Commission File No. 000-33485

______________________________________________________________________________

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

_____________________

**FORM 10-KANNUAL REPORT**

Pursuant to Section 13 or 15(d)of the Securities Exchange Act of 1934For the Fiscal Year Ended December 31, 2001

_____________________

**SAXON CAPITAL, INC.**Incorporated in Delaware4951 Lake Brook DriveSuite 300Glen Allen, Virginia 23060(804) 967-7400

54-2036076*(I.R.S. Employer Identification No.)*

_____________________

Securities registered pursuantto Section 12(b) of the Securities Exchange Act of 1934:

None

Securities registered pursuantto Section 12(g) of the Securities Exchange Act of 1934:

Common Stock, $0.01 par value

          Indicateby check mark whether the registrant: (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file suchreports) and (2) has been subject to such filing requirements forthe past 90 days. Yes [ X ] No [    ]

          Indicateby check mark if disclosure of delinquent filers pursuant to Item405 of Regulation S-K is not contained herein, and will not becontained, to the best of registrant's knowledge, in definitiveproxy or information statements incorporated by reference in PartIII of this Form 10-K or any amendment to this Form 10-K.[    ]

          Thenumber of shares of common stock of the registrant outstanding asof February 28, 2002 was 28,080,502. The aggregate market valueof common stock held by non-affiliates of the registrant as ofFebruary 28, 2002 was $236,074,922.

Documents Incorporated byReference

          Theregistrant intends to file a definitive proxy statement pursuantto Regulation 14A within 120 days of the end of the fiscal yearended December 31, 2001. Portions of such proxy statement areincorporated by reference in Part III of this Form 10-K.

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**TABLE OF CONTENTS**

Page

| **Part I**   |                                                                                         |   |
|--------------|----------------------------------------------------------------------------------------------|--------|
|         |                                                                                         |   |
| Item 1.      | Business                                                                                     | 1      |
| Item 2.      | Properties                                                                                   | 34     |
| Item 3.      | Legal Proceedings                                                                            | 35     |
| Item 4.      | Submission of Matters to a        Vote of Stockholders                                       | 35     |
|         |                                                                                         |   |
| **Part II**  |                                                                                         |   |
|         |                                                                                         |   |
| Item 5.      | Market for the Registrant's Common        Equity and Related Stockholder Matters             | 35     |
| Item 6.      | Selected Financial Data                                                                      | 37     |
| Item 7.      | Management's Discussion and Analysis of        Financial Condition and Results of Operations | 40     |
| Item 7A.     | Quantitative and Qualitative Disclosures        About Market Risk                            | 77     |
| Item 8.      | Financial Statements and Supplementary        Data                                           | 80     |
| Item 9.      | Changes in and Desagreements with        Accountants on Accounting and Financial Disclosure  | 80     |
|         |                                                                                         |   |
| **Part III** |                                                                                         |   |
|         |                                                                                         |   |
| Item 10.     | Directors and Executive Officers of the        Registrant                                    | 80     |
| Item 11.     | Executive Compensation                                                                       | 81     |
| Item 12.     | Security Ownership of Certain Beneficial        Owners and Management                        | 81     |
| Item 13.     | Certain Relationships and Related        Transactions                                        | 81     |
|         |                                                                                         |   |
| **Part IV**  |                                                                                         |   |
|         |                                                                                         |   |
| Item 14.     | Exhibits, Financial Statement Schedules,        and Reports on Form 8-K                      | 81     |
| Signatures   |                                                                                         | 82     |

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**PART I**

          Certaininformation contained in this Report constitutes forward-lookingstatements under Section 27 of the Securities Act of 1933 andSection 21E of the Securities Exchange Act of 1934. Generally,forward-looking statements can be identified by the use offorward-looking terminology including, but not limited to,"may," "will," "expect,""intend," "should," "anticipate,""estimate," or "believe" or comparableterminology. All statements addressing our operating performance,events, or developments that we expect or anticipate will occurin the future, including statements relating to net interestincome growth, earnings or earnings per share growth, and marketshare, as well as statements expressing optimism or pessimismabout future operating results, are forward-looking statements.The forward-looking statements are based upon management's viewsand assumptions, as of the date of this Report, regarding futureevents and operating performance, and are applicable only as ofthe dates of such statements. By their nature, allforward-looking statements involve risk and uncertainties. Actualresults may differ materially from those contemplated by theforward-looking statements for a number of reasons, including butnot limited to those discussed in "Item 1.Business—Risk Factors" as well as those discussedelsewhere in this Report.

| **Item 1.** | **     Business** |
|-------------|--------------------------------------------|

          SaxonCapital, Inc. is a Delaware corporation organized on April 23,2001. Our original name was Saxon Capital Acquisition Corp., andwe changed our name to Saxon Capital, Inc. on October 5, 2001. Weacquired all of the issued and outstanding capital stock of SCIServices, Inc. ("SCI Services" or"Predecessor"), a Virginia corporation (formerly knownas Saxon Capital, Inc.), from Dominion Capital, Inc.("Dominion Capital"), a wholly owned subsidiary ofDominion Resources, Inc. ("Dominion Resources") on July6, 2001. We maintain our principal executive offices at 4951 LakeBrook Drive, Suite 300, Glen Allen, Virginia 23060, and ourtelephone number is (804) 967-7400. Our common stock is listed onthe Nasdaq National Market under the symbol "SAXN."

**General**

          Ourbusiness is conducted through our operating subsidiaries. Weconduct mortgage loan originations, purchases, and secondarymarketing at Saxon Mortgage, Inc. ("Saxon Mortgage"),and retail loan origination activity at America's MoneyLine, Inc.("America's MoneyLine"). We conduct mortgage loanservicing at Meritech Mortgage Services, Inc.("Meritech"). Throughout our discussion of our businessoperations, words such as "we" and "our" areintended to include these operating subsidiaries and, forreferences to periods occurring prior to July 6, 2001, includeour Predecessor.

          Weoriginate, purchase, securitize, and service primarilynon-conforming residential mortgage loans derived through threeseparate channels. These loans are secured primarily by firstmortgages. We believe we deliver superior value and service toour borrowers through our disciplined credit, pricing, andservicing processes throughout the lives of their loans, which wecall our Life of the Loan Credit Risk Management strategy. Ourborrowers typically have limited credit histories, have highlevels of consumer debt, or have experienced credit difficultiesin the past. Mortgage loans to such borrowers are generallyclassified as "sub-prime" because they generally do notconform to or meet the underwriting guidelines of one or more ofthe 

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government sponsored entities. We originate and purchase loanson the basis of the borrower's ability to repay the mortgageloan, the borrower's historical patterns of debt repayment, andthe amount of equity in the borrower's property (as measured bythe borrower's loan-to-value ratio or "LTV"). Theinterest rate and maximum loan amount are determined based uponour underwriting and risk-based pricing matrices. We have beenoriginating and purchasing sub-prime mortgage loans since 1995,and believe the proprietary data that we have accumulated in ourdata warehouse enables us to analyze the characteristics thatdrive loan performance to ensure that we meet or exceed ourreturn on investment requirements. We also believe our Life ofthe Loan Credit Risk Management strategy increases theconsistency of our loan performance and financial returns.

          Weoriginate or purchase mortgage loans through three separateorigination channels. Our wholesale channel originates orpurchases loans through our network of approximately 3,000brokers throughout the country. These brokers rely on ourcentralized processing teams who, we believe, provide them withsuperior and consistent customer service. Our retail channeloriginates mortgage loans directly to borrowers through ourwholly-owned subsidiary, America's MoneyLine, which has a retailbranch network of 17 locations and uses direct mail and theInternet to originate loans. Our correspondent channel purchasesmortgage loans from approximately 300 correspondents following acomplete re-underwriting of each mortgage loan. We believe thatexceeding the expectations of our customers, whom we view asborrowers, brokers, and correspondents, is a key to our success.For the year ended December 31, 2001, we originated or purchasedapproximately $2.3 billion and securitized approximately $2.0billion of residential mortgage loans.

          Weintend to access the asset-backed securitization market toprovide long-term financing for our mortgage loans. We nowgenerate earnings and cash flows primarily from the net interestincome and fees that we earn from the mortgage loans we originateand purchase. We finance the loans initially under one of severaldifferent secured and committed warehouse financing facilities ona recourse basis. These loans are subsequently financed on alimited recourse basis using asset-backed securities we issuethrough a trust. The asset-backed securities will be repaid asthe mortgage loans pay off. The trusts are required to createcredit enhancement using excess cash flow (mortgage interestincome, net of bond interest expenses, losses, and servicingfees) to repay the asset-backed securities of the trust fasterthan the underlying mortgage loans, thereby creating"overcollateralization" (that is, the outstandingbalance of the mortgage loans exceeds the outstanding balance ofthe asset-backed securities). Once the overcollateralizationmeets predetermined levels, we will begin to receive the excesscash flow from the mortgage loans in the trust. Depending uponthe structure of the asset-backed securities and the performanceof the underlying mortgage loans, excess cash flow may not bedistributed to us for 12 to 24 months or more. As a result of theovercollateralization and certain other credit enhancementfeatures, the trust is able to issue highly rated investmentgrade asset-backed securities. In addition to the excess cashflow, we receive servicing and master servicing fees at annualrates equal to approximately 50 basis points and 3.5 basispoints, respectively, as well as ancillary servicing-related feeincome.

          SinceMay 1996, we have securitized approximately $11.0 billion inmortgage loans through our quarterly securitization program. Asof July 6, 2001, we now structure our securitizations asfinancing transactions. Accordingly, following a securitization,the mortgage 

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loans we originate or purchase remain on our balance sheet,and the securitization indebtedness replaces the warehouse debtassociated with the securitized mortgage loans. Also, we nowrecord interest income on the mortgage loans and interest expenseon the securities issued in the securitization over the life ofthe securitization, instead of recognizing a gain or loss uponcompletion of the securitization. This change to"portfolio-based" accounting will significantly impactour future results of operations compared to our historicalresults. Therefore, our historical results and management'sdiscussion of such results may not be indicative of our futureresults. This accounting treatment, however, more closely matchesthe recognition of income with the receipt of cash payments onthe individual loans, and is expected to decrease our earningsvolatility compared to structuring securitizations as sales inaccordance with accounting principles generally accepted in theUnited States of America ("GAAP").

          Oncewe originate or purchase a mortgage loan, our wholly-ownedsubsidiary, Meritech begins the process of performing theday-to-day administrative services for the loan. These activitiesare called "servicing." Meritech seeks to ensure thatthe loan is repaid in accordance with its terms. Beginning withan introductory call made as soon as seven days following theorigination or purchase of a mortgage loan, we attempt toestablish a consistent payment relationship with the borrower. Inaddition, our call center uses a predictive dialer to createcalling campaigns for delinquent loans based upon the borrower'shistorical payment patterns and the borrower's risk profile tothe borrower. Our Life of the Loan Credit Risk Managementstrategy is applied to every loan in our servicing portfolio. Theinherent risk of delinquency and loss associated with sub-primeloans requires active communication with our borrowers fromorigination through liquidation. Our technology deliversextensive data regarding the loan and the borrower to the desktopof the individual providing service to the borrower. Contact withour borrower is tailored to reflect the borrower's payment habit,loan risk profile, and loan status. Borrower contact is initiatedthrough outbound telephone campaigns, monthly billing statements,and direct mail. Our Website provides borrowers with access toaccount information and online payment alternatives.

**Industry Overview**

          Theresidential mortgage market is the largest consumer financemarket in the United States. Lenders in the United Statesoriginated over $2.04 trillion in single-family mortgage loans in2001, and are expected to originate approximately $1.41 trillionin 2002. Generally, the industry is segmented by the size of themortgage loans and credit characteristics of the borrowers.Mortgage loans that conform to the government sponsored entity,such as Fannie Mae and Freddie Mac, guidelines for both size andcredit characteristics are called "conformingmortgages." All other mortgage loans are considered"non-conforming loans" because of the size of the loans(generally referred to as jumbo mortgages) or the credit profilesof the borrowers (generally referred to as sub-prime mortgages)or both. We believe the non-conforming segment of the mortgageindustry can provide higher risk-adjusted returns on investmentthan the traditional conforming mortgage loan market, providedthe lender has a comprehensive and sophisticated process forcredit evaluation, risk-based pricing, and diligent servicing.

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**Business Strategy**

          Ourprimary goal is to grow, on our balance sheet, a substantialportfolio of non-conforming mortgage loans that produce stablenet interest and fee income and provide a superior risk adjustedreturn on investment for our industry. We believe we can achievethis goal by building upon our disciplined credit, proactivecollections and customer service, and strong history of managingcredit risk in the sub-prime mortgage market.

          For2002, management established the following key initiatives forour business channels. We expect that our business channels willfocus appropriate resources on achieving these initiatives:

> 
Retail:
- Expand our branch network in selected markets.
- Implement additional automation of our underwriting            program for our staff.
- Increase telemarketing capabilities.
- Improve the abilities of third party sources of            business to access our automated underwriting            capabilities over the Internet.

> 
Wholesale:
- Implement an automated underwriting program            accessible to our broker customers.
- Implement additional automation of loan processing.
- Expand account executive sales force.

Correspondent:
- Increase the number and broaden the base of            customers, while adding sales staff to handle these            additional customers.
- Implement an automated underwriting program            accessible to our correspondent customers.

Servicing:
- Deliver expanded loss mitigation alternatives and            processes.
- Focus foreclosure and Real Estate Owned (REO)            timeline refinements on decreasing seriously            delinquent accounts.

**Underwriting**

          Weoriginate and purchase loans in accordance with the underwritingcriteria described below. The loans we originate and purchasegenerally do not meet conventional underwriting standards, suchas the standards used by government sponsored entities, such asFannie Mae or Freddie Mac. As a result, our loan portfolios arelikely to have higher delinquency and foreclosure rates than loanportfolios based on conventional underwriting criteria. We have 

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established six classifications with respect to the creditprofile of potential borrowers, and we assign a rating to eachloan based on these classifications. Our underwriting guidelinesare designed to help us evaluate a borrower's credit history andcapacity to repay the loan, the value of the property that willsecure the loan, and the adequacy of such property as collateralfor the loan. In addition, we review credit scores derived fromthe application of one or more nationally recognized creditscoring models. Based on our analysis of these factors, we willdetermine loan terms, including the interest rate and maximumloan-to-value. We generally offer borrowers with less favorablecredit ratings loans with higher interest rates and lower LTVsthan borrowers with more favorable credit ratings based upon ourassessment of the borrower's risk or probability of default.

          Ourunderwriting philosophy is to analyze the overall situation ofthe borrower and to take into account compensating factors thatmay be used to offset certain areas of weakness. Specificcompensating factors include:

> - mortgage payment history;
- disposable income;
- employment stability;
- number of years at residence;
- LTV;
- income documentation type; and
- property type.

