<PAGE>


                     U.S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

(MARK ONE)
 [X]   Annual Report pursuant Section 13 or 15(d) of the Securities Exchange Act
       of 1934 For the fiscal year ended June 30, 2001

                                       or

 [ ]   Transition report pursuant to section 13 or 15(d) of the Securities
       Exchange Act of 1934 For the transition period from      to


                        Commission File Number 000-28709


                             THE CREDIT STORE, INC.
             (Exact name of registrant as specified in its charter)


               DELAWARE                                       87-0296990
    (State or other jurisdiction                           (I.R.S. Employer
  of incorporation or organization)                      Identification Number)


        3401 NORTH LOUISE AVENUE
     SIOUX FALLS, SOUTH DAKOTA 57107                    (800) 240-1855
 (Address of principal executive offices       (Registrant's telephone number,
              and zip code)                          including area code)

Securities registered pursuant to Section 12(b) of the Act:


                                              Name Of Each Exchange
        Title Of Each Class                   On Which Registered
        -------------------                   -------------------------
        Common Stock                          AMERICAN STOCK EXCHANGE
        par value $0.001 per
        Share

Securities registered pursuant to Section 12(g) of the Act: Common Stock, par
value $0.001 per Share

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

Aggregate market value of common stock held by non-affiliates of Registrant,
based upon the last sale price of the Common Stock reported on the American
Stock Exchange on September 30, 2001 was $45,306,904. Common stock outstanding
at September 30, 2001: 34,851,465 shares.


                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's definitive proxy statement filed with the
Securities and Exchange Commission in connection with the solicitation of
proxies for the Registrant's 2001 Annual Meeting of Shareholders are
incorporated by reference in Part III, Items 10, 11, 12 and 13, of this Form
10-K.


<PAGE>


                                     PART I

         This report contains "forward-looking statements" which you can
generally identify by our use of forward-looking words including "believe,"
"expect," "may," "will," "could," "should," "seek," "look for," "project,"
"anticipate," or "plan" or the negative or other variations of these terms or
similar expressions or by discussions of strategies that involve risk or
uncertainty. Forward-looking statements are inherently uncertain as they are
based on current expectations and assumptions concerning future events and are
subject to numerous known and unknown risks and uncertainties. We caution you
not to place undue reliance on these forward-looking statements, which are only
predictions and speak only as of the date of this report. Actual results could
differ materially from those currently anticipated due to a number of factors,
including those identified in the "Risk Factors" discussed elsewhere in this
Form 10-K. Except as required by law, we undertake no obligation to update or
publicly announce revisions to any forward-looking statements to reflect future
events or developments.

ITEM 1. BUSINESS

         GENERAL DEVELOPMENT OF BUSINESS

         The Credit Store (the "Company") is a technology and information based,
financial services company that provides credit card products to consumers who
may otherwise fail to qualify for a traditional unsecured bank credit card.
Unlike traditional credit card companies, we focus on consumers who have
previously defaulted on debt. We reach these consumers by acquiring their
defaulted debt. Through our direct mail and telemarketing operations, these
consumers are offered an opportunity to:

         o        settle their debt, typically at a discount,

         o        transfer the agreed settlement amount to a newly issued
                  unsecured MasterCard(R) or Visa(R) credit card, and

         o        establish a positive credit history on their newly issued card
                  by making timely and consistent payments.

         After six or more consecutive monthly payments have been made on the
consumer's outstanding credit card balance we consider the account seasoned and
available to sell or securitize. Because the focus of our business is to convert
defaulted debt into seasoned credit cards, we periodically sell or securitize
portfolios of these seasoned accounts.

         In December 1996, we acquired from Taxter One all the capital stock of
a company which had been engaged through a subsidiary, Service One
International, since January 1996 in the business of acquiring non-performing
consumer debt portfolios and marketing and servicing credit cards generated from
these portfolios. In connection with the acquisition, we changed our name to
Credit Store, Inc. Prior to the acquisition, we discontinued operations of our
prior line of business, which was unrelated to our current operations. In
February 1998, we merged the acquired subsidiary and another wholly owned
subsidiary, Credit Store Mortgage, Inc., into us. In March 1998, we merged with
Service One International and changed our name to The Credit Store, Inc.

         We have five wholly owned subsidiaries: Credit Store Services, Inc.,
Credit Store Capital Corp., American Credit Alliance, Inc., TCS Funding IV, Inc.
and TCS Funding V, Inc. Credit Store Services, Inc., a qualifying special
purpose entity established in July 2000, and Credit Store Capital Corp., a
special purpose entity established in July 2000, acquire non-performing consumer
receivables and contract with us to offer consumers a credit card under our
program or to accept settlements or payment plans. American Credit Alliance,
Inc., established in June 1995, owns a 50% interest in Dakota Card Fund II, a
limited liability company that contracts with us to service non-performing
receivables and credit card receivables that it owns. TCS Funding IV, Inc.,
established in May 2000, and TCS Funding V, Inc., established in May 2001, are
qualifying special purpose entities created in connection with securitizations
for the purpose of purchasing performing credit card receivables from us.


INDUSTRY OVERVIEW

         We operate in the consumer finance industry, competing with issuers of
revolving credit products and other buyers of non-performing consumer debt.

         The United States Federal Reserve reported that American consumers owed
an aggregate of $1.58 trillion of debt as of July 2001, and that the size of the
revolving credit market in the United States was in excess of $693 billion as of
July 2001, up from $631 billion in July 2000. The United States Federal Reserve
also reported that pools of securitized revolving credit assets totaled $377


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billion as of July 2001, up from $330 billion as of July 2000. We believe the
purchasing convenience associated with unsecured credit cards has driven the
growth of credit cards and has made them the preferred consumer credit vehicle.
In addition, we believe the purchase of consumer goods and services over the
Internet will continue to fuel the demand for credit cards. We also believe the
relative liquidity and predictability of these assets has fostered the
widespread acceptance of revolving credit securitizations by investors.

         While traditional banking organizations have enjoyed significant
advantages in consumer lending compared to non-bank providers of consumer loans,
greater access to capital and the emergence of securitization markets, coupled
with technological advances, has allowed non-banks to compete effectively with
banks in this arena. We believe future success in the credit card industry will
continue to be experienced primarily by highly focused organizations that are
adept at using information and technology to market their products and manage
risk within their portfolios.

         Credit card issuers make credit cards available to their clients in a
variety of ways. Many issuers offer cards as a convenience to existing clients,
a strategy to create greater affinity and client loyalty. This is generally the
case with credit cards offered by department stores, who offer private label
credit cards, as well as smaller banks and credit unions. In contrast, the
larger credit card issuers, who control the vast majority of the market, use
mass mailing of credit card offers to consumers as the most cost-effective means
of achieving the growth rates they seek. Often this process is accomplished by
obtaining a list of names of individuals who meet the issuer's credit guidelines
from one of the national credit bureaus.

         We, however, source our customers by purchasing non-performing consumer
debt from banks and financial companies. We believe the purchase of charged-off
debt is an efficient means to source new credit card customers in our target
market. We believe the market for buying and selling non-performing consumer
debt portfolios has expanded due to a steadily increasing volume of charged-off
consumer debt coupled with a shift by originating institutions toward selling
their portfolios of non-performing consumer loans. Historically, originating
institutions had relied on large internal collection staffs for their initial
collection efforts and outside collection agencies for accounts delinquent more
than 180 days. As buyers emerged to purchase non-performing debt, originating
institutions have increasingly sold these portfolios for cash. Institutions will
usually sell accounts when the market prices exceed the net present value of
retaining and working the accounts. In deciding whether to sell accounts,
sellers also evaluate the potential return on investment from reinvesting the
cash proceeds from portfolio sales in the core operations of originating and
servicing new loans.

         According to Faulkner & Gray, a leading receivables management
publisher, the sales volume of charged-off debt by initial credit grantors grew
from $2.5 billion in 1990 to an estimated $52.0 billion in 2000. The 2000
estimate includes resale volume, which is when debt buyers sell accounts to
other debt buyers. Sellers sell non-performing receivables in a number of ways.
Some originating institutions pursue auction type sales by constructing a
portfolio of receivables and seeking bids from specially invited competing
parties. This approach has resulted in an increase in the number of receivables
portfolios offered for sale by account brokers. Other means of selling
receivables include privately negotiated direct sales where the originating
institution contacts known, reputable purchasers. Originating institutions have
also entered into "forward flow" sales contracts. These contracts require an
originating institution to sell some or all of its receivables that meet
specified criteria, such as balance size and elapsed time since delinquency, to
a single purchaser during a specified period of time for an agreed on price.

BUSINESS OPERATIONS

         Our operations integrate the following disciplines: (1) portfolio
acquisitions and divestitures; (2) scrubbing and modeling; (3) marketing,
settlement and card origination; (4) cardholder services; and (5) receivables
sales and securitizations.

         PORTFOLIO ACQUISITIONS AND DIVESTITURES:
         ---------------------------------------

         We acquire a variety of types of non-performing consumer debt
including, but not limited to credit card receivables, consumer installment
loans, cellular phone contracts, and automobile deficiencies on a nationwide
basis, from a wide range of originating institutions, including banks and
financial companies. We have acquired in excess of $6.5 billion in receivables.
A typical portfolio contains between 5,000 and 150,000 consumer accounts that
typically were charged-off by the original lending institution and passed
through various stages of collection efforts. Usually, the size of each account
is between $1,000 and $6,000, with an average balance of approximately $2,100.
We purchase portfolios for prices typically ranging from 0.50% to 3.00% of the
receivable balance.

         After acquiring a portfolio, we conduct an analysis to determine which
accounts in the acquired portfolio should be returned to the seller because they
do not meet the criteria established under the terms of the portfolio
acquisition agreement. Although the


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terms of each portfolio acquisition agreement differ, examples of accounts that
may be returned under a typical portfolio acquisition agreement include debts
paid off prior to our acquisition, debts in which the consumer filed bankruptcy
prior to our acquisition and debts in which the consumer was deceased prior to
our acquisition. Typically, the agreement with the seller of the portfolio
allows us to return these non-qualifying accounts for a specified period of
time, which is generally between 120 and 180 days from the date of purchase.
Under the typical portfolio acquisition agreement, the seller either replaces a
returned account or refunds the portion of the purchase price attributable to
the account.

         An increasing portion of our acquisitions come from our "cash for
conversions" or "CFC" program, through which we pay the seller an agreed on
price for each account we convert to a credit card. Under a CFC, we typically
pay a higher price per account, but we only pay for the accounts we convert to a
credit card. The price paid per account under a CFC is negotiated with the
seller and depends on many factors including the market demand for the portfolio
under consideration. At the end of the CFC term, unconverted accounts are
returned to the seller.

         The consumer debt and credit card industries generally categorize
delinquent and charged-off accounts into three groups: primary, secondary and
tertiary. Primary accounts are typically 120 to 270 days past due and are in the
process of being placed with collection agencies or collection attorneys for the
first time. Secondary accounts are 270 to 360 days past due and may have already
been placed with one collection agency. Tertiary accounts have already been
placed unsuccessfully with more than two collection agencies. Most of the
accounts we acquire are secondary and tertiary accounts.

         We have also purchased tertiary accounts which are "out of statute." An
"out of statute account" is one in which the statute of limitations for
collection of the debt has expired. Debt that is "out of statute" will not be
enforced by a court of law. Accordingly, the likelihood of recoveries from such
accounts is lower than on accounts that are currently enforceable by a court of
law. These accounts are generally less attractive to buyers who employ a
collection strategy and, consequently, we pay less for "out of statute" accounts
than for "in statute" accounts. We actively purchase "out of statute" accounts
because we believe our approach, which offers the consumer the utility of a
credit card, is attractive to consumers who have typically been unable to
qualify for a traditional bank credit card. We market to "out of statute"
accounts in a fashion similar to the way we market to other potential consumers,
but provide specific and detailed disclosure to the customer on the legal status
of an "out of statute" account. Our policy is that we neither litigate nor
threaten to litigate "out of statute" accounts.

         We continually seek new non-performing portfolios for purchase. Once
new portfolios are located, an acquisition team is responsible for:

         o        coordinating due diligence;
         o        stratifying and analyzing the portfolio characteristics;
         o        projecting conversions to new credit cards and the total cash
                  collections on the account;
         o        preparing bid proposals for review and approval by our senior
                  management;
         o        processing and tracking the bids;
         o        documenting and closing the purchase; and
         o        coordinating the receipt of account documentation for the
                  acquired portfolios.

         We use our proprietary analytical methodology and database to evaluate
a potential portfolio purchase. We have developed a large and valuable database
of performance characteristics from the over $6.5 billion of receivables we
acquired since 1996 that enables us to estimate future portfolio performance.
For each portfolio we seek to acquire, we build a financial model that projects
all cash inflows and outflows associated with the acquisition, including:

         o        the number and dollar amount of credit cards that we will
                  originate;
         o        the cost to originate these accounts;
         o        the amount of net cash flows these cards will generate during
                  the time we own the receivables;
         o        the cost to service these accounts;
         o        the amount of cash received from non-card accounts and the
                  cost to collect this cash; and
         o        the amount of cash we will receive from the securitization and
                  sale of receivables.

         The net present value of these cash flows are used to establish the
portfolio price we offer to pay.



                                       4
<PAGE>


          We have developed a discipline of reselling unconverted accounts into
the secondary market. In general, we resell portfolios of unconverted accounts
when the price that other debt buyers are willing to pay exceeds the net present
value of the cash flows that we expect to generate over the remaining life of
the portfolio. We calculate the net present value of each portfolio on a monthly
basis. To date, we have resold over $2 billion of non-performing debt into the
secondary market.

          SCRUBBING AND MODELING:

          In our experience, much of the account information contained in the
portfolios we acquire is stale. Accordingly, once a particular portfolio has
been purchased, a "scrubbing" process begins. Scrubbing describes the process of
electronically updating phone numbers and addresses on each account purchased
and searching for bankrupt and deceased accounts. We have a scrubbing contract
with Riskwise, a subsidiary of Lexis-Nexis specializing in locating consumers
with little or no credit history. We believe using third-party scrubbing
services produces quality results and allows us to efficiently focus our
resources on marketing and servicing our customers.

          We have also developed proprietary scoring models in conjunction with
Riskwise using our data on the over $6.5 billion in receivables we have acquired
to date. These models allow us to focus on accounts with the best marketing
potential. As we continue to develop and deploy more refined models, we believe
they will allow us to refine our marketing campaigns by lowering our cost to
originate and service our credit card accounts.

         MARKETING, SETTLEMENT AND CARD ORIGINATION:
         ------------------------------------------

          Once a portfolio acquisition is completed and the portfolio has been
scrubbed, the receivables and accounts in the acquired portfolio are processed
by our marketing, settlement and card origination departments. We believe that
our consumer friendly and hands-on approach is a key component of our business
strategy. Many of the receivables we acquire represent obligations of
individuals who have, in the past several years, experienced some life-altering
event, such as divorce, career displacement or major medical illness, and have
recovered or currently are recovering financially from their setback. We contact
potential customers through direct mail and by telephone and offer them the
opportunity to settle their debt and obtain an unsecured credit card which they
can use to make new purchases.

          We operate a 25,000 square foot mail center in Sioux Falls, South
Dakota. Our mail center is equipped with high-speed printing, folding,
inserting, zip sorting and mailing equipment capable of sending 180,000 pieces
of mail a day. Having our direct mail operations in-house allows us to manage
high quality direct mail campaigns in a cost-effective manner. Our mail center
is linked electronically with our operation center, allowing our mail center to
receive database information to print and mail specific mail campaigns. We also
maintain a trained sales force that operates from our Sioux Falls, South Dakota
headquarters. The group is supported by a state-of-the-art auto-dialer, which
enables sales agents to effectively manage their large inventory of accounts. We
employ approximately 45 sales agents and we currently have space and system
capacity to significantly expand our telemarketing sales force. The auto-dialer
enhances productivity via high-speed dialing coupled with a screening process to
detect no-answers, nonexistent numbers and answering machines. This technology
allows our sales agents to concentrate their efforts on actual customers. In
addition to outgoing calls, we receive incoming calls that are prompted by
mailings. Incoming calls are routed directly to the telemarketing department
where sales agents service the inquiry. Our sales agents are trained to
understand our customer base, keeping in mind that the individual has
experienced the collection efforts of several agencies.

          A customer who accepts our offer, and meets our underwriting
guidelines, is issued a new unsecured credit card by one of our unaffiliated
issuing banks. The card has an outstanding balance and credit limit equal to the
agreed settlement amount. The settlement amount is negotiated between our sales
agent and the consumer. Historically, the average discount ranges between 20%
and 30% of the amount owed to us per account, which may include accrued interest
from the date of original default. The discount offered to a particular account
will depend on several factors including the customer's ability, based on their
income, to make the minimum monthly payments.

          As the customer makes principal payments on the outstanding balance,
the customer frees up the credit limit for new purchases. In addition, we report
the payment history on the credit card to the major credit bureaus giving our
customers an opportunity to establish a positive payment history on their credit
record by making timely and consistent payments.

          We believe our credit card product affords us more flexibility in
working with the customer than the originating institution or third-party
collection agency who are simply attempting to recover all or a portion of the
amount owed. Factors that contribute to this increased flexibility include:



                                       5
<PAGE>


         o        our ability to settle the account for an amount that fits
                  within the customer's budget because we typically acquire
                  accounts for between 0.50% and 3.00% of the actual outstanding
                  balance;
         o        our ability to offer a new unsecured credit card which has
                  utility to the customer due to its revolving nature;
         o        our freedom from many of the regulatory constraints and
                  corporate philosophies that influence account resolution
                  decisions of banks, savings and loans and other financial
                  institutions; and
         o        our ownership of the accounts which frees us from the time
                  limitations on collecting funds generally faced by third-party
                  collection agencies.

         The table below summarizes our standard credit card program as
currently offered:


               Initial Credit Line:          Settlement amount
               Annual Fee:                   $0 the 1st year; $35 annually
                                             thereafter
               Interest Rate:                18.9% or 19.9%
               Grace Period:                 25 Days
               Late Fee:                     $10.00 - $19.00
               Over Limit Fee:               $10.00 - $19.00
               Cash Advance Fee:             Greater of 2% or $10.00
               Minimum Payment:              Greater of 3% or $10.00


         Applicants failing to meet our underwriting or exception criteria are
notified of denial in accordance with the Equal Credit Opportunity Act. We offer
these applicants, as well as any customer who does not wish to establish a new
credit card account, installment and lump sum payment options to settle their
debt. Applicants who meet our underwriting guidelines or exception criteria are
notified of acceptance into the program and issued a card. Although the initial
credit limit of the credit card is fully utilized when issued, an applicant
regains availability of credit on the card as and to the extent the applicant
makes principal payments. After establishing a positive payment history a
customer may request a credit increase. Guidelines change periodically and
depend on the customer's payment history but in general, a customer can request
a credit line increase after their first payment, sixth payment, and annually
thereafter. Our primary underwriting guidelines center on reported annual income
and validation of contact information supplied by the customer. Historically,
over 90% of applicants have qualified for a credit card.

         Once a customer has accepted our offer and has cleared the underwriting
process, the relevant data is transmitted to First Data Resources to establish a
new account on First Data Resources' credit card processing system and to one of
two unaffiliated South Dakota based banks, The First National Bank in Brookings
and Plains Commerce Bank (fka The Bank of Hoven) so that a Visa or Mastercard
may be issued. First Data Resources is a subsidiary of First Data Corporation, a
provider of information processing and related services, including cardholder
processing and merchant processing, for major financial institutions throughout
the United States. We have arranged, through First Data Resources to provide
some of our cardholder services including:

         o        data processing;
         o        card issuance;
         o        monthly customer statement processing; and
         o        customer correspondence.

         We believe that outsourcing these services to First Data Resources
gives us operational efficiencies and the flexibility to handle additional
growth. We believe that outsourcing the credit card issuance function to
unaffiliated banks has allowed us to use our capital to acquire portfolios and
build our marketing and servicing operations. We may in the future consider
applying for a bank charter or acquiring an existing bank.

         We also offer the convenience of an Automatic Payment Program to our
customers. Under this program, the customer authorizes us to withdraw from the
customer's bank account the monthly minimum credit card payment. Approximately
14% of our customers are currently using the Automatic Payment Program. Accounts
on the Automatic Payment Program have a lower incidence of delinquency than
those accounts that are not on the Automatic Payment Program.



                                       6
<PAGE>


         CARDHOLDER SERVICES:
         -------------------

         We believe that to maximize the customer's payment performance, it is
imperative to have a sophisticated, highly structured hands-on approach to
educating and servicing the customers and addressing situations that would
result in default without our attention and assistance. Our cardholder services
group conducts our "Welcome Aboard" program verifying the customer has received
the credit card, thoroughly understands the program and knows how to use the
credit card. In addition, they place calls to customers at other critical times,
including shortly before the first payment is due. These calls are a part of our
educational approach with customers that stresses the importance and benefits of
making timely and consistent payments.

         The cardholder services group handles calls from customers regarding
their accounts, including:

         o        balance inquiries;
         o        billing inquires and disputes;
         o        requests for replacement cards; and
         o        requests for temporary credit line increases and requests for
                  evidence of account activity.

         Cardholder services representatives counsel the customer on use of the
card and continue the process of instilling the importance and benefits of
making timely and consistent payments.

         Our cardholder services group is also responsible for collection of
delinquent credit card accounts in a prompt, professional and thorough manner in
order to reduce net credit card losses. We use state of the art predictive and
power dialing technology to maximize collector productivity and heavily
emphasize "instant payment" products such as Western Union Quick Collect.
Collection calls are prioritized using a special scoring model implemented
through the First Data Resources servicing platform and are based on models
developed by us for our specific customer base. We maintain a strict re-age
policy which allows accounts to be re-aged if the cardholder displays a desire
to correct the status of the account as well as an ability to continue making
monthly payments on the account. We have systemic restrictions in place which
prevent customer service representatives from performing unauthorized re-aging
of accounts. In an effort to maximize cash flow, the settlement of an account
may be negotiated in cases where we have determined that the account is destined
to become a charge-off and there is no potential to retain the customer.
Accounts are charged off and taken as a loss either after formal notification of
bankruptcy or when they become contractually 180 days past due. Accounts
identified as fraud losses are immediately reserved for and charged off no later
than 90 days after the last activity. Our collections department manages
recovery efforts on charged-off accounts.

         RECEIVABLE SALES AND SECURITIZATIONS:
         ------------------------------------

         An important piece of our business strategy is to securitize seasoned
receivables and/or sell seasoned receivables to third parties for cash. When we
complete a sale or securitization we typically realize a gain in an amount equal
to the excess of the cash proceeds from the sale or securitization over our cost
basis in the receivables for those receivables carried on our financial
statements under the cost recovery accounting methodology or an increase rate in
the return on receivables in the month of sale and over the remaining life of
the portfolio for those portfolios carried on our financial statements under the
accrual accounting methodology. See "Management Discussion and Analysis -
Accounting for Investment and Receiving Portfolios."

         As part of the securitization process, we sell receivables in a pool of
designated credit card accounts to a wholly owned bankruptcy remote qualifying
special purpose entity. In the securitizations completed to date, the qualifying
special purpose entity entered into a financing agreement with a lender under
which the lender made one or more non-recourse loans to the qualifying special
purpose entity. The non-recourse loans are secured by all credit card
receivables owned or thereafter acquired by the qualifying special purpose
entity. In addition, we agreed to provide servicing on the pledged receivables
for a market rate servicing fee.

         We currently consider an account seasoned and available to sell or
securitize when the consumer has made six or more consecutive monthly payments
on the outstanding credit card balance. The number of payments we require a
consumer to make before an account is considered seasoned is based on conditions
in the market for securitizations and sales of receivables. If the purchasers of
receivables, or the lenders who finance our securitizations, were to change the
criteria they use to evaluate if a receivable may be purchased or securitized,
we would likely adjust the number of payments required.

         We have significant ongoing cash needs to fund our operations and to
fund the purchase of non-performing consumer debt portfolios. We use a variety
of debt instruments to fund our cash needs, which include subordinated debt,
senior secured debt, capital



                                       7
<PAGE>


leases, and non-recourse debt. The ability to borrow based on the collateral
value of our asset base is integral to our operations and growth plans.

         Our ability to sell or securitize the receivables and/or finance these
receivables on balance sheet is critical to the future and growth of the
business. To finance, sell or securitize our receivables, we maintain a detailed
database that records the status and performance of each receivable in our
portfolios. We must maintain this database to provide historical performance
information to potential lenders and purchasers of our receivables. Potential
lenders and purchasers assess our portfolio of receivables according to a
variety of factors including monthly repayment rates by the cardholders and
annualized default rates.

         As of June 30, 2001, we had completed six securitizations. In each
case, we established a new wholly-owned qualifying special purpose entity which
is not included in our financial statements. Five of the qualifying special
purpose entities were established for the purpose of purchasing performing
credit card receivables from us and one was established for the purpose of
purchasing non-performing receivable portfolios. We currently hold retained
interests in three of these qualifying special purpose entities. We sold our
retained interests in three of our qualifying special purpose entities during
fiscal 1999 resulting in a pre-tax gain of approximately $6.5 million.

         The activities of the qualifying special purpose entities are
significantly limited. Qualifying special purpose entities may only hold passive
assets and cannot be dissolved by us. These restrictions on qualifying special
purpose entities are required so that securitizations may be accounted for as
sales under the provisions of SFAS No. 140. The retained interest in the
securitized credit card receivables is treated as a debt security classified as
available-for-sale in accordance with SFAS No. 115.

         Summarized data on the three qualifying special purpose entities in
which we held a retained interest on June 30, 2001 is as follows:


<TABLE>
<CAPTION>
                                                                                                             Retained
                                                            Total          Outstanding      Credit Card     Beneficial
          Name                     Asset Type            Credit Line          Debt          Receivables      Interest
          ----                     ----------            -----------          ----          -----------      --------
<S>                         <C>                        <C>                 <C>              <C>              <C>
TCS Funding V, Inc.        Performing Receivables      $4,000,000              $3,969,126      $5,704,267         15%

TCS Funding IV, Inc.       Performing receivables      $40,000,000            $10,000,000     $14,699,345         15%

Credit Store Services,     Non-performing receivables  $25,000,000             $6,266,132      $9,466,137          5%
Inc.
</TABLE>


COMPETITIVE CONDITIONS

          We experience competition in all aspects of our business operations.
We compete with a wide range of third-party collection companies and other
financial services companies seeking to purchase portfolios of non-performing
consumer debt and with traditional collection companies seeking consignments of
non-performing debt for collection. We also compete with companies that provide
financing to consumers that have previously defaulted on a debt obligation.

            As more buyers enter the market to purchase portfolios of
non-performing consumer debt, the price for the purchase of these portfolios may
increase and our business strategy may become less profitable or viable. Some of
these competitors may have substantially greater personnel and financial
resources than we do. In addition, to the extent consumers with negative credit
histories have less difficulty obtaining credit, especially obtaining unsecured
credit cards, there may be less consumer demand for our product.

          We believe we compete effectively by using what we believe are
superior information technology capabilities, which enable us to evaluate and
purchase receivables more effectively than some of our competitors. We are
unaware of any competitors that have a database like ours that contains
information on over $6.5 billion in defaulted debt and how these accounts
convert and subsequently perform on a new credit card. Further, we believe we
differentiate ourselves from most of our competitors through our innovative
credit card program, which allows the consumer to resolve a prior obligation in
a positive manner, gaining the utility of a new credit card and establishing a
positive payment history on their credit record. Virtually all our competitors
who buy non-performing debt employ a collection strategy.



                                       8
<PAGE>


         We anticipate that additional competitors will seek to enter our niche
within the financial services market. Because of the high costs of developing
and servicing a credit card program and the high costs of acquiring
non-performing consumer debt, we believe that new competitors will likely be
large, established finance companies, or large collection agencies seeking
additional recovery methods for non-performing debt.

GOVERNMENT REGULATION

         Our collection practices, business operations and credit card
receivables are subject to numerous federal and state consumer protection laws
and regulations imposing licensing and other requirements with respect to
purchasing, collecting, making and enforcing consumer loans. We conduct periodic
internal compliance tests on a sample of accounts and, if necessary, implement
procedures to bring us into compliance with all applicable state and federal
regulatory requirements. Additionally, we contract with an external firm to
perform an annual compliance audit, the findings of which, if any, are addressed
through procedure and process enhancements. Our failure to comply with such
statutes or regulations could have a material adverse effect on our consolidated
results of operations or consolidated financial condition.

         The federal Fair Debt Collection Practices Act and comparable state
statutes establish specific guidelines and procedures that debt collectors must
follow to communicate with consumer debtors, including the time, place and
manner of such communications. Our policy is to comply with the provisions of
the Fair Debt Collection Practices Act and comparable state statutes in all of
our collection activities, although we may not be specifically subject to these
laws. If these laws apply to some or all of our collection activities, our
failure to comply with such laws could have a material adverse effect on our
consolidated results of operations and consolidated financial condition.

         As a purchaser of consumer receivables, we may acquire, as part of a
portfolio, receivables subject to legitimate claims, defenses or rights of
offset on the part of the consumer. As a result, we may not be able to collect
on these receivables. For example, as previously described, we acquire "out of
statute" accounts which are subject to a statute of limitations defense, and we
may also acquire some credit card accounts where customers cannot be held liable
for, or their liability may be limited with respect to, charges to a credit card
account that were a result of an unauthorized use of a credit card.

