling  $1,486,852,  including $75,000 issued to an officer of the Company
    in  exchange  for  conversion  of $75,000 of debt into  preferred  stock and
    $31,000 issued to an officer of the Company in exchange for cash.

    Effective  March 31, 2001, the Company issued 250,000 shares of common stock
    to the seller of the assets of Family First Mortgage,  Inc., and also issued
    an  additional  500,000  shares of common  stock into  escrow to be released
    after a period of time to the seller, subject to attaining certain financial
    benchmarks (see Note D).

    During  2001,  the  Company  issued  135,012  shares of common  stock to two
    vendors of the company in lieu of cash to pay obligations totaling $62,012.

NOTE I - COMMITMENTS AND CONTINGENCIES

    Litigation - Periodically,  the Company and its subsidiaries  become parties
    to  legal  proceedings  incidental  to  its  business.  In  the  opinion  of
    management,  such matters are not expected to have a material  impact on the
    financial position of the Company.

    Leases - The Company and its  subsidiaries  lease  office  facilities  under
    noncancellable  leases.  In  addition  to minimum  rentals,  several  leases
    provide for the Company to pay its  pro-rata  share of  operating  expenses.
    Future minimum lease payments under noncancellable leases are as follows:

                2002                                 $ 287,501
                2003                                   136,299
                2004                                    53,794
                2005                                     3,930
                Thereafter                                 -0-



                                       13
<PAGE>

NOTE J - DISCONTINUED OPERATIONS; DISPOSITION OF SUBSIDIARIES

    In January 2000, the Company ceased  operations of its FC Funding  wholesale
    mortgage banking subsidiary and closed its two Florida locations,  effective
    January 31, 2000.  Accordingly,  the financial statements have been restated
    to reflect FC Funding as a discontinued operation.

    In December 2000, the Company sold substantially all of the assets of NAI to
    an unrelated third party.  The  transaction  resulted in a gain of $119,017.
    Accordingly, the financial statements have been restated to reflect NAI as a
    discontinued operation.





SUPPLEMENTAL INFORMATION (Unaudited)

             Independent Auditor's Report on Additional Information

To the Board of Directors and Stockholders
of First Chesapeake Financial Corporation

         Our  report  of our audit of the basic  financial  statements  of First
Chesapeake  Financial  Corporation  for 2001 and 2000  appears on page 3 hereof.
That  audit was  conducted  for the  purpose  of forming an opinion on the basic
financial  statements  taken  as a  whole,  the  financial  statements  for  the
Company's  wholly-owned  mortgage  banking  subsidiary,  Collateral One Mortgage
Corporation,  at  December  31, 2001 is  presented  for  purposes of  additional
analysis  and is not a required  part of the basic  financial  statements.  Such
information  has not been  subjected to the auditing  procedures  applied in the
audit of the basic financial statements and, accordingly,  we express no opinion
on it.

/s/ Gross Kreger & Passio, L.L.C.

Philadelphia, Pennsylvania
April 2, 2002



                                       14

<PAGE>
<TABLE>
                                           COLLATERAL ONE MORTGAGE CORPORATION,

                            a wholly-owned subsidiary of First Chesapeake Financial Corporation

                                              Balance Sheets at December 31,




        ASSETS                                                                    2001                  2000
                                                                                  ----                  ----

<S>                                                                          <C>                    <C>
        Cash and cash equivalents                                            $ 363,805              $ 23,627
        Accounts and notes receivable                                        1,447,542             1,183,920
        Furniture and equipment, net                                            78,596                56,670
        Goodwill                                                               564,316                   -0-
        Other assets                                                            34,980                14,134
                                                                            ----------            ----------

        Total assets                                                        $2,489,239            $1,278,351
                                                                            ==========            ==========


         LIABILITIES

        Accounts payable                                                       243,224                61,649
        Accrued expenses                                                       458,030               173,022
        Note payable to bank secured by equipment                               22,117                   -0-
        Deferred officer compensation                                           19,583                   -0-
                                                                            ----------            ----------

        Total liabilities                                                      742,954               234,671
                                                                            ----------            ----------


         STOCKHOLDERS' EQUITY (DEFICIENCY)

        Common stock and paid-in capital                                       507,801                     1
        Retained earnings                                                    1,238,484             1,043,679
                                                                            ----------            ----------

        Total stockholders' equity                                           1,746,285             1,043,680
                                                                            ----------            ----------

        Total liabilities and stockholders' equity                          $2,489,239            $1,278,351
                                                                            ==========            ==========
</TABLE>


Reference the preceding Independent Auditor's Report on Additional Information

                                                     15
<PAGE>
<TABLE>
                                           COLLATERAL ONE MORTGAGE CORPORATION,

                            a wholly-owned subsidiary of First Chesapeake Financial Corporation

                                     Income Statement for the years ended December 31,




                                                                                    2001              2000
                                                                                    ----              ----
        REVENUES
<S>                                                                          <C>               <C>
        Operating revenues                                                   $ 5,694,994       $ 3,981,893
        Interest and other income                                                 67,100               -0-
                                                                             -----------       -----------

                 Total revenues                                              $ 5,762,094        $3,981,893

        OPERATING EXPENSES
        Compensation and employee benefits                                     3,917,481         2,376,249
        Professional fees                                                         13,624             8,437
        Occupancy                                                                363,524           259,257
        Depreciation and amortization                                             53,810            18,134
        Other operating expenses                                               1,218,850           842,685
                                                                             -----------       -----------

                 Total expenses                                                5,567,289         3,504,762
                                                                             -----------       -----------

        Net income                                                             $ 194,805          $477,131
                                                                               =========          ========


Reference the preceding Independent Auditor's Report on Additional Information



                                           COLLATERAL ONE MORTGAGE CORPORATION,

                            a wholly-owned subsidiary of First Chesapeake Financial Corporation

                     Statement of Shareholders' Equity for the years ended December 31, 2001 and 2000

                                                                                                 Total
                                                            Capital          Retained        stockholders'
                                                             stock           earnings           equity
                                                             -----           --------           ------

        Balance at December 31, 1999                     $       1           $566,548          $ 566,549

        Net income for the year                                  -            477,131            477,131
        -----------------------                          ---------        -----------        -----------

        Balance at December 31, 2000                     $       1        $ 1,043,679        $ 1,043,680

        Paid-in capital contribution                       507,800                  -            507,800
        Net income for the year                                  -            194,805            194,805
        -----------------------                          ---------        -----------        -----------

        Balance at December 31, 2001                     $ 507,801        $ 1,238,484        $ 1,746,285
                                                         =========        ===========        ===========
</TABLE>


Reference the preceding Independent Auditor's Report on Additional Information


                                                     16