          Weunderwrite each loan individually. All underwriting decisions arethe responsibility of each respective business channel's VicePresident of Underwriting. The Vice Presidents of Underwritinggenerally have a minimum of ten years of industry experience andreport directly to the Vice President in charge of the respectivebusiness channel. Reporting to each Vice President ofUnderwriting are Assistant Vice Presidents of Underwriting whohave substantial industry experience. In addition to the dailysupervision of all underwriting decisions, these Vice Presidentsand Assistant Vice Presidents of Underwriting conduct regulartraining sessions on emerging trends in production, as well asprovide feedback from the monthly default resolution and planning("DRP") and risk management meetings, which some or allregularly attend. In addition to the business channels' VicePresidents of Underwriting, the underwriting departments of thewholesale, retail, and correspondent channels have a total of 28,21, and 18 underwriters, respectively. Our underwriting staffbase their credit decisions upon the risk profile of theindividual loan, even in instances where we purchase a group ofmortgage loans in bulk.

          Ourunderwriting guidelines are determined by our credit committee("Credit Committee"), which is composed of our ChiefExecutive Officer, our President, our Chief Financial Officer,our Vice President of Capital Markets, our Vice President ofQuality Control, the Vice President in charge of each businesschannel, the Vice President of Servicing, the Vice President ofUnderwriting for each business channel, and our Vice President ofPricing and Analytics and is advised by our General Counsel. TheCredit Committee meets frequently to review proposed changes tounderwriting guidelines. To the extent an individual loan doesnot qualify for a loan 

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program or credit grade, our underwriters can and will makerecommendations for an approval of the loan by "underwritingexception." Our business channels' Vice Presidents andAssistant Vice Presidents of Underwriting have final approval ofunderwriting exceptions. Loan exceptions are tracked in our datawarehouse and performance of loans with and without exceptionsare monitored and reported monthly to management.

          Weunderwrite every loan we originate or purchase. This means wethoroughly review the borrower's credit history, income documents(except to the extent our stated income and limited documentationloan programs do not require income documentation), and appraisalfor accuracy and completeness. We use our automated creditdecision system to provide pre-qualification decisions over theInternet. When using this system, the loan is still underwrittenby one of our underwriters before funding. While we intend tocontinue to expand the functionality of our automated decisionsystem, we will continue to use our staff to review credit,income, and appraisal documentation to ensure that the loan isunderwritten in accordance with our guidelines.

          Ourunderwriting standards are applied in accordance with applicablefederal and state laws and regulations, and require a qualifiedappraisal of the mortgaged property conforming to Fannie Mae andFreddie Mac standards. Each appraisal includes a market dataanalysis based on recent sales of comparable homes in the areaand a replacement cost analysis based on the current cost ofbuilding a similar home. The appraisal may not be more than 180days old on the day the loan is originated. In most instances, werequire a second field appraisal for properties that have a valueof $300,000 to $500,000 and a second full appraisal forproperties that have a value of more than $500,000.

          Webelieve that one of the primary reasons for our strong historicalloss and delinquency performance is our reliance upon SaxonMortgage's Quality Control and Risk Management Department("QC Department"). The QC Department's primary focus isto ensure that all loans are underwritten in accordance with ourunderwriting guidelines. The QC Department consists of 19employees as of December 31, 2001, including our Vice Presidentof Quality Control.

          Eachmonth, the QC Department reviews and re-underwrites generally 15%of all loans funded. Using a statistical based sampling system,the QC Department selects certain funded loans, re-underwritesthose loans, re-verifies the sources of income, re-verifiesemployment, and reviews the appraisals to ensure collateralvalues for the loans are supported by the appraisals. Inaddition, the QC Department selects loans prior to funding forre-underwriting based upon collateral and borrowercharacteristics to further ensure that the quality of loansoriginated is consistent with our guidelines.

          TheQC Department also reviews any loan which becomes delinquent onits first or second payment due, as well as loans that go intodefault later in the loan's life and which the Meritech LossMitigation department believes may contain borrower or sellermisrepresentations. To the extent the QC Department's reviewindicates that a loan contains material misrepresentations, theQC Department will make recommendations regarding the exercise ofremedies available to us, including, where appropriate, requiringthe originator to repurchase the loan from us. In addition, theQC Department will advise our business channels on methods toensure that we do not fund loans with similar issues in thefuture.

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          Allfindings of the QC Department are reported on a monthly basis tomembers of senior management during the risk management meeting.During this meeting, management analyzes the results of themonthly QC Department audits as well as performance trends andservicing issues. Based upon this meeting, further analysis isundertaken and recommendations are made to the Credit Committeeto modify underwriting guidelines or procedures.

          Wehave three loan documentation programs:

> - Full Documentation —under this program, an            underwriter reviews the borrower's credit report,            handwritten loan application, property appraisal, and            the documents that are provided to verify employment            and bank deposits, such as W-2s and pay stubs, or            signed tax returns for the past two years.

> - Limited Documentation —loans under this            program are made to self-employed borrowers; six            months of personal and/or business bank statements            are acceptable documentation of the borrower's stated            cash flow; LTVs of 80% to 90% require two years of            personal bank statements.
- Stated Income —in this program, the            borrower's income as stated on the loan application            must be reasonable for the related occupation,            because the income is not independently verified. The            audit department does, however, verify the existence            of the business and employment; a self-employed            borrower must have been in business for at least two            years.

          Ourfull documentation program, which requires the highest level ofcredit documentation of all of our programs, is typicallyselected by those borrowers that are able to meet thoserequirements. Our limited documentation program is typicallyselected by self-employed borrowers, who may have encountereddifficulty qualifying for Fannie Mae and Freddie Mac prime loansdue to the requirements for W-2 forms, pay stubs, and similaremployment-related documentation requirements associated withprime loans. Our stated income program is typically selected byborrowers who do not meet the requirements for independentverification of income associated with Fannie Mae and Freddie Macprime loans. Both limited documentation and stated income programloans require specialized underwriting and involve higher degreesof risk; accordingly these loans generally require higherinterest rates and lower loan to value ratios than would beavailable to borrowers that meet the requirements of our fulldocumentation program.

          Wemay, from time to time, apply underwriting criteria that areeither more stringent or more flexible depending on the economicconditions of a particular market.

          Asdescribed below, we have two loan programs for first and secondmortgages and several niche programs for 100% combined LTV("CLTV"), second mortgages, and manufactured homes. Thekey distinguishing features of each program are the documentationrequired to obtain a loan, the LTV, and credit scores necessaryto qualify under a particular program. Nevertheless, each programuses maximum LTVs and loan amounts to mitigate risk.

          TraditionalUnderwriting Program. In this program, we analyze loan riskby comparing the loan details with credit-grade-specificguidelines including mortgage history, secondary

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credit history, bankruptcy history, and debt-to-income ratio.Careful consideration is given to borrower trends and benefits ofthe loan. Traditional first lien loans are available formortgages secured by properties of all occupancy types, and allof our loan documentation programs.

          Inaddition, each of our loan products has a maximum CLTV amount,which is the maximum encumbrance allowed on a specific mortgagedproperty. We permit three general categories of second liens thatmay be subordinate to a Saxon first lien. These are:

> - a Saxon second lien;
- an institutional lender second lien; or
- a private second lien (including second liens            retained by a seller of a mortgaged property).

          Themaximum CLTV varies based on occupancy type, documentation type,credit grade, LTV, credit score, and loan amount. Our"A" credit grade second lien program allows for amaximum CLTV of 100% for fully documented loans secured byowner-occupied properties to borrowers with a minimum creditscore of 640. Subordinate financing behind our traditional firstlien program will allow maximum CLTVs of up to 110% for fullydocumented loans with a reduced first lien LTV and institutionalfinancing on owner-occupied properties. For all products,subordinate financing on "C" and "D" creditgrade first liens must be from an institutional lender.

          ScorePlusUnderwriting Program. Our ScorePlus underwriting program is aproduct that we developed to provide a faster and simpler creditqualification process to those customers willing to forego theflexibility offered by our traditional underwriting program bylimiting the basis for our underwriting decisions to thefollowing five factors:

> - mortgage history;
- credit score (in place of secondary credit review);
- bankruptcy history;
- foreclosure history; and
- debt-to-income ratio.

          Thesevariables fit into parameters for maximum LTV and loan amount byoccupancy, income documentation, and property type to assess rateand risk. This program is available for mortgage loans secured byproperties of all occupancy types, and all of our loandocumentation programs. Because the ScorePlus underwritingdecision is based solely on the five factors listed above, theunderwriting process can be more extensively automated for thosecustomers for whom speed of decision is the paramount need. TheScorePlus program involves a lesser degree of individualizedexamination of traditional underwriting factors (other than thefive factors listed above). To compensate this incremental creditrisk, we have higher credit score and credit grade requirementsin our ScorePlus program. Unlike our traditional underwritingprogram, ScorePlus does not offer the possibility of our allowingreasoned exceptions to any of the underwriting decision factors.For borrowers not able to meet the ScorePlus requirements, we 

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continue to offer the traditional underwriting that allows usto examine the borrower's specific circumstances and, where wecan do so prudently and at an appropriately risk-adjusted price,extend credit based on reasoned exceptions.

          Webelieve our ScorePlus program is our most successful productdeveloped to date. We began development of the program during thefourth quarter of 2000 and introduced the product throughoutSaxon on January 16, 2001. For the year ended December 31, 2001,ScorePlus generated $485 million in loan production or 20.79% ofour total loan volume for 2001. We expect that ScorePlus'spercentage of our total production will increase throughout 2002.We expect our cost to produce a loan to decrease as we useScorePlus in conjunction with the automation of certain aspectsof our underwriting process.

          Wealso offer a number of other loan programs. Although each programcontains individual characteristics, maximum LTVs and loanamounts are designed to minimize risk within credit gradecategories. These programs include:

          SecondLiens. This credit score driven product, available for loansup to 100% CLTV, is concentrated on the home equity market and isavailable for loans secured by properties of all occupancy typesand under all of our loan documentation programs. Second lienprograms are most typically selected by borrowers who wish toborrow against the equity in their property without altering theprovisions of their existing first lien financing.

          ManufacturedHousing First Liens. This product is designed specificallyfor double-wide or larger manufactured homes. It is limited tohomes that are classified as real estate and meet our otherguidelines for construction and permanent attachment to the landon which it resides. These loans are available for primaryresidences or second homes (available with mortgage insurance),to a maximum loan amount of $150,000 and a minimum credit scoreof 550.

**Mortgage Loan Production Operations**

          *Overview*

          Weoriginate or purchase mortgage loans through three separateorigination channels. Our wholesale channel originates orpurchases loans through our network of approximately 3,000brokers throughout the country. These brokers rely on ourcentralized processing teams who we believe provide superior andconsistent customer service. Our retail channel originatesmortgage loans directly to borrowers through our wholly-ownedsubsidiary, America's MoneyLine, which has a retail branchnetwork of 17 locations and uses direct mail and the Internet tooriginate loans. Through our correspondent channel, we purchasemortgage loans from companies among our approximately 300approved correspondents following a complete re-underwriting ofeach mortgage loan. For the year ended December 31, 2001, weoriginated or purchased approximately $2.3 billion andsecuritized approximately $2.0 billion of residential mortgageloans. Further discussion of each mortgage loan productionchannel follows on pages 55 to 63.

          Thefollowing table sets forth selected information about our totalloan originations and purchases for the years ended December 31,2001, 2000, and 1999.

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|                                                                                                                   | **                      For        the Year Ended December        31              ** |
|------------------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                   | **     2001    **                                                                                                                                                                                                           | **     2000     ** | **     1999     ** |
| Average principal        balance per loan                                                                              | $111.9                                                                                                                                                                                                                                                                   | $97.7 | $99.2 |
| Combined weighted        average initial LTV                                                                           | 77.50%                                                                                                                                                                                                                                                                   | 77.46% | 78.12% |
| Percentage of        first mortgage loans owner occupied                                                               | 95.54%                                                                                                                                                                                                                                                                   | 94.66% | 93.49% |
| Percentage with        prepayment penalty                                                                              | 83.46%                                                                                                                                                                                                                                                                   | 83.61% | 76.65% |
| Weighted average        credit score                                                                                   | 593                                                                                                                                                                                                                                                                      | 580 | 591 |
| Percentage fixed        rate mortgages                                                                                 | 46.45%                                                                                                                                                                                                                                                                   | 55.07% | 53.99% |
| Percentage        adjustable rate mortgages                                                                            | 53.55%                                                                                                                                                                                                                                                                   | 44.93% | 46.01% |
| Weighted average        interest rate:                                                                                 |                                                                                                                                                                                                                                                                     |   |   |
|             Fixed        rate mortgages                    | 9.85%                                                                                                                                                                                                                                                                    | 10.98% | 10.16% |
|             Adjustable        rate mortgages               | 9.93%                                                                                                                                                                                                                                                                    | 10.66% | 9.98% |
|             Margin        – Adjustable rate mortgages | 5.88%                                                                                                                                                                                                                                                                    | 6.20% | 6.30% |

          Thefollowing table highlights the net cost to produce loans for ourtotal loan originations and purchases for the years endedDecember 31, 2001, 2000, and 1999.

|                                                     | **             For        the Year Ended December        31,              ** |
|----------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                     | **      2001     **                                                                                                                                          | **    2000    ** | **    1999    ** |
| Fees        collected(1)                                 | 75                                                                                                                                                                                                                  | 40 | 38 |
| General        and administrative production costs(1)(2) | 225                                                                                                                                                                                                                 | 226 | 221 |
| Premium        paid(1)                                   | 170                                                                                                                                                                                                                 | 207 | 243 |
| Net        cost to produce(1)(3)                         | 320                                                                                                                                                                                                                 | 393 | 426 |

| _______________ |
|-----------------|
| (1)             | In basis points. |
| (2)             | Excludes corporate overhead costs and        is prior to the net deferral of origination costs.        Includes depreciation expense. |
| (3)             | Defined as general and administrative        costs and premium paid, net of fees collected, divided by        volume. |

**Loan Production by Product Type**

          Weoriginate and purchase both adjustable rate mortgages("ARMs") and fixed rate mortgages ("FRMs").The majority of our FRMs are 30-year mortgages. In turn, our ARMproduction is divided into two categories: floating ARMs andhybrid ARMs. A floating ARM is a loan on which the interest rateadjusts throughout the life of the loan, either every 6 or every12-months. A hybrid ARM is a loan on which the interest rate isfixed for the initial 24 to 60-months on the loan term, andthereafter adjusts either every 6 or every 12-months. All of ourARMs adjust with reference to a defined index rate. The interestis determined by adding the "margin" amount to the"index" rate.