         While we are not a bank or credit card issuer, portions of our
operations are affected by federal and state consumer protection and related
laws and regulations that apply to the marketing and extension of credit by a
bank or credit card issuer because many of our receivables are originated
through credit card transactions. Significant laws include:

         o        the Truth-In-Lending Act;
         o        the Fair Credit Billing Act;
         o        the Equal Credit Opportunity Act;
         o        the Fair Credit Reporting Act;
         o        the Fair Debt Collection Practices Act;
         o        the Electronic Funds Transfer Act and the Federal Reserve
                  Board's regulations which relate to these acts; and
         o        comparable statutes in those states in which customers reside
                  or in which the originating institutions are located.

         State laws may also limit the interest rate and the fees that a credit
card issuer or other consumer lender may impose on its customers. Among other
things, the laws and regulations applicable to credit card issuers impose
disclosure requirements when a credit card account is advertised, when it is
applied for, when it is opened, at the end of monthly billing cycles and at year
end. Federal law requires credit card issuers to disclose to consumers the
interest rates, fees, grace periods and balance calculation methods associated
with their credit card accounts, among other things. In addition, customers are
entitled under current laws to have payments and credits applied to their credit
card accounts promptly, to receive prescribed notices and to require billing
errors to be resolved promptly. In addition, some laws prohibit discriminatory
practices in connection with the extension of credit. Failure by the originating
institutions or by us to comply with applicable statutes, rules and regulations
could create claims and/or rights of offset by the customers which could have a
material adverse effect on us.

         Changes in these laws or regulations, or in their interpretation or
application, could have a material adverse effect on us. Various proposals which
could affect our business have been introduced in Congress in recent years,
including proposals relating to:

         o        imposing a statutory cap on credit card interest rates;
         o        substantially revising the laws governing consumer bankruptcy;

                                       9
<PAGE>


         o        limiting the use of social security numbers;
         o        restricting the ability of banks to issue credit cards for
                  unaffiliated third parties;
         o        permitting affiliations between banks and commercial,
                  insurance or securities firms; and
         o        other regulatory restructuring proposals.

         There have also been proposals in state legislatures in recent years
to:

         o        restrict telemarketing activities;
         o        impose statutory caps on consumer interest rates;
         o        limit the use of social security numbers; and
         o        expand consumer protection laws.

         It is impossible to determine whether any of these proposals will
become law and, if so, what impact they might have on us and our consolidated
results of operations and consolidated financial condition.

         Due to the consumer-oriented nature of the collections and credit card
industry, there is a risk that we or other industry participants may be named as
defendants in litigation involving alleged violations of federal and state laws
and regulations, including consumer protection laws and consumer law torts
including fraud. A significant judgment against us or within the industry could
have a material adverse effect on our consolidated results of operations or
consolidated financial condition. See "Legal Proceedings."

EMPLOYEES

         As of June 30, 2001, we had 288 employees. No employee group is covered
under a collective bargaining agreement. We believe our relationship with our
employees is good.

TECHNOLOGY AND SYSTEMS

         We utilize a variety of management information and telecommunications
systems to enhance productivity in all areas of our business. We utilize the
latest technology in our operations and employ multiple levels of backup to
minimize the risk of systemic breakdown. We believe that advanced technology is
key to maintaining a competitive advantage and we seek to maximize the use of
technology. New technologies are continually evaluated for business
appropriateness and cost effectiveness.

         We use a proprietary credit card origination and servicing system
("NOCS") which services all aspects of our operation from the time a new
portfolio is acquired until an account is converted to a new credit card and set
up on the First Data Resources credit card servicing platform. NOCS includes
specialized applications for our direct mail operation, telesales, underwriting,
non-card collections, payment processing, account scrubbing, portfolio
stratification and customer service.

         The overall computing platform is a client-server, Windows NT/SQL
based, and is scaleable to accommodate our growth plans. We employ the latest
technology in telephony, including a predictive auto-dialer and voice
recognition technology. The telephony platform is capable of supporting in
excess of 2,000 workstations and we believe it is easily expandable to
accommodate our growth plans.

         We use image-based technology and processing to minimize paper flow
wherever possible. We have also invested in the latest electronic data
warehousing technologies to support our data mining strategies. We believe data
warehousing gives us a distinct competitive advantage in the portfolio analysis
and acquisitions aspect of our business. In addition, we believe data
warehousing will give us an advantage in the securitization markets through our
ability to provide a sophisticated level of performance detail to investors.

         We employ several layers of security to prevent unauthorized access to
our data and to protect our proprietary systems and methodologies. We also have
non-compete agreements with key employees who develop and manage our proprietary
models.

         We maintain a website at www.creditstore.com and we own the domain
name. We use the website to attract potential employees and provide information
to our business partners. In addition, credit card customers can access
information about their account and make payments on their account through our
website.



                                       10
<PAGE>


THIRD-PARTY SERVICING

          In addition to our accounts, at June 30, 2001, we serviced over 39,000
performing credit card accounts under third party servicing agreements. Almost
all of these accounts are held by our unconsolidated qualifying special purpose
entities. We receive a market rate fee on a monthly basis for servicing these
accounts. We serviced accounts for TCS Funding IV, Inc., TCS Funding V, Inc. and
Credit Store Services, Inc., for which we recorded $927,515, $46,380 and
$1,912,378, respectively, in servicing fees in fiscal 2001. We also serviced
accounts for third parties that have acquired accounts from us for which we
recorded $89,457 in servicing fees. In addition, we service the accounts covered
by the repurchase agreement with Plains Commerce Bank and receive the net cash
proceeds of the receivables in excess of the yield and fees owing to the bank As
servicer of these accounts, we must meet certain standards and financial
covenants. A default under these covenants may permit the account owners to
terminate the servicing agreements resulting in a loss of the associated
servicing fees. We intend to concentrate on servicing our own accounts and
accounts that we have either securitized or sold to third party purchasers.

ITEM 2.  PROPERTIES

         Our headquarters consist of a 30,000 square foot leased facility in
Sioux Falls, South Dakota. The lease expires on September 30, 2011. We own an
additional five acres of undeveloped property adjacent to this site that can be
utilized for expansion purposes.

         Our mail center consists of a separate 25,000 square foot leased
facility in Sioux Falls, South Dakota. The lease expires on February 28, 2002.
We plan to renew this lease in the ordinary course of business.

ITEM 3.  LEGAL PROCEEDINGS

         In the ordinary course of business, we receive notices of consumer
complaints from regulatory agencies and are named as a defendant in legal
actions filed by those who have been solicited to participate in our credit card
programs. Except as described below, we do not believe any of these ordinary
course of business claims will have a material effect on our consolidated
financial condition or consolidated results of operations. We believe we have
meritorious factual and legal defenses in each of these cases and are defending
these lawsuits vigorously. Because we have been successful in defending
ourselves in other similar proceedings arising in the ordinary course of our
business, we do not believe that these suits will have a material adverse effect
on our consolidated financial position and consolidated results of operations.
However, a significant judgment against us in one or more of the lawsuits could
subject us to a monetary judgment and/or require us to modify our methods of
operation, either of which could have a material adverse effect on our
consolidated results of operations or consolidated financial condition.

         On May 21, 1999, we were sued on behalf of a class of Arizona debtors
in the United States District Court for the District of Arizona in an action
titled Bingham v. The Credit Store, Inc. Our motion to dismiss this case was
granted and the suit has been dismissed. The ruling is subject to a motion for
reconsideration which is pending.

         On August 25, 2000, we were named as a co-defendant in an action
brought on behalf of a class of debtors in the United States District Court for
the Eastern District of Texas in an action titled Barnett v. Experian
Information Solutions, et al. The plaintiffs claim that their debt was
improperly reported as a bad debt on a credit-reporting bureau, Experian
Information Solutions, Inc., which was also named as a defendant. On February
13, 2001 the plaintiffs amended their complaint to assert claims against us
under the Fair Debt Collection Practices Act and RICO and seek unspecified
actual damages, treble damages under RICO, punitive damages, and statutory
damages of up to $500,000 under the Fair Debt Collection Practices Act. A motion
for class certification and motions to dismiss are pending before the court.

         On October 20, 2000, we were named in an action brought on behalf of
California debtors filed in the Superior Court for the State of California, San
Diego County, titled Maugeri v. The Credit Store, Inc., et al. The plaintiffs
seek damages and injunctive relief barring us from offering our credit card
program to debtors whose debt is out-of-statute and/or cannot be reported on a
credit bureau as bad debt. Claims are asserted against us under the California
Business and Professions Code and related state statutes. A motion to certify
the class action status of the plaintiffs is pending, and the suit is currently
in mediation.

         In addition, during the past twelve months we have settled or have
obtained the dismissal of four other actions, including one class action that
was the consolidation of three separate class actions.



                                       11
<PAGE>


         On April 23, 2001, we were sued by Renaissance Trust I in the United
States District Court for the Southern District of New York in an action titled
Renaissance Trust I v. The Credit Store, Inc. The plaintiffs alleged breach of a
Mutual Business Development Agreement and conversion and seek enforcement of the
contract, compensatory damages alleged to be in excess of $5 million, and
punitive damages of $25 million. Renaissance Trust I owns 4,000,000 shares of
our common stock and 400,000 shares of our Series B Preferred Stock. On June 29,
2001, the Court dismissed the conversion claim and dismissed the demand for
punitive damages. This case is in an early stage and no assurance can be given
as to its outcome. We have also been informed by O. Pappalimberis Trust that
they intend to file suit against us alleging breach of a second Mutual Business
Development Agreement. This matter is in an early stage and no assurances can be
given as to its outcome.

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

Not applicable.


                                     PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

MARKET PRICE OF AND DIVIDENDS ON THE COMPANY'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS

Since August 28, 2000, our common stock has traded on the American Stock
Exchange under the trading symbol "CDS". Before August 28, 2000, our common
stock was traded on the Over The Counter Bulletin Board under the trading symbol
"PLCR".


The high and low sale prices for the our common stock for each quarter for the
past two fiscal years were as follows:

         Fiscal
         Period                      High             Low
         ------                      ----             ---
2000     First Quarter             $ 3 13/16        $2 1/4
         Second Quarter              5 3/4           2 1/2
         Third Quarter               5 1/4           3 15/16
         Fourth Quarter              5 1/2           3 1/4

2001     First Quarter             $ 4.81            $3.69
         Second Quarter              4.69            2.19
         Third Quarter               3.19            1.85
         Fourth Quarter              2.05            1.52


         As of June 30, 2001, there were approximately 230 holders of record of
our common stock.

         We have not paid any dividends on our common stock during the past two
fiscal years and do not anticipate paying dividends on our common stock in the
foreseeable future.

         As of June 30, 2001, accumulated but undeclared and unpaid dividends on
preferred stock amounted to approximately $6.2 million. These dividends have not
been declared by our board nor paid by us, so they remain outstanding
obligations. Dividends have not been paid because we believe it to be in our
best interest at this time to retain our earnings to reinvest in our operations.

         Our board of directors will review our dividend policy from time to
time to determine the feasibility and desirability of paying dividends, after
giving consideration to our results of operations, financial condition, capital
requirements and such other factors as the board of directors deems relevant.

         In addition, the terms of our senior secured revolving credit facility
with Coast Business Credit, the terms of our agreement, as servicer and
originator of the accounts owned by TCS Funding IV, Inc. with TCS Funding IV,
Inc.'s lender, and the terms of our



                                       12
<PAGE>


agreement, as servicer and originator of the accounts owned by TCS Funding V,
Inc., with TCS Funding V, Inc.'s lender restrict our ability to pay dividends on
our common and preferred stock.

         There can be no assurance that dividends of any kind will ever be paid.

RECENT SALES OF UNREGISTERED SECURITIES

         We issued the following securities during the prior three fiscal years
without registering the securities under the Securities Act of 1933, as amended:

Issuance of Capital Stock:


     1.   On May 29, 1998, we issued 10,000 shares of Series D Preferred Stock
          to J.L.B. of Nevada, Inc. ("JLB") in exchange for JLB agreeing to
          cancel $10.0 million of the principal outstanding under the $10.0
          million Subordinated Promissory Note dated August 1, 1997. Each share
          of Series D preferred stock may be exchanged for 380 shares of Common
          Stock.

     2.   On August 31, 1998, we issued 10,000 shares of Series E Preferred
          Stock to JLB in exchange for JLB agreeing to cancel $10.0 million of
          the principal outstanding under the $20.0 million Subordinated
          Promissory Note dated August 1, 1997. Each share of Series E preferred
          stock may be exchanged for 285 shares of Common Stock.

Grant of Stock Options and Warrants:

     1.   On April 30, 1998, we issued to Coast Business Credit, a division of
          Southern Pacific Bank, a warrant to purchase 650,247 shares of Common
          Stock at an exercise price of $2.50. The warrant was issued in
          connection with a loan from Coast Business Credit to us.

     2.   On August 3, 1998, we granted options to purchase 10,000 shares of
          Common Stock under the Amended 1997 Stock Option Plan at an exercise
          price of $3.00 per share to employees.

     3.   On August 10, 1998, we granted options to purchase 300,000 shares of
          Common Stock under the Amended 1997 Stock Option Plan at an exercise
          price of $2.70 per share to employees.

     4.   On September 15, 1998, we granted options to purchase 10,000 shares of
          Common Stock under the Amended 1997 Stock Option Plan at an exercise
          price of $2.00 per share to employees.

     5.   On November 23, 1998, we granted options to purchase a total of
          150,000 shares of Common Stock under the Amended 1997 Stock Option
          Plan at an exercise price of $2.00 per share to two directors of the
          Company.

     6.   On February 15, 1999, we granted options to purchase 13,000 shares of
          Common Stock under the Amended 1997 Stock Option Plan at an exercise
          price of $2.38 per share to employees.

     7.   On March 17, 1999, we granted options to purchase 200,500 shares of
          Common Stock under the Amended 1997 Stock Option Plan at an exercise
          price of $2.00 per share to employees.

     8.   On March 18, 1999, we issued a warrant to purchase 1,000,000 shares of
          Common Stock to Business Transactions Express, Inc. at an exercise
          price of $2.00 per share. The warrant was issued in connection with
          the execution of a strategic modeling services agreement between us
          and Business Transactions Express, Inc.

     9.   On March 22, 1999, we granted options to purchase 3,500 shares of
          Common Stock under the Amended 1997 Stock Option Plan at an exercise
          price of $2.30 per share to employees.

     10.  On March 29, 1999, we granted options to purchase 3,500 shares of
          Common Stock under the Amended 1997 Stock Option Plan at an exercise
          price of $2.30 per share to employees.



                                       13
<PAGE>


     11.  On April 15, 1999, we granted options to purchase 75,000 shares of
          Common Stock under the Amended 1997 Stock Option Plan at an exercise
          price of $2.19 per share to a director of the Company.

     12.  On May 29, 1999, we issued a warrant to purchase 4,000,000 shares of
          Common Stock to J.L.B. of Nevada, Inc. at an exercise price of $3.25
          per share issued as partial consideration for J.L.B. of Nevada Inc.'s
          forgiveness of certain interest owed by us to J.L.B. of Nevada, Inc..

     13.  On June 1, 1999, we granted options to purchase 503,000 shares of
          Common Stock under the Amended 1997 Stock Option Plan at an exercise
          price of $2.40 per share to employees.

     14.  On July 26, 1999, we granted options to purchase 10,000 shares of
          Common Stock under the Amended 1997 Stock Option Plan at an exercise
          price of $2.88 per share to employees.

     15.  On August 1, 1999, we granted options to purchase 22,000 shares of
          Common Stock under the Amended 1997 Stock Option Plan at an exercise
          price of $3.00 per share to employees.

     16.  On August 3, 1999, we granted options to purchase 10,000 shares of
          Common Stock under the Amended 1997 Stock Option Plan at an exercise
          price of $2.97 per share to employees.

     17.  On August 27, 1999, we granted options to purchase 10,000 shares of
          Common Stock under the Amended 1997 Stock Option Plan at an exercise
          price of $2.69 per share to a consultant.

     18.  On September 1, 1999, we granted options to purchase 1,500 shares of
          Common Stock under the Amended 1997 Stock Option Plan at an exercise
          price of $2.75 per share to employees.

     19.  On September 10, 1999, we issued a warrant to purchase 25,000 shares
          of Common Stock to Cappello Capital Corp. at an exercise price of
          $2.56 per share. The warrant was issued in connection with Cappello
          Capital Corp. providing financial advisory services to us.

     20.  On September 16, 1999, we granted options to purchase 8,000 shares of
          Common Stock under the Amended 1997 Stock Option Plan at an exercise
          price of $2.75 per share to employees.

     21.  On October 18, 1999, we granted options to purchase 2,000 shares of
          Common Stock under the Amended 1997 Stock Option Plan at an exercise
          price of $2.75 per share to employees.

     22.  On October 25, 1999, we granted options to purchase 5,000 shares of
          Common Stock under the Amended 1997 Stock Option Plan at an exercise
          price of $3.13 per share to employees.

     23.  On November 8, 1999, we granted options to purchase 10,000 shares of
          Common Stock under the Amended 1997 Stock Option Plan at an exercise
          price of $3.88 per share to employees.

     24.  On November 19, 1999, we granted options to purchase 310,000 shares of
          Common Stock under the Amended 1997 Stock Option Plan at an exercise
          price of $3.44 per share to employees and a consultant.

     25.  On November 29, 1999, we granted options to purchase 15,000 shares of
          Common Stock under the Amended 1997 Stock Option Plan at an exercise
          price of $5.00 per share to employees.

     26.  On December 1, 1999, we granted options to purchase 2,000 shares of
          Common Stock under the Amended 1997 Stock Option Plan at an exercise
          price of $4.69 per share to employees.

     27.  On January 10, 2000, we granted options to purchase 3,500 shares of
          Common Stock under the Amended 1997 Stock Option Plan at an exercise
          price of $4.03 per share to employees.

     28.  On March 1, 2000, we granted options to purchase 2,000 shares of
          Common Stock under the Amended 1997 Stock Option Plan at an exercise
          price of $4.00 per share to employees.



                                       14
<PAGE>


     29.  On March 20, 2000, we granted options to purchase 5,500 shares of
          Common Stock under the Amended 1997 Stock Option Plan at an exercise
          price of $4.00 per share to employees.

     30.  On April 3, 2000, we granted options to purchase 2,000 shares of
          Common Stock under the Amended 1997 Stock Option Plan at an exercise
          price of $4.00 per share to employees.

     31.  On April 17, 2000, we granted options to purchase 7,500 shares of
          Common Stock under the Amended 1997 Stock Option Plan at an exercise
          price of $4.00 per share to employees.

     32.  On April 24, 2000, we granted options to purchase 3,500 shares of
          Common Stock under the Amended 1997 Stock Option Plan at an exercise
          price of $3.88 per share to employees.

     33.  On May 1, 2000, we granted options to purchase 2,000 shares of Common
          Stock under the Amended 1997 Stock Option Plan at an exercise price of
          $4.88 per share to employees.

     34.  On May 15, 2000, we granted options to purchase 10,000 shares of
          Common Stock under the Amended 1997 Stock Option Plan at an exercise
          price of $4.50 per share to employees.

     35.  On June 1, 2000, we granted options to purchase 2,000 shares of Common
          Stock under the Amended 1997 Stock Option Plan at an exercise price of
          $4.50 per share to employees.

     36.  On June 26, 2000, we granted options to purchase 2,000 shares of
          Common Stock under the Amended 1997 Stock Option Plan at an exercise
          price of $4.38 per share to employees.

     37.  On July 10, 2000, we granted options to purchase 2,000 shares of
          Common Stock under the Amended 1997 Stock Option Plan at an exercise
          price of $4.31 per share to employees.

     38.  On July 17, 2000, we granted options to purchase 2,000 shares of
          Common Stock under the Amended 1997 Stock Option Plan at an exercise
          price of $4.31 per share to employees.

     39.  On July 19, 2000, we granted options to purchase 1,016,900 shares of
          Common Stock under the Amended 1997 Stock Option Plan at an exercise
          price of $4.31 per share to certain employees and at an exercise price
          of $6.47 to certain of our officers and employees.

     40.  On July 24, 2000, we granted options to purchase 2,000 shares of
          Common Stock under the Amended 1997 Stock Option Plan at an exercise
          price of $4.28 per share to employees.

         The sales and issuance described in paragraphs 1-2 under "Issuances of
Capital Stock" and in paragraphs 1, 8 and 19 under "Grant of Stock Options and
Warrants" above were deemed to be exempt from registration under the Securities
Act of 1933, as amended by virtue of Section 4(2), Regulation D promulgated
thereunder. The remaining issuances were exempt from registration under the
Securities Act of 1933, as amended by virtue of Rule 701. The sales and
issuances under Section 4(2) and Regulation D were conducted in a manner to
avoid a public offering, were made to a limited number of financially
sophisticated persons or entities with a high net worth and were not made
pursuant to any general advertising or general solicitation. The sales and
issuances under Rule 701 were offered and sold either pursuant to a written
compensatory benefit plan or pursuant to a written contract relating to
compensation.

         Appropriate legends are affixed to the stock certificates issued in the
aforementioned transactions. Similar legends were imposed in connection with any
subsequent sales of any of these securities. All recipients either received
adequate information about us or had access, through employment or other
relationships, to such information.


                                       15
<PAGE>


ITEM 6.  SELECTED FINANCIAL DATA

         The selected financial data presented below should be read together
with our consolidated financial statements and the notes thereto. The
consolidated statement of operations data with respect to the fiscal years ended
May 31, 1997, 1998, 1999, and 2000, and the fiscal year ended June 30, 2001, and
the consolidated balance sheet data at May 31, 1997, 1998, 1999, and 2000, and
June 30, 2001 are derived from, and are qualified by reference to, our audited
consolidated financial statements. The consolidated financial statements as of
and for the fiscal years ended May 31, 1998, 1999 and 2000, and the fiscal year
ended June 30, 2001 were audited by Grant Thornton LLP, independent auditors.
The consolidated financial statements as of May 31, 1997 and for the fiscal year
ended May 31, 1997, which fiscal year covered the period from October 8, 1996
through May 31, 1997, were audited by Tanner & Co., independent auditors. The
following financial information should be read together with "Management's
Discussion and Analysis of Financial Condition -- Results of Operations" below.





                                       16
<PAGE>


<TABLE>
<CAPTION>
                                                            FISCAL YEAR                            FISCAL YEAR
                                                            ENDED MAY 31,                             ENDED
                                                                                                      JUNE 30,
                                   ------------------------------------------------------------    ------------
                                      1997 **          1998           1999            2000           2001
                                   ------------    ------------    ------------    ------------    ------------
<S>                                <C>             <C>             <C>             <C>             <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:

Income from investment in
receivable portfolios              $    975,108    $ 12,089,724    $ 28,483,745    $ 30,435,832    $ 38,714,160

Securitization  income and asset
sales                                        --              --      12,114,703      13,266,241       3,304,331

Servicing fees and other income       1,601,228       1,292,596       1,564,356       2,684,554       5,034,187
                                   ------------    ------------    ------------    ------------    ------------

Total revenue                         2,576,336      13,382,320      42,162,804      46,386,627      47,052,678


Provision for losses                  1,494,001       6,483,736       4,607,081       5,680,975       9,305,969
                                   ------------    ------------    ------------    ------------    ------------

Net revenue                           1,082,335       6,898,584      37,555,723      40,705,652      37,746,709

Income (loss) before income
taxes                               (14,405,555)    (29,445,031)      1,889,271       2,029,820      (6,925,067)

Income tax benefit                           --              --       1,986,409       1,402,375       1,836,544
                                   ------------    ------------    ------------    ------------    ------------

Net income (loss)                   (14,405,555)    (29,445,031)      3,875,680       3,072,195      (5,088,523)

Dividends on preferred stock*            (7,397)       (399,996)     (1,799,999)     (2,000,000)     (2,000,000)
                                   ------------    ------------    ------------    ------------    ------------

Net income (loss) applicable to
common stockholders
                                   $(14,412,952)   $(29,845,027)   $  2,075,681    $  1,072,195    $ (7,088,523)
                                   ============    ============    ============    ============    ============

Net income (loss) per share,
diluted                            $      (0.56)   $      (0.90)   $       0.06    $       0.03    $      (0.20)
                                   ============    ============    ============    ============    ============

Net income (loss) per share,
diluted                            $      (0.56)   $      (0.90)   $       0.06    $       0.03    $      (0.20)
                                   ============    ============    ============    ============    ============
</TABLE>


*    We have not paid dividends on our capital stock during the periods
     presented.

**   Fiscal 1997 represents activity from October 8, 1996 through May 31, 1997.



                                       17
<PAGE>


<TABLE>
<CAPTION>
                                                            AS OF                               AS OF
                                                           MAY 31,                              JUNE 30,
                                 ----------------------------------------------------------   ------------
                                     1997           1998            1999           2000         2001
                                 ------------   ------------    ------------   ------------   ------------
<S>                              <C>            <C>             <C>            <C>            <C>
CONSOLIDATED BALANCE SHEET
DATA:

Cash and cash equivalents and
  restricted cash                $  2,685,581   $  8,205,071    $  4,283,930   $  2,448,879   $  3,103,454

Investments in
  Receivable portfolios, net       10,760,362     18,592,485      21,648,100     33,892,290     32,948,042

Total assets                       24,743,871     39,723,418      45,780,956     64,388,192     66,828,705

Notes payable                         428,973      5,902,041       6,086,766     23,609,326     23,186,134

Subordinated notes and
  accrued interest payable-
 Related Party                     10,446,043     31,807,322      19,246,595     19,139,028     19,970,834

 Total liabilities                 18,118,396     47,366,528      33,692,311     50,013,724     54,941,956

Total stockholders'
  Equity (deficit)                  6,625,475     (7,643,112)     12,088,645     14,374,468     11,886,749

Credit card receivables owned
  and managed                      35,709,395     84,830,552      89,149,715     96,128,627    117,142,582

Number of credit card accounts
  Owned and managed                    26,803         84,351          94,278         76,732         86,384

Total employees, end
  of period                               233            292             305            305            288
</TABLE>

------------


ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

          The following discussion of our financial condition and results of
operations should be read in connection with our consolidated financial
statements and notes thereto appearing elsewhere in this report. The following
discussion contains forward-looking statements that involve risks and
uncertainties. For a discussion of such risks and uncertainties, see "Risk
Factors" below.

OVERVIEW

         On May 24, 2001, we changed our fiscal year end to June 30 from May 31.
Reference in this Form 10-K to fiscal 2001 represents the twelve months ended
June 30, 2001. Reference in this Form 10-K to fiscal years 2000 and 1999
represent the twelve months ended May 31, 2000 and 1999. We have not included
financial information for the twelve months ended June 30, 2000 and 1999 in this
Form 10-K because it is not practical or cost beneficial to prepare the
information. We believe that the twelve months ended May 31, 2000 and 1999
provide a meaningful comparison to the twelve months ended June 30, 2001. We are
aware of no facts that would impact the comparability of information or trends
if the results for the twelve months ended June 30, 2000 and 1999 were presented
in lieu of results for the twelve months ended May 31, 2000 and 1999, except for
the change in the method of recording revenues relating to investments in
receivable portfolios which we disclose at page 19.

          We are a technology and information based, financial services company
that provides credit card products to consumers who may otherwise fail to
qualify for a traditional unsecured bank credit card. Unlike traditional credit
card companies, we focus on consumers who have previously defaulted on debt. We
reach these consumers by acquiring their defaulted debt. We purchase portfolios
for prices typically ranging from 0.50% to 3.00% of the receivable balance. An
increasing amount of our acquisitions come



                                       18
<PAGE>


from our CFC program, through which we pay the seller an agreed on price for
each account we convert to a credit card. Under a CFC, we typically pay a higher
price per account, but we only pay for the accounts we convert to a credit card.

          Through our direct mail and telemarketing operations, these consumers
are offered an opportunity to:

         o        settle their debt, typically at a discount;
         o        transfer the agreed settlement amount to a newly issued
                  unsecured MasterCard(R) or Visa(R) credit card; and
         o        establish a positive credit history on their newly issued card
                  by making timely and consistent payments.

         We accept lump sum settlements or installment payment plans from those
consumers who do not accept the credit card offer.

         After the consumers have made six or more consecutive monthly payments
on their outstanding credit card balance we consider the account seasoned and
available to sell or securitize. Because the focus of our business is to convert
defaulted debt into seasoned credit cards, we periodically sell or securitize
portfolios of these seasoned accounts. We also periodically sell into the
secondary market for non-performing consumer debt portfolios of accounts we
acquired but were unable to convert.

         We have five subsidiaries, Credit Store Services, Inc., Credit Store
Capital Corp., American Credit Alliance, TCS Funding IV, Inc., and TCS Funding
V, Inc. All of these subsidiaries are wholly owned by us; however, only Credit
Store Capital Corp. and American Credit Alliance, Inc. are consolidated on our
financial statements. Credit Store Services, Inc., TCS Funding IV, Inc., and TCS
Funding V, Inc. are qualifying special purpose entities that are not required to
be consolidated. See "Business--Business Operations- Receivables Sales and
Securitizations."