          Theinterest rate on ARMs once the initial rate period has lapsed isdetermined by adding the "margin" amount to the"index" rate. The index most commonly used in our loanprograms is the one-month London Inter-Bank Offered Rate("LIBOR"). The margin is a predetermined percentagethat, when added to the index, gives the borrower the rate thatwill eventually be due. It is common in the beginning stages ofan ARM loan to allow the borrower to pay a rate lower than therate that would be determined by adding the margin to the index.Over time, the rate adjusts upward such that eventually theinterest rate the borrower pays will take into account the indexplus the entire margin amount.

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          Asubstantial portion of our loans contain prepayment penalties.Borrowers who accept the prepayment penalty receive a lowerinterest rate on their mortgage loan. Borrowers always retain theright to refinance their loan, but may have to pay a charge of upto six-months interest on 80% of the remaining principal whenprepaying their loans.

          Thefollowing table sets forth information about our loan productionbased on product type (ARMs and FRMs) for the years endedDecember 31, 2001, 2000, and 1999.

|                    |  **                 For        the Year Ended December        31,         ** |
|-------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                    | **     2001     **                                                                                                                                                | **     2000     ** | **     1999     ** |
| **Product        Type** |                                                                                                                                                                                                                |   |   |   |
| ARMs                    | ARMs                                                                                                                                                                                                                | 0.05% | 0.14% | 1.84% |
|                    | Hybrids                                                                                                                                                                                                             |      53.50%      |      44.80%      |      44.17%      |
|                    |             Total        ARMs                                                                                                                           |      53.55%      |      44.94%      |      46.01%      |
| FRMs                    | Fifteen        year                                                                                                                                                                                                 | 4.22% | 4.57% | 4.51% |
|                    | Thirty        year                                                                                                                                                                                                  | 20.43% | 16.51% | 21.91% |
|                    | Balloons                                                                                                                                                                                                            | 19.70% | 33.98% | 27.57% |
|                    | Other                                                                                                                                                                                                               |      2.10%      |      --      |      --      |
|                    |             Total        FRMs                                                                                                                           |      46.45%      |      55.06%      |      53.99%      |

**Loan Production by Borrower Risk Classification**

          Thefollowing table sets forth information about our loan productionby borrower risk classification for the years ended December 31,2001, 2000, and 1999.

|                                                                                              |  **              For        the Year Ended December        31,               ** |
|---------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                              | **     2001     **                                                                                                                                                                  | **     2000     ** | **     1999     ** |
| **A+        Credit Loans(1)**                                                                     |                                                                                                                                                                                                                                  |   |   |
| Percentage        of total purchases and origination                                              | 17.95%                                                                                                                                                                                                                                | 6.63% | 5.52% |
| Combined        weighted average initial LTV                                                      | 73.93%                                                                                                                                                                                                                                | 77.46% | 77.75% |
| Weighted        average credit score                                                              | 676                                                                                                                                                                                                                                   | 648 | 654 |
| Weighted        average interest rate:                                                            |                                                                                                                                                                                                                                  |   |   |
|             FRMs                      | 7.95%                                                                                                                                                                                                                                 | 9.49% | 8.95% |
|             ARMs                      | 8.41%                                                                                                                                                                                                                                 | 9.85% | 8.79% |
|             Margin        – ARMs | 4.87%                                                                                                                                                                                                                                 | 4.90% | 4.56% |
| **A        Credit Loans(1)**                                                                      |                                                                                                                                                                                                                                  |   |   |
| Percentage        of total purchases and origination                                              | 18.51%                                                                                                                                                                                                                                | 11.19% | 14.57% |
| Combined        weighted average initial LTV                                                      | 79.85%                                                                                                                                                                                                                                | 79.63% | 78.10% |
| Weighted        average credit score                                                              | 619                                                                                                                                                                                                                                   | 620 | 630 |
| Weighted        average interest rate:                                                            |                                                                                                                                                                                                                                  |   |   |
|             FRMs                      | 9.68%                                                                                                                                                                                                                                 | 10.46% | 9.37% |
|             ARMs                      | 8.95%                                                                                                                                                                                                                                 | 10.09% | 9.51% |
|             Margin        – ARMs | 5.20%                                                                                                                                                                                                                                 | 5.24% | 5.27% |
| **A-        Credit Loans(1)**                                                                     |                                                                                                                                                                                                                                  |   |   |
| Percentage        of total purchases and origination                                              | 35.66%                                                                                                                                                                                                                                | 40.92% | 44.48% |
| Combined        weighted average initial LTV                                                      | 81.09%                                                                                                                                                                                                                                | 80.41% | 80.83% |
| Weighted        average credit score                                                              | 578                                                                                                                                                                                                                                   | 590 | 598 |
| Weighted        average interest rate:                                                            |                                                                                                                                                                                                                                  |   |   |
|             FRMs                      | 10.33%                                                                                                                                                                                                                                | 10.83% | 10.22% |
|             ARMs                      | 9.77%                                                                                                                                                                                                                                 | 10.32% | 9.69% |
|             Margin        – ARMs | 5.75%                                                                                                                                                                                                                                 | 5.95% | 6.11% |

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| **B        Credit Loans(1)**                                                                      |   |   |   |
|---------------------------------------------------------------------------------------------------|--------|--------|--------|
|                                                                                              |
| Percentage        of total purchases and origination                                              | 16.58% | 23.05% | 19.85% |
| Combined        weighted average initial LTV                                                      | 76.53% | 76.81% | 77.32% |
| Weighted        average credit score                                                              | 547    | 556    | 561    |
| Weighted        average interest rate:                                                            |   |   |   |
|             FRMs                      | 11.23% | 11.32% | 10.81% |
|             ARMs                      | 10.57% | 10.69% | 10.04% |
|             Margin        – ARMs | 6.42%  | 6.32%  | 6.43%  |
| **C        Credit Loans(1)**                                                                      |   |   |   |
| Percentage        of total purchases and origination                                              | 9.34%  | 14.43% | 12.91% |
| Combined        weighted average initial LTV                                                      | 71.45% | 72.46% | 73.40% |
| Weighted        average credit score                                                              | 531    | 539    | 549    |
| Weighted        average interest rate:                                                            |   |   |   |
|             FRMs                      | 12.40% | 12.27% | 11.53% |
|             ARMs                      | 11.58% | 11.33% | 10.58% |
|             Margin        – ARMs | 6.92%  | 6.75%  | 6.81%  |
| **D        Credit Loans(1)**                                                                      |   |   |   |
| Percentage        of total purchases and origination                                              | 1.96%  | 3.78%  | 2.67%  |
| Combined        weighted average initial LTV                                                      | 59.90% | 62.20% | 62.44% |
| Weighted        average credit score                                                              | 529    | 539    | 545    |
| Weighted        average interest rate:                                                            |   |   |   |
|             FRMs                      | 13.12% | 13.49% | 12.68% |
|             ARMs                      | 12.48% | 12.26% | 11.38% |
|             Margin        – ARMs | 7.59%  | 7.37%  | 7.22%  |

| _______________ |
|-----------------|
| (1)             | The letter grade applied        to each risk classification reflects our internal        standards and do not necessarily correspond to        classifications used by other mortgage lenders. |

**Loan Production by Income Documentation**

          Thefollowing table sets forth information about our loan productionbased on income documentation for the years ended December 31,2001, 2000, and 1999.

|                         |    **                                         For        the Year Ended December        31,                                ** |
|------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Income documentation**     | **         2001         **                                                                                                                                                                                                                                                                                                                                                                                                      | **         2000         ** | **         1999         ** |
|                         | **% of****Originations**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | **Average****Credit Score** | **% of****Originations** | **Average****Credit Score** | **% of****Originations** | **Average****Credit Score** |
| Full        documentation    | 77.79%                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | 590           | 76.00%           | 576           | 75.39%           | 586           |
| Limited        documentation | 5.36%                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | 607           | 6.41%           | 598           | 7.46%           | 612           |
| Stated        income         | 16.63%                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | 602           | 17.11%           | 593           | 16.77%           |           605           |
| Other                        | 0.22%                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | 613           | 0.48%           | 598           | 0.38%           | 611           |

**Loan Production by Borrower Purpose**

          Thefollowing table sets forth information about our loan productionbased on borrower purpose for the years ended December 31, 2001,2000, and 1999.

|                          | **                         For        the Year Ended December        31,            ** |
|-------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Borrower        Purpose**   | **        2001        **                                                                                                                                                                        | **        2000        ** | **        1999        ** |   |
| Cash-out        refinance     | 69.86%                                                                                                                                                                                                                                                                          | 59.49% | 55.15% |   |
| Purchase                      | 20.93%                                                                                                                                                                                                                                                                          | 29.94% | 31.30% |   |
| Rate        or term refinance | 9.21%                                                                                                                                                                                                                                                                           | 10.57% | 13.55% |   |

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**Loan Production Based Upon the Borrower's Credit Score**

          Thefollowing table sets forth information about our loan productionbased on borrowers' credit scores for the years ended December31, 2001, 2000, and 1999.

|                        | **                   For        the Year Ended December        31,            ** |
|-----------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                        | **     2001     **                                                                                                                                                                        | **     2000     ** | **     1999     ** |
| >700                     | 7.41%                                                                                                                                                                                                                                       | 3.22% | 4.72% |
| 700 to        651           | 11.73%                                                                                                                                                                                                                                      | 8.39% | 10.63% |
| 650 to        601           | 22.98%                                                                                                                                                                                                                                      | 21.55% | 23.64% |
| 600 to        551           | 26.55%                                                                                                                                                                                                                                      | 31.38% | 29.49% |
| 550 to        501           | 24.29%                                                                                                                                                                                                                                      | 27.41% | 21.35% |
| <        500             | 6.19%                                                                                                                                                                                                                                       | 5.88% | 4.46% |
| Unavailable                 | 0.85%                                                                                                                                                                                                                                       | 2.17% | 5.71% |
| Average        Credit Score | 593                                                                                                                                                                                                                                         | 580 | 591 |

**Geographic Distribution**

          Thefollowing table sets forth the percentage of all loans originatedor purchased by the Company by state for the periods shown.

|                                      | **            For        the Year Ended December        31,            ** |
|-------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                      | **      2001    **                                                                                                                              | **     2000    ** | **     1999     ** |
| California                                | 22.70%                                                                                                                                                                                            | 22.37% | 21.09% |
| Florida                                   | 5.24%                                                                                                                                                                                             | 5.38% | 5.10% |
| Michigan                                  | 4.25%                                                                                                                                                                                             | 5.35% | 3.66% |
| Illinois                                  | 3.74%                                                                                                                                                                                             | 5.74% | 4.63% |
| Colorado                                  | 3.25%                                                                                                                                                                                             | 3.05% | 3.20% |
| Minnesota                                 | 3.24%                                                                                                                                                                                             | 2.07% | 2.16% |
| Texas                                     | 3.13%                                                                                                                                                                                             | 4.22% | 5.22% |
| Washington                                | 2.18%                                                                                                                                                                                             | 3.23% | 4.07% |
| Arizona                                   | 1.83%                                                                                                                                                                                             | 2.36% | 2.11% |
| Massachusetts                             | 1.21%                                                                                                                                                                                             | 0.91% | 0.85% |
| Other                                     |      49.23%                                                                                                                                     |      45.32%      |      47.91%      |
|       Total |      100.00%                                                                                                                                    |      100.00%      |      100.00%      |

**Securitization and Financing**

          Asa fundamental part of our present business and financingstrategy, we securitize almost all of our mortgage loans. Fromtime to time, we may choose to sell loans rather than securitizethem if we believe that market conditions present an opportunityto achieve better economic execution through such sales. Weexpect that such sales will continue to constitute a smallpercentage of our production. Since 1996, we have securitizedapproximately $11.0 billion of the loans we originated orpurchased. We intend to continue utilizing the asset-backedsecuritization market to provide long-term financing for ourmortgage loans. We will generate earnings and cash flowsprimarily from the net interest income and fees we earn from themortgage loans we originate and purchase.

          Ina typical securitization, pools of mortgage loans, together withthe right to receive all payments on the loans, are assembled andtransferred to a trust. The trust issues certificates that 

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represent the right to receive a portion of the amountscollected on the loans each month. Most of the trust certificates(referred to as asset-backed securities) are offered for sale tothe public, with the remainder either privately placed orretained by the company sponsoring the securitization. Many ofthe certificates are assigned ratings by rating agencies such asMoody's, Standard & Poor's, and Fitch. The trust agreementcreating the securitization trust establishes various classes ofcertificates, and assigns an order of rights to priority ofpayment to each class. The trust agreement also provides for suchadministrative matters as the appointment of a trustee of thetrust, the servicing of the mortgage loans, and the monthlydistribution of funds and reports to the holders of thecertificates.

          Wefinance loans initially under one of several different securedand committed warehouse financing facilities. When the loans aresecuritized, we receive proceeds from the securities issued bythe securitization trust, and we use those proceeds to, amongother uses, pay off the related warehouse financing. Generallythe company sponsoring the securitization is not legallyobligated to make payments on the securities issued by thesecuritization trust, and we do not have this legal obligationwith respect to our securitizations, although under GAAPapplicable to our current portfolio-based accounting, suchobligations are included as liabilities on our consolidatedbalance sheet. We do, however, make certain customaryrepresentations and warranties to each securitization trust,which, if violated, could legally obligate us to repurchase someor all of the securitized loans from the trust. The asset-backedsecurities issued by the securitization trust pay down as thesecuritized loans pay off.

          Weanticipate that the structure employed by our securitizationtransactions will require credit enhancement. By applying excesscash flow (mortgage interest income net of interest on theasset-backed securities, losses, and servicing fees) to pay downthe asset-backed securities of the trust faster than theunderlying mortgages, we are able to create any requiredovercollateralization. Once the overcollateralization meetspredetermined levels, we will begin to receive the excess cashflow from the mortgage loans in the trust. Depending upon thestructure of the asset-backed securities and the performance ofthe underlying loans, excess cash flow may not be distributed tous for 12 to 24 months or more. These excess amounts are derivedfrom, and are affected by, the interplay of several economicfactors:

> - the extent to which the interest rates of the            mortgage loans exceed the interest rates of the            related asset-backed securities;
- the creation of overcollateralization;
- the level of loss and delinquencies experienced on            the securitized mortgage loans; and
- the extent to which the loans are prepaid by            borrowers in advance of scheduled maturities.