         Credit Store Services, Inc. and Credit Store Capital Corp. acquire
non-performing consumer receivables and contract with us to offer consumers a
credit card under our program or to accept settlements or payment plans.
American Credit Alliance owns a 50% interest in Dakota Card Fund II, a limited
liability company that contracts with us to service non-performing receivables
and credit card receivables that it owns. TCS Funding IV, Inc. and TCS Funding
V, Inc. were created in connection with securitizations for the purpose of
purchasing performing credit card receivables from us.

ACCOUNTING FOR INVESTMENTS IN RECEIVABLE PORTFOLIOS.

         Effective June 1, 2000, we account for our investments in receivable
portfolios on the accrual basis of accounting in accordance with the provisions
of the AICPA's Practice Bulletin 6, "Amortization of Discounts on Certain
Acquired Loans." Before June 1, 2000, we used the cost recovery method of
accounting for acquired non-performing consumer debt portfolios. Practice
Bulletin 6 requires that the accrual basis of accounting be used at the time the
amount and timing of cash flows from an acquired portfolio can be reasonably
estimated and collection is probable. As of June 1, 2000, we had accumulated
statistics in our data warehouse on the approximately $6 billion of
non-performing debt we acquired since the beginning of fiscal 1997. At that
point, we determined that our models provided us with reliable estimates of the
amounts and timing of cash flows that portfolios of acquired debt would generate
in future periods. These estimates include the key assumptions of credit cards
originated, cash flows from these cards and from unconverted receivables, new
funding and retention and losses. As required by Practice Bulletin 6, we then
converted on a prospective basis to accrual accounting. As part of our ongoing
commitment to data analysis and statistical modeling, we update and evaluate our
models on a monthly basis to facilitate the application of the accrual method of
accounting and the internal valuation of our portfolios.

         Under the accrual method and cost recovery method of accounting, static
pools are established for each portfolio acquired. Once a static pool is
established, the receivables are permanently assigned to the pool. We account
for each static pool as a unit for the economic life of the pool for recognition
of income from receivable portfolios, for collections applied to principal of
receivable portfolios and for provision for loss or impairment. Income from
receivable portfolios is accrued based on the effective interest rate determined
for each pool applied to each pool's carrying value as of June 1, 2000 or its
cost if purchased after June 1, 2000, adjusted for unpaid accrued income and
principal paydowns. The effective interest rate is the internal rate of return
determined based on the timing and amounts of actual cash received since the
date of adoption or since inception if purchased after June 1, 2000 and
anticipated future cash flow projections for each pool.

         For financial statement purposes, the cost of a portfolio is the
purchase price paid to the seller plus costs directly related to the acquisition
of the portfolio. For financial statement purposes under the accrual method, the
portfolio cost also includes amortization of receivable portfolios discount. All
direct mail and scrubbing costs are expensed as incurred. From the time a
settlement has been reached with a consumer until the cardholder begins to make
new charges on the new credit card account, no incremental asset is recorded in
the financial statements. For other forms of settlement, financial statement
entries are recorded as an account holder makes



                                       19
<PAGE>


payments. Under the cost recovery method, we record the purchase price of a
portfolio and any costs directly related to the purchase as an investment in
non-performing consumer debt on the balance sheet. We apply cash flows related
to the acquired portfolio as a reduction of the investment on the balance sheet.
Once the cost of a portfolio has been recovered, the remaining cash flow is
recorded as excess of revenue over cost recovered. As a result, the application
of cost recovery can have a material negative impact on revenue and net income
during periods of increasing portfolio acquisitions and a material positive
impact during periods of decreasing portfolio acquisitions and increasing
portfolios dispositions.

         We monitor impairment of non-performing receivable portfolios based on
the current market environment and discounted projected future cash flows of
each portfolio compared to each portfolio's carrying amount. Provisions for
losses are charged to earnings when it is determined that the investment in a
non-performing receivable portfolio is greater than the present value of
expected future cash flows. No provision for losses on non-performing receivable
portfolios was recorded in the year ended June 30, 2001, or the one-month period
ending June 30, 2000.

         Our provision for credit card losses resulting from the funding of new
purchases and the accrued interest and fees on credit card balances includes
current period losses and an amount which, in our judgment, is necessary to
maintain the allowance for credit card losses at a level that reflects known and
inherent risks in the credit card portfolio. In evaluating the adequacy of the
allowance for credit card losses, we consider several factors, including:
historical trends of charge-off activity for each credit card portfolio, current
economic conditions and the impact current economic conditions might have on a
borrowers' ability to repay. Significant changes in these factors could affect
the adequacy of the allowance for credit card losses in the near term. Credit
card accounts are generally charged off at the end of the month during which the
credit card receivable becomes contractually 180 days past due. Bankrupt
accounts and accounts of deceased cardholders without a surviving, contractually
liable individual, are charged off immediately on receipt of formal notification
of bankruptcy or death, as the case may be.


                              RESULTS OF OPERATIONS

         REVENUES. Total revenue for the fiscal year ended June 30, 2001 was
$47.1 million, a 1.4% increase from the $46.4 million recorded during the fiscal
year ended May 31, 2000 which was a 10% increase from the $42.2 million in the
fiscal year ended May 31, 1999. Total revenue for the one month ended June 2000
increased 36.8% from $2.6 million in June 1999 to $3.6 million in June 2000.
Core revenues (income from all activities other than portfolio sales or interest
in affiliate revenues) increased 34.7% and 11.5% in fiscal 2001 and 2000, and
are reported as $45.4 million, $33.8 million, and $30.3 million in fiscal 2001,
2000 and 1999, respectively. Core revenue in the one month ended June 2000 was
$3.6 million which is an increase of 36.8% from the one month ended June 1999.
Increasing revenues reflect our growing base of owned and managed accounts,
increases of income resulting from retained interests in securitized credit card
receivables, and adoption of the accrual method of accounting effective June 1,
2000 (see next paragraph). Gains on sales of portfolios have decreased from
$11.9 million in fiscal 1999 to $6.1 million in fiscal 2000 to $1.5 million in
fiscal 2001. This decline is reflective of the difference in the volume of sale
activity between fiscal 1999, 2000, and 2001, and the effects of the adoption of
the accrual methodology of accounting between fiscal 2000 and 2001. In fiscal
2000, we recognized a $6.5 million gain on the sale of our interest in three
special purpose entities; no such sale occurred in fiscal 2001 or fiscal 1999.
With the adoption of the accrual method of accounting effective June 1, 2000,
sales of portfolios in fiscal 2001 result in an increase in the rate of return
over the remaining life of a portfolio instead of a one time gain. We completed
three securitizations in fiscal 1999, one securitization in fiscal 2000, and one
securitization in fiscal 2001. Servicing fees and other income has increased
from $1.6 million in fiscal 1999 to $2.7 million in fiscal 2000 and to $5.0
million in fiscal 2001. This continued increase reflects the increasing number
of accounts serviced by the Company for third parties and unconsolidated
subsidiaries formed in connection with securitizations. The provision for losses
reported for fiscal 2001, 2000 and 1999 was $9.3 million, $5.7 million, and $4.6
million. These provision amounts are 20.4%, 16.8%, and 15.2% of core revenues
for the fiscal years 2001, 2000 and 1999. The provision for losses for the one
month ended June 2000 increased 128.5% from $0.5 million in June 1999 to $1.2
million in June 2000. These increases are the result of the adoption of the
accrual method of accounting effective June 1, 2000. Irrespective of the unique
events and sales each year, net revenue has remained fairly constant at $37.7
million, $40.7 million and $37.6 million in fiscal 2001, 2000 and 1999,
respectively.

         On June 1, 2000, we adopted the accrual method of accounting for our
investment in receivable portfolios. Prior to June 1, 2000, we used the cost
recovery method of accounting. Under cost recovery all cash receipts relating to
individual portfolios of non-performing consumer debt are applied first to
recover the cost of the portfolios, prior to recognizing any revenue. The
accrual method recognizes the discount on acquired portfolios over the period in
which the payments are reasonably estimable and probable of collection. The
recognition of this discount is based on the effective interest rate of each
portfolio. The accrual method accelerates the



                                       20
<PAGE>


recognition of revenue as compared to the cost recovery method. For fiscal 2001,
the adoption of the accrual method of accounting resulted in an increase of $7.7
million in income from credit card receivables.


<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
Revenues                                Fiscal 1999        One Month Ended       Fiscal 2000     One Month Ended       Fiscal 2001
                                                            June 30, 1999                         June 30, 2000
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                   <C>                  <C>                 <C>               <C>                 <C>
Income from investment
in receivable portfolios                 $28,483,745         $ 2,376,962         $30,435,832       $ 3,312,545         $38,714,160
---------------------------------------------------------------------------------------------------------------------------------
Securitization income                        263,624              75,548             666,976            44,488           1,777,826
---------------------------------------------------------------------------------------------------------------------------------
Servicing fees and
other income                               1,564,356             174,052           2,684,554           237,176           5,034,187
---------------------------------------------------------------------------------------------------------------------------------
     Core Revenue                         30,311,725           2,626,562          33,787,362         3,594,209          45,526,173
---------------------------------------------------------------------------------------------------------------------------------
Gains on Sales                            11,851,079                --            12,599,265              --             1,526,505
---------------------------------------------------------------------------------------------------------------------------------
     Total Revenue                        42,162,804           2,626,562          46,386,627         3,594,209          47,052,678
---------------------------------------------------------------------------------------------------------------------------------
Provision for Losses                       4,607,081             542,010           5,680,975         1,238,291           9,305,969
---------------------------------------------------------------------------------------------------------------------------------
     Net Revenue                         $37,555,723         $ 2,084,552         $40,705,652       $ 2,335,918         $37,746,709
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>


         EXPENSES. Total operating expenses for fiscal 2001 were $38.9 million,
a 15.5% increase from $33.7 million in fiscal 2000 which was a 6.5% increase
from $31.6 million in fiscal 1999. The fiscal 2001 operating expenses include
$3.8 million of nonrecurring expenses. These nonrecurring expenses represent
estimated costs of settlement of certain contract claims, one of which is
currently in litigation. Also, the nonrecurring expenses consist of a reserve of
$1.3 million for notes receivable from an unrelated party, and a reserve of $0.5
million for a note receivable from a former executive. Excluding these
nonrecurring expenses, operating expenses in fiscal 2001 would have been $35.1
million, a 4.3% increase from fiscal 2000. Operating expenses net of
nonrecurring expenses were 77.2%, 99.7%, and 104.4% of core revenues in fiscal
2001, 2000, and 1999, respectively. This continued decrease in operating
expenses net of nonrecurring expenses as a percent of core revenues reflects our
ability to increase the number of accounts owned and managed while maintaining a
relatively constant expense base. We experienced a 7.9% and 21.9% increase in
the aggregate balance of credit card receivables we owned and managed from $89.1
million as of May 31, 1999 to $96.1 million as of May 31, 2000 to $117.1 million
as of June 30, 2001. Total operating expenses increased 8.9% to $3.3 million for
the one month ended June 2000 from $3.0 million for one month ended June 1999
but decreased as a percentage of core revenues from 114% to 91% which reflects
our ability to increase revenues faster than our growth in expenses.

         Salaries and employee benefits increased 6.2% in fiscal 2001 as
compared to fiscal 2000 which was an increase of 8.1% over fiscal 1999, but
decreased as a percentage of core revenue from 41.2% in 1999 to 40.0% in 2000 to
31.5% in 2001. Incremental expenses between years is due to increased
commissions as a result of increased acquisitions and originations.

         Third party services expenses, consisting of credit card services and
scrubbing fees, decreased 3.1% and 11.1% in fiscal 2001 and fiscal 2000
respectively. As a percentage of core revenue, third party services expenses
were 8.5%, 11.8%, and 14.7% in fiscal 2001, 2000 and 1999. These costs continue
to decline as we increase our processing efficiencies to lower the costs per
account.

         Marketing and customer communications expense increased 47.9% and 26.4%
in fiscal 2001 and 2000 but remained fairly constant as a percentage of core
revenue at 11.0%, 10.0%, and 8.9% in fiscal 2001, 2000 and 1999, respectively.
Marketing and consumer communications expenses includes direct mail cost and
scrubbing costs, which increase with the volume of accounts acquired,
originated, and serviced. Marketing and communication expenses increased 149.4%
to $0.4 million for the one month ended June 30, 2000 from $0.2 million for the
one month ended June 30, 1999 due to increased volumes of portfolio
acquisitions.

         Royalty expense, pursuant to two mutual business development
agreements, increased 12.4% from $1.5 million in fiscal 1999 to $1.7 million in
fiscal 2000 and decreased 38.4% to $1.1 million in fiscal 2001. Royalty expense
increased to $0.2 million in the one month ended June 30, 2000 from the $0.04
million for the one month ended June 30, 1999 due to increased activity in June
2000. The royalty expense is accrued when new credit card accounts make their
third payment according to the terms of the cardholder agreement or when cash
from non-card accounts is collected. The decrease in royalty expense in fiscal
2001 is the result of the Company's



                                       21
<PAGE>


decision to discontinue accrual of the royalty expense after November 2000. The
mutual business development agreements are currently in dispute. See "Legal
Proceedings". In fiscal 2001, we recorded a $2.0 million accrual which is our
estimate of the amount required to settle the contract disputes and to terminate
the agreements.

         Financing fees increased 12.7% from $1.1 million in fiscal 2000 to $1.2
million in fiscal 2001 and decreased as a percentage of core revenue from 3.2%
in fiscal 2000 to 2.7% in fiscal 2001. Financing fees increased 416% from $0.2
million in fiscal 1999 to $1.1 million in fiscal 2000 and increased as a
percentage of core revenues to 3.2% in fiscal 2000 from 0.7% in fiscal 1999. The
increase from fiscal 1999 to fiscal 2000 and 2001 resulted from our ability to
obtain additional financing sources in fiscal 2000.

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------
              Expenses                     Fiscal 1999     One Month Ended      Fiscal 2000      One Month Ended      Fiscal 2001
                                                            June 30, 1999                         June 30, 2000
----------------------------------------------------------------------------------------------------------------------------------
<S>                                      <C>             <C>                    <C>              <C>                  <C>
Salaries and employee benefits             $12,484,582          $1,057,276       $13,502,074          $1,130,262      $14,334,712
----------------------------------------------------------------------------------------------------------------------------------
Professional fees                            2,701,016             198,304         2,604,992             353,592        3,048,027
----------------------------------------------------------------------------------------------------------------------------------
Depreciation and amortization                2,614,216             228,229         2,494,489             166,133        1,990,390
----------------------------------------------------------------------------------------------------------------------------------
Third-party credit card services             4,468,992             390,323         3,972,785             338,482        3,850,903
----------------------------------------------------------------------------------------------------------------------------------
Marketing and customer
communications                               2,683,270             150,596         3,391,962             375,528        5,016,901
----------------------------------------------------------------------------------------------------------------------------------
Occupancy and equipment rental               1,614,513              63,258         1,727,884             143,982        2,032,742
----------------------------------------------------------------------------------------------------------------------------------
Royalty expense                              1,541,944              37,363         1,733,412             211,069        1,067,363
----------------------------------------------------------------------------------------------------------------------------------
Financing fees                                 211,864             475,899         1,092,286             277,661        1,231,161
----------------------------------------------------------------------------------------------------------------------------------
Other                                        3,316,564             328,572         3,173,999             261,259        2,567,078
----------------------------------------------------------------------------------------------------------------------------------
Non recurring events                                --                  --                --                  --        3,787,061
----------------------------------------------------------------------------------------------------------------------------------
     Total expenses                        $31,636,961          $2,993,015       $33,693,883          $3,257,968      $38,926,338
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>


         INTEREST EXPENSE. Interest expense increased to $5.7 million in fiscal
2001, a 15.3% increase from $5.0 million in fiscal 2000 which was a 23.6%
increase from $4.0 million in fiscal 1999. These increases were due to a higher
average amount of debt outstanding of $23.7 million, $17.0 million and $5.9
million in fiscal 2001, 2000 and 1999. As a result of higher core revenue in
fiscal 2000 and fiscal 2001, interest expense, as a percentage of core revenue,
was 13.3% in fiscal 1999, but decreased from 14.7% in fiscal 2000 to 12.6% in
fiscal 2001. Interest expense increased 66.0% for the one month ended June 30,
2000 as compared to the one month ended June 30, 1999. This increase was due to
a higher outstanding balance in June 2000.

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                             Fiscal 1999       One Month Ended              Fiscal 2000         One Month Ended       Fiscal 2001
                                                June 30, 1999                                    June 30, 2000
------------------------------------------------------------------------------------------------------------------------------------
<S>                      <C>                   <C>                    <C>                   <C>                   <C>
Interest Expense              $4,029,491           $286,723                 $4,981,949              $476,023           $5,745,438
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>


         INCOME TAX EXPENSE/BENEFIT. We recognized a tax benefit of $1.8 million
in fiscal 2001, $1.0 million in fiscal 2000, and $2.0 million in fiscal 1999.
The tax benefit in each year represents the recognition of a tax benefit that
offsets the tax expense recorded in other comprehensive income. Fiscal 2000 and
1999 also included a $2.0 million and $0.7 million reduction of a valuation
allowance related to net operating loss carryforwards. We have recorded a
valuation allowance of $10.7 million at June 30, 2001. We continue to review the
adequacy of our valuation allowance and have determined that based on historical
results and forecasted future earnings it was more likely than not that a
portion of our net operating loss carryforward would be utilized. We will
continue to evaluate the remaining valuation allowance and will recognize tax
benefits as factors indicate that it is more likely than not that additional
future tax benefits will be realized.

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                             Fiscal 1999       One Month Ended            Fiscal 2000         One Month ended          Fiscal 2001
                                                  June 1999                                    June 30, 2000
------------------------------------------------------------------------------------------------------------------------------------
<S>                        <C>                 <C>                      <C>                  <C>                     <C>
Income tax benefit             $1,986,409        $        --              $1,042,375            $   63,456            $  1,836,544
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>


                                       22
<PAGE>


         NET INCOME (LOSS). Net income was $3.9 million in fiscal 1999 and $3.1
million in fiscal 2000 compared to a net loss of $5.1 million in fiscal 2001.
Included in net income for fiscal 2000 and 1999 are $2.0 million and $0.7
million of tax benefits recognized as a result of the reduction of a portion of
our valuation allowance account. Dividends on preferred stock have accumulated
but have not been declared and are not yet payable. However, we treat the
dividends as declared and payable for the purpose of calculating net income
(loss) applicable to common shareholders. After the effect of preferred
dividends of $2.0 million in fiscal 2001 and 2000 and $1.8 million in 1999, the
net income (loss) applicable to common shareholders was $2.1 million, or $0.06
per basic and diluted common share, in fiscal 1999; and $1.1 million, or $.03
per basic and diluted common share, in fiscal 2000; compared to a net loss
applicable to common stockholders of $(7.1) million, or $(0.20) per basic and
diluted common share in fiscal 2001. Net loss for the one month ended June 30,
2000 was $(1.5) million compared to $(1.4) million for the one month ended June
30, 1999.


<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------------
                                       Fiscal 1999     One Month Ended      Fiscal 2000   One Month Ended          Fiscal 2001
                                                        June 30, 1999                      June 30, 2000
--------------------------------------------------------------------------------------------------------------------------------
<S>                                     <C>               <C>                <C>            <C>                    <C>
Net income (loss)                       $3,875,680        $(1,195,186)       $3,072,195     $(1,314,617)           $(5,088,523)
--------------------------------------------------------------------------------------------------------------------------------
  Dividends on preferred stock         (1,799,999)           (166,667)      (2,000,000)        (166,667)            (2,000,000)
--------------------------------------------------------------------------------------------------------------------------------
Net income (loss), applicable to
common shareholders                     $2,075,681        $(1,361,853)       $1,072,195     $(1,481,284)           $(7,088,523)
--------------------------------------------------------------------------------------------------------------------------------
</TABLE>


         INVESTMENTS IN RECEIVABLES

         Our business is highly dependent on the amount of non-performing
consumer debt we acquire, the cost to acquire these accounts, and the cash flows
we generate from these accounts through the conversion to our credit card or
through collection efforts. We refer to the non-performing consumer debt
accounts acquired as unconverted receivables from the time of acquisition to the
date we convert them to a credit card. At time of conversion, we begin referring
to the agreed settlement amount as a credit card receivable. The marketing cycle
for and useful life of a new credit card account extends over several years.
Therefore, we measure our operating results on both a traditional fiscal period
basis and on a "vintage basis." When analyzing our performance on a vintage
basis, we track each acquired portfolio over the entire period we own the
accounts. We store statistics for each portfolio of accounts in our data
warehouse and use these statistics to develop our portfolio acquisition models,
marketing models, account servicing models, and accounting methodology. Since
1996, we have acquired approximately $6.5 billion in non-performing consumer
debt through approximately 115 separate portfolio acquisitions.

         The charts below summarize the performance of the portfolios we
acquired in each of the past four fiscal periods on a vintage basis analysis,
that is, from the date of acquisition of the portfolio through June 30, 2001.
For fiscal 2001, the charts include portfolios of receivables owned by The
Credit Store ("CDS") and by Credit Store Services, Inc. ("CSSI") an
unconsolidated qualified special purpose entity established in July 2000. We
analyze our performance on a "managed portfolio" basis, as if the portfolios
acquired through CSSI were still on our balance sheet, because the performance
of these portfolios will affect the future cash flows we receive from CSSI.

             Vintage Basis Analysis of Non-Performing Debt Acquired

<TABLE>
<CAPTION>

                                         Unconverted        Total          Unconverted
                         Purchased        Receivables     Unconverted      Receivables
                        Unconverted        Acquired       Receivables       Returned
Fiscal Year Ended       Receivables      through CFC's      Acquired        to Seller*
-------------------    --------------   --------------   --------------   --------------

<S>                    <C>              <C>              <C>              <C>
CDS - June 30, 2001    $  358,429,591   $  419,567,849   $  777,997,440   $  382,547,335

CSSI - June 30, 2001      785,269,895                0      785,269,895       16,124,794
----------------------------------------------------------------------------------------
</TABLE>
<PAGE>

<TABLE>
<S>                    <C>              <C>              <C>              <C>
Total
 June 30, 2001          1,143,699,486      419,567,849    1,563,267,335      398,672,129

 May 31, 2000           1,490,243,243      328,797,101    1,819,040,344      390,226,996

 May 31, 1999             956,043,213                0      956,043,213       21,047,575

 May 31, 1998             899,367,399                0      899,367,399       25,551,327


<CAPTION>
                                           Unconverted
                                           Receivables     Unconverted
                        Net Unconverted      Settled       Receivables        Remaining
                         Receivables     through Credit    Resold into       Unconverted
Fiscal Year Ended          Acquired       Card or Cash   Secondary Market    Receivables
--------------------    --------------   --------------   --------------   --------------
<S>                     <C>              <C>              <C>              <C>
CDS - June 30, 2001     $  395,450,105   $   35,152,390   $   14,805,403   $  345,492,312

CSSI - June 30, 2001       769,145,101       32,077,040                0      737,068,061

------------------------------------------------------------------------------------------

Total
 June 30, 2001           1,164,595,206       67,229,430       14,805,403    1,082,560,373

 May 31, 2000            1,428,813,348       73,987,019      291,562,195    1,063,264,134

 May 31, 1999              934,995,638       60,493,888      685,813,875      188,687,875

 May 31, 1998              873,816,072      130,866,306      513,411,743      229,538,023

</TABLE>


         * Returned to seller includes non-qualifying accounts and accounts
returned at termination of CFC contracts.


                                       23
<PAGE>

         We have developed new methods to acquire portfolios over the past two
fiscal years which make better use of our available capital. We invested $8.3
million in fiscal 1999, $14.3 million in fiscal 2000, and $4.4 million in fiscal
2001 to acquire portfolios. Additionally in fiscal 2001, we invested $0.5
million and The Varde Fund IV-A, L.P. invested $8.5 million in CSSI to allow
CSSI to purchase non-performing consumer debt portfolios from third parties
through us. The significant decline in amounts invested to acquire portfolios in
fiscal 2001 is due to the success of our CFC program and the use of CSSI as a
portfolio acquisition vehicle. While our goal is to continue acquiring a
significant portion of our portfolios in this manner, we cannot guaranty that
sellers will continue to find CFCs an attractive alternative to traditional cash
sales or that investment capital for vehicles such as CSSI will continue to be
available. See "Management Discussion and Analysis - Liquidity and Capital
Resources."

         The chart below summarizes our history of converting non-performing
accounts we acquire to our credit card product. This chart is also on a vintage
basis, that is, from the date of acquisition through June 30, 2001:


<TABLE>
<CAPTION>

     Vintage Basis Analysis of Settled Balances Transferred to Credit Cards



                                   Amounts                                  New Charges,
                               Transferred to    Closed                      Interest
                                 Credit Card   Credit Card    Net Amounts   and Fees on
Fiscal Year Ended                Accounts *    Accounts **    Transferred   Credit Cards
-----------------              -------------- -------------  ------------  --------------
<S>                              <C>           <C>           <C>           <C>
CDS - June 30, 2001              $33,757,100   $11,127,818   $22,629,282   $ 5,679,093

CSSI - June 30, 2001              28,861,770     3,921,500    24,940,270     1,901,310
-----------------------------------------------------------------------------------------
Total - June 30, 2001             62,618,870    15,049,318    47,569,552     7,580,403

May 31, 2000                      69,110,157    20,491,610    48,618,547    23,071,495

May 31, 1999                      50,256,711    11,313,794    38,942,917    28,439,186

May 31, 1998                      85,093,935    14,624,423    70,469,512    44,854,159


<CAPTION>
                                    Payments                  Credit Card
                                  Received On   Credit Card   Receivables   Remaining
                                  Credit Card   Receivables     Sold or     Credit Card
Fiscal Year Ended                 Receivables   Charged Off   Securitized   Receivables
-----------------                 -----------   -----------   -----------   -----------
<S>                               <C>           <C>           <C>           <C>
CDS - June 30, 2001               $ 5,693,975   $ 4,359,604   $   786,186   $18,254,796

CSSI - June 30, 2001                2,400,843       236,904            --    24,203,833
-----------------------------------------------------------------------------------------
Total - June 30, 2001               8,094,818     4,596,508       786,186    42,458,629

May 31, 2000                       23,711,465    17,903,287     3,714,433    29,822,904

May 31, 1999                       30,619,128    19,207,402    11,569,953     8,969,207

May 31, 1998                       46,908,823    45,523,830    19,789,327     5,477,817

</TABLE>



         * Amounts represent balances agreed to by customer and transferred to
new credit card, and includes original debt plus imputed interest from original
default date net of agreed discount.

         ** Accounts on which the first required payment was never made and
accounts closed at the request of customers before any significant activity
occurred.


                             Vintage Basis Analysis of
               Receivables Compared to Balance Sheet Amount Recorded


<TABLE>
<CAPTION>
                                    Unconverted      Credit Card      Balance Sheet
                                    Receivables      Receivables         Amount
                                 ---------------------------------------------------
Fiscal Year Ended
-----------------
<S>                              <C>                <C>              <C>
CDS - June 30, 2001                   $345,492,312     $ 18,254,796      $5,711,185

CSSI - June 30, 2001                   737,068,061       24,203,833      11,025,842*
                                 ---------------------------------------------------
Total - June 30, 2001                1,082,560,373       42,458,629      16,737,026


May 31, 2000                         1,063,264,134       29,822,904      14,745,511

May 31, 1999                           188,687,875        8,969,207       5,436,477

May 31, 1998                           229,538,023        5,477,817       4,158,254
</TABLE>

         * Represents amount on balance sheets of CSSI which is not consolidated
on our balance sheet.


         The above chart presents, on a vintage basis, the remaining inventory
of unconverted receivables and the outstanding balance of performing credit card
receivables compared to the amounts actually recorded on our balance sheet. Upon
settlement of the debt, a credit card is issued to the customer with the opening
balance and credit line equal to the settlement amount. From the time a


                                       24

<PAGE>

settlement has been reached with the customer, until after the customer begins
to make principal payments on the credit card receivable, no incremental asset
is recorded except for the amortization of receivable portfolios discount. After
making principal payments on the settlement amount, the customer may use the
credit card for new purchases and cash advances up to its available credit
limit, which may be increased from time to time based on their payment history.
The customers' purchasing activities are recorded on our balance sheet net of
customer payments.


                                       25
<PAGE>

        Vintage Basis Analysis of Unconverted Receivables Settled for Cash

                                  Original
                               Unconverted                            Cash
                               Receivables                      Collection
                                  Acquired  Cash Collected      Percentage
                                  --------  --------------      ----------
Fiscal Year Ended

CDS - June 30, 2001             $2,206,614     $ 1,062,863           48.2%

CSSI -June 30, 2001              3,527,630       1,014,435           28.8%
                            -----------------------------------------------
Total June 30, 2001              5,734,244       2,077,298           36.2%

May 31, 2000                     7,167,545       3,870,063           54.0%

May 31, 1999                     4,460,116       3,666,440           82.2%

May 31, 1998                    10,813,555       6,208,659           57.4%


         The chart above summarizes, on a vintage basis, our experience with
collections on accounts settled for cash and/or installment payments. The cash
collected represents lump sum settlements and periodic payments received from
customers on an installment basis. As the portfolios age, the overall collection
percentage will tend to increase as additional installment payments are received
from the debtor. We do not record the amount of installment arrangements as an
asset on our balance sheet.