          Weexpect that our securitization trusts will also provide that, ifcertain delinquencies and/or losses exceed certain levels (whichvary among the securitization trusts), as established by theapplicable rating agencies (or the financial guaranty insurer, inthe case of certain securitization trusts), the required level ofovercollateralization may be increased or may be 

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prevented from decreasing as would otherwise be permitted iflosses and/or delinquencies did not exceed such levels. Othertests (based on delinquency levels or other criteria) mayrestrict our ability to receive excess cash flow from asecuritization transaction. We cannot assure that the performancetests will be satisfied. Nor can we assure, in advance ofcompleting negotiations with the rating agencies or other keytransaction parties, the actual terms of such delinquency tests,overcollateralization terms, cash flow release mechanisms orother significant factors regarding the calculation of net assetincome to us. Failure to negotiate such terms on a favorablebasis may materially and adversely affect the availability of netexcess income to us.

          Generally,so long as excess cash flow is being directed to the seniorsecurities of a securitization trust to achieveovercollateralization, we will not receive distributions from therelated securitized pool. In addition, because the application ofthe excess cash flow to the senior securities of a securitizationtrust is dependent upon the performance of the related mortgageloans, there may be material variations in the amount, if any, ofthe excess cash flow distributed to us from period to period, andthere may be extended periods when we do not receive excess cashflow. Any variations in the rate or timing of our receipt ofdistributions may adversely affect our financial condition.

          Wecannot assure that our securitizations will generate sufficientexcess cash flow to ensure that targeted levels ofovercollateralization will be achieved and maintained at alltimes. As described above, a high rate of delinquencies anddefaults, or rapid rates of prepayments experienced by asecuritized pool (or an increase in LIBOR or any other benchmarkwhich may be utilized) may cause the amount of interest receivedon the mortgage loans to be less than the amount of interestpayable on the securities of the securitization trust on therelated payment date. In this case, the principal balance of suchsecurities would decrease at a slower rate relative to theprincipal balance of the securitized pool, which would lead to areduction of overcollateralization below targeted levels andresult in no excess cash flow being paid to us.

          Forfederal income tax purposes, we will elect to treat each of oursecuritizations as one or more real estate mortgage investmentconduits ("REMICs"). As a result of this election, wewill recognize taxable gain or loss on the sale of asset-backedsecurities even though we will not recognize gain or loss onsecuritization of mortgage loans for financial reportingpurposes. For purposes of computing such gain or loss, we arerequired to allocate our tax basis in the mortgage loanscontributed to the REMIC among the asset-backed securities issuedby the REMIC, including any asset-backed securities we retain. Werecognize such taxable gain or loss only with respect to theasset-backed securities we sell, utilizing the value of theretained interest as a component of the gain.

          Historically,we have typically held, and may continue in the future to hold,the residual interests in some of the REMICs we create. A portionof the income we recognize that is attributable to such residualinterests, referred to as excess inclusions, is subject tospecial tax treatment. Specifically, our taxable income for anytaxable year can never be less than the sum of our excessinclusions for the year. Thus, if we have excess inclusions forany year, we will have to pay federal income tax even if the sumof our otherwise allowable deductions and losses for the yearexceed our income (computed without regard to the excessinclusion rule) for the year.

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**Competition**

          Weface intense competition in the business of originating,purchasing, securitizing, and servicing mortgage loans. Ourcompetitors include consumer finance companies and otherdiversified financial institutions, mortgage banking companies,commercial banks, credit unions, savings and loans, credit cardissuers, and insurance finance companies. Many traditionalmortgage lenders have begun to offer products similar to those weoffer to our borrowers. Fannie Mae and Freddie Mac have alsoexpressed interest in adapting their programs to includenon-conforming products, and have begun to expand theiroperations into the sub-prime market. We also expect increasedcompetition over the Internet, as entry barriers are relativelylow over the Internet. Many of these competitors, including largefinancial corporations taking advantage of consolidationopportunities in the industry, are substantially larger and havemore capital, or greater access to capital at lower costs, andgreater technical and marketing resources than we have.Efficiencies in the asset-backed securities market have generallycreated a desire for increasingly larger transactions, givingcompanies with greater volumes of originations a competitiveadvantage.

          Competitionin the industry can take many forms, including interest rate andcost of a loan, convenience in obtaining a loan, customerservice, amount and term of a loan, and marketing anddistribution channels. Additional competition may lower the rateswe can charge borrowers and potentially lower our net interestmargin.

          Ourcompetitive position may be affected by fluctuations in interestrates and general economic conditions. During periods of risinginterest rates, competitors that have "locked in" lowborrowing costs may have a competitive advantage. During periodsof declining interest rates, competitors may solicit ourborrowers to refinance their loans. During economic slowdowns orrecessions, our borrowers may face new financial difficulties andmay be receptive to refinancing offers by our competitors.

          Webelieve that our competitive strengths are:

> - investment in technology to support operating            efficiency, maintain credit decision consistency, and            drive loss mitigation efforts;
- a disciplined approach to underwriting and servicing            sub-prime mortgage loans using sophisticated and            integrated risk management techniques;
- customer-focused processing and underwriting teams            that are responsive to borrowers' needs;
- risk-based pricing using our historical performance            databases to increase predictability of our returns;            and
- low cost funding and liquidity availability through            the asset-backed securities market.

We believe these strengths enable us to    produce higher-quality, better performing loans than our    competitors.

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**Regulation**

          Themortgage lending industry is highly regulated. Our business issubject to extensive regulation and supervision by variousfederal, state, and local government authorities. As of December31, 2001, we were licensed or exempt from licensing requirementsby the relevant state banking or consumer credit agencies tooriginate first and second mortgages in 49 states and theDistrict of Columbia. We do not originate loans in the State ofAlabama.

          Ourmortgage lending and servicing activities are subject to theprovisions of various federal and state statutes, including theEqual Credit Opportunity Act of 1974, as amended, the FederalTruth-in-Lending Act and Regulation Z promulgated thereunder, theHome Ownership and Equity Protection Act of 1994, the Fair CreditReporting Act of 1970, as amended, the Real Estate SettlementProcedures Act, the Fair Debt Collection Practices Act, the HomeMortgage Disclosure Act, the Fair Housing Act, and state statutesgoverning mortgage lending. Our business is subject to the rulesand regulations of various federal, state, and local regulatoryagencies in connection with originating, purchasing, processing,underwriting, securitizing, and servicing mortgage loans. Theserules and regulations, among other things:

> - impose licensing obligations on us;

> - establish eligibility criteria for mortgage loans;

> - prohibit discrimination;

> - provide for inspections and appraisals of properties;

> - require us to adhere to certain procedures regarding            credit reports on loan applicants;

> - regulate assessment, collection, foreclosure and            claims handling, investment and interest payments on            escrow balances, and payment features;

> - mandate certain disclosures and notices to borrowers;            and

> - may fix maximum interest rates, fees, and mortgage            loan amounts.

          Failureto comply with these requirements can lead to, among otherthings, loss of approved licensing status, demands forindemnification or mortgage loan repurchases, certain rights ofrescission for mortgage loans, class action lawsuits,administrative enforcement actions, and civil and criminalliability.

          Thefederal Gramm-Leach-Bliley financial reform legislation enactedin 2000 imposes additional privacy obligations on us with respectto our applicants and borrowers. We have prepared appropriatecontrols and procedures to comply with the law. In addition,several states are also considering adopting privacy laws thatare not entirely consistent with one another. The enactment ofinconsistent state privacy legislation could substantiallyincrease our compliance costs.

          Inaddition, several federal, state, and local laws and regulationshave been adopted or are under consideration that are intended toeliminate so-called "predatory" lending practices, suchas "steering" borrowers into loans with high interestrates and away from more affordable 

17

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products, selling unnecessary insurance to borrowers, and"flipping" or repeatedly refinancing loans. Since 1999,a number of states and municipalities have adopted laws relatedto predatory lending. These laws, rules, and regulations, orother laws, rules, or regulations adopted in the future, couldhave a material adverse impact on our business by substantiallyincreasing the costs of compliance with a variety of federal,state, and local rules, or restricting our ability to chargerates and fees adequate to compensate us for the risk associatedwith certain loans.

          Dueto the consumer-oriented nature of the mortgage industry, thereis a risk that we or other industry participants may be named asdefendants in litigation involving alleged violations of federaland state laws, including consumer protection laws, or become thesubject of a regulatory investigation. In recent years, severalnon-conforming mortgage lenders have been the subjects of classaction lawsuits and regulatory actions alleging impropermarketing practices, abusive loan terms and fees, disclosureviolations, improper yield spread premiums and other matters.Other mortgage lenders and we now face inconsistent judicialdecisions about such payments. If the adverse decisions are notoverturned regarding lender payments to brokers and potentialcosts defending these types of claims and in paying any judgmentsthat might result. The costs of a significant increase inlitigation could have a material adverse effect on our results ofoperation, financial condition and business prospects.

**Environmental**

          Inthe ordinary course of our business, from time to time weforeclose on properties securing loans that are in default. Thereis a risk that hazardous or toxic waste could be found on theseproperties and we may be held liable to a governmental entity orto third parties for property damage, personal injury, andinvestigation and cleanup costs incurred in connection with thecontamination. To date, we have not been required to perform anymaterial investigation or clean up activities, nor have we beensubject to any environmental claims. We cannot assure you,however, that this will remain the case in the future.

**Employees**

          Weemployed 899 full-time employees as of December 31, 2001. None ofour employees are represented by a union or covered by acollective bargaining agreement. We believe our relations withour employees are good.

**Rule 144A Offering**

          OnJuly 6, 2001, we sold 28,000,000 shares of our common stock toFriedman, Billings, Ramsey & Co., Inc. ("FBR"), ata price per share of $9.30. FBR then sold the shares to investorsat a price of $10.00 per share in a transaction not requiringregistration under the Securities Act or applicable statesecurities law. Simultaneously with the sale of the 28,000,000shares, we sold 20,000 shares of our common stock to our CEO,20,000 shares to our President, and 10,000 shares to our CFO at aprice of $10.00 per share in a private placement not registeredunder the Securities Act (together with the sale of the28,000,000 shares, referred to as the 144A Offering). Inconnection with the 144A Offering, we granted warrants to FBR topurchase an aggregate of 1,200,000 shares of our common stock(the FBR Warrants). We also entered into a registration 

18

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rights agreement for the benefit of the holders of the28,000,000 shares of common stock and the common stock underlyingthe FBR Warrants, all of which shares are now registered forresale under the Securities Act.

          Ournet proceeds of the 144A Offering were approximately $260million. We used the net proceeds as follows:

> - to pay the cash component of the purchase price for            the acquisition of SCI Services, Inc. which was            $145.3 million, net of a $25 million note to Dominion            Capital, Inc., and

> - the remainder for general corporate and working            capital purposes.

**Acquisition of SCI Services, Inc.**

          OnJuly 6, 2001, we purchased all of the issued and outstandingshares of capital stock of SCI Services from Dominion Capital,Inc. The purchase occurred simultaneously with the consummationof our 144A Offering.

          Wepurchased SCI Services for $170.3 million, which is a price equalto SCI Services' net tangible book value as of July 5, 2001,adjusted to take into effect the distribution of assets andliabilities by SCI Services to Dominion Capital Inc. describedbelow that we did not purchase, plus a premium of $11.7 millionprimarily related to loans held prior to securitization. Theaggregate purchase price was paid in the form of a $25 millionfive-year senior subordinated promissory note, which accruesinterest at 8% annually, and the remainder in cash. We did notpurchase any of SCI Services' historical goodwill or taxliabilities, or any of the interest-only residual assets andrelated hedges, or subordinate bonds SCI Services retained insecuritizations that occurred before our purchase. SCI Servicesdistributed these assets and liabilities to Dominion Capital Inc.immediately before the closing.

**Executive Officers**

          Ourexecutive officers are as follows:

          *MichaelL. Sawyer, Age 45.* Mr. Sawyer is our Chief Executive Officerand a Director. He has served as Saxon Mortgage's President sinceDecember 1998. Before being named President, Mr. Sawyer hadserved as a Director and our Senior Vice President ofUnderwriting since 1995. Before joining Saxon, Mr. Sawyer servedas Vice President and Director of Conduit Funding for HouseholdFinancial Services. From 1993 until 1994, Mr. Sawyer was generalmanager and director of correspondent lending for Novus FinancialCorporation. From 1985 until 1993, Mr. Sawyer held variousmanagerial positions for Ford Consumer Finance, includingregional underwriting manager and manager of operations. Mr.Sawyer received his Bachelor's degree in Liberal Arts from theUniversity of Illinois, and received his Masters of BusinessAdministration from the University of California, Irvine.

          *DennisG. Stowe, Age 41.* Mr. Stowe is our President, Chief OperatingOfficer, and a Director. He has served as President and ChiefExecutive Officer of Meritech and Senior Vice President of SaxonMortgage since 1994. Before joining Meritech, Mr. Stowe was VicePresident of Niagara Portfolio Management Corp. (Niagara),responsible for management and 

19

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liquidation of Goldome Credit Corporation (GCC) pursuant toNiagara's contract with the FDIC, serving as GCC's Senior VicePresident. Mr. Stowe received his Bachelors of BusinessAdministration in Accounting with honors from the University ofTexas at Arlington.

          *RobertG. Partlow, Age 35.*Mr. Partlow is our Executive VicePresident, Chief Financial Officer, Treasurer, and a Director.Mr. Partlow has served as Saxon Mortgage's and America'sMoneyLine's Executive Vice President, Chief Financial Officer,and Treasurer since 1999, Saxon's Treasurer since 1998, andMeritech's Senior Vice President, Chief Financial Officer, andTreasurer since 1998. Before this, Mr. Partlow had served invarious positions, including as Vice President and Controller ofSaxon, Saxon Mortgage, Meritech, and America's MoneyLine, since1996. Before joining Saxon in 1996, Mr. Partlow served as Managerof Tax and Accounting for Dynex Capital, Inc., as a senior taxconsultant at KPMG LLP, an international accounting firm, and asa bank examiner for the Federal Reserve Bank of Richmond. Mr.Partlow received a Bachelor of Science degree in BusinessAdministration from the University of Richmond, and received hisMaster of Science in Accountancy from the University of Virginia.Mr. Partlow is a licensed Certified Public Accountant in theCommonwealth of Virginia.

          *BradleyD. Adams, Age 36*. Mr. Adams is our Vice President of CapitalMarkets. Mr. Adams has served as Senior Vice President of CapitalMarkets of Saxon Mortgage since October 1999. Prior to this, Mr.Adams had served as Vice President of Capital Markets of SaxonMortgage since 1998 and Assistant Vice President since 1996.Before joining Saxon in 1994, Mr. Adams served in variousfinancial positions at Dynex Capital, Inc., Best ProductsCorporation, Hesa Educational Corp., and Growth Capital Corp. Mr.Adams received his Bachelor of Science degree in Finance, and hisMaster of Business Administration degree, from VirginiaCommonwealth University.

          *RobertB. Eastep, Age 38*. Mr. Eastep is our Vice President ofStrategic Planning and our Chief Accounting Officer. Mr. Eastephas served as Saxon's Senior Vice President and Chief AccountingOfficer since October 2000. Prior to this, Mr. Eastep had servedas Saxon's Vice President and Controller since April 1999. Beforejoining Saxon, Mr. Eastep worked at Cadmus Communications, aprinting company, as Director of Internal Audit from 1998 to1999. Before that, Mr. Eastep served as Vice President-Financefor Central Fidelity Bank, NA (now Wachovia Corporation), acommercial bank, from 1996 to 1998. Before 1996, Mr. Eastep was aSenior Manager at KPMG LLP, an international accounting firm. Mr.Eastep received his Bachelor of Science in BusinessAdministration with honors from West Virginia University. Mr.Eastep is a licensed Certified Public Accountant in theCommonwealth of Virginia.

          *BruceC. Morris, Age 56*. Mr. Morris is our Vice President ofQuality Control. Mr. Morris has served as Saxon Mortgage's SeniorVice President of Quality Control since 1998. Before joining us,Mr. Morris was a Senior Asset Manager for SMAI, Inc., anindependent contract firm that managed the liquidation of failedfinancial institutions under contract with the RTC/FederalDeposit Insurance Corporation from 1993 to 1997. Before that, Mr.Morris held various senior management positions at Ritz-CohenJoint Ventures and HomeFed Bank, SunBelt Savings FSB. Mr. Morrisreceived his Bachelor of Business Administration degree inFinance and Economics from Stephen F. Austin University.

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          *RichardD. Shepherd, Age 48*. Mr. Shepherd is our Vice President,General Counsel, and Secretary. Mr. Shepherd has served as VicePresident, General Counsel and Assistant Secretary of Saxon andMeritech since 1997. Before being named Vice President andGeneral Counsel, Mr. Shepherd served as Assistant General Counseland Assistant Secretary of Saxon, Saxon Mortgage, Meritech, andAmerica's MoneyLine. Before joining Saxon Mortgage and Meritechin 1995, Mr. Shepherd was an attorney at Ragsdale, Beals, Hooper& Seigler and Robert Musselman and Associates, concentratingin real estate finance matters. Mr. Shepherd received hisBachelor of Arts degree in Liberal Arts from the University ofMaryland, and received his Juris Doctor degree from theUniversity of Virginia.

          *DavidL. Dill, Age 38*. Mr. Dill is our Vice President of Servicing.Mr. Dill has served as Senior Vice President of Meritech sinceAugust 1999, responsible for management of the Performing AssetDivision including customer service, collections, and escrowadministration. Mr. Dill joined Meritech in 1998 as VicePresident and Loss Mitigation Manager, responsible for outboundcollection and loss mitigation activities on mortgage loans sixtyor more days delinquent. Before joining Meritech, Mr. Dill heldvarious managerial positions at North Dallas Bank and Trust from1985 to 1998, most recently as Vice President of ConsumerLending. Mr. Dill studied at North Lake Jr. College and hascompleted real estate lending courses and the Texas BankersAssociation Consumer Lending School.

          *ThomasS. Conroy, Jr., Age 41*. Mr. Conroy is our Vice President andGeneral Manager of our Wholesale Business Channel and has servedin this capacity since January 2001. Before joining Saxon, Mr.Conroy was Vice President of Consumer Lending at Flagstar Bank in2000 and was Managing Director of the sub-prime unit of DMRFinancial Services, Inc., from 1998 until 2000. From 1997 to1998, Mr. Conroy was the Executive Vice President of Home AmericaFinancial Services, Inc. From 1995 until 1997, Mr. Conroy servedas Executive Vice President, Third Party Originations for BancOneFinancial Services, Inc. Prior to these positions, Mr. Conroyheld various managerial positions at the CIT Group, CommercialCredit Corporation and Transamerica Financial Services, Inc. Mr.Conroy received his Bachelor of Arts degree in BusinessManagement from Moravian College.

          *FrederickR. Elflein, Jr., Age 38*. Mr. Elflein is our Vice Presidentand General Manager of our Retail Production. Mr. Elflein hasserved in this capacity since 1997. Before joining us, Mr.Elflein held various managerial positions at Household FinanceCorporation from 1986 to 1997, most recently as Regional VicePresident of the Western Sales Region. Mr. Elflein received hisBachelor of Arts degree from Creighton University.

          *JeffreyA. Haar, Age 35*. Mr. Haar is our Vice President and GeneralManager of our Correspondent Business Channel. Before being namedSenior Vice President, Mr. Haar had served as a Regional AccountManager for Saxon since 1997. Before joining Saxon, Mr. Haar wasSenior Vice President of Indy Mac's Correspondent LendingDivision from 1996 to 1997 and National Account Manager from 1993to 1996. Prior to these positions, Mr. Haar was a Retail LoanOfficer for First Pacific Mortgage and Commerce Security Bankfrom 1990 to 1993. Mr. Haar received his Bachelor of BusinessAdministration in Finance from the University of Toledo.

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**Risk Factors**

***We have incurred significant operational losses inthe year 2000 and for the year 2001.***

          Ourbusiness operations resulted in net losses in the year 2000 andfor the year 2001. These losses were caused primarily fromcharges related to the impairment of certain residual assets andgoodwill. Furthermore, beginning July 6, 2001, we changed oursecuritization structure so that we no longer book a gain at thetime of securitization, and instead record interest income andloan loss provisions over the life of the mortgage loans.Therefore, we will continue to experience operating losses untilwe rebuild our mortgage investment portfolio to the point thatour mortgage loans generate sufficient net income to cover ouroperating costs.

***A prolonged economic downturn or recession couldadversely affect our operations and financial condition.***

          TheUnited States economy has recently undergone and may becontinuing to undergo a period of slowdown, which some observersview as a recession. Although we have not operated during aperiod of prolonged general economic downturn or a recession,these events have historically resulted in a reduction inmortgage origination activity and an increase in the rate ofmortgage defaults. A continued economic downturn or recessionwould have a significant adverse impact on our operations and ourfinancial condition. For example, a reduction in new mortgageswill adversely affect our ability to expand our mortgageportfolio, which is our principal means of increasing ourearnings. In addition, because we make a substantial number ofloans to credit-impaired borrowers, the actual rates ofdelinquencies, foreclosures, and losses on these loans could behigher during economic slowdowns. Any sustained period ofincreased delinquencies, foreclosures, or losses could adverselyaffect our ability to originate, purchase, and securitize loans.

***Inability to generate liquidity or access fundingsources may affect our operations.***

          Werequire substantial amounts of cash to fund our loan origination,purchase, securitization, and servicing activities. We also incursignificant securitization costs, as well as a current taxliability, in connection with a securitization. Additionally, asa servicer, we are required to advance delinquent principal andinterest payments to investors, tax and insurance escrowpayments, and foreclosure costs on certain delinquent loans.Accordingly, our strategy of increasing the number of loansoriginated, purchased, and serviced will require substantialamounts of cash. A significant source of our operating cash flowswas removed from our balance sheet when Dominion Capital retainedthe residual cash flows associated with all securitizations thatoccurred before our divestiture. As a result, the cash generatedfrom our current operations is not sufficient to fund ouroperating activities and growth plans. While we are building ourmortgage portfolio, we will fund the operating shortfall with our$132.4 million in available working capital and $1.4 billion incommitted warehouse lines. We expect that we will use asubstantial portion of this working capital before we reach aposition of cash flow neutrality. In addition to our committedwarehouse lines, there are three other main sources from which weexpect to derive our liquidity:

> -      securitizations of            acquired or originated mortgage loans and whole loan            sales;

> -      our issuance of equity            and debt securities; and

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> -      earnings from            operations.

          Wecannot assure you that any of these alternatives will beavailable to us, or if available, that we will be able tonegotiate favorable terms. If we cannot generate sufficientliquidity, we will be unable to continue our operations, grow ourloan portfolio, and maintain our hedging policy.

***Dependence on financing facilities andsecuritizations may create liquidity risks.***

          *Liquidityrisks associated with credit and warehouse facilities.*

          Ourability to fund current operations and accumulate loans forsecuritization depends to a large extent upon our ability tosecure short-term financing on acceptable terms. The availabilityof these financing sources depends to some extent on factorsoutside of our control, including regulatory capital treatmentfor unfunded bank lines of credit and the availability of bankliquidity in general. If we are unable to extend or replace anyof these facilities, we will have to curtail our loan productionactivities and/or sell a substantial portion of our loanoriginations, which would have a material adverse effect on ourbusiness, financial condition, liquidity, and results ofoperations.

          *Liquidityrisks associated with securitizations.*

          SinceMay 1996, we have relied, and expect to continue to rely, uponour ability to securitize our mortgage loans to generate cash forrepayment of short-term credit and warehouse facilities, and tofinance the mortgage loan for the remainder of the mortgageloan's life. We cannot assure you, however, that we will continueto be successful in securitizing mortgage loans that weaccumulate. Our ability to complete securitizations of our loanswill depend on a number of factors, including conditions in thesecurities markets generally, conditions in the asset-backedsecurities market specifically, and the performance of ourportfolio of securitized loans. If it is not possible oreconomical for us to complete the securitization of all the loansthat we accumulate, we may exceed our capacity under ourwarehouse financing. This could require us to sell theaccumulated loans at a time when the market value of the loans islow, and potentially to incur a loss in the sale transaction. Ina securitization, securities are issued with various ratings andare priced at a spread over a certain benchmark, such as theyield on United States Treasury bonds, swaps, or LIBOR. If thespread that investors are willing to pay over the benchmarkwidens and the rates we charge on our mortgage loans are notincreased accordingly, we may experience a material adverseimpact on our ability to execute securitizations.

***We face additional risks by securitizing ourloans.***

          *Oursecuritizations require credit enhancement.*

          Since1997, all of our securitizations have utilized credit enhancementprimarily in the form of senior subordinate bonds. The market forthese senior subordinate bonds could become more illiquid ortrade at steep discounts, thereby affecting our ability tosecuritize our loans. In addition, we have, from time to time,used financial guaranty insurance policies to provide creditenhancement for our securitizations instead of using seniorsubordinate structures. While we plan 

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to use these credit enhancement features in the future, wecannot assure you that these features will be available at coststhat would allow us to finance mortgage loans economically.

          *Oursecuritizations place demands on the interest we collect on ourmortgage loans that must be satisfied before we can use thatsource of cash for current operations.*

          Oncewe securitize loans, interest income on those loans is used firstto pay interest on the issued securities. In addition, many ofour securitizations require that all funds that would otherwisebecome payable to us as holders of the residual interests in thesecuritization trust must be used to repay principal on theissued securities until the aggregate balance of the loansexceeds the aggregate balance of the issued securities by aspecified amount. Such requirements are generally known as"overcollateralization."

          Overcollateralizationtends to have a positive effect on the ratings assigned by ratingagencies to the securities issued by the securitization trust;however it also prevents us from using the cash required to bedevoted to overcollateralization to fund our current businessoperations.

          *Ourcash flow from our securitization program is subject to seniorclaims, and to the effects of loan defaults, loan prepayments,and fluctuations in interest rates.*

          Netcash flow that we receive from our securitizations generallyrepresents the excess of amounts, if any, generated by themortgage loans in a securitized pool over the amounts required tobe paid to the holders of related asset-backed securities used tofinance loans, after deduction for servicing fees and otherexpenses related to the securitization, such as trustee's fees,registration fees, underwriting fees, rating agency fees, andattorneys fees. We cannot assure you that there will be any suchexcess. These excess amounts are derived from, and are affectedby, the interplay of several economic factors:

> - the extent to which the interest rates of the            mortgage loans exceed the interest rates of the            related asset-backed securities;

> - the creation of overcollateralization, as described            above;

> - the level of losses and delinquencies experienced on            the related loans; and

> - the extent to which the loans are prepaid by            borrowers in advance of scheduled maturities.

          Asignificant factor affecting the net interest income we willreceive from a securitization is the extent to which the interestrates of the loans in a securitized pool (net of expenses) exceedthe interest rate required to be paid on the related asset-backedsecurities used to finance loans. This difference is expected tochange from time to time, and may be reduced or, in extremecases, extinguished by, among other factors:

> - a significant amount of defaults (particularly on            loans with higher interest rates);

> - a rapid level of prepayments (particularly on loans            with higher interest rates); and

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> - the extent to which the interest rate index on the            asset-backed securities (for example, LIBOR) adjusts            significantly upwards.

          Thecombination of any of the factors listed above may materially andadversely affect the amount of net interest income available tobe distributed to us. We cannot assure you of the level andtiming of delinquencies and prepayments that will be experiencedat any time, the value of any applicable interest rate index, orthe amount of interest income that will be generated by asecuritization.

          Weexpect that our securitizations will also provide that, ifdelinquencies or losses exceed certain levels (which will varyamong the securitizations), as established by the applicablerating agencies (or the financial guaranty insurer, in the caseof certain securitizations), the required overcollateralizationmay be increased or may be prevented from decreasing as wouldotherwise be permitted if losses or delinquencies did not exceedsuch levels.

          Occasionallywe purchase, and may purchase from time to time, outstandingmortgage-backed bonds that we have previously issued, and maydeploy funds, encumber assets, or otherwise take appropriatesteps to support outstanding mortgage-backed bonds.

          Generally,so long as excess cash flow is being directed to the seniorsecurities of a securitization to achieve overcollateralization,we will not receive distributions from the related securitizedpool. In addition, because the application of the excess interestto the senior securities of a securitization is dependent uponthe performance of the related loans, there may be materialvariations in the amount, if any, of the excess cash flowdistributed to us from period to period, and there may beextended periods when we receive no excess cash flow.

          Wecannot assure you that interest from the loans in excess of thatrequired to pay the interest on the issued securities in asecuritization will be sufficient to ensure that the requiredovercollateralization will be achieved and maintained at alltimes. As described above, a high rate of delinquencies anddefaults or rapid rates of prepayments on the mortgages in asecuritized pool (or an increase in the applicable interest rateindex on the related asset-backed securities) may cause theamount of interest received on the mortgage loans to be less thanthe amount of interest payable on the securities of thesecuritization on the related payment date. In this case, theprincipal balance of the securities would decrease at a slowerrate relative to the principal balance of the securitized pool,which would reduce the overcollateralization below targetedlevels and no excess cash flow would be paid to us.