Credit Card Receivable Quality

         Once an acquired non-performing receivable is settled and the
settlement amount is transferred to a credit card, we employ traditional credit
card measurements to track delinquencies and charge-offs in our portfolio of
performing credit cards. We experience the majority of defaults and
delinquencies during the first few months after the settlement amount is
transferred to a new credit card. In general, if a customer does not make the
first required payment on an account, we close the credit card account and
return the original purchased receivable amount to unconverted receivables. We
follow the same policy if the customer closes the account voluntarily before
making the first required payment. As previously noted, the initial amount
transferred to a credit card is not recorded in our financial statements.
Therefore any account restored to an unconverted status has no impact in our
financial statements. We consider these returns to unconverted status in the
determination of our effective interest rate for each portfolio.

         The delinquency chart below includes all our owned and managed credit
card receivables but does not include receivables in accounts that have not yet
made a first payment. Because these accounts are not yet performing and may be
closed, including them would distort the reporting of actual delinquencies on
our performing portfolio of accounts.


<TABLE>
<CAPTION>

                                           Delinquencies as a Percentage of Owned and Managed Credit Card
                                                                     Receivables

                                                              For the Three Months Ended


                                     May 31,          Aug. 31,         Nov. 30,         Feb. 29,          May 31,
                                      1999             1999             1999              2000             2000
                                  -------------    -------------    -------------    -------------    -------------
<S>                               <C>              <C>              <C>              <C>              <C>
Owned
Receivables
Amount                            $  58,925,411    $  63,532,090    $  63,899,508    $  72,059,180    $  72,130,353

Managed
Receivables
Amount                            $  27,616,423    $  22,716,512    $  21,906,243    $  20,890,662    $  18,252,815

Total
Receivables
Amount                            $  86,541,834    $  86,248,602    $  85,805,751    $  92,949,842    $  90,383,168
                                  -------------    -------------    -------------    -------------    -------------

<CAPTION>

                                       Sept. 30,        Dec. 31,          Mar. 31,           June 30,
                                         2000             2000              2001               2001
                                    -------------    --------------    --------------    --------------
<S>                                 <C>              <C>               <C>               <C>
Owned
Receivables
Amount                              $  82,932,303    $   80,674,251    $   72,775,407    $   54,936,629

Managed
Receivables
Amount                              $  16,919,113    $   19,401,550    $   31,671,150    $   49,843,613

Total
Receivables
Amount                              $   99,851,416   $  100,075,801    $  104,446,557    $  104,780,242
                                    --------------   --------------    --------------    --------------


<CAPTION>

                                                                       (percent of total)

                                          May 31,          Aug. 31,         Nov. 30,         Feb. 29,          May 31,
                                           1999             1999             1999              2000             2000
                                       -------------    -------------    -------------    -------------    -------------
Loans Delinquent:
<S>                                    <C>              <C>              <C>              <C>              <C>
30 to 59 days                              10.9%             9.6%             9.3%             8.2%             9.6%

60 to 89 days                               5.0%             5.5%             4.4%             3.6%             4.7%

90 to 119 days                              3.3%             4.0%             3.4%             3.0%             3.2%

Total 60 to 119 days                        8.2%             9.4%             7.9%             6.6%             7.9%


<CAPTION>

                                                          (percent of total)

                                          Sept. 30,         Dec. 31,          Mar. 31,          June 30,
                                            2000              2000              2001              2001
                                        -------------    --------------    --------------    --------------
Loans Delinquent:
<S>                                     <C>              <C>               <C>               <C>
30 to 59 days                                11.6%             13.5%             10.1%             11.4%

60 to 89 days                                 6.6%              6.0%              4.6%              6.3%

90 to 119 days                                4.7%              4.8%              4.2%              5.0%

Total 60 to 119 days                         11.2%             10.9%              8.8%             11.3%

</TABLE>


                                       26
<PAGE>



         The trend in delinquent accounts correlates to the age of accounts
owned and managed and the timing of sales of credit card receivables.
Delinquency during the quarter ended September 30, 2000, increased due to the
transfer of the servicing of approximately $20.0 million credit card receivables
to the third party who purchased them in May 2000. The credit cards transferred
were some of our most seasoned, current accounts, which had the effect of
increasing the delinquency percent of the remaining portfolio. As we sell
receivables to other credit card companies and transfer the servicing, our
delinquencies tend to increase, since we are typically selling more seasoned
receivables. Also, in periods of receivable growth, our delinquencies increase,
which is contrary to a typical credit card portfolio, because the majority of
our defaults occur within the first six months of a customer receiving their new
credit card. The increase in delinquencies during fiscal 2001 reflects a 32%
increase in the volume of new credit cards originated on an owned and managed
basis over the previous fiscal year from $66.9 million in fiscal 2000 to $88.3
million in fiscal 2001. There is also a seasonal factor in that our
delinquencies typically decline during the first calendar quarter when our
cardholders tend to repay card balances at a faster rate to pay for purchases
made during the holiday season.

          Under our program, when a new credit card is issued to the consumer,
the opening balance and credit line equal the agreed settlement amount of the
debt obligation we purchased.

          However, for financial statement purposes, we record as our investment
          in receivables only:

         o        the original cost of the receivables portfolio;
         o        amortization of receivables portfolio discount;
         o        amounts funded as a result of cash advances and new cardholder
                  purchases made after the cardholder makes the first payment on
                  the credit card account;
         o        the accrued interest on these cash advances and new purchases;
                  and
         o        the accrued fees on the account.

         We do not record any credit card asset until after the cardholder makes
payments and begins to make new charges on the account. As a result,
historically, the amount owed by our cardholders exceeds the amount of
receivables recorded on our balance sheet as summarized in the following chart.

               Actual Cardholder Balances Compared to Credit Card
                      Receivables Recorded on Balance Sheet

<TABLE>
<CAPTION>

                                                                  As of May 31                     As of June 30,
                                                                  ------------                     --------------
                                                      1998            1999           2000               2001
                                                      ----            ----           ----               ----
<S>                                                <C>            <C>             <C>               <C>
Owned credit card receivables                      $74,096,668    $55,184,540     $77,832,562       $66,184,418
Unused credit                                      $ 6,093,820    $ 4,296,364     $ 7,837,918       $ 9,355,862
Utilization rate                                       92%            93%             91%               86%
Amounts funded, interest and fees                  $16,824,782    $21,879,209     $27,386,165       $28,172,826
Amounts funded, interest and fees as a
   percentage of owned credit card receivables         23%            40%             35%               43%
</TABLE>


          We reserve for credit card losses on our balance sheet and charge
against the reserve based on the amounts funded as a result of cash advances and
new cardholder purchases made after the cardholder makes the first payment on
the credit card account, the



                                       27
<PAGE>


accrued interest on these cash advances and new purchases, and the accrued fees
on the account. The following table presents our charge-offs for the periods
indicated and our provision for losses on our owned credit card receivables:


          Charge Offs and Provision for Losses on Average Investment in
                Receivable Portfolios Recorded on Balance Sheet

<TABLE>
<CAPTION>

                                                                  As of May 31                     As of June 30
                                                                  ------------                     -------------
                                                      1998            1999           2000               2001
                                                      ----            ----           ----               ----
<S>                                                <C>            <C>             <C>                  <C>
Average Investment in Receivable Portfolios        $10,043,983    $19,906,367     $34,476,497     $  46,466,649
Charge-offs*                                       $ 4,721,858     $5,448,783     $6,051,670      $   9,042,996
Charge-offs as a percentage of average credit         47.0%          27.4%           17.6%            19.5%
card receivables on balance sheet
Provision for credit card losses                   $ 6,483,737    $ 4,607,081     $ 5,680,975     $   9,305,969
Provision as a percentage of charge-offs             137.3%          84.6%           93.9%               102.9%
</TABLE>

*  Does not give effect to any amounts recovered after the charge off.


                         LIQUIDITY AND CAPITAL RESOURCES

         We seek to maintain an adequate level of liquidity through active
management of assets and liabilities, through sales or securitizations of credit
card receivables, and through debt and equity financing. Because the
characteristics of our assets and liabilities change, liquidity management is a
dynamic process affected significantly by the maturity of our assets and the
seasonality of the credit card business.

         At June 30, 2001, we had $3.1 million of cash and cash equivalents and
restricted cash, compared to $2.4 million at May 31, 2000 and $4.2 million at
May 31, 1999. We maintain restricted cash reserves at two banks to facilitate
the funding of new charges and advances on our customer's credit cards. These
restricted balances were $1.3 million at June 30, 2001, and $1.0 million at May
31, 2000, and $0.8 million at May 31, 1999. We rely on cash flow from our
receivables portfolio, receivable sales and securitizations, and credit lines to
operate our business.

         We maintain a senior secured revolving credit line with Coast Business
Credit ("Coast"), a division of Southern Pacific Bank. The maximum amount
available under the credit line was $13.0 million at July 2, 2001. The credit
line is secured by substantially all of our assets. Borrowings under the credit
line are based on a formula, which is dependent primarily on the performance and
maturity of our credit card receivables. The credit facility currently has an
expiration date of, and the outstanding balance matures on, July 31, 2002. As of
October 31, 2001, the maximum amount available under the credit line will be
reduced to the lesser of $11.5 million or $13.0 million minus 60% of net cash
proceeds derived by us from sales or securitizations of credit card portfolios
between September 28, 2001, and October 31, 2001 and thereafter will be further
reduced by 60% of the net cash proceeds derived by us from the sales or
securitization of credit card portfolios concluded after October 31, 2001. There
was $13.4 million outstanding under the credit line at June 30, 2001 and May 31,
2000.

         We have also received secured financing from a related party, J.L.B. of
Nevada. The notes are payable on demand but are subordinated to the senior
secured revolving credit line. The holder of the notes cannot demand repayment
prior to repayment of the senior secured revolving credit. The remaining
principal amount outstanding on these notes totaled $17.3 million at June 30,
2001 and May 31, 2000. Accrued interest under the facility totaled $2.7 million
at June 30, 2001. No payments of interest are required until at least May 4,
2002.

         On September 20, 1999, we entered into a repurchase agreement with
Plains Commerce Bank (fka Bank of Hoven). Under the agreement, the bank
purchased credit card receivables from us. The initial agreement had a purchase
price of $3.0 million which was increased to $6.0 million in March 2000. On
November 30, 2000, we entered into a new repurchase agreement with the bank,
replacing the original repurchase agreement. The new repurchase agreement is for
$8.0 million and has an expiration date of January 4, 2002. For accounting
purposes, the repurchase agreement is treated as a financing transaction.



                                       28
<PAGE>


         A significant source of liquidity for us has been the sale and
securitization of credit card receivables. We intend to continue to securitize
receivables in the capital markets and sell receivables to unaffiliated credit
card banks in the ordinary course of business. During the fiscal year ended May
31, 2000, we sold our retained interest in three qualified special purpose
entities to the senior beneficial interest holder for approximately $8.6 million
in cash, realizing a pretax gain of approximately $6.5 million. During the
fiscal year ended May 31, 1999, we sold approximately $7.0 million in face
amount of receivables to an unaffiliated bank for $5.0 million and received cash
of approximately $13.0 million from three securitizations of credit card
receivables totaling $20.4 million.

         In October 1999, through a bankruptcy remote special purpose entity, we
established a $17.5 million secured revolving credit line with General Electric
Capital Corporation to finance the acquisition of non-performing consumer debt
portfolios, which credit line expires in August 2002. There was $1.7 million and
$1.8 million outstanding under the credit line at June 30, 2001 and May 31,
2000, with $0.30 million available under the borrowing base formula for
additional borrowing at June 30, 2001. The transfer of receivables to this
special purpose entity by us does not qualify for sale treatment under SFAS No.
125 or No. 140. The special purpose entity is consolidated in our financial
results.

         During the fiscal year ended May 31, 2000, we established a new
wholly-owned qualified special purpose entity, TCS Funding IV, Inc. for the
purpose of purchasing performing credit card receivables from us. TCS Funding
IV, Inc. entered into a $40.0 million credit facility with Miller & Schroeder
Investments Corporation to finance the purchase of credit card receivables. The
initial $12.1 million sale of credit card receivables to the qualified special
purpose entity included receivables with a principal balance of approximately
$14.2 million. TCS Funding IV, Inc. provided $10.0 million for the purchase and
the remaining $2.1 million was recorded by us as retained interest. We
recognized a pretax gain of approximately $3.8 million. Future borrowings under
the facility are subject to the lender's discretion and a number of other
conditions.

         The TCS Funding IV, Inc. credit facility requires payments of interest
only until December 31, 2001 and allows for multiple advances during this period
up to $40.0 million. Borrowings in excess of $10.0 million are governed by a
borrowing base and are contingent upon specified conditions, including the
senior beneficial interests receiving a minimum BBB- rating from a nationally
recognized rating agency. We do not anticipate drawing additional funds from
this credit facility prior to December 31, 2001. The credit facility advances
70% of the receivables balance, of which 5% must be deposited into a reserve
account. The terms of the credit facility require that all credit card
receivables purchased by TCS Funding IV, Inc. must be current with a minimum of
eight payments made on each account and must meet other specified eligibility
requirements.

         Until December 1, 2001, after new charges are funded and fees and
interest are paid, excess cash collections can be used by the qualified special
purpose entity to purchase additional accounts from us or pay down the senior
beneficial interest. During fiscal 2001, TCS Funding IV, Inc. used approximately
$2.4 million of its excess cash collections to purchase credit card receivables
aggregating $3.6 million in principal balance from us. We recognized a pre-tax
gain of approximately $0.4 million on the sale of these receivables and had a
retained interest of approximately $7.6 million at June 30, 2001.

         After December 1, 2001, the TCS Funding IV Inc. credit facility
requires that all cash collections received relating to the senior debt interest
in the receivables be used to repay principal, after payment-related servicing
fees and interest are paid. All new charges on the sold accounts are either sold
to the special purpose entity or contributed in exchange for a retained interest
until such time as the senior debt interest is paid down. Accordingly, If we do
not refinance the receivables, extend the revolving period, or sell the
receivables in a portfolio sale, our funding requirements for new receivables
will increase. Early repayment of the credit facility can be triggered if the
annualized net loss rate exceeds 21% over a consecutive three month period or if
the monthly credit card payments are less than 5.75% of the previous month end
receivables balance over a consecutive three month period. While the senior debt
interest is in place, there are restrictions on our ability to pay dividends and
to pay interest on or the principal of the notes held by our controlling
stockholder.

         During July 2000, we established Credit Store Services, Inc. ("CSSI"),
a wholly-owned qualified special purpose entity. During October 2000, CSSI
entered into a financing relationship with The Varde Fund IV-A, L.P. ("Varde")
involving CSSI's purchase of non-performing consumer debt portfolios from us. We
sell the non-performing debt portfolios to CSSI on the same date and terms that
we purchase them from third parties, at a price equal to our book value, which
is the acquisition price of the portfolio. CSSI entered into a $25.0 million
credit facility with Varde to finance a portion of the purchase price of these
portfolios. Under the facility, Varde finances 95% of the acquisition price of
the non-performing consumer debt portfolios and we finance the remaining 5% of
the acquisition price. Each loan from Varde to CSSI is evidenced by a note, the
principal and interest of which are due twenty-four months after the date of the
note. CSSI pays us all applicable servicing fees in connection with the acquired
portfolios, which fees totaled $1.91 million during fiscal 2001. In addition,
CSSI pays interest on the loans advanced by Varde and by us. Varde may receive
additional cash returns based on the performance of the portfolios. The



                                       29
<PAGE>


remainder of the cash flows are shared equally by Varde and us. As of June 30,
2001, we recorded a retained interest of approximately $1.59 million. Future
borrowings under the facility are subject to Varde's discretion and a number of
other conditions.

         During fiscal 2001, we established a new wholly-owned qualified special
purpose entity, TCS Funding V, Inc. for the purpose of purchasing performing
credit card receivables from us. TCS Funding V, Inc. entered into a $4.0 million
credit facility with Miller & Schroeder Investments Corporation to finance the
purchase of credit card receivables. The initial $4.86 million sale of credit
card receivables to TCS Funding V, Inc. included receivables with a principal
balance of approximately $5.7 million. We recorded $0.86 million as a retained
interest. We recorded $46,380 in servicing fees from TCS Funding V for the
fiscal year ended June 30, 2001 and had a retained interest of $2.2 million.

         The TCS Funding V, Inc. credit facility advanced 70% of the principal
credit card receivables balance, of which 5% was deposited into a reserve
account. The terms of the credit facility require that all credit card
receivables purchased by TCS V must be current with a minimum of eight payments
made on each account and must meet other specified eligibility requirements.

         Until May 1, 2002, after new charges are funded and fees and interest
are paid, excess cash collections are required to be used by TCS Funding V, to
repay the lender's beneficial interest. After May 1, 2002 all cash collections
relating to the senior debt interest in the receivables are required to be used
to repay principal, after payment-related servicing fees and interest are paid,
and all new charges on the sold accounts are required to be purchased by us in
exchange for a residual interest until such time as the senior debt interest is
paid down. Accordingly, if we do not refinance the receivables, extend the
revolving period, or sell the receivables in a portfolio sale, our funding
requirements for new receivables will increase. While the senior debt interest
is in place, there are restrictions on our ability to pay dividends and to pay
interest on or the principal of the notes held by our controlling stockholder.

         We typically finance our capital expenditures through equipment leases.
We invested $2.5 million in property and equipment during fiscal 2001 compared
to $0.9 million in fiscal 2000 and $1.1 million in fiscal 1999. During fiscal
year 2001, we invested in enhanced system hardware to further accommodate our
growth and developed additional proprietary software for use in our business. We
plan to make continued investments in technology, the amount of which will
depend on the amount of lease financing available for such investments.

         During June, 2001, we also sold a portfolio of credit card receivables
for approximately $2.7 million, to an unrelated financial institution without
recourse.

         Subsequent to year end, in September, we sold a portfolio of credit
cards for approximately $3.5 million to an unrelated financial institution
without recourse.

         We are currently exploring alternate means of financing our operations
during fiscal 2002, including replacing our Coast credit facility. We are also
currently in discussions with two financial institutions to sell, on a quarterly
basis during calendar year 2002, up to $20 million of performing credit card
receivables with six or more consecutive payments and a minimum of $20 million
of performing credit card receivables having eight or more consecutive payments.
Proceeds from these sales would be adequate to meet our funding needs through
the next fiscal year. We cannot guaranty that these sales will ultimately take
place or if the timing of the sales will allow us to meet our working capital
needs as they arise. However, management believes that cash on hand together
with the proceeds of these or other transactions it expects to consummate will
be sufficient to fund our operations during fiscal 2002.

         While we have not seen a significant impact on credit quality or credit
card repayment rates as a result of the current economic climate or the
September 11th terrorist attacks in New York City and Washington, D.C., we
cannot guaranty that our customer base will continue to perform at the same
levels of delinquencies and defaults as in the past or that the market for sales
and securitizations of our credit card receivables will not be negatively
affected.

       We can give no assurance that amounts available under our credit
facility, portfolio sales, securitizations, cash flow from future operations and
cash on hand will be sufficient to cover our portfolio acquisitions and our
continuing operations. If we were to consummate any strategic transactions or
undertake any other projects requiring significant capital resources, we would
be required to seek additional financing. If circumstances were to require us to
incur additional indebtedness, we can give no assurance that its terms would
favorable to us.



                                       30
<PAGE>


INFLATION

         We believe that inflation has not had a material impact on our results
of operations during the past three fiscal years.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         Market risk is the risk of loss from adverse changes in market prices
and rates. Our principal market risk is due to changes in interest rates. These
changes affect us directly in our lending and borrowing activities, as well as
indirectly as interest rates may impact the payment performance of our credit
card holders.

         To manage our direct risk to market interest rates, management actively
monitors the interest rates and the interest sensitive components of our balance
sheet to minimize the impact changes in interest rates have on the fair value of
assets, net income and cash flow. Management seeks to minimize the impact of
changes in interest rates primarily by matching asset and liability repricings.

         Our credit card receivables earn interest at a fixed annual percentage
rate. Our fixed annual percentage rate credit card receivables have no stated
maturity or repricing period. However, we may reprice our credit card
receivables upon providing the required prior notice to the customer, which is
generally no more than 60 days. The interest rates on our liabilities are
generally indexed to the prime rate. The characteristics of our receivables and
liabilities expose us to repricing risk, which results from differences between
the timing of rate changes and the timing of cash flows, which could impact net
interest income if liabilities reprice more often than assets. The principal
objective of our asset/liability risk management activities is to monitor and
control our exposure to adverse effects resulting from movements of interest
rates over time. We have not entered into derivative transactions to hedge
repricing risk.

         The retained interest in securitized receivables is treated as a debt
security classified as an available-for-sale security and is carried at fair
value. At the time of securitization, the retained interest is initially
recorded at the basis allocated in accordance with SFAS No. 140. This original
cost basis is adjusted to fair value, which is based on the discounted
anticipated future cash flows on a "cash out" basis. Any adjustment, net of
related deferred income taxes, is recorded as a component of other comprehensive
income. The cash out method projects cash collections to be received only after
all amounts owed to investors have been remitted. On a monthly basis, we review
the fair value assumptions which are based on the current cash flow projections
discounted at an effective rate that reflects a current risk-adjusted rate of
return that a knowledgeable investor would require.

         The interest rates on our notes payable are generally indexed to the
prime rate. Changes in short-term interest rates will affect our earnings. If
the market interest rates on our variable rate loans increase or decrease an
average of 10%, interest expense and income before income taxes would not change
by a material amount. We have not entered into derivative transactions to hedge
the interest rate risk.


                                  RISK FACTORS

Risk Factors Related to Us

         We may not achieve positive cash flow from operations or profitability.
We have incurred significant expenditures to build the infrastructure necessary
to acquire charged-off portfolios, market and create new credit card accounts
from these portfolios, and service the resulting base of credit card accounts.
As a result, we have historically experienced negative cash flow from operations
before our investing activities. Cash flow from our investing activities
includes our cash flow from credit cards and collections. Our negative cash flow
from operations was $2.25 million for the year ended May 31, 1999, $13.1 million
for the year ended May 31, 2000, and $14.8 million for the year ended June 30,
2001. We may continue to generate negative cash flow from operations, while we
expand and develop our customer base. In fiscal 1999 and fiscal 2000, and to
some extent in fiscal 2001, our negative cash flow from operations was offset by
gains on sales of portfolios of receivables and/or securitizations. Sales of
portfolios of receivables and/or securitizations resulted in



                                       31
<PAGE>


gains of $12.1 million for the year ended May 31, 1999, and $13.3 million for
the year ended May 31, 2000 and $3.3 million for the year ended June 30, 2001.
However, as a result of our conversion to the accrual basis of accounting for
our investments in receivable portfolios, sales or portfolios of receivables
and/or securitizations in the future will likely generate smaller gains. Cash
will be adequate to meet our working capital requirements. Until we generate
sufficient cash flows from operations, we will need to use our available
capital, including any proceeds from the sale or securitization of receivables
and any future issuances of debt or equity securities to fund our cash flow
requirements.

         We need additional capital to finance our operations. We currently have
cash and equivalents available that we expect will be sufficient to fund our
continuing operations through November 2001. We are currently exploring
alternative means of financing our operations during fiscal 2002, including
replacing our Coast credit facility. We are currently in discussions with two
financial institutions to sell, on a quarterly basis during calendar year 2002,
performing credit card receivables. We cannot guaranty that these sales will
take place or if the timing of the sales will meet our working capital needs as
they arise. There can be no assurance that we will be successful in raising
sufficient funds on terms that are considered acceptable. If we cannot generate
sufficient funds, we may be required to delay or abandon some of our planned
expenditures. This likely would affect our growth and our ability to repay our
outstanding debt as well. Moreover, our current funding sources may be
inadequate to sustain our operations.

         If we cannot replace our senior credit facility and obtain additional
working capital as needed to finance our operations and grow our business, we
will have to limit our operations and restrict our growth, which could hurt our
cash flow. We have a substantial ongoing need for capital to finance our
operations. This need is expected to increase along with the growth of our
business. We fund our cash requirements through a combination of:

         o        cash flow from operations;
         o        asset sales and securitizations; and
         o        loans and other financing transactions.

         Our credit facility currently has an expiration date of, and the
outstanding balance matures on, July 31, 2002. On October 31, 2001, the maximum
amount available under the credit line will be reduced to the lesser of $11.5
million or $13 million less 60% of net cash proceeds derived by us from sales or
securitizations of credit card portfolios between September 28, 2001 and October
31, 2001 and thereafter will be further reduced by 60% of the net cash proceeds
derived by us from the sales or securitization of credit card portfolios
concluded after October 31, 2001. The maximum credit line was $13 million at
July 2, 2001.

         If we cannot obtain additional working capital when needed and
additional receivable sales and securitizations are not completed, our ability
to operate and grow our business will be limited. If we fail to grow our
business we may have difficulty returning to profitability. We cannot assure you
we will be successful in obtaining additional financing when needed to meet our
working capital requirements.

         Because we have pledged all of our assets, we may have difficulty
securing future financing. Our principal lender, Coast Business Credit, has a
security interest in all of our assets, including all receivables, inventory and
equipment, to secure our payment and performance under our senior secured
facility. Our controlling stockholder, Jay L. Botchman, has a subordinated lien
on our assets to secure payment of notes held by him. While both our senior
secured lender and our controlling stockholder have in the past voluntarily
released their liens on assets we wanted to sell or securitize, the terms of our
loan agreements do not require them to release their liens. We cannot assure you
they will be willing to do so in the future. As a result, we may find it more
difficult to secure additional financing in the future.

         Fluctuations in our quarterly operating results may cause the market
price of our common stock to fluctuate. The timing of portfolio acquisitions and
credit card receivable sales and securitizations affects the timing of recorded
income and results in periodic fluctuations in our quarterly operating results.
The timing of any sale or securitization transaction is affected by a number of
factors beyond our control including market conditions and the presence of
investors and lenders interested in our credit card accounts. We may also
experience seasonal fluctuations in operating results due to other factors
beyond our control including the rate at which customers pay down their credit
card balances, make new purchases and take cash advances. For example during the
year-end holiday season customers make new credit card purchases at a faster
rate than they pay their debts. For these and other reasons our operating
results may fall below expectations of securities analysts or investors which
may cause the market price of our common stock to fluctuate. In addition, the
current economic cycle could cause increased unemployment, negatively impacting
our customers ability to keep their



                                       32
<PAGE>


accounts with us current. The impact of the September 11th terrorist attacks on
the economy and any resulting impact on our customer base are also unknown and
could negatively impact our cash flow in the ensuing months.

         Because we are leveraged our ability to successfully operate our
business may be limited. As of June 30, 2001, we had approximately $47 million
of debt outstanding and we may incur substantial additional debt in the future.
Our level of debt could have important consequences to you, including:

         o        a substantial portion of our cash flow from operations will be
                  dedicated to paying principal and interest on our debt,
                  reducing funds available for expansion or other purposes;
         o        our significant amount of debt could make us more vulnerable
                  to changes in general economic conditions or increases in
                  prevailing interest rates;
         o        our failure to comply with the restrictions contained in any
                  of our financing arrangements could lead to a default which
                  could result in our being required to repay all of our
                  outstanding debt; and
         o        we may be more leveraged than some of our competitors, which
                  may result in a competitive disadvantage.


         If we are not successful in converting the defaulted debt we acquire to
credit card accounts, we may not be able to generate sufficient cash flow to
fund our operations. We are primarily in the business of providing credit card
products to consumers who have previously defaulted on a debt. Before our
acquisition of the receivables, the originating institutions and intermediary
owners, if any, have generally made numerous attempts to collect on the
non-performing accounts. Before buying receivables we project the amount we
expect to collect on those receivables. If:

         o        we collect less on the receivables than expected;
         o        we convert fewer of the non-performing accounts than expected
                  into credit card accounts; or
         o        the new credit card accounts have a higher default rate than
                  we anticipated we may not be able to generate sufficient cash
                  to cover the costs associated with purchasing receivables and
                  operating our business.

         Lack of maturity of our credit card portfolio may result in increased
delinquencies and defaults reducing our cash flows. A portfolio of older
accounts generally behaves more predictably than a portfolio of newly originated
accounts. As a result, the average age of a credit card issuer's portfolio is
generally used as an indicator of the stability of the delinquency and default
levels of that portfolio. As of June 30, 2001, the majority of the credit card
accounts owned by us were less than three years old. As a result there can be no
assurance as to the levels of delinquencies and defaults which may result in
charge-offs which would affect our earnings over time. Any material increase in
delinquencies and defaults above management's expectations would decrease our
cash inflows.

         Our failure to manage growth could result in increased costs and
decreased revenue. We may be unable to manage our growth effectively and
maintain our historical level of cash flows from the portfolios we purchase.
This would increase the cost of expansion and impair our ability to fully
implement our expansion plans. The development and expansion of our business
will depend on, among other things, our ability to:

         o        maintain our relationships with third-party credit card
                  issuers;
         o        acquire non-performing debt on favorable terms;
         o        convert acquired non-performing debt to credit cards accounts
                  and collect on these new credit card accounts;
         o        obtain adequate financing on favorable terms;
         o        estimate the timing and amount of expected future cardholder
                  payments; and
         o        profitably securitize or sell our receivables on a regular
                  basis.

         Our inability to achieve any or all of these factors could result in
reduced income and cash flow.

         Because we have accumulated but not paid cash dividends on our
preferred stock, if we were required to pay these dividends it would decrease
our liquidity and could adversely affect the growth of our business. As of June
30, 2001, we had accumulated approximately $6.2 million in undeclared and unpaid
dividends on our preferred stock. Although our board of directors has not
declared, and therefore we have not paid, the accumulated dividends to date, we
may be called on to pay the accumulated dividends in the future. To the extent
the preferred stock remains outstanding, additional cash dividends will
accumulate. If we are required to pay the dividends, the payments would limit
the amount of cash available to use for operations which could adversely affect
the growth of our business.



                                       33
<PAGE>


         Jay L. Botchman controls a majority of our voting power and his
interests may conflict with your interests. Jay L. Botchman is the beneficial
owner of 40.3% of our fully diluted outstanding shares of common stock. In
addition, Mr. Botchman beneficially owns all of our Series A, C, D and E
Preferred Stock. The Series A Preferred Stock contains preferential voting
rights. As a result, Mr. Botchman controls approximately 80% of all votes
entitled to be voted at any meeting of our stockholders and is able to control
our management and affairs and the outcome of all matters submitted to our
stockholders for approval, including the election and removal of directors, any
merger, consolidation or sale of all or substantially all of our assets and any
charter amendments.

         Since we are dependent on the continued contributions of our key
personnel, the loss of the services of one or more of our key employees could
disrupt our operations causing our income and cash flow to decrease. We have
entered into employment agreements with Kevin T. Riordan, our President and
Chief Operating Officer, and Michael J. Philippe, our Executive Vice President
and Chief Financial Officer. Mr. Philippe's employment agreement contains a
change of control provision which would be triggered if Taxter One were to sell
all of its common stock. If triggered, Mr. Philippe would be entitled to
terminate his employment and receive payments under his employment agreement
through June 2002. The loss of the services of either of these individuals or
the services of other officers or key employees could cause us to incur costs
for recruiting replacements, result in the loss of the valuable expertise and
business relationships, and affect our business and prospects.

         Labor shortages and high employee turnover rates could increase costs
significantly and adversely impact revenue. The credit card industry is labor
intensive and generally experiences a high rate of turnover in personnel. Growth
in our business will also require us to continue to recruit and train
significant numbers of additional qualified personnel. A high turnover rate
among our employees would increase our recruiting and training costs and could
adversely impact the overall recovery of our receivables. In addition, Sioux
Falls, South Dakota experiences a low incidence of unemployment. There can be no
assurance we will be able to hire, train and retain a sufficient number of
qualified employees. If we were unable to recruit and retain a sufficient number
of employees, we would be forced to limit our growth or possibly curtail our
operations.

         Because we cannot issue our own credit cards, the failure of our
third-party credit card issuers to continue to provide credit cards to our
accounts could severely disrupt our business. We are not licensed to nor do we
currently have the ability to independently issue credit cards. As a result, we
are dependent on the two banks we use to issue credit cards to our customers.
These banks operate under extensive governmental regulation. If additional
regulations or restrictions were imposed on issuing credit cards, the new
regulations or restrictions could increase our costs or limit our operations. In
addition, if our existing credit card issuers discontinue offering credit cards
to our accounts and we cannot find a new credit card issuer willing to issue
cards to consumers with impaired credit histories, we would be unable to operate
our business as it is currently conducted. We cannot assure you we could find an
alternate provider willing to issue credit cards to our accounts on terms we
consider favorable in a timely manner without disruption of our business.

         Because we do not have backup arrangements for all of our operations,
we may incur significant losses if an outage occurs. Through the issuing bank's
arrangement with First Data Resources, we use First Data Resources for
third-party processing of credit card data and services. We provide credit card
data to First Data Resources on a daily basis and this data is backed up and
stored by First Data Resources. While we are currently evaluating a back-up
servicer for our portfolio of credit cards, to date we have not arranged for a
back-up. In addition, we do not have a back-up telemarketer for our marketing
programs. If a disaster or other event closed our main facility or shut down our
primary and redundant data connections to First Data Resources our business
would be interrupted until we could repair our data lines and/or facilities or
relocate to temporary facilities. Any interruption in our operations could have
a material adverse impact on our business and revenues.

         If we cannot protect our proprietary information, we may lose a
competitive advantage and suffer decreased revenues and cash flow. We are
dependent, in part, on proprietary data, analytical computer programs and
methods and related know-how for our day-to-day operations. We rely on a
combination of confidentiality agreements, contract provisions and trade secret
laws to protect our proprietary rights. Although we intend to protect our rights
vigorously, there can be no assurance we will be successful in protecting our
proprietary rights. If we are unable to protect our proprietary rights, or if
our proprietary information and methods become widely available, we may lose a
competitive advantage within our market niche. The loss of this competitive
advantage could result in decreased revenues and cash flow.

         If we fail to successfully anticipate, invest in or adopt technological
advances within our industry, we may lose market share which could result in
decreased cash flow. Our success is dependent in large part on our continued
investment in sophisticated telecommunications and computer systems, including
predictive dialers, automated call distribution systems and digital switching


                                       34
<PAGE>


equipment. We have invested significantly in technology in an effort to remain
competitive and anticipate it will be necessary to continue to do so. Moreover,
computer and telecommunications technologies are evolving rapidly and are
characterized by short product life cycles, which require us to anticipate and
stay current with technological developments. There can be no assurance we will
be successful in anticipating, managing or adopting technological changes on a
timely basis or that we will have the capital resources available to invest in
new technologies. Our failure to anticipate or adopt technological changes may
affect our ability to maintain our customers and result in decreased our cash
flow.

         Our competitors may introduce new products and services which adversely
impact our ability to attract new credit card customers and grow our business.
As competitors enter the market for non-performing debt they may introduce
additional products that we cannot offer. To the extent consumers with negative
credit histories have less difficulty obtaining credit there may be less demand
for our product. A decrease in the demand for our products and services would
likely slow the growth of our business and could adversely effect our ability to
repay the subordinated renewable notes. See "Business -- Competitive
Conditions."

         We are developing new products and services which may not be
successful. While we may, from time to time, develop additional products and
services, there can be no assurance the development of these products and
services will be completed or that any new products or services will be
successfully marketed and implemented. Consumer preferences for credit card and
credit related products are difficult to predict, especially where consumers
have experienced past credit difficulties. Failure to obtain significant
customer satisfaction or market share for our products and services would impact
our ability to attract new customers.

         Pending and future litigation may interrupt our business operations and
adversely affect our liquidity or profitability. From time to time we have been
named as a defendant in class action lawsuits. Three class action lawsuits and
one suit concerning a Mutual Business Development Agreement are pending against
us. We have been informed by O. Pappalimberis Trust that they intend to file
suit against us alleging breach of a Mutual Business Development Agreement. If
we were required to pay a significant judgment in one or more of the lawsuits,
or in a future lawsuit, it would affect our liquidity. In addition, a loss might
also require us to change how we conduct our business if our operations were
found to not comply with applicable legal standards. Any required changes might
affect our ability to return to profitability. See "Legal Proceedings."

         Because we use estimates in our accounting, differences between actual
and expected performance may cause fluctuations in our reported revenue and
reported income. Income from investment in receivables portfolios and
securitization income and asset sales have constituted, and are likely to
continue to constitute, a significant portion of our revenue. Portions of this
revenue are reported based on the cash flow we expect to receive from the credit
cards we originate or own and from the credit cards that have been securitized
and in which we hold a retained interest. The expected cash flows are based on
our estimates of interest rates, default rates, new account origination rates,
repayment rates, and new charges made by cardholders. These estimates are based
on a variety of factors, many of which are not within our control. Differences
between actual and expected performance of the receivables may cause us to
adjust our estimates and result in fluctuations in our reported revenue and
reported income.

         Because our stock price has been and may continue to be volatile, it is
more difficult for you to evaluate our company and our prospects. The trading
price of our common stock has been and is likely to be highly volatile. Our
stock price could fluctuate widely in response to a variety of factors,
including:

         o        actual or anticipated variations in quarterly operating
                  results;
         o        new products or services offered by us or our competitors;
         o        changes in interest rates;
         o        changes in economic conditions;
         o        changes in financial estimates by securities analysts;
         o        additions or departures of key personnel;
         o        sales of common stock; and
         o        other events or factors that may be beyond our control.

          In addition, the American Stock Exchange has recently experienced
extreme price and volume fluctuations. These fluctuations often have been
unrelated or disproportionate to the operating performance of the affected
companies. Broad market and industry factors may materially adversely affect the
market price of our common stock, regardless of our actual operating
performance.




                                       35
<PAGE>


         Risk Factors Related to the Non-Performing Debt and Sub Prime Credit
Card Industries

         Because the market for our credit card receivables is limited, we may
be unable to sell or securitize our portfolios to generate the cash required to
operate our business. Our future is highly dependent on our ability to sell or
securitize the portfolios of credit cards we generate from the non-performing
debt we acquire. Although we have sold several portfolios and completed several
securitizations, no assurance can be given we will be able to sell or securitize
future portfolios. Our ability to complete securitizations or asset sales
depends on several factors including interest rates, general market conditions
and the quality of our portfolios.

         We may not be able to acquire enough receivables on favorable terms to
operate profitably. To obtain additional credit card customers, we depend on the
continued availability of non-performing portfolios that meet our requirements.
The availability of portfolios of receivables for future purchase at prices
favorable to us depends on a number of factors outside of our control. These
factors include:

         o        continuation of the current growth trend in credit card and
                  consumer installment debt;
         o        the ability of consumers to obtain credit, especially
                  unsecured credit cards;
         o        the overall default rates on consumer debt;
         o        the ability of traditional credit card lenders to rehabilitate
                  their own non-performing credit card receivables;
         o        the prices competitors bidding on available non-performing
                  receivables are willing to pay; and
         o        the entry of new competitors.

         If we cannot purchase a sufficient amount of non-performing receivables
at favorable prices it will reduce our cash flow.

         Fluctuations in economic conditions could increase payment
delinquencies and defaults and reduce our cash flow from operations. During
strong economic cycles, available credit, including consumer credit, generally
increases and payment delinquencies and defaults generally decrease. During
periods of economic slowdown and recession, delinquencies and defaults generally
increase. We cannot predict what effect the September 11th attacks on New York
City and Washington, D.C. or subsequent military actions will have on economic
conditions. No assurances can be given that our credit card losses and
delinquencies would not worsen in a weak economic cycle. Significant increases
in credit card losses would reduce our operating cash flow.

         Adverse publicity or increased regulation may impair acceptance of our
products and adversely affect our cash flow from operations. Critics of the
credit card industry have in the past focused on marketing practices they claim
encourage consumers to borrow more money than they should and on pricing
practices they claim are either confusing or result in prices that are too high.
Increased criticism of the industry or us could hurt customer acceptance of our
products or lead to adverse changes in the law or regulatory environment. In
addition, increased regulation of financial institutions that buy credit card
receivables or invest in securitizations could affect the pricing or the size of
the market for credit card sales or securitizations. These changes could
adversely affect our ability to generate cash from our operations or complete
sales or securitizations of credit card receivables.

          Failure to comply with consumer and debtor protection laws and
regulations could adversely affect our business. Our collection practices,
business operations and credit card receivables are subject to numerous federal
and state consumer protection laws and regulations imposing licensing and other
requirements with respect to purchasing, collecting, making and enforcing
consumer loans. Our failure to comply with these statutes or regulations could
cause adverse publicity which could make it more difficult to collect our
receivables. See "Business --Government Regulation."


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

          The consolidated financial statements and the report thereon of Grant
Thornton LLP, independent certified public accountants, dated August 22, 2001,
except for Note F, as to which date is September 28, 2001, are filed as part of
this Form 10-K. See Item 14.

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

          None.



                                       36
<PAGE>


                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS

          The information included in our definitive proxy statement for the
2001 Annual Meeting of Shareholders under the captions "Election of Directors,"
"Executive Officers" and "Section 16(a) Beneficial Ownership Reporting
Compliance" is incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

          The information included in our definitive proxy statement for the
2001 Annual Meeting of Shareholders under the captions "Election of
Directors--Compensation of Directors," "Summary Compensation Table," "Option
Tables--Option Grants in Last Fiscal Year", " Option Tables--Aggregate Option
Exercises in Fiscal 2001 and Fiscal Year-End Option Values" and "Employment
Agreements" is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

          The information included in our definitive proxy statement for the
2001 Annual Meeting of Shareholders under the caption "Security Ownership of
Principal Shareholders and Management" is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

          The information included in our definitive proxy statement for the
2001 Annual Meeting of Shareholders under the caption "Certain Relationships and
Related Transactions" is incorporated herein by reference.

ITEM 14. FINANCIAL STATEMENTS AND EXHIBITS

(a)       Index to Consolidated Financial Statements

          The Consolidated Financial Statements required by this item are
          submitted in a separate section beginning on page F-1 of this
          registration statement

                                                                         PAGE

          Report of Independent Certified Public Accountants             F-2

          Consolidated Balance Sheets                                    F-3

          Consolidated Statements of Operations                          F-4

          Consolidated Statements of Stockholders' Equity                F-5

          Consolidated Statements of Cash Flows                          F-7

          Notes to Consolidated Financial Statements                     F-9



                                       37

<PAGE>


               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS


Board of Directors
The Credit Store, Inc.


         We have audited the accompanying consolidated balance sheets of The
Credit Store, Inc. (a Delaware corporation) and subsidiaries as of June 30, 2001
and May 31, 2000, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years ended June 30,
2001, May 31, 2000 and 1999, and the one-month ended June 30, 2000. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

         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 financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

         In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of The
Credit Store, Inc. and subsidiaries as of June 30, 2001 and May 31, 2000 and the
consolidated results of their operations and their consolidated cash flows for
each of the three years ended June 30, 2001, May 31, 2000 and 1999, and the
one-month ended June 30, 2000, in conformity with accounting principles
generally accepted in the United States of America.

         As discussed in Note B to the financial statements, the Company changed
its method of revenue recognition related to investment in receivable portfolios
as of June 1, 2000.



/s/ GRANT THORNTON LLP

Minneapolis, Minnesota
August 22, 2001 (except for note F, as
to which the date is September 28, 2001)


                                       F-2



<PAGE>

                             The Credit Store, Inc.

                           CONSOLIDATED BALANCE SHEETS

                         June 30, 2001 and May 31, 2000


<TABLE>
<CAPTION>

                                                                                 June 30,               May 31,
                ASSETS                                                             2001                   2000
                                                                                 --------               -------
<S>                                                                            <C>                   <C>
Cash and cash equivalents                                                      $ 1,853,454           $ 1,423,248
Restricted cash                                                                  1,250,000             1,025,631
Accounts and notes receivable, net                                               5,392,845             2,765,882
Prepaid expenses                                                                 1,073,283             1,341,516
Amounts due from special purpose entities                                          617,737             9,332,890
Investments in receivable portfolios, net                                       32,948,042            33,892,290
Investment in unconsolidated affiliate                                           1,000,750             1,279,888
Retained interest in securitized credit card receivables                        11,370,252             2,142,846
Property and equipment, net                                                      5,512,853             4,790,060
Goodwill, net                                                                    2,123,558             2,347,999
Deferred tax asset                                                               2,700,000             2,700,000
Other assets                                                                       985,931             1,345,942
                                                                              ------------          ------------

                                                                              $ 66,828,705          $ 64,388,192
                                                                              ============          ============

             LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES
   Accounts payable and accrued expenses                                       $ 7,537,895           $ 4,499,142
   Notes payable                                                                23,186,134            23,609,326
   Capitalized lease obligations                                                 4,247,093             2,766,228
   Subordinated notes and accrued interest payable -
      related party                                                             19,970,834            19,139,028
                                                                              ------------          ------------

                Total liabilities                                               54,941,956            50,013,724
                                                                              ------------          ------------

COMMITMENTS AND CONTINGENCIES                                                           -                     -
                                                                              ------------          ------------

STOCKHOLDERS' EQUITY
   Series A, B, C, D and E Preferred Stock                                      27,000,000            27,000,000
   Common stock, $.001 par value; 65,000,000 shares
      authorized at June 30, 2001 and May 31, 2000; 34,851,465 shares
      issued and outstanding at June 30, 2001 and 34,761,965 shares
      issued and outstanding at May 31, 2001                                        34,851                34,762
   Additional paid-in capital                                                   23,972,421            23,743,260
   Unrealized gain from retained interest in securitized
      credit card receivables, net of tax                                        4,324,398               638,227
   Accumulated deficit                                                         (43,444,921)          (37,041,781)
                                                                              ------------          ------------

                Total stockholders' equity                                      11,886,749            14,374,468
                                                                              ------------          ------------

                Total liabilities and stockholders' equity                    $ 66,828,705          $ 64,388,192
                                                                              ============          ============
</TABLE>


The accompanying notes are an integral part of these statements.

                                      F-3
<PAGE>


                             The Credit Store, Inc.

                      CONSOLIDATED STATEMENTS OF OPERATIONS

            For the years ended June 30, 2001, May 31, 2000 and 1999
                      and the one-month ended June 30, 2000


<TABLE>
<CAPTION>

                                                              Year ended     One-month ended              Year ended May 31
                                                               June 30,          June 30,             ------------------------
                                                                 2001              2000               2000               1999
                                                              ----------     ---------------          ----               ----
<S>                                                          <C>            <C>                   <C>                <C>
Revenue
     Income from investment in receivable portfolios          $38,714,160     $  3,312,545         $30,435,832        $28,483,745
     -----------------------------------------------          -----------     ------------         -----------        -----------
   Securitization income and asset sales                        3,304,331           44,488          13,266,241         12,114,703
   Servicing fees and other income                              5,034,187          237,176           2,684,554          1,564,356
                                                              -----------     ------------         -----------        -----------
                Total revenue                                  47,052,678        3,594,209          46,386,627         42,162,804
   Provision for losses                                         9,305,969        1,238,291           5,680,975          4,607,081
                                                              -----------     -----------          -----------        -----------
                Net revenue                                    37,746,709        2,355,918          40,705,652         37,555,723
Expenses
   Salaries and employee benefits                              14,334,712        1,130,262          13,502,074         12,484,582
   Professional fees                                            3,048,027          353,592           2,604,992          2,701,016
   Third-party services                                         3,850,903          338,482           3,972,785          4,468,992
   Depreciation and amortization                                1,990,390          166,133           2,494,489          2,614,216
   Marketing and customer communications                        5,016,901          375,528           3,391,962          2,683,270
   Occupancy and equipment expense                              2,032,742          143,982           1,727,884          1,614,513
   Royalty expense                                              1,067,363          211,069           1,733,412          1,541,944
   Financing fees                                               1,231,161          277,661           1,092,286            211,864
   Nonrecurring events
     Provision for contract settlement -
       related party                                            2,000,000              -                   -                  -
     Provision for losses                                       1,250,000              -                   -                  -
     Provision for losses - related party                         537,061              -                   -                  -
   Other                                                        2,567,078          261,259           3,173,999          3,316,564
                                                              -----------     -----------          -----------        -----------
                Total expenses                                 38,926,338        3,257,968          33,693,883         31,636,961
                                                              -----------     -----------          -----------        -----------

                Operating income (loss)                        (1,179,629)        (902,050)          7,011,769          5,918,762

Interest expense                                                3,655,415          304,241           2,867,999          1,590,219
Interest expense - related party                                2,090,023          171,782           2,113,950          2,439,272
                                                              -----------     -----------          -----------        -----------

                Income (loss) before income taxes              (6,925,067)      (1,378,073)          2,029,820          1,889,271

Income tax benefit                                              1,836,544           63,456           1,042,375          1,986,409
                                                              -----------     -----------          -----------        -----------
                Net income (loss)                              (5,088,523)      (1,314,617)          3,072,195          3,875,680
Dividends on preferred stock                                   (2,000,000)        (166,667)         (2,000,000)        (1,799,999)
                                                              -----------     ------------         -----------        -----------
Net income (loss), applicable to common stockholders
                                                              $(7,088,523)    $ (1,481,284)        $ 1,072,195        $ 2,075,681
                                                              ===========     ============         ===========        ===========
Net income (loss) per share - basic and diluted                    $(0.20)          $(0.04)              $0.03              $0.06

Weighted-average common shares outstanding
   Basic                                                       34,799,135       34,761,965          34,761,965         34,761,965
                                                              ===========     ============         ===========        ===========
   Diluted                                                     34,799,135       34,761,965          36,924,208         35,091,550
                                                              ===========     ============         ===========        ===========

</TABLE>

The accompanying notes are an integral part of these statements.

                                      F-4
<PAGE>

                             The Credit Store, Inc.

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

            For the years ended June 30, 2001, May 31, 2000 and 1999
                     and the one-month ended June 30, 2000

<TABLE>
<CAPTION>

                                                    Common stock
                                               ------------------------      Series A       Series B      Series C       Series D
                                               Shares            Amount      Preferred      Preferred     Preferred      Preferred
                                               ------            ------      ---------      ---------     ---------      ---------
<S>                                         <C>                 <C>         <C>           <C>            <C>            <C>
Balance at May 31, 1998                       34,761,965         $34,762    $1,200,000      $800,000     $5,000,000     $10,000,000
Net income                                           -               -              -             -              -               -
   Unrealized gain and accretion on
     retained interest in securitization,
     net of tax                                      -               -              -             -              -               -

         Comprehensive income                        -               -              -             -              -               -

   Issuance of Series E Preferred Stock in
     exchange for $10 million subordinated
     note                                            -               -              -             -              -               -

   Issuance of warrants in lieu of payment
     of accrued interest on subordinated
     debt                                            -               -              -             -              -               -
                                              ----------         -------    ----------      --------     ----------     ------------
Balance at May 31, 1999                       34,761,965          34,762     1,200,000       800,000      5,000,000      10,000,000

   Net income                                        -               -              -             -              -               -

   Unrealized gain and accretion on
     retained interest in securitization,
     net of tax                                      -               -              -             -              -               -

   Sale of retained interest in securitized
     receivables, net of tax                         -               -              -             -              -               -

         Comprehensive income                        -               -              -             -              -               -

  Issuance of warrants and stock options in
     lieu of payment for services and assets         -               -              -             -              -               -
                                              ----------         -------    ----------      --------     ----------     -----------
Balance at May 31, 2000                       34,761,965          34,762     1,200,000       800,000      5,000,000      10,000,000

   Net loss                                          -               -              -             -              -               -
   Unrealized (loss) and accretion on
     retained interest in securitization,
     net of tax                                      -               -              -             -              -               -

         Comprehensive income                        -               -              -             -              -               -
                                              ----------         -------    ----------      --------     ----------     -----------
Balance at June 30, 2000                      34,761,965          34,762     1,200,000       800,000      5,000,000      10,000,000

   Net loss                                          -               -              -             -              -               -
   Unrealized gain and accretion on
     retained interest in securitization,
     net of tax                                      -               -              -             -              -               -

         Comprehensive loss                          -               -              -             -              -               -

   Stock options exercised                        89,500              89            -             -              -               -

   Issuance of stock options in lieu of
     payment for services                            -               -              -             -              -               -
                                              ----------         -------    ----------      --------     ----------     -----------
 Balance at June 30, 2001                     34,851,465         $34,851    $1,200,000      $800,000     $5,000,000     $10,000,000
                                              ==========         =======    ==========      ========     ==========     ===========

</TABLE>

The accompanying notes are an integral part of these statements.

                                      F-5

<PAGE>

                             The Credit Store, Inc.

           CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - CONTINUED

            For the years ended June 30, 2001, May 31, 2000 and 1999
                     and the one-month ended June 30, 2000

<TABLE>
<CAPTION>

                                                               Additional                            Other              Total
                                                  Series E      paid-in           Accumulated     comprehensive     stockholders'
                                                 Preferred      capital             deficit          income            equity
                                                 ---------     ----------         -----------     -------------     ------------
<S>                                            <C>           <C>                <C>              <C>              <C>
Balance at May 31, 1998                           $       -      $19,311,782     $(43,989,656)    $       -          $ (7,643,112)

   Net income                                             -              -          3,875,680             -             3,875,680

   Unrealized gain and accretion on
     retained interest in securitization,
     net of tax                                           -              -                 -        2,497,148           2,497,148
                                                                                                                      -----------
         Comprehensive income                             -              -                 -              -             6,372,828

   Issuance of Series E Preferred Stock in
     exchange for $10 million subordinated
     note                                          10,000,000            -                 -              -            10,000,000

   Issuance of warrants in lieu of payment
     of accrued interest on subordinated debt             -        3,358,929               -              -             3,358,929
                                                  -----------    -----------     -------------    -----------         -----------
Balance at May 31, 1999                            10,000,000     22,670,711      (40,113,976)      2,497,148          12,088,645
   Net income                                             -              -          3,072,195             -             3,072,195

   Unrealized gain and accretion on
     retained interest in securitization,
     net of tax                                           -              -                 -        2,062,292           2,062,292

   Sale of retained  interest in securitized
     receivables, net of tax                              -              -                 -       (3,921,213)         (3,921,213)
                                                                                                                      -----------
         Comprehensive income                             -              -                 -              -             1,213,274

   Issuance of warrants and stock options
     in lieu of payment for services and assets           -        1,072,549               -              -             1,072,549
                                                  -----------    -----------     -------------    -----------         -----------

Balance at May 31, 2000                            10,000,000     23,743,260      (37,041,781)        638,227          14,374,468

   Net loss                                               -              -         (1,314,617)            -            (1,314,617)

   Unrealized gain and accretion on
     retained interest in securitization,
     net of tax                                           -              -                 -          123,180             123,180
                                                                                                                      -----------
         Comprehensive income                             -              -                 -              -            (1,191,437)
                                                  -----------    -----------     -------------    -----------         -----------
Balance at June 30, 2000                           10,000,000     23,743,260      (38,356,398)        761,407          13,183,031

   Net loss                                               -              -         (5,088,523)            -            (5,088,523)

   Unrealized gain and accretion on
     retained interest in securitization,
     net of tax                                           -              -                 -        3,562,991           3,562,991
                                                                                                                      -----------

         Comprehensive loss                               -              -                 -              -            (1,525,532)

   Stock options exercised                                -          210,261              -               -               210,350

   Issuance of stock options in lieu of
     payment for services                                 -           18,900               -              -                18,900
                                                  -----------    -----------     -------------    -----------         -----------
Balance at June 30, 2001                          $10,000,000    $23,972,421     $(43,444,921)    $ 4,324,398         $11,886,749
                                                  ===========    ===========     =============    ===========         ===========

</TABLE>

The accompanying notes are an integral part of these statements.

                                      F-6
<PAGE>

                             The Credit Store, Inc.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

            For the years ended June 30, 2001, May 31, 2000 and 1999
                     and the one-month ended June 30, 2000

<TABLE>
<CAPTION>
                                                                                    One-month
                                                                    Year ended        ended             Years ended May 31,
                                                                      June 30,       June 30,      -------------------------------
                                                                        2001           2000              2000              1999
                                                                  -------------    -----------     -------------     -------------
<S>                                                               <C>              <C>             <C>               <C>

Cash flows from operating activities:
   Net income (loss)                                              $  (5,088,523)   $(1,314,617)    $   3,072,195     $   3,875,680
   Adjustments to reconcile net income (loss) to net cash
     provided (used) in operating activities
       Provision for credit card losses                               9,305,969      1,238,291         5,680,975         4,607,081
       Amortization of receivable portfolios discount               (20,551,081)    (1,304,350)       (1,344,418)              -
       Amortization of retained interest in securitized
         credit cards                                                (1,802,451)       (44,488)              -                 -
       Provision for losses on accounts and notes receivable          1,791,567            -             100,000           768,860
       Depreciation and amortization                                  1,990,390        166,133         2,494,489         2,614,216
       Deferred tax benefit                                          (1,836,544)       (63,456)       (1,042,375)       (1,986,409)
       Gain on sale of interest in affiliates                               -              -          (5,260,358)              -
       (Gain) loss from unconsolidated affiliates                       (37,290)        (6,733)          332,760          (325,183)
       Gain on sale of credit card receivable portfolios             (1,526,504)           -          (5,771,007)      (11,851,080)
       Services received for stock options granted                       18,900            -              38,500               -
       Changes in operating assets and liabilities:
         Restricted cash                                               (146,787)       (77,582)         (275,631)          250,000
         Accounts and notes receivable                               (3,976,334)        87,606        (1,715,675)       (1,426,401)
         Receivable from special purpose entities                     4,673,377      4,041,776        (8,102,190)       (1,230,700)
         Prepaid expenses                                               122,188        147,909          (723,318)         (173,362)
         Accrued interest on funds advanced on credit cards            (440,393)        43,519          (511,096)           82,488
         Accrued fees                                                (1,162,586)         4,609        (1,197,790)          291,161
         Other assets                                                   360,436         (2,331)          407,121          (177,085)
         Unearned fees                                                  (12,868)        (4,308)          264,855           184,551
         Accounts payable and accrued expenses                        2,876,976        136,777           185,733          (193,277)
         Accrued interest payable on subordinated notes                 660,023        171,783           242,433         2,439,273
                                                                  -------------    -----------     -------------      ------------
                Net cash provided (used) in operating
                    activities                                      (14,781,535)     3,220,538       (13,124,797)       (2,250,187)
Cash flows from investing activities:
   Collection of consumer debt and funds advanced                    38,167,265      2,150,036        25,761,161        24,583,838
   Retained interest in securitized credit card receivables          (1,794,295)           -          (1,840,282)       (1,346,815)
   Proceeds from sale of credit card receivable portfolios            9,257,092            -          12,244,229        17,129,109
   Funds advanced on credit cards                                   (27,997,798)    (2,298,314)      (30,849,101)      (29,460,286)
   Purchase of non-performing consumer debt portfolios               (4,430,995)           -         (13,811,499)       (8,622,478)
   Proceeds from sale of beneficial interest in affiliates                  -              -           8,643,233               -
   Purchase of performing consumer debt portfolios                          -              -          (4,082,114)              -
   Development of proprietary software                                 (453,047)       (61,141)         (207,587)         (460,497)
   Purchase of property and equipment                                (2,086,373)       (52,411)         (737,172)         (682,539)
                                                                   ------------    -----------     -------------     -------------

                Net  cash   provided   (used)   in   investing
                  activities                                         10,661,849       (261,830)       (4,879,132)        1,140,332
                                                                    -----------    -----------      ------------      ------------
</TABLE>


The accompanying notes are an integral part of these statements.