          *Wemay be required to remove or substitute mortgage loans if webreach representations and warranties.*

          Inconnection with the approximately $5.6 billion of mortgage loanssecuritized by us since May 1996 and which are still outstanding,we made representations and warranties about certaincharacteristics of the loans, the borrowers, and the underlyingproperties. In the event of a breach of these representations andwarranties, we may be required to remove loans from asecuritization and replace them with cash or substitute loans.While we may have recourse to the sellers of loans we purchased,we cannot assure you that the sellers will be able to honor theirrespective obligations to us.

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          *Wemay fail to satisfactorily perform our servicing obligations.*

          Weretain servicing rights upon the securitization of a pool ofmortgage loans, and also provide mortgage loan servicing forthird parties. In addition, we retain master servicing rightsthat entitle us to monitor the servicing of loans in oursecuritizations. If we fail to fulfill our obligations under therelated agreements or to make required advances, or becomeinsolvent or subject to bankruptcy proceedings, our servicing ormaster servicing rights may be terminated.

          Additionally,our servicing rights may be terminated upon the occurrence ofcertain events, generally if delinquencies or losses on the poolof loans in that securitization exceed certain levels once theappropriate amount of time has lapsed. Delinquencies or losseswith respect to seven securitizations for which we are servicercurrently exceed the prescribed levels, of which onesecuritization's time has lapsed. As a result, our servicingrights with respect to those securitizations may be terminated,resulting in our loss of the related servicing fees. As ofDecember 31, 2001, the aggregate principal balance of themortgage loans in the affected mortgage pools was approximately$875.9 million. Our servicing fee is approximately 0.50% of theprincipal balance of the loan serviced per annum. We cannotassure you that our servicing rights will not be terminated withrespect to those seven securitizations in the future or thatdelinquencies or losses with respect to pools of loans in othersecuritizations will not exceed the prescribed levels and subjectus to termination of our servicing rights with respect to thoseother securitizations.

          *Wemay be required to find a new subservicer.*

          Ifwithin three years of our purchase of SCI Services, we areacquired by a third-party that does not either (1) have asub-prime mortgage loan residential primary servicer rating of"2" or better from Fitch, Inc., an "AboveAverage" or better rating from Standard & Poor's, or acomparable rating from another nationally recognized statisticalrating agency, or (2) make certain agreements with respect toMeritech's operations for the period ending on the thirdanniversary of our purchase of SCI Services, including anagreement to conduct Meritech's servicing operations incompliance with our servicing guide and maintain Meritech's thencurrent primary servicing systems, then Dominion Capital willhave the option to require us to solicit bids from othersub-prime mortgage loan servicers to service, as a subservicer,the mortgage loans securitized in connection with SCI Services'sprior securitizations. A subservicer is a mortgage loan servicingcompany that performs some, or all, of the loan servicingfunctions for a particular pool of loans as a contractor for theservicer initially designated by the owner of that pool of loans.Typically the original servicer retains ultimate responsibilityfor the subservicer's performance of the servicing obligations inthe event the subservicer fails to perform any material functionin a timely manner.

***Our borrowings and substantial indebtedness mayadversely affect our financial health.***

          *Costof borrowings may exceed return on assets.*

          Thecost of borrowings under our financing facilities corresponds toa referenced interest rate plus or minus a margin. The marginvaries depending on factors such as the nature and liquidity ofthe underlying collateral and the availability of financing inthe market. We will 

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experience net interest losses if the returns on our assetsfinanced with borrowed funds fail to cover the cost of ourborrowings.

          *Defaultrisks under financing facilities.*

          Ourcredit and warehouse facilities contain extensive restrictionsand covenants, and have required us to maintain or satisfyspecified financial ratios and tests, including maintenance ofasset quality and portfolio performance tests. Failure to meet orsatisfy any of these covenants, financial ratios, or financialtests could result in an event of default under these agreements.These agreements also contain cross-default provisions, so thatif a default occurs under any agreement, the lenders could electto declare all amounts outstanding under all of our agreements tobe immediately due and payable, enforce their interests againstcollateral pledged under such agreements, and restrict ourability to make additional borrowings under these agreements. Ourability to meet those financial ratios and satisfy financialtests may be affected by general economic conditions. Forexample: an overall decline in residential mortgage interestrates may tend to accelerate refinancings of our loans, tendingto reduce the value and performance of our residual interests inour securitization trusts; an economic recession or increase inunemployment levels may adversely affect the performance of ourloan portfolio; or an overall decline in the value of mortgageloan collateral within the capital markets of the United Statesmay reduce or eliminate the amount of credit available to usthrough these facilities. We cannot assure you that we willcontinue to be able to meet those financial ratios and satisfythose financial tests.

          *Risksassociated with restrictive covenants.*

          Ourcredit and warehouse facilities restrict our ability to, amongother things:

> - incur additional debt;

> - pay dividends;

> - make certain investments or acquisitions;

> - repurchase or redeem capital stock; and

> - engage in mergers or consolidations.

          Theserestrictions may interfere with our ability to obtain financingor to engage in other business activities.

> - We are subject to risks related to mortgage loans we            originate or purchase.

***We are subject to substantial risksassociated with lending to lower credit grade borrowers.***

          Wespecialize in originating, purchasing, securitizing, andservicing sub-prime mortgage loans. Sub-prime mortgage loansgenerally have higher-than-average delinquency and default rates.Delinquency, foreclosures and losses generally increase duringeconomic slowdowns or recessions. The actual risk ofdelinquencies, foreclosures and losses on loans made tonon-conforming borrowers could be higher under adverse economicconditions than those currently experienced in the mortgagelending industry in general. Further, any material decline inreal 

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estate values increase the LTV ratios of loans previously madeby us, thereby weakening collateral coverage and increasing thepossibility of a loss in the event of a borrower default. Noassurance has been given that our underwriting criteria ormethods will afford adequate protection against the higher risksassociated with loans made to lower credit grade borrowers. Inthe past, certain of these factors have caused revenues and netincome of many participants in the mortgage industry, includingus, to fluctuate from quarter to quarter.

          *Riskof default on our mortgage loans.*

          Weaccumulate mortgage loans until we have a sufficient quantity forsecuritization. We are subject to risks of borrower defaults andbankruptcies, fraud losses, and losses to property securingmortgages caused by earthquake, acts of war and other hazards notcovered by customary hazard insurance. In the event of anydefault under our loans, we will bear the risk of loss ofprincipal to the extent of any deficiency between the value ofthe collateral securing the loan and the principal amount of themortgage loan. Also, the costs of financing the loans throughwarehouse lines of credit or repurchase facilities could exceedthe interest income we receive on the loans.

          *Potentiallosses related to loan delinquency and default.*

          Generally,the agreements related to our securitization transactions containspecified limits on the delinquency, default, and loss rates onthe loans. If, at the measuring date, the delinquency, default,or loss rate with respect to any securitization were to exceedthe specified rates, excess cash flow from the securitization, ifany, may be used to fund the increased overcollateralizationtarget instead of being distributed to us, which could have amaterial adverse effect on our business, financial condition,liquidity, and results of operation. Also, when borrowers aredelinquent in making monthly payments on loans included in asecuritization, we are required to advance interest payments,insurance premiums, property taxes, and property protection costswith respect to the delinquent loans to the extent that webelieve the advances are ultimately recoverable. These advanceshave priority of repayment from the succeeding month'scollections.

          *Ourbusiness may be significantly affected by the economy ofCalifornia, where we conduct a significant amount of business.*

          Forthe year ended December 31, 2001, approximately 23% of themortgage loans we originated or purchased were secured byproperty in California. An overall decline in the economy or theresidential real estate market, or the occurrence of a naturaldisaster that is not covered by standard homeowners' insurancepolicies, such as an earthquake, in California could adverselyaffect the value of mortgaged premises in California and increasethe risk of delinquency, foreclosure, bankruptcy, or loss onmortgage loans in our portfolio. This would negatively affect ourability to originate, purchase, and securitize mortgage loans,which could have a material adverse effect on our business,financial condition, liquidity, and result of operation.

***We are exposed to environmental liabilities withrespect to properties to which we take title.***

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          Inthe course of our business, we may foreclose and take title toresidential properties, and could be subject to environmentalliabilities with respect to these properties. We may be heldliable to a governmental entity or to third parties for propertydamage, personal injury, investigation, and clean-up costsincurred by these parties in connection with environmentalcontamination, or may be required to investigate or clean uphazardous or toxic substances, or chemical releases at aproperty. The costs associated with investigation or remediationactivities could be substantial. Moreover, as the owner or formerowner of a contaminated site, we may be subject to common lawclaims by third parties based on damages and costs resulting fromenvironmental contamination emanating from the property.

          *Ourbalance sheet contains certain assets for which the fair marketvalue may not be easily determined.*

          Thefair market value of the mortgage loans and loanservicing-related assets on our balance sheet may not be easilydetermined, because the market for these types of assets is nothighly liquid. Accordingly, in determining the value of theseassets, we must make economic assumptions and projectionsconcerning future events, such as the extent to which the relatedmortgage loans will go into default and generate losses, the rateat which refinancing and prepayment of mortgage loans will occur,and the possibility of future fluctuations in interest rates.Each of those assumptions can have a significant effect on thevalue at which these assets are carried on our balance sheet. Wecannot assure you that our assumptions and projections willreflect the actual future performance of these assets. As aresult, the actual value of these assets may be less than theamount carried on our books. If the actual value were to differmaterially from that on our balance sheet, our future cash flowsand liquidity could be negatively affected.

- We are subject to legislative and litigation risks.

          *Newlegislation may restrict our ability to make loans, negativelyimpeding our revenues.*

          Severalfederal, state, and local laws and regulations have been adopted,or are under consideration, that are intended to eliminateso-called "predatory" lending practices, such as"steering" borrowers into loans with high interestrates and away from more affordable products, selling unnecessaryinsurance to borrowers, and "flipping" or repeatedlyrefinancing loans. Many of these laws and rules extend beyondcurbing "predatory" lending to restricting acceptedlending activities and would impose additional costly andburdensome compliance requirements on us.  See"Business—Regulation."

*          Arecent federal circuit court**decision regardingthe legality of yield spread premiums could increase litigationagainst us and other mortgage A recent federal circuit courtlenders.*

          Arecent federal circuit court decision regarding the legality ofyield spread premiums could increase litigation against othermortgage lenders and us. In June 2001, the Eleventh Circuit Courtof Appeals issued a decision in Culpepper v. Irwin Mortgage Corp.in which the court revisited the legality of certain paymentsthat lenders commonly make to mortgage brokers, often referred toas yield spread premiums, under the federal Real EstateSettlement Procedures Act ("RESPA"). A "yieldspread premium" is an amount paid by a mortgage lender to amortgage broker for the origination of a loan, typically measuredby the difference, or spread, between the amount the 

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lender is willing to pay with respect to a given loan based onthe loan's specific characteristics, such as interest rate, LTVratio, and credit grade, and the amount of the lender's baselineor par price that the lender offers to pay for loans with certainbaseline or par characteristics. For example, if a brokerproduces a $100,000 loan meeting the requirements that a lenderspecifies in order to pay 101% (1% above the lender's par price)then the lender will pay that broker a yield spread premium of$1,000 ($100,000 x 1%). In 1999, the Department of Housing andUrban Development ("HUD") issued a policy statementtaking the position that lender payments to mortgage brokers,including yield spread premiums, are not per se illegal, and itreiterated this basic position in a statement issued in October,2001. The Culpepper decision is inconsistent with the positiontaken by HUD and reiterated in October, 2001. While HUDstatements do not have the binding effect of a statute orregulation, in March 2002, the Eighth Circuit Court of Appealsissued a favorable decision in *Glover v. Standard FederalBank*, another case similarly challenging the payment ofyield spread premiums, and, in direct conflict with the Culpeppercourt, paid deference to HUD's interpretations that yield spreadpremiums are not per se illegal under RESPA. Other mortgagelenders and we now face inconsistent judicial decisions aboutsuch payments. If the adverse decisions are not overturned orotherwise superseded by law or regulation, there could be asubstantial increase in litigation regarding lender payments tobrokers and potential costs defending these types of claims andin paying any judgments that might result. RESPA imposes severepenalties, including damages equal to three times the amount ofthe illegal payment, with respect to any yield spread premiums orother payments in the event such payments were determined to haveviolated the law, in addition to exposing the violating party tosubstantial amounts of attorney's fees.

***Our mortgage assets are susceptible to prepaymentrisk.***

          Prepaymentrates on mortgage loans vary from time to time and may causechanges in the amount of our net interest income. Prepaymentstend to increase during periods of declining interest rates. Weseek to minimize prepayment risk through a variety of means,including structuring a diversified portfolio with a variety ofprepayment characteristics, and originating a significant portionof loans containing prepayment penalties with terms of two tofive years. No strategy, however, can completely insulate us fromprepayment risks, whether arising from the effects of interestrate changes or otherwise.

***Interest rate levels and fluctuations mayadversely affect our business.***

          Ourbusiness, financial condition, liquidity, and results ofoperations may be materially and adversely affected in many waysas a result of interest rate levels and fluctuations. Ourprofitability is likely to be adversely affected during anyperiod of unexpected or rapid changes in interest rates. Thefollowing are some of the interest rate related risks we face:

> - Our profitability may be directly affected by the            level of, and fluctuations in, interest rates, which            affect our ability to earn a spread between interest            received on mortgage loans and the cost of our            borrowings, which is tied to yields on United States            Treasury obligations, swaps, and LIBOR.

> - The cost of our borrowing is a function of various            benchmark rates plus a spread which represents            compensation to the holders of our asset-backed            securities. This spread may increase at any time due            to concerns that may be specific to our 

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> 
industry or due to more generic credit concerns. An        increase in this spread will increase our cost of        borrowing.

> - A substantial and sustained increase in interest            rates could adversely affect our ability to purchase            or originate loans, because borrowers will be less            likely to obtain, or refinance existing, mortgage            loans; and

> - Certain classes of securities issued to investors in            our securitizations pay a variable rate of interest            based on one-month LIBOR. Many of the mortgage loans            in those securitizations pay a fixed rate of interest            for two, three, or five years after origination            before converting to a variable rate of interest and            are referred to as hybrid loans. During the period            when the hybrid loans pay a fixed rate of interest,            we are exposed to the risk that one-month LIBOR may            increase to levels that cause the interest rates            payable on the issued securities to exceed the            fixed-rate payable on the hybrid loans.

          Weuse various hedging strategies to provide a level of protectionagainst interest rate risks, but no hedging strategy cancompletely protect us.

          Wecannot assure you that our hedging transactions will offset therisks of changes in interest rates, and it is possible that therewill be periods during which we will incur losses afteraccounting for our hedging activities. In addition, if thecounterparties to our hedging transactions are unable to performaccording to the terms of the contracts, we may incur losses.

***Changes in accounting principles related to theimplementation of SFAS 133 could have a material effect on ourreported results of operations.***

          Weutilize several types of derivative instruments to manage variousoperating risks. Effective January 1, 2001, we adopted Statementof Financial Accounting Standards No. 133, *Accounting forDerivative Instruments and Hedging Activities* (SFAS No. 133),as required. SFAS No. 133, as amended, standardizes theaccounting for derivative instruments and hedging activities andrequires that all derivative instruments be recognized as assetsand liabilities at fair value. In accordance with SFAS No. 133,all derivative instruments are recognized on our balance sheet atfair value effective January 1, 2001. The impact of accountingfor our risk management activities according to SFAS No. 133 maycreate a level of ongoing volatility due to the periodicrevaluation of derivative instrument positions which could causesignificant fluctuations in our reported results of operations.

          TheFinancial Accounting Standards Board, or FASB, is evaluating anumber of mortgage banking industry-related issues concerning theimplementation of SFAS No. 133. The ultimate conclusions reachedconcerning these issues could result in material changes to therecorded carrying values of our derivative instruments, or mayhave a significant impact on our reported earnings.

31

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***Changes in the volume and cost of loans originatedby our wholesale and correspondent channels may decrease our loanproduction and our cash flow.***

          Wedepend, to a large extent, on brokers and correspondents for ouroriginations and purchases of mortgage loans. Moreover, our totalloan purchases from correspondents, historically, have beenhighly concentrated. Our top three correspondents accounted forapproximately 32% of our correspondent loan volume and 12% of ourtotal volume through the year ended December 31, 2001. Ourbrokers and correspondents are not contractually obligated to dobusiness with us. Further, our competitors also haverelationships with our brokers and correspondents, and activelycompete with us in our efforts to expand our broker andcorrespondent networks. Accordingly, we cannot assure you that wewill be successful in maintaining our existing relationships orexpanding our broker and correspondent networks which couldnegatively impact the volume and pricing of our loans, whichcould have a material adverse effect on our results of operation.

***We may be required to pay federal and state incometaxes even though we produce a loss for financial reportingpurposes.***

          Wenow classify our securitizations as financings for the purposesof financial reporting. For tax purposes, the securitizationswill be treated as a sale of the loans to one or more REMICs. Asa result, we may recognize a gain on the sale of the loans fortax purposes even though for financial reporting purposes we willrecognize income and expense over the lives of the relatedmortgages. The result of the differing tax and financialreporting requirements will result in the creation of a deferredtax asset and may result in the creation of a tax liability inperiods where, for financial reporting purposes, we report a netloss.

          Asa result of securitizing our mortgage loans in a REMIC, for taxpurposes, we may own interests in residuals that generate"excess inclusion income." According to InternalRevenue Service regulations, all excess inclusion income relatedto securitization residual interests retained by us will besubject to federal tax in the current period regardless of othercurrent period losses or net operating loss carryovers otherwiseavailable to offset regular taxable income. Accordingly, due toour receipt of "excess inclusion income", we may berequired to pay income taxes in periods where we are operating ata loss for financial reporting purposes or for tax purposes.

***There are few barriers to new entrants to thesub-prime mortgage business, and government-sponsored businessesare expanding into the sub-prime mortgage business.***

          Weface intense competition from finance and mortgage bankingcompanies and, to a growing extent, from traditional bank andthrift lenders who have entered the non-conforming mortgagemarket. Government sponsored entities such as Fannie Mae andFreddie Mac, are also expanding their participation in thenon-conforming mortgage market. We also expect increasedcompetition over the Internet, where entry barriers arerelatively low. As we seek to expand our business further, wewill face a significant number of competitors, many of whom willbe well established in the markets we seek to penetrate. Thenature of the mortgage banking industry, and the way business isconducted, is changing. Some of our competitors are much largerthan we are, have better name recognition than we do, and havefar greater financial and other resources.

32

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          Theintense competition in the non-conforming mortgage market hasalso led to rapid technological developments, evolving industrystandards, and frequent releases of new products andenhancements. As mortgage products are offered more widelythrough alternative distribution channels, such as the Internet,we may be required to make significant changes to our currentretail structure and information systems to compete effectively.Our inability to develop a successful Internet operation, or toadapt to other technological changes in the industry, could havea material adverse effect on our business.

          Theneed to maintain mortgage loan volume in this competitiveenvironment creates a risk of price competition in the mortgageindustry. Competition in the industry can take many forms,including interest rates and costs of a loan, convenience inobtaining a loan, customer service, amount and term of a loan,and marketing and distribution channels. Price competition wouldlower the interest rates that we are able to charge borrowers,which would lower our interest income. Price-cutting ordiscounting reduces profits and will depress earnings ifsustained for any length of time. Increased competition may alsoreduce the volume of our loan originations, purchases, andsecuritizations. Any increase in these pricing pressures couldhave a material adverse effect on our business.

***Some provisions of our certificate ofincorporation and bylaws may deter takeover attempts, which maylimit the opportunity of our stockholders to sell their shares ata favorable price.***

          Someof the provisions of our amended and restated certificate ofincorporation (our charter), and bylaws could make it moredifficult for a third party to acquire us, even if doing so mightbe beneficial to our stockholders by providing them with theopportunity to sell their shares at a premium to the then marketprice.

          *ThreeClasses of Directors*. Additionally, our board of directors isdivided into three classes. The term of the first class expiresat the 2002 annual meeting, the term of the second class expiresthe following year, and the third class's term expires in 2004.At each annual meeting, the terms of approximately one-third ofthe directors will expire, and new directors will be elected toserve three years. It will take at least two annual meetings toeffectuate a change in control of the board of directors becausea majority of the directors cannot be elected at a singlemeeting. This extends the time required to effect a change incontrol of the board of directors and may discourage hostiletakeover bids.

          Wemay issue preferred stock without stockholder approval, withrights and preferences adverse to the voting power or otherrights of holders of our common stock. Our charter authorizes theboard of directors to issue up to 1,000,000 shares of preferredstock. The preferred stock may be issued in one or more series,the terms of which may be determined at the time of issuance bythe board of directors without further action by stockholders.These terms may include voting rights, including the right tovote as a series on particular matters, preferences as todividends and liquidation, conversion and redemption rights andsinking fund provisions. No shares of preferred stock arecurrently outstanding and we have no present plans for theissuance of any preferred stock. The issuance of any preferredstock, however, could materially adversely affect the rights ofholders of our common stock, and therefore could reduce itsvalue. In addition, specific rights granted to future holders ofpreferred stock could be used to restrict our 

33

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ability to merge with, or sell assets to, a third party. Theability of the board of directors to issue preferred stock couldmake it more difficult, delay, discourage, prevent or make itmore costly to acquire or effect a change in control, therebypreserving the current stockholders' control.

          *AdvancedNotice Bylaw*. Our bylaws contain provisions regulating theintroduction of business at annual stockholders' meetings byanyone other than the board of directors.

***Possible Volatility of Stock Price; Effect ofFuture Offerings on Market Price of Common Stock.***

          Themarket price of the our common stock may experience fluctuationsthat are unrelated to our operating performance. In particular,the price of the common stock may be affected by general marketprice movements as well as developments specifically related tothe consumer finance industry and the financial services sectorsuch as, among other things, interest rate movements, quarterlyvariations or changes in financial estimates by securitiesanalysts and a significant reduction in the price of the stock ofanother participant in the consumer finance industry. Thisvolatility may make it difficult for us to access the capitalmarkets through a secondary offering of common stock, regardlessof our financial performance.

***Future sales of our common stock could have anadverse effect on our stock price.***

          Futuresales of common stock by our stockholders or us could adverselyaffect the market price of our common stock. As of February 28,2002, 28,080,501 shares of our common stock are outstanding. Wealso have warrants and options outstanding to purchase up to4,405,500 shares of our common stock as of December 31, 2001. Allof the shares of common stock underlying these options andwarrants are being registered pursuant to the registrationstatement of which this Annual Report is a part, and will befreely tradable without restriction under the Securities Act,assuming they are not held by our affiliates. On January 15,2002, we filed a registration statement under the Securities Acton Form S-8 registering the 3,262,000 shares to be issuedpursuant to our 2001 Stock Incentive Plan, the 1,000,000 sharesof our common stock to be issued pursuant to our 2001 EmployeeStock Purchase Plan, and the 1,000,000 shares of our common stockto be issued as matching contributions for our 401(k) plan.

| **Item 2.** |           **Properties** |
|-------------|----------------------------------------------------------------------------|

          Ourprincipal executive headquarters is located at 4951 Lake BrookDrive in Glen Allen, VA and contains 14,594 square feet. Ourprincipal mortgage loan origination headquarters is located at4880 Cox Road in Glen Allen, VA and contains 59,948 square feet.Our principal mortgage loan servicing headquarters is located at4708 Mercantile Drive, Forth Worth, TX and contains approximately60,000 square feet. The leases for these premises expire on April30, 2007, July 31, 2005 and September 30, 2009, respectively. Wealso lease property in the following metropolitan areas: Phoenix,AZ; Foothill Ranch, CA; Denver, CO; Ft. Lauderdale, FL; Atlanta,GA; Chicago, IL; Kansas City, KS; New Orleans, LA; Raleigh, NC;Cherry Hill, NJ; Buffalo, NY; Nashville, TN; Dallas, TX;Richmond, VA; and Virginia Beach, VA. We do not consider anyspecific leased location to be material to our operations. Webelieve that equally suitable alternative locations are availablein all areas where we currently do business.

34

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| **Item 3.** |           **Legal        Proceedings** |
|-------------|------------------------------------------------------------------------------------------|

          *Johnson*.In January, 2002 Kim Johnson filed a complaint, seeking classaction status, against Saxon Mortgage, Inc., Meritech MortgageServices, Inc., and other defendants in the U.S. District Courtfor the Northern District of Georgia. The complaint alleges,among other claims that payments we make to mortgage brokers,referred to as yield spread premiums, violate the federal RealEstate Settlement Procedures Act. We have filed a motion tocompel arbitration of the plaintiff's claim pursuant to thearbitration agreement contained in the plaintiff's loandocuments. We intend to assert our position that the payments atissue in the plaintiff's loan were legal, and that the case isnot appropriate for treatment as a class action, for reasonsincluding but not limited to the fact that the plaintiff's claimis governed by the arbitration agreement contained in theplaintiff's loan documents.

          Becausethe nature of our business involves the collection of numerousaccounts, the validity of liens and compliance with various stateand federal lending laws, we are subject to various other legalproceedings in the ordinary course of business. We do not believethat the resolution of these lawsuits, individually or in theaggregate, will have a material adverse effect on our business,financial position or our results of operations.

| **Item 4.** |           **Submision        of Matters to a Vote of Stockholders** |
|-------------|-----------------------------------------------------------------------------------------------------------------------|

          None.

**PART II**

| **Item 5.** |           **Market        for Registrant's Common Equity and Related Stockholder        Matters** |
|-------------|-----------------------------------------------------------------------------------------------------------------------------------------------------|

          Ourcommon stock has been listed for trading on the Nasdaq NationalMarket under the symbol "SAXN" since January 16, 2002.Prior to that time, including during the period covered by thisreport, there was no public market for our common stock. OnFebruary 28, 2002, the last reported price of our common stock onthe Nasdaq National Market was $11.10 per share. Based uponinformation supplied to us by the registrar and transfer agentfor our common stock, the number of common stockholders of recordon February 28, 2002 was 133, not including beneficial owners innominee or street name. We believe that a significant number ofshares of our common stock are held in nominee name forbeneficial owners.

          Wehave never declared or paid any cash dividends on our commonstock. We currently intend to retain any earnings for use in ourbusiness and do not anticipate paying any cash dividends in theforeseeable future. In addition, we are prohibited from payingdividends and making distributions under certain of our creditfacilities without the prior approval of our lenders.

**Ongoing Registered Offering**

          Pursuantto the registration rights agreement related to our 144AOffering, we filed a Registration Statement on Form S-1(Registration Statement No. 333-71052) that was declaredeffective by the SEC on January 14, 2002. We registered forresale a total of 32,463,100 shares of our common stock,including 50,000 shares owned by certain senior executives and4,413,000 

35

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shares of common stock that may be issued to certain of theselling stockholders upon exercise of options and warrants. Allof these shares were registered at our expense for sale byselling stockholders and may be sold by them from time to time onan ongoing basis. We have not received (and will not receive inthe future) any proceeds from the sale of common stock by theselling stockholders. Through February 28, 2002, we have incurredexpenses in connection with the offering totaling approximately$2.9 million.

**Recent Sales of Unregistered Securities**

          Thefollowing information relates to the securities we have issued orsold within the past three years that were not registered underthe Securities Act of 1933, as amended (the "SecuritiesAct"). Each of these transactions was completed withoutregistration of the relevant security under the Securities Act inreliance upon the exemptions provided by Section 4(2) fortransactions not involving a public offering.

| (i)    | April 23, 2001, we issued and sold 100        shares of our common stock to our founding stockholder,        Michael L. Sawyer, for $0.01 per share.                                                                                                                                     |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (ii)   | July 6, 2001, we issued and sold        28,000,000 shares of our common stock to Friedman,        Billings, Ramsey & Co., Inc. as the initial purchaser        in our 144A Offering for a price of $9.30 per share.                                                                  |
| (iii)  | July 6, 2001, we issued and sold 50,000        shares of our common stock to certain senior executives        for a price of $10.00 per share.                                                                                                                                           |
| (iv)   | July 6, 2001, we issued warrants to        purchase 1,200,000 shares of our common stock with an        exercise price of $10.00 per share to Friedman, Billings,        Ramsey & Co., Inc. in connection with our 144A        offering. These warrants are immediately exercisable. |
| (v)    | July, 2001, we issued options to        purchase 400,000 shares of common stock with an exercise        price of $10.00 per share to our non-employee directors.        Each option vests pro rata over a four-year period.                                                              |
| (vi)   | July, 2001, we issued options to        purchase 2,225,000 shares of common stock, with an        exercise price of $10.00 per share to certain of our        employees pursuant to our Stock Plan. Each option vests        pro rata over a four-year period.                           |
| (vii)  | October, 2001, we issued options to        purchase 75,000 shares of common stock, with an exercise        price of $10.10 per share to Thomas Wageman, a        non-employee director. The options vest pro rata over a        four-year period.                                        |
| (viii) | October, 2001, we issued options to        purchase 566,500 shares of common stock, with an exercise        price of $10.10 per share to certain of our employees        pursuant to our Stock Plan. Each option vests pro rata        over a four-year period.                          |
| (ix)   | December, 2001, we issued options to        purchase 7,500 shares of common stock with an exercise        price of $10.10 per share to certain of our employees        pursuant to our Stock Plan. Each option vests pro rata        over a four-year period.                            |

36

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| **Item 6.** | **     Selected        Financial Data** |
|-------------|------------------------------------------------------------------|

          Thefollowing selected financial data as of December 31, 2000 and1999, for the period January 1, 2001 to July 5, 2001, and for theyears ended December 31, 2000, 1999, and 1998 have been derivedfrom SCI Services, Inc.'s ("Predecessor") consolidatedfinancial statements, which have been audited. The selectedfinancial data as of December 31, 1998, as of December 31, 1997and for the year then ended, have been derived from our auditedfinancial statements, which have been audited by independentauditors.