                                      F-7

<PAGE>



                             The Credit Store, Inc.

                CONSOLIDATED STATEMENT OF CASH FLOWS - CONTINUED

            For the years ended June 30, 2001, May 31, 2000 and 1999
                     and the one-month ended June 30, 2000

<TABLE>
<CAPTION>
                                                                  Year ended   One-month ended        Years ended May 31,
                                                                    June 30,       June 30,      ----------------------------
                                                                     2001            2000            2000            1999
                                                                 ------------    ------------    ------------    ------------
<S>                                                              <C>             <C>             <C>             <C>
Cash flows from financing activities:
   Proceeds from debt                                            $  4,129,628    $    251,255    $ 19,128,881    $    576,643
   Payments on debt                                                (2,561,301)     (2,242,774)     (1,956,321)     (2,032,989)
   Borrowings from capital leases                                   3,426,266              --         896,018         559,713
   Payments on capital lease obligations                           (1,791,594)       (153,807)     (2,175,331)     (1,664,653)
    Partner distributions from unconsolidated affiliates              323,161              --              --              --
   Proceeds from issuance of stock                                    210,350              --              --              --
                                                                 ------------    ------------    ------------    ------------

                Net cash provided (used) in financing
                  activities                                        3,736,510      (2,145,326)     15,893,247      (2,561,286)
                                                                 ------------    ------------    ------------    ------------

                NET INCREASE (DECREASE) IN CASH AND CASH
                  EQUIVALENTS                                        (383,176)        813,382      (2,110,682)     (3,671,141)

Cash and cash equivalents at beginning of period                    2,236,630       1,423,248       3,533,930       7,205,071
                                                                 ------------    ------------    ------------    ------------

Cash and cash equivalents at end of period                       $  1,853,454    $  2,236,630    $  1,423,248    $  3,533,930
                                                                 ============    ============    ============    ============


Supplemental disclosures of cash flow information:
     Cash paid during the year for:
       Interest                                                  $  4,825,707    $    265,007    $  4,178,571    $  1,592,864
       Income taxes                                                        --              --              --              --

     Noncash investing activities:
         Conversion of cardholder account to note receivable          504,801              --              --              --
         Change in fair market  value of retained  interest in
           securitized credit cards, net of tax                     2,214,309       1,471,862       2,062,292       2,497,148

     Noncash financing activities:
         Series D and E preferred stock issued in exchange
           for subordinated note                                           --              --              --      10,000,000
         Obligations assumed in lieu of payment of accrued
           interest on subordinated debt                                   --              --              --       1,641,071
         Issuance of warrants in lieu of payment of accrued
           interest on subordinated debt                                   --              --              --       3,358,929
         Issuance of warrants and stock options in lieu of
           payment for services and assets                             18,900              --       1,072,549              --
</TABLE>


The accompanying notes are an integral part of these statements.


                                      F-8

<PAGE>


                             The Credit Store, Inc.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                      June 30, 2001, May 31, 2000 and 1999
                                and June 30, 2000


NOTE A  -  ORGANIZATION

   The Credit Store (the "Company") is a technology and information based
   financial services company that provides credit card products to consumers
   who may otherwise fail to qualify for a traditional unsecured bank credit
   card. Unlike traditional credit card companies, the Company focuses on
   consumers who have previously defaulted on debt. The Company reaches these
   consumers by acquiring their defaulted debt. Through direct mail and
   telemarketing operations, these consumers are offered an opportunity to
   settle their debt, typically at a discount, transfer the agreed settlement
   amount to a newly issued unsecured MasterCard(R) or Visa(R) credit card, and
   establish a positive credit history on their newly issued card by making
   timely and consistent payments. The Company accepts lump sum settlements or
   installment payment plans from those consumers who do not accept the credit
   card offer.

   After the consumers have made six or more consecutive monthly payments on
   their outstanding credit card balance the Company considers the account
   seasoned and available to sell or securitize. Because the focus of the
   Company's business is to convert defaulted debt into seasoned credit cards,
   the Company periodically sells or securitizes portfolios of these seasoned
   accounts. The Company also periodically sells into the secondary market for
   non-performing consumer debt portfolios of accounts it acquired but was
   unable to convert.

   On May 24, 2001, the Company changed its fiscal year end to June 30, from May
   31. The Company believes that the twelve months ended June 30, 2001 provide a
   meaningful comparison to the twelve months ended May 31, 2000 and 1999. There
   are no factors, of which the Company is aware, seasonal or otherwise, that
   would impact the comparability of information or trends, if the results for
   the twelve months ended June 30, 2000 and 1999 were presented in lieu of
   results for the twelve months ended May 31, 2000 and 1999, except for the
   change in revenue recognition related to investments in receivables effective
   June 1, 2000.


NOTE B  -  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

   Principles of Consolidation

      The Company has five subsidiaries, Credit Store Services, Inc., Credit
   Store Capital Corp., American Credit Alliance, TCS Funding IV, Inc. , and TCS
   Funding V, Inc. All of these subsidiaries are wholly owned by the Company;
   however, only Credit Store Capital Corp. and American Credit Alliance are
   consolidated in the financial statements. Credit Store Services, Inc., TCS
   Funding IV, Inc., and TCS Funding V, Inc. are qualifying special purpose
   entities ("QSPE's") that are not required to be consolidated.


                                      F-9
<PAGE>


NOTE B  -  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  -  Continued

      Credit Store Services, Inc. and Credit Store Capital Corp. acquire
   non-performing consumer receivables and contract with the Company to offer
   consumers a credit card or to accept settlements or payment plans. American
   Credit Alliance owns a 50% interest in Dakota Card Fund II, a limited
   liability company that contracts with the Company to service non-performing
   receivables and credit card receivables that it owns. TCS Funding IV, Inc.
   and TCS Funding V, Inc. were created in connection with securitizations for
   the purpose of purchasing performing credit card receivables from the
   Company. For consolidated entities, all significant inter-company
   transactions have been eliminated.

   Cash and Cash Equivalents

   For purposes of the statement of cash flows, cash includes all cash and
   investments with original maturities of three months or less when purchased,
   except restricted cash. The Company's restricted cash is on deposit with two
   banks in order to facilitate funding of credit card loans. The Company
   maintains its cash in bank deposit accounts, which at times may exceed
   federally insured limits.

   Investment in Unconsolidated Affiliate

   Investment in unconsolidated affiliate represents the Company's earnings in
   Dakota Card Fund II, LLC, an entity involved in substantially the same
   business as the Company and is recorded on the equity method of accounting.

   Securitization Accounting

   Statement of Financial Accounting Standards No. 140 ("SFAS No. 140"),
   "Accounting for Transfers and Servicing of Financial Assets and
   Extinguishments of Liabilities," was issued in September 2000 and replaces,
   in its entirety, SFAS No. 125. The Company was required to adopt the
   provisions of SFAS No. 140 prospectively to transactions beginning after
   March 31, 2001. Although SFAS No. 140 has changed many of the rules regarding
   securitizations under SFAS No. 125, it continues to require an entity to
   recognize the financial and servicing assets it controls and the liabilities
   it has incurred and to derecognize financial assets when control has been
   surrendered. The proceeds of securitized financial assets are allocated to
   the assets sold, the servicing asset or liability and retained interest based
   on their relative fair values at the transfer date in determining the gain on
   the securitization transaction.



                                      F-10
<PAGE>



NOTE B  -  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  -  Continued

   SFAS No. 140 and No. 125 require an entity to recognize a servicing asset or
   servicing liability each time it undertakes an obligation to service
   financial assets that have been securitized and amortize it over the period
   of estimated net servicing income or loss. The Company received adequate
   compensation for the servicing of securitized credit card receivables and
   therefore no servicing asset or liability was recorded.

   Retained Interest in Securitized Credit Card Receivables

   The retained interest in securitized credit card receivables is treated as a
   debt security classified as available-for-sale in accordance with Statement
   of Financial Accounting Standards No. 115, "Accounting for Certain
   Investments in Debt and Equity Securities," and is carried at fair value. At
   the time of securitization, the retained interest is initially recorded at
   the basis allocated in accordance with SFAS No. 140. The original cost basis
   is adjusted monthly to fair value which is based on the discounted
   anticipated future cash flows on a "cash out" basis. The cash out method
   projects cash collections to be received only after all amounts owed to
   investors have been paid. Adjustments to fair value (net of related income
   taxes) are recorded as a component of other comprehensive income.

   Income on the retained interest is accrued based on the effective interest
   rate applied to its original cost basis, adjusted for previously accrued
   interest and cash payments. The effective interest rate is the internal rate
   of return determined based on the timing and amounts of anticipated future
   cash flows for the underlying pool of securitized credit card receivables.
   The Company adopted EITF 99-20, "Recognition of Interest Income and
   Impairment on Purchased and Retained Beneficial Interests in Securitized
   Financial Assets", during the fourth quarter of fiscal year 2001. The
   adoption of EITF 99-20 did not have a material impact on the consolidated
   financial statements.

      The retained interest in securitized credit card receivables is evaluated
      for impairment by management monthly based on current market and cash flow
      assumptions applied to the underlying receivables. Provisions for losses
      are charged to earnings when it is determined that the retained interest's
      original cost basis, adjusted for accrued interest and principal payments,
      is greater than the present value of expected future cash flows. No such
      provision for losses was recorded during the fiscal years ended June 30,
      2001, May 31, 2000 and 1999, and the one-month ended June 30, 2000.



                                      F-11
<PAGE>




NOTE B  -  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  -  Continued

   Property and Equipment

   Property and equipment are recorded at cost, less accumulated depreciation
   and amortization. Depreciation and amortization are determined using the
   straight-line method over the estimated useful lives of the assets or terms
   of the capital lease. Expenditures for maintenance and repairs are expensed
   when incurred.

   Goodwill

   Goodwill originating from the acquisition of companies is being amortized
   using the straight-line method over fifteen years. The Company evaluates the
   impairment of goodwill based on expectations of future non-discounted cash
   flows and operating income related to purchased businesses. As of June 30,
   2001 and May 31, 2000 accumulated amortization was $984,087 and $759,646.

   Revenue Recognition

   Effective June 1, 2000, the Company accounts for its investments in
   receivable portfolios on the accrual basis of accounting in accordance with
   the provisions of the AICPA's Practice Bulletin 6, "Amortization of Discounts
   on Certain Acquired Loans." Prior to June 1, 2000, the Company used the cost
   recovery method of accounting. Practice Bulletin 6 requires that the accrual
   basis of accounting be used at the time the amount and timing of projected
   portfolio cash flows can be reasonably estimated and collection is probable.
   The Company has established projection models from historical portfolio data
   that it believes provides appropriate information to reasonably estimate
   future cash flows.

   For both the cost recovery and accrued methods of accounting, static pools
   are established which include accounts having similar attributes, based on
   the specific seller and the timing of the acquisition. Once a static pool is
   established, the receivables are permanently assigned to the pool. The
   discount (i.e., the difference between the cost of each static pool and the
   related aggregate consumer receivable balances) is not recorded at the time
   of purchase because the Company expects to collect a relatively small
   percentage of each static pool's consumer receivable balances. The Company
   accounts for each static pool as a unit for the economic life of the pool for
   recognition of income from receivable portfolios, for collections applied to
   principal of receivable portfolios and for provision for loss or impairment.
   All direct mail and scrubbing costs are expensed as incurred.





                                      F-12
<PAGE>



NOTE B  -  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  -  Continued

   Under the accrual basis of accounting, amortization of receivable portfolios
   discount is accrued based on the effective interest rate determined for each
   pool applied to each pool's carrying value as of June 1, 2000, adjusted for
   previously accrued interest and cash payments, or its cost if purchased after
   June 1, 2000. The effective interest rate is the internal rate of return
   determined based on the timing and amounts of actual cash received since the
   date of adoption of accrual accounting or since the pool's purchase date, if
   purchased after June 1, 2000, and anticipated future cash flow projections
   for each pool.

   The Company monitors impairment of non-performing receivable portfolios based
   on the current market environment and the discounted projected future cash
   flow of each portfolio compared to the portfolio's carrying amount.
   Provisions for losses are charged to earnings when the Company has determined
   that the investment in a non-performing receivable portfolio is greater than
   the present value of expected future cash flows. No such provision for losses
   was recorded in the year ended June 30, 2001, May 31, 2000 and 1999, or the
   one-month period ended June 30, 2000.

   The change to the accrual method resulted in an increase of $7.7 million and
   $1.2 million in income from credit card receivables for the year ended June
   30, 2001 and one-month period ended June 30, 2000, compared to the amount
   that would have been reported under the cost recovery method previously used,
   and an increase of $5.0 million and $0.4 million in the provision for losses
   on credit card receivables. Prior periods are not required to be restated.

   Prior to June 1, 2000, the portfolios of non-performing consumer debt were
   accounted for on a pool basis using the cost recovery method of accounting in
   accordance with Practice Bulletin No. 6, "Amortization of Discounts on
   Certain Acquired Loans." Under the cost recovery method of accounting, all
   cash receipts relating to individual portfolios of nonperforming consumer
   debt are applied first to recover the cost of the portfolios, prior to
   recognizing any revenue. Cash receipts in excess of cost of acquired
   portfolios are then recognized as revenue. The cost of the portfolio includes
   the purchase price paid to the seller plus costs directly related to the
   acquisition of the portfolio.

   Servicing revenues are fees related to originating, processing and managing
   credit cards for third parties. These revenues are recognized when the
   related services are provided.



                                      F-13
<PAGE>



NOTE B  -  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  -  Continued

   Fee income and interest on new advances is accrued on all credit card
   accounts including delinquent accounts, until the account is charged off. A
   credit card is contractually delinquent if the minimum payment is not
   received on the specified payment due date on the customer's statement.

   Allowance for Credit Card Losses

   The provision for credit card losses includes current period losses and an
   amount which, in the judgment of management, is necessary to maintain the
   allowance for possible credit card losses at a level that reflects known and
   inherent risks in the credit card portfolio. In evaluating the adequacy of
   the allowance for credit card losses, management considers several factors,
   including: historical trends of charge-off activity for each credit card
   portfolio as well as current economic conditions and the impact that such
   conditions might have on a borrowers' ability to repay. Significant changes
   in these factors could affect the adequacy of the allowance for credit card
   losses in the near term. Credit card accounts are generally charged-off when
   the credit card receivable becomes contractually 180 days past due, with the
   exception of bankrupt accounts, which are charged off immediately upon formal
   notification of bankruptcy, and accounts of deceased cardholders without a
   surviving, contractually liable individual, which are also charged off
   immediately upon notification.

   The following table summarizes information about the Company's allowance for
credit card losses.


<TABLE>
<CAPTION>
                                                        For the year           For the year
                                                           ended                   ended
                                                       June 30, 2001           May 31, 2000
                                                      ---------------          ------------
<S>                                                   <C>                   <C>
     Balance at beginning of period                     $ 3,593,909           $ 2,846,533
     Provision for credit card losses                     9,305,969             5,680,975
     Credit card receivables charged-off                 (9,042,996)           (6,051,670)
                                                        -----------           -----------

     Balance at end of period                           $ 3,856,882           $ 2,475,838
                                                        ===========           ===========
</TABLE>



                                      F-14
<PAGE>



NOTE B  -  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  -  Continued

   Accounts and Notes Receivable

   Accounts and notes receivables represent amounts due to the Company mainly
   relating to sales of credit card receivables, a separation agreement with a
   former chief executive officer and other nonrelated party transactions.
   During the fourth quarter of fiscal 2001, the company recorded a reserve of
   $537,061 related to a note receivable from the former chief executive officer
   and $1,250,000 related to a note receivable from a third party. As of June
   30, 2001 and May 31, 2000, the accounts and notes receivable allowance for
   doubtful accounts was $2,366,584 and $584,029.

   Stock Based Compensation

   The Company utilizes the intrinsic value method of accounting for its
   stock-based employee compensation plans. Stock based awards granted to
   non-employees are expensed over the time the services are rendered based upon
   the fair value of the award or services. Proforma information related to the
   fair value based method of accounting is contained in Note H.

   Deferred Income Taxes

   Deferred income taxes reflect the net tax effects of temporary differences
   between the carrying amounts of assets and liabilities for financial
   reporting purposes and the amounts used for income tax purposes.

   Net Income (Loss) Per Share

   Basic net income (loss) per share is computed by dividing net income (loss)
   applicable to common stockholders by the weighted-average number of common
   shares outstanding during the period. Net income (loss) applicable to common
   stockholders is computed by deducting dividends on preferred stock from net
   income (loss). Diluted net income (loss) per share is based on the
   weighted-average number of common and common equivalent shares outstanding.
   The calculation takes into account the shares that may be issued upon
   exercise of stock options and warrants, reduced by the shares that may be
   repurchased with the funds received from the exercise, based on the average
   price during the period. In computing diluted net income (loss) per share,
   only potential common shares that are dilutive (those that reduce net income
   per share) are included. Exercise of stock options is not assumed if the
   result would be antidilutive, such as when a net loss is reported.



                                      F-15
<PAGE>



NOTE B  -  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  -  Continued

   Comprehensive Income

   Comprehensive income, as defined by SFAS No. 130, "Reporting Comprehensive
   Income," includes net income (loss) and items defined as other comprehensive
   income. SFAS No. 130 requires that items defined as other comprehensive
   income (loss), such as unrealized gains and losses on certain investments in
   debt securities, be separately classified in the financial statements. Such
   disclosures are included in the consolidated statements of stockholders'
   equity.

   Reclassifications

   Certain reclassifications have been made to prior period amounts to conform
   to the current period presentation.

   Use of Estimates

   In preparing financial statements in conformity with accounting principles
   generally accepted in the United States of America, management is required to
   make estimates and assumptions that affect the reported amounts of assets and
   liabilities, the disclosure of contingent assets and liabilities at the date
   of the financial statements, and the reported amounts of revenues and
   expenses during the reporting period. Actual results could differ from those
   estimates.

   Significant estimates have been made by management with respect to the timing
   and amount of collection of future cash flows from non-performing consumer
   debt and credit card receivables ("portfolios"). Among other things, the
   estimated future cash flows of the portfolios are used to recognize income
   from receivable portfolios, impairment in investment in non-performing
   consumer debt, provision for losses on credit card receivables and fair value
   of retained interest in securitized credit card receivables. On a monthly
   basis, management reviews the estimate of future collections, and it is
   reasonably possible that these estimates may change based on actual results
   and other factors. A change could be material to the consolidated financial
   statements.



                                      F-16
<PAGE>



NOTE B  -  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  -  Continued


                          New Accounting Pronouncements

   On July 20, 2001, the Financial Accounting Standards Board ("FASB") issued
   Statement of Financial Accounting Standards ("SFAS") 141, Business
   Combinations, and SFAS 142, Goodwill and Intangible Assets. SFAS 141 is
   effective for all business combinations completed after June 30, 2001. SFAS
   142 is effective for fiscal years beginning after December 15, 2001; however,
   early application is permitted for companies with fiscal years beginning
   after March 15, 2001. Certain provisions of SFAS 142 apply to goodwill and
   other intangible assets acquired between July 1, 2001 and the effective date
   of SFAS 142. Major provisions of these Statements and their effective dates,
   assuming early application of SFAS 142 is not elected, for the Company are as
   follows:

      o  all business combinations initiated after June 30, 2001 must use the
         purchase method of accounting. The pooling of interest method of
         accounting is prohibited except for transactions initiated before July
         1, 2001.

      o  intangible assets acquired in a business combination must be recorded
         separately from goodwill if they arise from contractual or other legal
         rights or are separable from the acquired entity and can be sold,
         transferred, licensed, rented or exchanged, either individually or as
         part of a related contract, asset or liability.

      o  goodwill, as well as intangible assets with indefinite lives, acquired
         after June 30, 2001, will not be amortized. Effective for the Company's
         fiscal year beginning July 1, 2002, all previously recognized goodwill
         and intangible assets with indefinite lives will no longer be subject
         to amortization.

      o  effective for the Company's fiscal year beginning July 1, 2002,
         goodwill and intangible assets with indefinite lives will be tested for
         impairment annually and whenever there is an impairment indicator.



                                      F-17
<PAGE>


NOTE B  -  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  -  Continued

   The Company is currently reviewing early application of SFAS 142 as well as
   the affect of these FASB Statements on their financial statements.


NOTE C  -  INVESTMENTS IN RECEIVABLE PORTFOLIOS

   The Company acquires portfolios of non-performing consumer installment debt,
   credit card receivables, and automobile deficiency debt that have not been
   performing for several years from originating financial institutions. These
   debts are acquired at a substantial discount from the actual consumer
   outstanding balance. The Company's objective is to offer the consumer an
   opportunity to settle these debts, typically at a discount, and transfer the
   settled amount to a newly issued credit card. Debts that consumers do not
   settle may be sold by the Company to a third party.

      Upon settlement of the debt, a credit card is issued to the consumer with
      the opening balance and credit line equal to the settlement amount. From
      the time a settlement has been reached with the consumer, no incremental
      asset is recorded until after the consumer begins to make principal
      payments except for amortization of receivable portfolios discount and
      subsequent consumer funded activity. For financial statement purposes, the
      Company records amortization of receivable portfolios discount and funded
      credit card activity in investments in receivable portfolios. Amortization
      of receivable portfolios discount represents the present value of future
      cash flows from purchased non-performing consumer debt settled to the
      credit card account. Funded credit card activity reflects amounts funded
      by the Company for new purchases or advances, accrued interest on new
      purchases and advances, and accrued fees, less a provision for losses and
      unearned fees. After making principal payments on the settlement amount,
      the consumer may use the credit card for new purchases and cash advances
      up to their available credit limit, which may be increased from time to
      time based on their payment history.



                                      F-18
<PAGE>



NOTE C  -  INVESTMENTS IN RECEIVABLE PORTFOLIOS  -  Continued

   Investments in receivable portfolios consist of the following at:

<TABLE>
<CAPTION>
                                                                              June 30,                 May 31,
                                                                                2001                    2000
                                                                              --------                  ------

<S>                                                                          <C>                     <C>
     Cost and amortization of receivable portfolios discount                 $ 9,281,048             $ 9,648,090
                                                                             -----------             -----------

     Principal funded on new advances and purchases                          $27,456,560             $26,536,055
     Accrued interest on principal funded                                        376,749                 420,383
     Accrued fees                                                                339,517                 429,727
                                                                             -----------             -----------

     Credit card receivables                                                  28,172,826              27,386,165
                                                                             -----------             -----------

     Less
     Allowance for losses on credit card receivables                           3,856,882               2,475,838
     Unearned fees                                                               648,950                 666,127
                                                                             -----------             -----------

                                                                               4,505,832               3,141,965
                                                                             -----------             -----------

     Investments in receivable portfolios                                    $32,948,042             $33,892,290
                                                                             ===========             ===========

     Total credit card balances (1)                                          $66,184,418             $77,832,562
                                                                             ===========             ===========

     Available credit (2)                                                    $ 9,355,862             $ 7,837,918
                                                                             ===========             ===========
</TABLE>

  (1) Total credit card balances above represent the total amount owed to the
      Company by the cardholders through initial settlement, new charges,
      interest, fees and payments.

  (2) Available credit represents the amount that the Company would be
      obligated to fund if the credit cards were fully utilized by the
      cardholders.



                                      F-19
<PAGE>



NOTE D  -  SECURITIZATION AND GAIN ON SALES OF CREDIT CARD
             RECEIVABLE PORTFOLIOS


   During the fiscal year ended June 30, 2001, the Company established a new
   wholly-owned qualified special purpose entity, TCS Funding V, Inc. ("TCS V"),
   for the purpose of purchasing performing credit card receivables from the
   Company. TCS V entered into a $4.0 million credit facility with Miller &
   Schroeder Investments Corporation to finance the purchase of credit card
   receivables. The initial $4.9 million sale of credit card receivables to TCS
   V included receivables with a principal balance of approximately $5.7
   million. The remaining $0.9 million, was recorded as a retained interest.

   The TCS V credit facility advanced 70% of the principal credit card
   receivables balance, of which 5% was deposited into a reserve account. The
   terms of the credit facility require that all credit card receivables
   purchased by TCS V must be current with a minimum of eight payments made on
   each account and must meet specified other eligibility requirements.

   Until May 1, 2002, after new charges are funded and fees and interest are
   paid, excess cash collections received are required to be used by TCS V, the
   special purpose entity, to amortize the lender's beneficial interest. After
   May 1, 2002, all cash collections received relating to the senior debt
   interest in the receivables are required to be used to repay principal, after
   payment-related servicing fees and interest are paid. All new charges on the
   sold accounts are required to be purchased by the Company in exchange for a
   residual interest until such time as the senior debt interest is paid down.
   While the senior debt interest is in place, there are restrictions on the
   Company's ability to pay dividends and to pay interest on or the principal of
   the notes held by the controlling stockholder.

   During October 2000, the Company established a new wholly-owned qualified
   special purpose entity, Credit Store Services, Inc. ("CSSI"), for the purpose
   of purchasing non-performing consumer debt portfolios from the Company. The
   Company contracts with CSSI to offer consumers credit cards under the
   Company's program or to accept settlements or payment plans. Non-performing
   consumer debt portfolios are sold to CSSI at a price equal to the Company's
   book value. CSSI entered into a $25.0 million credit facility with a lending
   institution to finance a portion of the purchase price of the acquired
   portfolios. The facility expires in October 2003. Through June 30, 2001, the
   Company sold approximately $785.0 million face value of consumer debt at a
   sales price of $9.0 million to CSSI and recorded a retained interest of $1.6
   million in these assets, through June 30, 2001. As of June 30, 2001, the
   outstanding balance under CSSI's credit facility was $6.3 million, with $18.7
   million available for future borrowings at the lender's discretion.



                                      F-20
<PAGE>


NOTE D  -  SECURITIZATION AND GAIN ON SALES OF CREDIT CARD
             RECEIVABLE PORTFOLIOS  -  Continued


   During the year ended June 30, 2001, the Company also sold various receivable
   portfolios totaling $3.7 million for approximately $2.7 million to an
   unrelated party without recourse.

   During the year ended May 31, 2000, the Company established a new
   wholly-owned qualified special purpose entity (SPE), TCS Funding IV, Inc.
   ("TCS IV"), for the purpose of purchasing performing credit card receivables
   from the Company. TCS IV entered into a $40.0 million credit facility with a
   lending institution to finance the purchase of credit card receivables. The
   initial sale of credit card receivables to the SPE totaling approximately
   $12.1 million included receivables with a principal balance of approximately
   $14.2 million. TCS IV provided $10.0 million for the purchase and the
   remaining $2.1 million was recorded by the Company as retained interest. The
   transaction closed on May 31, 2000. The Company recognized a pre-tax gain of
   approximately $3.8 million. The unrealized gain of approximately $0.6
   million, included in the retained interest, was recorded net of tax as a
   separate component of stockholders' equity.

   At May 31, 2000, the Company recorded a receivable from TCS IV for $9.3
   million. This balance represented sales proceeds due to the Company. The
   receivable was guaranteed by the lending institution through an irrevocable
   commitment to fund. The receivable was collected subsequent to May 31, 2000.

   During the year ended May 31, 2000, the Company also sold a portfolio of
   receivables totaling approximately $1.4 million, with a carrying value of
   approximately $0.6 million, for approximately $1.1 million to an unrelated
   party without recourse.

   During the year ended May 31, 1999, the Company completed three
   securitizations of seasoned credit card receivables ("receivables") of
   approximately $20.4 million with three unconsolidated wholly-owned qualified
   special purpose entities ("SPE's"). All receivables sold in these
   transactions were current with a minimum of eight payments made on each
   account. The SPE's purchased the receivables from the Company for
   approximately $17.3 million of which approximately $13.0 million was funded
   with the sale of senior debt interests. The Company recognized a pre-tax gain
   of approximately $8.0 million and recorded a retained interest in securitized
   credit card receivables on an allocated basis in the amount of approximately
   $1.3 million.



                                      F-21
<PAGE>



NOTE D  -  SECURITIZATION AND GAIN ON SALES OF CREDIT CARD
             RECEIVABLE PORTFOLIOS  -  Continued

   At May 31, 1999, the allocated basis amount was adjusted to a fair value of
   approximately $5.1 million, resulting in approximately $3.8 million of
   unrealized gain on the retained interest in securitized credit card
   receivables. The unrealized gain was recorded net of tax of approximately
   $1.3 million, resulting in approximately $2.5 million, as a component of
   comprehensive income. During November 1999, the Company sold its retained
   interest in the three SPE's to the lender for approximately $8.6 million,
   resulting in a pre-tax gain of approximately $6.5 million.

   During the year ended May 31, 1999, The Company also sold a portfolio of
   credit card receivables with a total credit card balance of approximately
   $7.0 million and a carrying value of approximately $2.2 million for $5.0
   million to an unrelated party without recourse.

         The following summarizes the Company's securitization activity:


                                           Year ended               Year ended
                                          June 30, 2001           May 31, 2000
                                          -------------           ------------

      Proceeds from securitizations          $4,496,048            $10,461,551

      Servicing fees received                 2,886,273                508,503



                               Retained Interests

   The Company's retained interests are carried at estimated fair market value
   with the changes in fair value included as other comprehensive income. The
   estimated fair market value is based on the present value of expected future
   cash flows using management's estimates of key assumptions. The following
   summarizes the changes in the balance of the Company's retained interest for
   the year ended June 30, 2001:




                                      F-22
<PAGE>



NOTE D  -  SECURITIZATION AND GAIN ON SALES OF CREDIT CARD
             RECEIVABLE PORTFOLIOS  -  Continued


<TABLE>
<CAPTION>

                                                                               Estimated
                                                                               unrealized               Fair
                                                                  Cost            gains                 value
                                                                 ------        -----------             -------
<S>                                                          <C>                <C>                  <C>
     Balance at July 1, 2000                                 $1,220,325         $1,153,647           $ 2,373,972
                                                             ----------         ----------           -----------
     Retained interests in portfolios sold                    1,794,295                 -              1,794,295
     Interest accrued                                         1,802,451                 -              1,802,451
     Change in unrealized gain                                       -           5,399,534             5,399,534
                                                             ----------         ----------           -----------

     Balance at June 30, 2001                                $4,817,071         $6,553,181           $11,370,252
                                                             ==========         ==========           ===========
</TABLE>


   As of June 30, 2001, the gross net unrealized gain has been offset by a
deferred tax expense of approximately $2.2 million.

   The key economic assumptions used in measuring the fair value of retained
   interests at the time of and subsequent to a securitization are the expected
   net cash payment rate and the discount rate. The expected net cash rate is
   approximately 2.25% per month and varies by type of cards sold in each
   securitization. The net cash rate is the excess consumer payments over new
   credit card purchases and advances. The estimated cash flows have been
   discounted at 23%.

   The following represents the sensitivity of the current fair value of
   retained interest in securitizations at June 30, 2001 to changes to key
   assumptions:


        Expected cash payment rate (monthly)                            2.25%
                Impact on fair value of 5% adverse change            $715,000
                Impact on fair value of 10% adverse change         $1,312,000
        Discount rate                                                     23%
                Impact on fair value of 5% adverse change            $245,000
                Impact on fair value of 10% adverse change           $484,000



                                      F-23
<PAGE>


NOTE D  -  SECURITIZATION AND GAIN ON SALES OF CREDIT CARD
             RECEIVABLE PORTFOLIOS  -  Continued

   The above sensitivities are hypothetical and should be used with caution. As
   the amounts indicate, changes in fair value based on variations in
   assumptions generally cannot be extrapolated because the relationship of the
   change in assumption to the change in fair value may not be linear. Also, in
   this table, the effect of a variation in a particular assumption on the fair
   value of the retained interest is calculated without changing any other
   assumption. In reality, changes in one factor may result in changes in
   another, which might magnify or counteract the sensitivities.

   The Company's managed credit card receivables consists of retained interest
   in credit card receivable securitizations and investor's share of
   securitizations sold to unrelated parties without recourse. The Company
   records its retained interest in credit card receivable securitizations on
   the balance sheet. The following table summarizes the balances included in
   the managed credit card receivable portfolios.


<TABLE>
<CAPTION>
                                                                        June 30, 2001          May 31, 2000
                                                                        -------------          ------------
<S>                                                                     <C>                    <C>
     Retained interest in credit card receivable portfolios
       securitized - (sellers interest)                                   $11,370,252          $  2,142,846

     Investor's interests in credit card receivable
       portfolios securitized - (not included on balance
       sheet)                                                               9,636,810            12,153,228
                                                                          -----------          ------------

     Total managed credit card receivable portfolios
                                                                          $21,007,062           $14,296,074
                                                                          ===========          ============
</TABLE>



                                      F-24
<PAGE>



NOTE E  -  PROPERTY AND EQUIPMENT

   Property and equipment consist of the following:

<TABLE>
<CAPTION>
                                                         Useful
                                                          life                     June 30,                May 31,
                                                       (in years)                      2001                   2000
                                                       ----------                     ------                 -----
<S>                                                    <C>                      <C>                    <C>
     Computer equipment and software                     3 - 5                  $  7,374,305           $  7,289,750
     Office equipment                                    5 - 7                     1,768,762              2,280,037
     Furniture and fixtures                              5 - 7                     1,302,527              1,241,458
     Proprietary software                                  5                       1,182,271                668,084
     Leasehold improvements                          Life of leases
                                                                                     694,670                669,884
                                                                                ------------           ------------
                                                                                  12,322,535             12,149,213
     Less accumulated depreciation and
       amortization                                                               (6,940,108)            (7,489,579)
                                                                                  ----------             ----------
                                                                                   5,382,427              4,659,634
     Land                                                                            130,426                130,426
                                                                                ------------           ------------

                                                                                $  5,512,853           $  4,790,060
                                                                                ============           ============
</TABLE>



NOTE F  -  NOTES PAYABLE



   Notes payable consist of the following at:


                                         June 30,               May 31,
                                             2001                  2000
                                       -----------           -----------

     Note payable - bank               $13,380,867           $13,442,597
     Note payable - other                9,805,267            10,166,729
                                       -----------           -----------

                                       $23,186,134           $23,609,326
                                       ===========           ===========



                                      F-25
<PAGE>



NOTE F  -  NOTES PAYABLE  -  Continued

   Note Payable  -  Bank

   On April 30, 1998, the Company entered into a financing agreement with a
   bank. The revolving line of credit, may not exceed an established dollar
   amount or 50% of the Company's eligible receivables as defined by the
   agreement and is used for general working capital purposes. The originally
   established dollar amount, which was $5,000,000, was increased to $10,000,000
   on June 25, 1999, increased to $15,000,000 on December 6, 1999, and decreased
   to $13,000,000 on July 2, 2001. On September 28, 2001, this agreement was
   amended to change the maturity date from May 31, 2002 to July 31, 2002.
   Effective October 31, 2001, the maximum dollar amount available under the
   credit limit will be reduced to the lesser of $11,500,000 or an amount equal
   to $13,000,000 less sixty percent of net cash proceeds derived from sales or
   securitizations of credit card portfolios on or after September 28, 2001 and
   prior to October 31, 2001. After October 31, 2001, the maximum amount
   available under the credit limit will be further reduced by an amount equal
   to sixty percent of all net cash proceeds derived from sales or
   securitizations of credit card portfolios. The line is collateralized by
   substantially all of the Company's assets. The interest rate, which was
   originally at the prime rate plus 2.75% per annum, was reduced to prime rate
   plus 2.5% per annum on June 25, 1999. Interest expense for the three years
   ended June 30, 2001, May 31, 2000 and 1999, and the one-month ended June 30,
   2000 was $1,462,243, $1,501,047, $617,249, and $142,696.

   Note Payable  -  Other

   The Company has uncollateralized installment notes issued in connection with
   purchases of non-performing consumer debt in addition to installment
   obligations assumed in connection with the closing of certain affiliated
   mortgage companies (see Note L). The notes have various maturity dates
   through May 2002, with interest rates ranging up to 23.7% per annum. The
   amount outstanding as of June 30, 2001 and May 31, 2000 was $145,644 and
   $2,292,920. Interest expense for the three years ended June 30, 2001, May 31,
   2000 and 1999, and the one-month ended June 30, 2000 was $118,302, $145,763,
   $65,353, and $13,086.



                                      F-26
<PAGE>



NOTE F  -  NOTES PAYABLE  -  Continued

   On October 15, 1999, the Company, through a bankruptcy remote special purpose
   entity (SPE), entered into a revolving line of credit ("revolving line") with
   a financial institution. The revolving line, which may not exceed
   $17,500,000, is non-recourse to the Company and is secured by all assets of
   the SPE. The revolving line is used to acquire non-performing consumer debt
   portfolios. The Company services the portfolios subject to an agreement with
   the SPE and purchases all new credit card receivables for a pre-determined
   price. The SPE is not a qualified SPE for accounting purposes and is
   consolidated with the Company in the accompanying consolidated financial
   statements. Interest is charged at a floating daily rate and is equal to the
   reference rate plus 2.5% per annum. The agreement is in effect until August
   31, 2002. The amount outstanding as of June 30, 2001 and May 31, 2000 was
   $1,659,623 and $1,772,888. Interest expense for the years ended June 30, 2001
   and May 31, 2000, and the one-month ended June 30, 2000 was $239,369,
   $151,547, and $18,727.

   On September 20, 1999, the Company entered into a repurchase agreement with a
   bank. Under the agreement the bank purchased credit card receivables from the
   Company for $3,000,000 which had an initial repurchase date of December 20,
   1999. The original agreement was amended in March 2000 to increase the
   repurchase amount to $6,000,000. Interest was charged at a rate of 15% per
   annum. In November 2000, the Company entered into a new $8,000,000 repurchase
   agreement with the same bank and interest charged was reduced to 12% per
   annum. The agreement, as amended, has a repurchase date of January 4, 2002.
   The balance outstanding at June 30, 2001 and May 31, 2000 was $8,000,000 and
   $6,000,000. Interest expense for the years ended June 30, 2001, May 31, 2000,
   and the one-month ended June 30, 2000 was $884,083, $378,750, and $62,500.

   At June 30, 2001, future minimum principal payments for all notes payable
were as follows:



                    Year                                 Amount
                    ----                                --------

                    2002                             $ 8,145,644
                    2003                              15,040,490
                                                     -----------

                                                     $23,186,134
                                                     ===========


                                      F-27
<PAGE>



NOTE G  -  CAPITAL LEASE OBLIGATIONS

   The Company leases computer equipment and furniture and fixtures under
   long-term leases and has the option to purchase the equipment for a nominal
   cost at the termination of the lease. Assets under capital leases have been
   capitalized at a cost of $6,896,895 and $6,953,160, and have accumulated
   amortization of $3,998,825 and $5,023,793 at June 30, 2001 and May 31, 2000.

   Future minimum lease payments for capitalized leases are as follows at June
30, 2001:

                Year                                            Amount
                ----                                           --------

                2002                                         $2,573,877
                2003                                          1,625,429
                2004                                            988,402
                                                             ----------

                                                              5,187,708

                Less amount representing interest              (940,615)
                                                             ----------

                                                             $4,247,093
                                                             ==========

   Amortization expense for assets under capital leases for the three years
   ended June 30, 2001, May 31, 2000 and 1999, and the one-month ended June 30,
   2000 was $1,685,628, $1,377,479, $1,645,705 and $73,171.


NOTE H  -  STOCK OPTIONS

   The Board of Directors of the Company approved the Company's 1997 Stock
   Option Plan (the "Plan"). The Plan authorizes the grant of stock options
   covering 8,000,000 shares of the Company's common stock. In addition, the
   Board of Directors has granted stock options outside the Plan covering a
   total of 1,550,000 shares of Common Stock. The Board of Directors has the
   authority to determine the key employees, consultants, and directors who
   shall be granted options as well as the number of options granted and the
   nature of each grant. The options granted under the Plan may be either
   incentive stock options or nonqualified stock options.



                                      F-28
<PAGE>



NOTE H  -  STOCK OPTIONS  -  Continued

   Transactions during each three years ended June 30, 2001, May 31, 2000 and
   1999, and the one-month ended June 30, 2000 are summarized as follows:



                                                    Number of     Weighted
                                                  shares under     average
                                                     option     exercise price
                                                    --------    --------------

     Outstanding at June 1, 1998                   3,656,000         $2.93
        Granted                                      690,500          2.35
                                                    --------

     Outstanding at May 31, 1999                   4,346,500          2.84
        Granted                                      942,500          2.90
        Cancelled                                   (156,000)         2.08
                                                   ---------

     Outstanding at May 31, 2000                   5,133,000          2.88
        Granted                                        4,000          4.44
                                                      ------

     Outstanding at June 30, 2000                  5,137,000          2.88
        Granted                                    2,534,438          3.13
        Exercised                                    (89,500)         2.35
        Cancelled                                   (108,000)         3.00
                                                   ---------

     Outstanding at June 30, 2001                  7,473,938          2.97
                                                   =========


   At June 30, 2001 options exercisable for 5,481,000 shares of common stock
   with a weighted average exercise price of $2.78 were outstanding.

   The following table summarizes information about stock options outstanding at
June 30, 2001:


                                                  Options outstanding
                                      -----------------------------------------
                                                      Weighted
                                                      average         Weighted
             Range of                                 remaining       average
             exercise                    Number         life          exercise
              prices                  outstanding      (years)        price
        ------------------            -----------   -------------    --------

          $1.56 - $2.40                 4,733,238        2.80          $1.94
          $2.50 - $3.69                   782,700        3.03           2.95
          $3.88 - $6.47                 1,958,000        2.41           5.45
                                        ---------
                                        7,473,938                       2.97
                                        =========






                                      F-29
<PAGE>



NOTE H  -  STOCK OPTIONS  -  Continued

                                                Options exercisable
                                          ----------------------------------
                                              Number              Weighted
                      Range of            exercisable at          average
                      exercise               June 30,             exercise
                        prices                 2001                price
                  ----------------         --------------         --------

                   $1.56 - $2.40            3,743,000               $2.03
                   $2.50 - $3.69              715,000                2.95
                   $3.88 - $6.47            1,023,000                5.42
                                            ---------

                                            5,481,000                2.78
                                            =========


   The Company's pro forma net income (loss) applicable to common shareholders
   and basic and diluted net income (loss) per share would have been as follows
   had the fair value method been used for valuing stock options granted to
   employees:

<TABLE>
<CAPTION>
                                              Year ended           One-month ended          Years ended May 31,
                                               June 30,                June 30,         ----------------------------
                                                2001                   2000              2000                  1999
                                              -----------            -----------        ---------            -------
<S>                                           <C>                    <C>                <C>                  <C>
     Net income (loss) applicable to
       common shareholders                    $(8,620,256)           $(1,525,504)       $(506,953)           $50,109
     Net income (loss) per share
       Basic and diluted                           $(0.25)                $(0.04)          $(0.01)             $0.00
</TABLE>


   The fair value of each option grant is estimated on the date of grant using
   the Black-Scholes option pricing model with the following assumptions:


<TABLE>
<CAPTION>
                                              Year ended           One-month ended          Years ended May 31,
                                               June 30,                June 30,         ----------------------------
                                                 2001                   2000              2000                1999
                                              -----------            -----------        ---------            -------
<S>                                        <C>                    <C>                <C>                  <C>

   Fair value of options granted                   $1.69                  $2.91              $2.12               $1.73

   Assumptions:
     Dividend yield                                   $0                     $0                 $0                  $0
     Volatility                                      75%                    75%                90%                 90%
     Average term                          5 or 10 years          5 or 10 years      5 or 10 years       5 or 10 years
     Risk-free rate of return                      5.75%                  5.75%      6.05% - 6.47%       5.75% - 5.81%
</TABLE>



                                      F-30
<PAGE>


NOTE H  -  STOCK OPTIONS  -  Continued

   On April 30, 1998, the Company granted warrants to purchase 650,247 shares of
   the Company's common stock for $2.50 per share to a bank with which it has a
   financing agreement. Warrants to purchase 278,677 shares were exercisable
   immediately, while the remaining 371,570 warrants were exercisable on June
   25, 1999, when the Company's line of credit increased to $10,000,000 (see
   Note F). The fair value of the warrants was $1.01 at the date of grant. For
   the years ended June 30, 2001 and May 31, 2000 and the one-month period ended
   June 30, 2000, $276,526, $357,182, and $23,044 of amortization was included
   in interest expense.

   On March 18, 1999, the Company granted a five-year warrant to a vendor to
   purchase up to 1,000,000 shares of the Company's common stock at $2.00 per
   share. As of June 30, 2001 and May 31, 2000, 500,000 shares were vested under
   this agreement. The fair value of warrants was $0.85 and $0.56 at the
   respective vesting dates. For the years ended June 30, 2001 and May 31, 2000
   and the one-month period ended June 30, 2000, expense was $129,860, $72,262,
   and $10,822.


NOTE I  -  INCOME TAXES

   Deferred income tax assets (liabilities) consist of the following at:


<TABLE>
<CAPTION>
                                                                                 June 30,               May 31,
                                                                                     2001                  2000
                                                                              ------------          ------------
      Deferred tax assets
<S>                                                                           <C>                   <C>
       Net operating loss carryforward                                        $ 15,664,041          $ 14,291,447
      Allowance for doubtful accounts                                            1,857,782             1,389,759
       Other reserves                                                            1,593,600                    -
                                                                              ------------          ------------
                   Total deferred tax assets                                    19,115,423            15,681,206
       Less valuation allowance                                                (11,251,592)          (10,327,461)
                                                                              ------------          ------------
                                                                                 7,863,831             5,353,745
     Deferred tax liabilities
       Gain on sales of portfolios                                                      -             (2,324,961)
       Unrealized gain on retained interest in securitization                   (2,227,720)             (328,784)
       Revenue recognition method difference                                    (2,936,111)                   -
                                                                              ------------          ------------
                   Total deferred tax liabilities                               (5,163,831)           (2,653,745)
                                                                              ------------          ------------

     Net deferred tax asset                                                   $  2,700,000          $  2,700,000
                                                                              ============          ============
</TABLE>



                                      F-31
<PAGE>



NOTE I  -  INCOME TAXES  -  Continued

   The difference between the total income tax benefit and the income tax
   expense (benefit) computed using the applicable Federal income tax rate was
   as follows for the three years ended June 30, 2001, May 31, 2000 and 1999,
   and the one-month ended June 30, 2000:


<TABLE>
<CAPTION>
                                                      Year ended     One-month ended          Years ended May 31,
                                                       June 30,          June 30,        ----------------------------
                                                         2001              2000             2000             1999
                                                     -----------       ----------       -----------      -----------
<S>                                                  <C>               <C>              <C>              <C>
     Computed Federal income taxes at 34%
                                                     $(2,354,523)       $(468,545)      $   690,139      $   642,352

     Other                                                (1,153)             --            211,013          295,708

     (Increase) decrease of deferred tax
       asset valuation allowance                         519,132          404,999        (1,943,527)      (2,924,469)
                                                     -----------       ----------       -----------      -----------

     Income tax benefit                              $(1,836,544)      $  (63,456)      $(1,042,375)     $(1,986,409)
                                                     ===========       ==========       ===========      ===========
</TABLE>


   At June 30, 2001, the Company has a net operating loss carryforward available
   to offset future taxable income of approximately $45,000,000, which will
   begin to expire in 2012. The benefit of the net operating loss carryforwards
   is dependent upon the tax laws in effect at the time the net operating loss
   carryforwards are to be utilized and the change of control rules.

   The Company continually reviews the adequacy of the valuation allowance and
   recognizes those benefits only as the Company's assessment indicates that it
   is more likely than not that future tax benefits will be realized. Based upon
   actual pretax income and projected future earnings, the Company has reduced
   the valuation allowance by $2,000,000 and $700,000 for the years ended May
   31, 2000 and 1999, respectively. The Company maintains a valuation allowance
   for the remaining amount of deferred tax assets created by net operating
   losses and the allowance for doubtful accounts.



                                      F-32
<PAGE>



NOTE J  -  EMPLOYEE BENEFIT PLANS

   In January 1998, the Company adopted a defined contribution 401(k)
   profit-sharing plan for its employees. All employees working at least 1,000
   hours per year are eligible to participate in the plan. Employees can
   contribute up to 15% of their salary up to $10,500, $10,000 and $9,500 for
   the calendar years 2000, 1999 and 1998. The plan requires the employer to
   match 100% of the first 3% of compensation contributed to the plan by the
   employees. Employer contributions vest at a rate of 20% per year. Additional
   employer contributions are allowable at the discretion of the Board of
   Directors. The Company expensed $211,702, $217,271, $173,479 and $18,183 for
   the years ended June 30, 2001, May 30, 2000 and 1999 and for the month ended
   June 30, 2000 relating to this plan.


NOTE K  -  MUTUAL BUSINESS DEVELOPMENT AGREEMENTS

   In October 1996, the Company's predecessor entered into two Mutual Business
   Development Agreements ("Development Agreements"), one with O. Pappalimberis
   Trust and one with Renaissance Trust I.

   The Development Agreements call for a royalty equal to 5% of any newly
   established receivable originated or acquired by the Company by way of a
   converted credit card account held which: (i) is delivered to a
   pre-securitization credit facility, (ii) becomes a qualifying receivable, or
   (iii) meets other specified account age and payment parameters. A qualifying
   receivable is defined as any converted account on which the cardholder has
   made three consecutive payments within certain time restrictions. In
   addition, the Development Agreements provide for royalties equal to 5% of all
   principal cash collections on specified accounts that are not converted to
   credit cards. The total royalty, if earned, payable under each of the two
   Development Agreements, after deductions and exclusions, will not exceed $25
   million.

   The Development Agreement with the O. Pappalimberis Trust was amended on
   September 1, 1998 to alter the amount and timing of payments, give the
   Company a buyout option, alternate royalty payment options and extend the
   term of the agreement to May 31, 2005. The Development Agreement with
   Renaissance Trust I expires October 7, 2002 and has not been amended.



                                      F-33
<PAGE>


NOTE K  -  MUTUAL BUSINESS DEVELOPMENT AGREEMENTS  -  Continued

   Both Development Agreements are currently in dispute. In February 2001 the
   Company discontinued payment of royalties under both Development Agreements.
   The Company is discussing the rights and obligations of the parties under the
   Development Agreement with the O. Pappalimberis Trust.

   On April 23, 2001, the Company was sued by Renaissance Trust I in the United
   States District Court for the Southern District of New York in an action
   titled Renaissance Trust I v. The Credit Store, Inc. The plaintiffs allege
   breach of the Mutual Business Development Agreement and conversion and seek
   enforcement of the contract, compensatory damages alleged to be in excess of
   $5 million, and punitive damages of $25 million. Renaissance Trust I owns
   4,000,000 shares of the Company's common stock and 400,000 shares of the
   Company's Series B Preferred Stock. On June 29, 2001, the Court dismissed the
   conversion claim and dismissed the demand for punitive damages.

   At June 30, 2001, the Company has estimated that it is probable that a
   settlement of at least $2,000,000 will be required to settle the contract
   disputes and terminate the agreements. This amount has been accrued during
   the fourth quarter of fiscal 2001.

   For the three years ended June 30, 2001, May 31, 2000 and 1999, and the
   one-month ended June 30, 2000, $1,067,363, $1,733,412, $1,541,944, and
   $211,069 of royalty expenses were incurred with $893,918, $740,487, $702,075,
   and $816,556 accrued at June 30, 2001, May 31, 2000 and 1999, and June 30,
   2000.


NOTE L  -  RELATED PARTY TRANSACTIONS

      At June 30, 2001 and May 31, 2000, the Company owed amounts under
      subordinated promissory notes to J.L.B. of Nevada, Inc. ("JLB"), an entity
      wholly owned by Jay L. Botchman ("Botchman"), majority shareholder and
      former director, totaling $16,444,940 payable on demand with interest at
      12% per annum. Interest expense on these notes was $2,000,801, $2,006,283,
      $2,307,467, and $164,449 for the three years ended June 30, 2001, May 31,
      2000 and 1999, and the one-month ended June 30, 2000. Accrued interest
      related to subordinated promissory notes was approximately $2,200,000 and
      $1,500,000 at June 30, 2001 and May 31, 2000. The notes are collateralized
      by substantially all the Company's assets, but subordinated to the
      Company's revolving credit lines.



                                      F-34
<PAGE>


NOTE L  -  RELATED PARTY TRANSACTIONS  -  Continued

   On May 29, 1999, JLB, forgave $5,000,000 of interest on the subordinated
   promissory notes, in exchange for warrants to purchase 4,000,000 shares of
   the Company's common stock with an exercise price of $3.25 per share,
   expiring on June 30, 2004, and the Company's assumption of equipment and
   related lease obligations from a company affiliated with JLB in the amount of
   approximately $1,700,000. The fair value of the warrant was approximately
   $3,300,000.

   On February 27, 1998, the Company issued a subordinated promissory note to
   Botchman in the amount of $350,000 payable on demand with interest at 12% per
   annum. The note was paid during fiscal 2000. Interest expense for the years
   ended May 31, 2000 and 1999 was $18,200, and $42,583.

   The Company's former Chairman of the Board of Directors and Chief Executive
   Officer, Martin J. Burke, III ("Burke"), resigned effective September 21,
   2000. On this date, Burke had a personal credit card account with the Company
   with a balance due of approximately $500,000. Under the terms of Burke's
   separation and release agreement, the credit card balance and another $25,000
   for legal fees paid by the Company on Burke's behalf was combined into a note
   receivable, which matures on December 1, 2002, with interest at 8% per year
   payable monthly. The note receivable is secured by the severance payments
   made to Burke through March 26, 2002 and by Burke's stock options which have
   a $2.00 exercise price and terminate in December 2002. As of June 30, 2001,
   Burke's stock option exercise price is above market. During the year ended
   June 30, 2001, the Company received only the applied severance payments from
   Burke. Accordingly, the Company has provided a reserve for the entire
   principal and interest of $537,061 due from Burke as of June 30, 2001.

   The Company, through its wholly-owned subsidiary, American Credit Alliance,
   Inc., has an $880,000 note payable to JLB with an interest rate of 10% per
   annum. American Credit Alliance Inc. is the managing member and 50% owner of
   Dakota Card Fund II, LLC, an entity that owns performing credit card
   receivables. Interest expense for the years ended June 30, 2001, May 31, 2000
   and 1999, and the one-month ended June 30, 2000 was $89,222, $89,467, $89,222
   and $7,333. Accrued interest related to this note payable was approximately
   $424,000 and $327,000 at June 30, 2001 and May 31, 2000.



                                      F-35
<PAGE>


NOTE L  -  RELATED PARTY TRANSACTIONS  -  Continued

   The Series A and B Preferred Shares were issued at $1.00 per share (total of
   $2,000,000) on December 4, 1996 to a related party. During fiscal year 2001,
   400,000 shares of Series B Preferred Shares were transferred to a different
   related party. There was no change in the amount or number of outstanding
   Series B Preferred Shares. The Series A Preferred Stock, as a class, was
   granted 80% of the voting rights in the Company, but the percentage is
   subject to adjustment on certain issuances of capital stock. The Series B
   Preferred Stock has one vote per share. The shares of Series A and B
   Preferred Stock have a liquidation preference of $1.00 per share and will
   earn cumulative dividends at a rate of $0.05 per share per annum. At anytime
   after December 31, 2001 the Series A and B Preferred Stock will be redeemable
   at the option of the Company. The Series B Preferred Stock is convertible at
   the option of the holder into Series A Preferred Stock on a share-for-share
   basis.

   On December 31, 1996, the Company issued 5,000 shares of Series C Preferred
   Stock to a related party for $5,000,000. The shares of Series C Preferred
   Stock are non-voting and earn cumulative dividends at 6% of $1,000 per share
   per annum. The shares have a liquidation preference of $1,000 per share. The
   Series A and B Preferred Stock rank senior to the Series C with respect to
   dividend and liquidation rights.

   On May 29, 1998, the Company issued 10,000 shares of Series D Preferred Stock
   to a related party in exchange for cancellation of a $10,000,000 Promissory
   Note dated August 1, 1997. The shares of Series D Preferred Stock are
   non-voting and earn a dividend of 8% of the stated value of $1,000 per share
   per annum payable annually on December 31. The shares have a liquidation
   preference of $1,000 per share. The Series D Preferred Stock ranks senior to
   the Series A, B and C with respect to dividend and liquidation rights. Each
   share of Series D Preferred Stock is convertible into 380 shares of common
   stock. The holders of the Series D Preferred Stock have piggyback
   registration rights with respect to the Common Stock issuable upon conversion
   of the shares of Series D Preferred Stock.

   On August 31, 1998, the Company issued 10,000 shares of Series E Preferred
   Stock to a related party in exchange for agreeing to cancel a $10,000,000
   subordinated promissory note. The shares of Series E Preferred Stock are
   non-voting and earn a dividend of 8% of the stated value of $1,000 per share
   per annum payable annually on December 31. The shares have a liquidation
   preference of $1,000 per share. The Series E Preferred Stock ranks senior to
   the Series A, B, C and D with respect to dividend and liquidation rights.
   Each share of Series E Preferred Stock is convertible into 285 shares of
   common stock. The holders of the Series E Preferred Stock have piggy back
   registration rights with respect to the common stock issuable upon conversion
   of the shares of Series E Preferred Stock.



                                      F-36
<PAGE>


NOTE L  -  RELATED PARTY TRANSACTIONS  -  Continued

   As of June 30, 2001 and May 31, 2000, accumulated preferred dividends
   undeclared and unpaid on preferred stock amounted to approximately $6,200,000
   and $4,100,000.

   On May 4, 2001, in consideration of JLB agreeing to amend the payment terms
   of several promissory notes, the Company extended the expiration date of the
   conversion feature of the Series D Preferred Stock until May 30, 2006 and the
   Series E Preferred Stock until August 30, 2006.

   During fiscal 2001, the Company appointed a new director who is counsel to a
   law firm that provides services to the Company. The Company recorded legal
   expense for services from this firm of approximately $543,000 in fiscal 2001.


NOTE M  -  COMMITMENTS AND CONTINGENCIES

   Operating Leases

   The Company leases certain properties, vehicles and equipment under
   non-cancelable operating leases. Total lease rentals charged to operations
   were approximately $1,154,000, $858,000, $766,000 and $73,000, for the years
   ended June 30, 2001, May 31, 2000 and 1999, and the one-month ended June 30,
   2000. Future minimum lease payments under the non-cancelable operating leases
   are as follows:

                Year ending June 30,                        Amount
                                                           --------

                      2002                                $ 834,000
                      2003                                  691,000
                      2004                                  538,000
                      2005                                  285,000
                      2006                                  285,000
                      Thereafter                          1,734,000
                                                          ---------

                                                         $4,367,000
                                                         ==========


                                      F-37
<PAGE>



NOTE M  -  COMMITMENTS AND CONTINGENCIES  -  Continued

   Contingencies and Litigation

   The Company, in the ordinary course of business, receives notices of consumer
   complaints from regulatory agencies and is named as a defendant in legal
   actions filed by those who have been solicited to participate in its credit
   card programs. Currently pending against the Company are: (i) one class
   action on behalf of persons purportedly solicited by the Company to
   voluntarily repay debt that had been improperly reported as a bad debt on a
   credit-reporting bureau, alleging that the Company had violated other
   provisions of federal or state law, including violations of the Bankruptcy
   Code, the Fair Debt Collection Practices Act and RICO; (ii) one action on
   behalf of plaintiffs seeking class status asserting claims under California
   state statutes seeking damages and injunctive relief barring the Company from
   offering its credit card program to debtors whose debt is out of statute
   and/or cannot be reported on a credit bureau as bad debts; and (iii) the
   contract dispute concerning the Business Development Agreement discussed in
   Note K. The Company is defending itself vigorously in these lawsuits. The
   Company does not believe that pending litigation and consumer complaints
   involving the Company will have a material adverse effect on the consolidated
   financial position and consolidated results of operations. However, a
   significant judgment against the Company in one or more of the lawsuits could
   subject the Company to a monetary judgment and/or require the Company to
   modify its methods of operation, either of which could have a material
   adverse effect on the Company's consolidated results of operations or
   consolidated financial condition.


NOTE N  -  FAIR VALUE OF FINANCIAL INSTRUMENTS

   The accompanying financial statements include various estimated fair value
   information as of June 30, 2001 and May 31, 2000. As required by SFAS No.
   107, "Disclosures About Fair Value of Financial Instruments," such
   information, which pertains to the Company's financial instruments, is based
   on the requirements set forth in the statement and does not purport to
   represent the aggregate net fair value of the Company. None of the Company's
   financial instruments are held for trading purposes.

   The following methods and assumptions were used to estimate the fair value of
   each class of financial instrument for which it is practicable to estimate
   fair value.

   Cash, Cash Equivalents and Restricted Cash

   The carrying amount approximates fair value.



                                      F-38
<PAGE>


NOTE N  -  FAIR VALUE OF FINANCIAL INSTRUMENTS  -  Continued

   Accounts and Notes Receivables

   The carrying amount approximates fair value.


   Amounts Due from Special Purpose Entities

   The carrying amount approximates fair value.


   Investments in Receivable Portfolios

   The fair value is estimated based on recent acquisitions of similar
   receivable portfolios and discounted expected future cash flows. The discount
   rate is based on a rate of return, adjusted for specific risk factors that
   would be expected by an unrelated investor in a similar stream of cash flows.


   Retained Interest in Securitized Credit Card Receivables

   The carrying amount approximates fair value. Fair value is estimated by
   discounting anticipated future cash flows using a discount rate based on
   specific factors. The anticipated future cash flows are projected on a "cash
   out" basis to reflect the restriction of cash flows until the investors have
   been fully paid.


   Accounts Payable and Accrued Expenses

   The carrying amount approximates fair value.

   Notes Payable

   The carrying amount approximates fair value. Rates currently available to the
   Company for debt with similar terms and remaining maturities are used to
   estimate the fair value of existing debt.



                                      F-39
<PAGE>



NOTE N  -  FAIR VALUE OF FINANCIAL INSTRUMENTS  -  Continued


   Subordinated Notes and Accrued Interest Payable

   Due to the related party relationship of these notes, it is not practical to
estimate fair value.


   The carrying amounts and estimated fair values of the Company's financial
instruments consisted of the following:

<TABLE>
<CAPTION>
                                                    June 30, 2001                    May 31, 2000
                                             ---------------------------     ---------------------------
                                               Carrying       Estimated        Carrying       Estimated
                                                value        fair value         value         fair value
                                             -----------     -----------     -----------     -----------
<S>                                          <C>             <C>             <C>             <C>
Cash,  Cash  Equivalents  and Restricted
  Cash                                       $ 3,103,454     $ 3,103,454     $ 2,448,879     $ 2,448,879

Accounts and Notes Receivable                $ 5,392,844     $ 5,392,844     $ 2,765,882     $ 2,765,882
Amounts Due from Special Purpose
  Entities                                   $   617,737     $   617,737     $ 9,332,890     $ 9,332,890
Investments in Receivable Portfolios
                                             $32,948,042     $49,175,646     $33,892,290     $63,900,000
Retained Interest in Securitized  Credit
  Card Receivables                           $11,370,252     $11,370,252     $ 2,142,846     $ 2,142,846
Accounts Payable and Accrued Expenses
                                             $ 7,537,895     $ 7,537,895     $ 4,499,142     $ 4,499,142
Notes Payable                                $23,186,134     $23,186,134     $23,609,326     $23,609,326
</TABLE>


                                      F-40
<PAGE>


NOTE O  -  NET INCOME (LOSS) PER SHARE


<TABLE>
<CAPTION>
                                                                   One month
                                                Year ended           ended              Years ended May 31,
                                                  June 30,           June 30,       ----------------------------
                                                   2001               2000             2000            1999
                                                ------------      ------------      -----------     -----------
<S>                                             <C>               <C>               <C>             <C>
Basic net income (loss) per share
  Net income (loss) applicable to common
    stockholders                                $ (7,088,523)     $ (1,481,284)     $ 1,072,195     $ 2,075,681
                                                ============      ============      ===========     ===========
  Weighted-average shares outstanding
                                                  34,799,135        34,761,965       34,761,965      34,761,965
                                                ============      ============      ===========     ===========
  Basic net income (loss) per share             $      (0.20)     $      (0.04)     $      0.03     $      0.06
                                                ============      ============      ===========     ===========
Diluted net income (loss) per share
  Net income (loss) applicable to common
    stockholders                                $ (7,088,523)     $ (1,481,284)     $ 1,072,195     $ 2,075,681
                                                ============      ============      ===========     ===========
  Weighted-average shares outstanding
                                                  34,799,135        34,761,965       34,761,965      34,761,965
  Effect of diluted securities options                    -*                -*        2,162,243         329,585
                                                ------------      ------------      -----------     -----------
         Weighted-average of diluted
           shares outstanding                     34,799,135        34,761,965       36,924,208      35,091,550
                                                ============      ============      ===========     ===========
Diluted net income (loss) per share             $      (0.20)     $      (0.04)     $      0.03     $      0.06
                                                ============      ============      ===========     ===========
</TABLE>


*Antidilutive.


NOTE P  -  PREFERRED STOCK

   As of June 30, 2001 and May 31, 2000, Preferred Stock consists of the
following:

<TABLE>
<CAPTION>

                                                                                   June 30,              May 31,
                                                                                     2001                  2000
                                                                                    ------                ------
<S>                                                                                <C>               <C>
     Series A Preferred Stock, $.001 par value; 2,000,000 shares authorized;
       1,200,000 shares issued and outstanding; stated at liquidation value
       of $1 per share                                                           $ 1,200,000         $ 1,200,000

     Series B Preferred Stock, $.001 par value; 800,000 shares authorized,
       issued, and outstanding; stated at liquidation value of $1 per share          800,000             800,000
</TABLE>




                                      F-41
<PAGE>


NOTE P  -  PREFERRED STOCK  -  Continued

<TABLE>
<CAPTION>
                                                                                 June 30,               May 31,
                                                                                     2001                  2000
                                                                                    ------                ------
<S>                                                                            <C>                   <C>
     Series C Preferred Stock, $.001 par value; 5,000 shares
       authorized, issued, and outstanding; stated at liquidation value
       of $1,000 per share                                                     $ 5,000,000           $ 5,000,000

     Series D Preferred Stock, $.001 par value; 10,000 shares authorized,
       issued,  and outstanding; convertible into 3,800,000 shares of
       common stock; stated at liquidation value of $1,000 per share         10,000,000            10,000,000

     Series E Preferred Stock, $.001 par value; 20,000 shares
       authorized, convertible into 5,700,000 shares of common stock;
       10,000 shares issued and outstanding; stated at liquidation value
       of $1,000 per share                                                      10,000,000            10,000,000
                                                                                ----------            ----------

                                                                               $27,000,000           $27,000,000
                                                                                ==========            ==========
</TABLE>

   Dividends on preferred stock have accumulated but have not been declared and
   are not yet payable. The Company, however, treats the dividends as declared
   and payable for the purpose of calculating net income (loss) applicable to
   common shareholders.


                                      F-42
<PAGE>


NOTE Q  -  COMPARATIVE CONDENSED INFORMATION (UNAUDITED)

   The following unaudited condensed financial information presents the
   one-month period ended June 30, 1999 and is presented for comparative
   purposes to the one-month period ended June 30, 2000, which is included in
   the consolidated financial statements.


                      Consolidated Statement of Operations

<TABLE>
<S>                                                                      <C>
Revenue                                                                  $  2,626,562

 Less provision for losses                                                    542,010
                                                                         ------------

         Net revenue                                                        2,084,552

Operating expenses                                                          2,993,015
                                                                         ------------

         Operating loss                                                      (908,463)

Interest expense                                                              286,723
                                                                         ------------

         Loss before income taxes                                          (1,195,186)

Income tax benefit                                                                 --
                                                                         ------------

         NET LOSS                                                          (1,195,186)

Dividends on preferred stock                                                 (166,667)
                                                                         ------------

Net loss, applicable to common stockholders                              $ (1,361,853)
                                                                         ============

Basic and Diluted net loss per share                                     $      (0.04)

Basic and Diluted weighted-average common shares outstanding             $ 34,761,965
                                                                         ============

</TABLE>

                      Consolidated Statement of Cash Flows


<TABLE>

<S>                                                                      <C>
Net cash flows used in  operating activities                             $   (730,626)

Cash flows from investing activities:
   Collection of funds advanced on credit cards and consumer debt           1,200,201
   Funds advanced on securitized and owned credit card receivables         (2,035,372)
   Purchase of nonperforming and performing consumer debt portfolios       (4,284,877)
   Other                                                                      (34,113)
                                                                         ------------

         Net cash used in investing activities                             (5,154,161)

Cash flows from financing activities:
   Proceeds from debt, net                                                  5,121,096
   Other                                                                      (13,708)
                                                                         ------------

         Net cash provided in financing activities                          5,107,388
                                                                         ------------

         NET DECREASE IN CASH AND CASH EQUIVALENTS                           (777,399)

Cash and cash equivalents at beginning of period                            3,533,930
                                                                         ------------

Cash and cash equivalents at end of period                               $  2,756,531
                                                                         ============
</TABLE>



                                      F-43
<PAGE>


            NOTE R - SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED)

<TABLE>
<CAPTION>

                                                                Year ended June 30, 2001
                                            ------------------------------------------------------------------
                                              Total for
                                             year ended      Fourth       Third         Second        First
                                            June 30, 2001   quarter**    quarter*       quarter*      quarter*
                                            -------------  -----------   --------      ---------      --------
                                                           (dollars in thousands, except per share data)
<S>                                        <C>            <C>           <C>           <C>           <C>
Summary of operations
   Revenue                                    $ 47,053      $ 11,355      $ 13,050      $ 11,208      $ 11,439
   Provision for losses                         (9,306)       (2,941)         (690)       (3,412)       (2,262)
                                              --------      --------      --------      --------      --------

         Net revenue                            37,747         8,414        12,360         7,796         9,177

Operating income (loss)                         (1,180)       (4,026)        3,848          (717)         (284)

Net income (loss)                               (5,089)       (3,664)        2,399        (2,194)       (1,630)
Dividends on preferred stock                    (2,000)         (500)         (500)         (500)         (500)
                                              --------      --------      --------      --------      --------

         Net income (loss)  applicable to
           common stockholders                $ (7,089)     $ (4,164)     $  1,899      $ (2,694)     $ (2,130)
                                              ========      ========      ========      ========      ========

Net income (loss) per share
   Basic                                      $  (0.20)     $  (0.12)     $   0.05      $  (0.08)     $  (0.06)
   Diluted                                    $  (0.20)     $  (0.12)     $   0.05      $  (0.08)     $  (0.06)
</TABLE>


*    The amounts presented for the first, second and third quarters of fiscal
     year ended June 30, 2001 vary from amounts presented within previously
     filed Form 10Q's due to the Company's change in year end.
**   The amounts include non-recurring charges of $3,787 related to allowances
     for notes receivable from a related party, and from previous owners and
     estimated settlement of a contract dispute.


<TABLE>
<CAPTION>
                                                                    Year ended May 31, 2000
                                            ------------------------------------------------------------------
                                             Total for
                                             year ended      Fourth       Third         Second        First
                                            May 31, 2000    quarter      quarter        quarter       quarter
                                            -------------  -----------   --------      ---------      --------
<S>                                           <C>          <C>           <C>          <C>           <C>
                                                              (dollars in thousands, except per share data)
Summary of operations
   Revenue                                    $ 46,387      $ 14,763      $ 8,770      $ 14,621      $ 8,233
   Provision for losses                         (5,681)         (865)      (1,078)       (1,703)      (2,035)
                                              --------      --------      -------      --------      -------

         Net revenue                            40,706        13,898        7,692        12,918        6,198

Operating income (loss)                          7,012         3,729         (669)        5,553       (1,600)

Net income (loss)                                3,072         4,382       (1,836)        3,135       (2,608)
Dividends on preferred stock                    (2,000)         (500)        (500)         (500)        (500)
                                              --------      --------      -------      --------      -------

         Net income (loss)  applicable to
           common stockholders                $  1,072      $  3,882      $(2,336)     $  2,635      $(3,108)
                                              ========      ========      =======      ========      =======

Net income (loss) per share
   Basic                                      $    .03      $    .11      $  (.07)     $    .07      $  (.09)
   Diluted                                    $    .03      $    .10      $  (.07)     $    .07      $  (.09)

</TABLE>



                                      F-44
<PAGE>


(b)      Index to Exhibits.


             EXHIBIT
             NUMBER                         DESCRIPTION OF DOCUMENT
             ------                         -----------------------

               3.1(1)         Amended and Restated Certificate of Incorporation

               3.2(4)         Amended and Restated By-Laws

               4.1(1)         Specimen certificate representing shares of Common
                              Stock

               4.2(6)         Agreement, dated May 4, 2001, between the Company
                              and J.L.B. of Nevada, Inc.

               4.3(6)         Agreement, dated May 4, 2001, between the Company
                              and J.L.B. of Nevada, Inc.

               10.1(1)        Amended and Restated Lease Agreement dated
                              December 12, 1996 between Service One
                              International Corporation and Donald A. Dunham,
                              Jr.


               10.2(1)        Amendment No. One to the Amended and Restated
                              Lease Agreement dated June 11, 1997 between
                              Service One International Corporation and Donald
                              A. Dunham, Jr.


               10.3(1)        Amendment No. Two to the Amended and Restated
                              Lease Agreement dated July 31, 1997 between
                              Service One International Corporation and Donald
                              A. Dunham, Jr.


               10.4(1)        Lease Agreement dated February 28, 1997 between
                              Service One International Corporation and Eagle
                              Properties, L.L.C.


               10.5(1)        Addendum to Lease Agreement dated November 18,
                              1997 between Service One International Corporation
                              and Eagle Properties, L.L.C.


               10.6(1)        Mutual Business Development Agreement dated as of
                              October 8, 1996, between Service One International
                              Corporation and the O. Pappalimberis Trust


               10.7(1)        Amendment dated as of December 16, 1997 to the
                              Mutual Business Development Agreement dated as of
                              October 8, 1996, such amendment among O.
                              Pappalimberis Trust, Taxter One LLC, Service One
                              International Corporation, Eikos Management, LLC
                              and Thesseus International Asset Fund




               10.8(1)        Amendment dated September 1, 1998 to the Mutual
                              Business Development Agreement dated as of October
                              8, 1996, as amended, between the Company and Eikos
                              Management LLC



               10.9(1)        Mutual Business Development Agreement dated as of
                              October 8, 1996, between Service One International
                              Corporation and Renaissance Trust I


               10.10(1)       Strategic Modeling Agreement dated March 18, 1999,
                              between the Company and Business Transactions
                              Express, Inc.


               10.10.1        Amendment to the Strategic Modeling Agreement
                              dated March 16, 2001, between the Company and
                              Business Transactions Express, Inc.

               10.10.2        Second Amendment to the Strategic Modeling
                              Agreement dated May 29, 2001, between the Company
                              and Business Transactions Express, Inc.

<PAGE>


               10.10.3        Third Amendment to the Strategic Modeling
                              Agreement dated August 16, 2001, between the
                              Company and Business Transactions Express, Inc.

               10.10.4        Fourth Amendment to the Strategic Modeling
                              Agreement dated September 13, 2001, between the
                              Company and Business Transactions Express, Inc.

               10.10.5        Fifth Amendment to the Strategic Modeling
                              Agreement dated October 12, 2001, between the
                              Company and Business Transactions Express, Inc.

               10.11(1)       Warrant to purchase Common Stock of the Company
                              issued to J.L.B. of Nevada, Inc. on June 22, 1999


               10.12(1)       Loan and Security Agreement, dated as of April 30,
                              1998, between the Company and Coast Business
                              Credit, a division of Southern Pacific Bank


               10.13(1)       First Amendment to Loan and Security Agreement,
                              dated as of September 30, 1998, between the
                              Company and Coast Business Credit, a division of
                              Southern Pacific Bank



               10.14(1)       Second Amendment to Loan and Security Agreement,
                              dated as of December 1, 1998, between the Company
                              and Coast Business Credit, a division of Southern
                              Pacific Bank



               10.15(1)       Amendment Number Two to Loan and Security
                              Agreement, dated as of April 27, 1999, between the
                              Company and Coast Business Credit, a division of
                              Southern Pacific Bank



               10.16(1)       Fourth Amendment to Loan and Security Agreement,
                              dated as of May 27, 1999, between the Company and
                              Coast Business Credit, a division of Southern
                              Pacific Bank



               10.17(1)       Amendment Number Five to Loan and Security
                              Agreement, dated as of June 25, 1999, between the
                              Company and Coast Business Credit, a division of
                              Southern Pacific Bank



               10.18.1(1)     Amendment Number Six to Loan and Security
                              Agreement Dated as of December 6, 1999 between the
                              Company and Coast Business Credit, a division of
                              Southern Pacific Bank



               10.18.2(6)     Seventh Amendment to Loan and Security Agreement,
                              dated as of May 31, 2000, between the Company and
                              Coast Business Credit, a division of Southern
                              Pacific Bank

               10.18.3(6)     Eighth Amendment to Loan and Security Agreement,
                              dated as of October 31, 2000, between the Company
                              and Coast Business Credit, a division of Southern
                              Pacific Bank

               10.18.4(4)     Amendment Number Nine to Loan and Security
                              Agreement, dated as of April 16, 2001, between the
                              Company and Coast Business Credit, a division of
                              Southern Pacific Bank

               10.18.5(6)     Tenth Amendment to Loan and Security Agreement
                              dated as of May 1, 2001 between the Company and
                              Coast Business Credit, a division of Southern
                              Pacific Bank

               10.18.6        Eleventh Amendment to Loan and Security Agreement
                              dated as of September 28, 2001, between the
                              Company and Coast Business Credit, a division of
                              Southern Pacific Bank


<PAGE>


               10.19(1)       Security Agreement dated as of August 1, 1997,
                              between J.L.B. of Nevada, Inc., Credit Store
                              Mortgage, Inc., New Beginnings Corp., Consumer
                              Debt Acquisitions, Inc., Sleepy Hollow Associates,
                              Inc., Service One Holdings Inc., Service One
                              International Corporation, American Credit
                              Alliance, Inc., Service One Receivables
                              Acquisition Corporation, the Company, Service One
                              Commercial Corporation and Soiland Company

               10.20(1)       First Amendment to Security Agreement, dated as of
                              October 23, 1997 between J.L.B. of Nevada, Inc.,
                              the Company and Credit Store Mortgage, Inc., New
                              Beginnings Corp., Consumer Debt Acquisitions,
                              Inc., Sleepy Hollow Associates, Inc., Service One
                              Holdings, Inc., Service One International
                              Corporation, Service One Receivables Acquisition
                              Corporation, the Company, Service One Commercial
                              Corporation and Soiland Company

               10.21(1)       Second Amendment to Security Agreement, dated as
                              of November 21, 1997 between J.L.B. of Nevada,
                              Inc., the Company, Sleepy Hollow Associates, Inc.,
                              Service One International Corporation, American
                              Credit Alliance, Inc. and Service One Receivables
                              Acquisition Corporation

               10.22(1)       Credit Agreement dated as of October 15, 1999
                              among Credit Store Capital Corp., the Company, the
                              Lenders Signatory thereto from time to time, and
                              General Electric Capital Corporation

               10.23(2)       Amended 1997 Stock Option Plan of the Company

               10.24(1)       Employment Agreement dated March 27, 1997, between
                              the Company and Martin Burke

               10.25(1)       Letter from Martin Burke dated March 27, 1997,
                              regarding credit card repayment terms

               10.26(1)       Employment Agreement dated April 1, 1997, between
                              the Company and Kevin Riordan

               10.27(1)       Employment Agreement dated June 17, 1997, between
                              the Company and Michael Philippe

               10.28(1)       Amendment to Employment Agreement between the
                              Company and Michael Philippe dated December 15,
                              1999

               10.29(1)       Employment Agreement dated August 1, 1997, between
                              the Company and Richard Angel

               10.30(1)       Amendment to Employment Agreement between the
                              Company and Richard Angel dated December 15, 1999

               10.31(1)       Employment Agreement dated October 15, 1997,
                              between the Company and Cynthia Hassoun

               10.32(1)       Bankcard Marketing Agreement between the Company
                              and Bank of Hoven dated February 9, 1999

               10.33(1)       Purchase Agreement between Bank of Hoven and the
                              Company dated February 9, 1999


<PAGE>


               10.34(1)       Bankcard Marketing Agreement between Service One
                              International Corporation and First National Bank
                              in Brookings dated October 2, 1997

               10.35(1)       Purchase Agreement between First National Bank in
                              Brookings and Service One International
                              Corporation doing business as TCS Services, Inc.
                              dated October 2, 1997

               10.35.1        Second Amendment to the Purchase Agreement between
                              First National Bank in Brookings and The Credit
                              Store, Inc., dated September 21, 2001

               10.36(1)       Amendment to Purchase Agreement by First National
                              Bank in Brookings and the Company dated August 31,
                              1998

               10.37(1)       Letter Agreement Regarding Bankcard Marketing
                              Agreement and Purchasing Agreement between the
                              Company and First National Bank in Brookings dated
                              August 17, 1999

               10.38(1)       Agreement Regarding Transfer of Accounts between
                              the Company and First National Bank in Brookings
                              dated December 14, 1998

               10.39(1)       Subordinated Grid Promissory Note of the Company
                              in favor of J.L.B. of Nevada, Inc. dated August 1,
                              1997 in the amount of $20,000,000

               10.40(1)       Subordinated Grid Promissory Note of the Company
                              in favor of J.L.B. of Nevada, Inc. dated October
                              23, 1997 in the amount of $5,000,000

               10.41(1)       Subordinated Grid Promissory Note of the Company
                              in favor of J.L.B. of Nevada, Inc. dated November
                              21, 1997 in the amount of $5,000,000

               10.42(4)       Receivables Purchase Agreement, dated as of May
                              31, 2000, by and between The Credit Store, Inc.
                              and TCS Funding IV, Inc.

               10.43.1(4)     Master Credit and Security Agreement, dated as of
                              May 31, 2000, by and among TCS Funding IV, Inc.,
                              The Credit Store, Inc., and Miller & Schroeder
                              Investments Corporation.

               10.43.2(6)     Credit and Security Agreement, dated as of May 1,
                              2001, by and among TCS Funding V, Inc., The Credit
                              Store, Inc., and Miller & Schroeder Investments
                              Corporation.

               10.43.3(6)     Receivables Purchase Agreement dated May 1, 2001,
                              by and between The Credit Store, Inc. and TCS
                              Funding V, Inc.

               10.44(4)       Account Purchase Agreement, dated as of October
                              31, 2000, by and among The Credit Store, Inc. and
                              Credit Services, Inc.

               10.45(4)       Converted Accounts/Receivables Sale Agreement,
                              dated as of October 31, 2000, by and among Credit
                              Store Services, Inc. and The Credit Store, Inc.

               10.46(4)       Master Loan and Servicing Agreement, dated October
                              31, 2000, by and among Credit Store Services,
                              Inc., The Credit Store, Inc., and The Varde Fund
                              IV-A. **

<PAGE>


               10.47(4)       Repurchase Agreement, dated November 22, 2000, by
                              and between Bank of Hoven and (4) The Credit
                              Store, Inc.

               10.47.1(6)     Amendment dated February 27, 2001 to the
                              Repurchase Agreement dated November 22, 2000, by
                              and between Bank of Hoven and The Credit Store,
                              Inc.

               10.47.2(6)     Amendment dated May 31, 2001 to the Repurchase
                              Agreement dated November 22, 2000, by and between
                              Bank of Hoven and The Credit Store, Inc.

               10.48(5)       Separation Agreement and Release by and between
                              The Credit Store, Inc. and Martin Burke dated
                              December 11, 2000.

               10.49(5)       Secured Promissory Note of American Credit
                              Alliance, Inc. in favor of J.L.B. of Nevada, Inc.
                              dated August 16, 1996 in the amount of $880,000.

               10.50(6)       Amendment to Subordinated Grid Promissory Notes,
                              dated May 4, 2001, made by The Credit Store, Inc.,
                              to the order of J.L.B. Nevada, Inc. in the
                              respective original principal amounts of
                              $20,000,000, $5,000,000 and $5,000,000 dated
                              respectively August 1, 1997, October 23, 1997 and
                              November 21, 1997 and Secured Promissory Note made
                              by American Credit Alliance, Inc., to the order of
                              J.L.B. of Nevada, Inc. in the original principal
                              amount of $880,000 dated August 16, 1996.

               23.1           Consent of Grant Thornton LLP


-----------

(1)      Filed with the Securities and Exchange Commission as an exhibit to the
         issuer's registration statement on Form 10 filed February 24, 2000
         (File No. 000-28709) and incorporated herein by reference.

(2)      Filed with the Securities and Exchange Commission as an exhibit to the
         issuer's registration statement on Form S-8 filed July 26, 2000 (File
         No. 333-42278) and incorporated herein by reference.

(3)      Intentionally deleted.

(4)      Filed with the Securities and Exchange Commission as an exhibit to the
         issuer's quarterly report on Form 10-Q for the period ended November
         30, 2000 (File No. 001-16083) and incorporated herein by reference.

(5)      Filed with the Securities and Exchange Commission as an exhibit to the
         issuer's registration statement on Form S-1 filed March 2, 2001 (File
         No. 333-56456) and incorporated herein by reference.

(6)      Filed with the Securities and Exchange Commission as an exhibit to the
         issuer's registration statement on Form S-1/A filed June 19, 2001 (File
         No. 333-56456) and incorporated herein by reference.

**       Denotes confidential information that has been omitted from the exhibit
         and filed separately, accompanied by a confidential treatment request,
         with the Securities and Exchange Commission pursuant to Rule 24b-2 of
         the Securities Exchange Act of 1934, as amended.


<PAGE>


                                   SIGNATURES


    Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.



                                               THE CREDIT STORE, INC.
Dated:  October 15, 2001
                                               By  /s/ Kevin T. Riordan
                                                   ----------------------------
                                                   Kevin T. Riordan
                                                   President


    Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities indicated as of October __, 2001.




                     SIGNATURE                               TITLE
                     ---------                               -----

                 /s/   Michael J. Philippe         Executive Vice President,
      --------------------------------------       Chief Financial Officer and
                      Michael J. Philippe          Treasurer


                 /s/  Barry E. Breeman             Director
      --------------------------------------
                      Barry E. Breeman


                 /s/  J. Richard Budd, III         Director
      --------------------------------------
                      J. Richard Budd, III


                 /s/  Peter J. Mansbach            Director
      --------------------------------------
                      Peter J. Mansbach


                 /s/   Kevin T. Riordan            President and Director
      --------------------------------------
                       Kevin T. Riordan


                 /s/  Geoffrey A. Thompson         Director
      --------------------------------------
                      Geoffrey A. Thompson


                 /s/  Salvatore J. Zizza           Director
      --------------------------------------
                      Salvatore J. Zizza