          Thefollowing selected financial data for Saxon Capital, Inc. for theperiod July 6, 2001 to December 31, 2001 and as of December 31,2001 have been derived from our audited consolidated financialstatements, which have been audited by independent auditors, andare included elsewhere herein.

          Youshould read the information below along with all other financialinformation and analysis presented in this Annual Report,including the sections captioned "Management's Discussionand Analysis of Financial Condition and Results ofOperations" and our consolidated financial statements andrelated notes included elsewhere herein.

          Historically,we sold our mortgage loans, while retaining certain residualinterests, through securitizations structured as sales, with acorresponding one-time recognition of gain or loss, under GAAP.After July 6, 2001, we structure our securitizations as financingtransactions. See "Critical AccountingPolicies—Securitizations." These securitizations do notmeet the qualifying special purpose entity criteria underStatement of Financial Accounting Standards No. 140, *Accountingfor Transfers and Servicing of Financial Assets andExtinguishments of Liabilities, Replacement of FASB Statement No.125* (SFAS No. 140) and related interpretations because afterthe loans are securitized, the securitization trust may acquirederivatives relating to beneficial interests retained by us. We,as servicer, subject to applicable contractual provisions, havesole discretion to use our best commercial judgment indetermining whether to sell or work out any loans securitizedthrough the securitization trust that become troubled.Accordingly, following a securitization, the mortgage loansremain on our balance sheet, and the securitization indebtednessreplaces the warehouse debt associated with the securitizedmortgage loans. We record interest income on the mortgage loansand interest expense on the securities issued in thesecuritization over the life of the securitization, and do notrecognize a gain or loss upon completion of the securitization.This accounting treatment more closely matches the recognition ofincome with the actual receipt of cash payments, and is expectedto decrease our earnings volatility compared to those companiesthat structure their securitizations as sale transactions forGAAP purposes. This change may significantly impact our futureresults of operations compared to our historical results.Therefore, SCI Services, Inc.'s and Saxon Capital, Inc.'shistorical results and management's discussion of such resultsmay not be indicative of our future results.

37

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|                                                    | **       Saxon        Capital,               ****       Inc.(1)      **** ** | ** ****         SCI        Services, Inc.        (Predecessor)      ****  **                                                                                                                                                       |
|---------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                    | **December 31,              ****        2001       **                                                           | **                                December,)                         ** |
|                                                    |                                                                                                                                                                                                                     | **  ****     2000  **** **                                                                                                                                                                                                                                                 | ******     1999 ** | ******     1998 ** | **  ****   1997** |
|                                                    |                                                                                                                                                                                                                     | ($ in thousands)                                                                                                                                                                                                                                                                                                             |
| **Balance Sheet        Data:**                          |                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                                                         |   |   |   |
| Mortgage loans        held prior to securitization, net |            $     366,997                                                                                                                 |     $105,214                                                                                                                                                                                                                                                                                             |    $123,609 |   $139,283 |    $89,088 |
| Securitized loans,        net                           |                1,352,698                                                                                                                      |               —                                                                                                                                                                                                                                   |              — |            — |           — |
| Interest-only        residual assets                    |                           —                                                       |       298,415                                                                                                                                                                                                                                                                                  |     346,675 |    281,898 |    189,123 |
| Mortgage servicing        rights, net                   |                    33,847                                                                                                 |        47,834                                                                                                                                                                                                                                                                             |       40,416 |      34,523 |     23,132 |
| Subordinate bonds                                       |                          —                                                             |        13,597                                                                                                                                                                                                                                                                             |       27,019 |      41,019 |          — |
| Servicing related        advances(2)                    |                  101,378                                                                                                            |        30,847                                                                                                                                                                                                                                                                             |       28,735 |      15,735 |       6,621 |
| Total assets                                            |                1,899,349                                                                                                                      |      572,408                                                                                                                                                                                                                                                                                        |     640,432 |     600,321 |    397,536 |
| Warehouse        financing                              |                   283,370                                                                                                      |        88,225                                                                                                                                                                                                                                                                             |     110,465 |     137,123 |      95,742 |
| Limited recourse        securitization financing        |                1,329,568                                                                                                                      |              —                                                                                                                                                                                                                                         |             — |            — |           — |
| Total liabilities                                       |                1,647,351                                                                                                                      |       228,871                                                                                                                                                                                                                                                                                  |     294,775 |    311,410 |    186,844 |
| Stockholders'        equity                             |             $    251,998                                                                                                                 |     $343,537                                                                                                                                                                                                                                                                                             |   $345,657 |   $288,927 |   $210,692 |

 

|                                                                                                     |   **Saxon Capital,             ****       Inc.(1)      **** **                   | ** ****                          SCI        Services, Inc.        (Predecessor)        ****  **                                                          |
|----------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                     |                                                                                                                                                                                      | **                               Year        Ended December        31,                         ** |
|                                                                                                     | **  July 6-        December 31,              ****        2001       ** | **    January 1-              July 5,         ****       2001     **                                                                                                                                                           | **       2000     ** | **      1999    ** | **       1998    ** | **       1997      ** |
|                                                                                                     | (amounts in thousands)                                                                                                                                                                    |
| **Operating        Data:**                                                                               |                                                                                                                                                                                      |                                                                                                                                                                                                                                                                                                                                              |   |   |   |   |
| Interest income                                                                                          | $   50,328                                                                                                                                                                 | $   15,331                                                                                                                                                                                                                                                                                                                         | $     34,444 | $     45,818 | $     35,794 | $     34,128 |
| Interest expense                                                                                         |    (23,457)                                                                                                                                                                |    (11,524)                                                                                                                                                                                                                                                                                                                        |     (24,875) |      (21,342) |      (18,817) |     (20,975) |
| Net interest income                                                                                      | 26,871                                                                                                                                                                                    | 3,807                                                                                                                                                                                                                                                                                                                                             | 9,569 | 24,476 | 16,977 | 13,153 |
| Provision for loan losses                                                                                |    (11,861)                                                                                                                                                                |      (8,423)                                                                                                                                                                                                                                                                                                             |       (6,403) |       (9,107) |       (4,363) |      (1,912) |
| Net interest income after             provision for loan losses                      | 15,010                                                                                                                                                                                    | (4,616)                                                                                                                                                                                                                                                                                                                                           | 3,166 | 15,369 | 12,614 | 11,241 |
| Gain on sale of loans                                                                                    | —                                                                                                                                                                                    | 32,892                                                                                                                                                                                                                                                                                                                                            | 79,234 | 98,369 | 76,277 | 69,749 |
| Servicing income, net of              amortization                              |      11,681                                                                                                                                                      |      16,550                                                                                                                                                                                                                                                                                                              |       24,885 |       15,984 |       10,237 |        6,893 |
| Total net revenues                                                                                       | 26,691                                                                                                                                                                                    | 44,826                                                                                                                                                                                                                                                                                                                                            | 107,285 | 129,722 | 99,128 | 89,920 |
| General and administrative,              payroll and other        expenses | 36,935                                                                                                                                                                                    | 43,678                                                                                                                                                                                                                                                                                                                                            | 71,444 | 63,538 | 51,116 | 41,763 |
| Impairment of residual assets,              net                            | —                                                                                                                                                                                    | 7,301                                                                                                                                                                                                                                                                                                                                             | 108,445 | 8,308 | 28,596 | 457 |
| Impairment of SCI Services,              Inc. goodwill                     |             —                                                                                                            |        44,963                                                                                                                                                                                                                                                                                                  |             — |             — |             — |             — |
| Total expenses                                                                                           |      36,935                                                                                                                                                      |        95,942                                                                                                                                                                                                                                                                                                  |    179,889 |      71,846 |      79,712 |      42,220 |
| Income (loss) before taxes                                                                               | (10,244)                                                                                                                                                                                  | (51,116)                                                                                                                                                                                                                                                                                                                                          | (72,604) | 57,876 | 19,416 | 47,700 |
| Income tax (benefit) expense                                                                             |     (3,957)                                                                                                                                                           |      (21,609)                                                                                                                                                                                                                                                                                                            |    (24,084) |      21,228 |        7,398 |      17,654 |
| Net income (loss)                                                                                        | $  (6,287)                                                                                                                                                                      | $   (29,507)                                                                                                                                                                                                                                                                                                                       | $(48,520) | $  36,648 | $  12,018 | $  30,046 |
| Basic and diluted earnings per              common share(3)                | $      (.22)                                                                                                                                                | $       (1.05)                                                                                                                                                                                                                                                                                                 | $    (1.73) | $   (1.31) | $      0.43 | $      1.07 |
| Shares outstanding                                                                                       | 28,050                                                                                                                                                                                    | 28,050                                                                                                                                                                                                                                                                                                                                            | 28,050 | 28,050 | 28,050 | 28,050 |

 

38

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|                                                                                                                                                                                                                                                                                                                                                                     | **                       **

**Saxon Capital,            ****           Inc.(1)           **** ** | **                                             SCI        Services, Inc.        (Predecessor)                          **                                                |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                                                                                        | **                                                          Year        Ended December        31,                             ** |
|                                                                                                                                                                                                                                                                                                                                                                     | **  July 6-        December 31,          ****      2001     **                                                                                                                                                                                                                   | **                             **

**January 1-        July 5,           ****      2001    ****  **                                                                                                                                                                                                             | **    ****      2000     ** | ** ****      1999     ** | **    ****     1998     ** | **     1997     ** |
|                                                              | ($ in thousands)                                                                                                                                                                                                                                                                                                                                            |
| **Other Data:**                                                                                                                                                                                                                                                                                                                                                          |                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   |   |   |   |
| Total mortgage loan        originations(4)                                                                                                                                                                                                                                                                                                                               | $1,112,661                                                                                                                                                                                                                                                                                                                              | $1,220,575                                                                                                                                                                                                                                                                                                                                                                                                                                                  | $2,088,503                 | $ 2,234,512        | $ 2,137,958     | $1,826,691     |
|       Wholesale originations(4)                                                                                                                                                                                                                                                                                                            | 501,780                                                                                                                                                                                                                                                                                                                                 | 463,607                                                                                                                                                                                                                                                                                                                                                                                                                                                          | 712,746                 | 1,011,652        | 801,634     | 520,451     |
|       Retail        originations(4)                                                                                                                                                                                                                                                                                                        | 252,819                                                                                                                                                                                                                                                                                                                                 | 194,703                                                                                                                                                                                                                                                                                                                                                                                                                                                          | 233,753                 | 174,611        | 106,544     | 22,845     |
|       Correspondent        originations(4)                                                                                                                                                                                                                                                                                                 | 358,062                                                                                                                                                                                                                                                                                                                                 | 562,265                                                                                                                                                                                                                                                                                                                                                                                                                                                          | 1,142,004                 | 1,048,249        | 1,229,780     | 1,283,395     |
| Mortgage loans securitized                                                                                                                                                                                                                                                                                                                                               | 1,352,698                                                                                                                                                                                                                                                                                                                               | 661,456                                                                                                                                                                                                                                                                                                                                                                                                                                                          | 2,098,659                 | 2,679,556        | 2,349,035     | 2,300,180     |
| Total serviced assets at        period             end                                                                                                                                                                                                                                                                                          | 6,355,304                                                                                                                                                                                                                                                                                                                               | 6,286,078                                                                                                                                                                                                                                                                                                                                                                                                                                                        | 5,588,598                 | 4,803,812        | 3,578,946     | 2,482,385     |
|       Average        principal balance per                    loan        serviced at period end                                                                                                                                                                               | $           96                                                                                                                                                                                                                                                                   | $            95                                                                                                                                                                                                                                                                                                                                                                                      | $           93                 | $                 100         | $          104     | $         104     |
| Number of retail branches at        period end                                                                                                                                                                                                                                                                                                                           | 17                                                                                                                                                                                                                                                                                                                                      | 16                                                                                                                                                                                                                                                                                                                                                                                                                                                               | 16                 | 14         | 14     | 2     |
| Average number of wholesale        account executives(5)                                                                                                                                                                                                                                                                                                                 | 99                                                                                                                                                                                                                                                                                                                                      | 100                                                                                                                                                                                                                                                                                                                                                                                                                                                              | 99                 | 115         | 91     | 43     |
| **Ratios:**                                                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   |   |   |   |
| Average equity to average        assets                                                                                                                                                                                                                                                                                                                                  | 15.4%                                                                                                                                                                                                                                                                                                                                   | 36.9%                                                                                                                                                                                                                                                                                                                                                                                                                                                            | 56.8%                 | 51.1%         | 50.1%     | 48.4%     |
| Return on average        equity(6)(7)                                                                                                                                                                                                                                                                                                                                    | (6.0)%                                                                                                                                                                                                                                                                                                                                  | 17.9%                                                                                                                                                                                                                                                                                                                                                                                                                                                            | 17.4%                 | 14.2%         | 16.3%     | 20.3%     |
| Return on average        assets(6)(7)                                                                                                                                                                                                                                                                                                                                    | (0.9)%                                                                                                                                                                                                                                                                                                                                  | 6.6%                                                                                                                                                                                                                                                                                                                                                                                                                                                             | 9.9%                 | 7.2%         | 8.1%     | 9.8%     |
| Operating expenses as a              percentage of total        serviced              assets(6)                                                                                                                                                                                                              | 1.2%                                                                                                                                                                                                                                                                                                                                    | 1.4%                                                                                                                                                                                                                                                                                                                                                                                                                                                             | 1.3%                 | 1.3%         | 1.4%     | 1.7%     |
| **Asset Quality Data        (Serviced Portfolio):**                                                                                                                                                                                                                                                                                                                      |                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   |      |   |   |
| Total seriously delinquent(8)                                                                                                                                                                                                                                                                                                                                            | 12.2%                                                                                                                                                                                                                                                                                                                                   | N/A                                                                                                                                                                                                                                                                                                                                                                                                                                                              | 10.1%                 | 8.0%         | 6.3%     | 4.4%     |
| Annual losses on serviced              portfolio as a        percentage of              total serviced assets                                                                                                                                                                                                | 1.28%                                                                                                                                                                                                                                                                                                                                   | N/A                                                                                                                                                                                                                                                                                                                                                                                                                                                              | 0.8%                 | 0.7%         | 0.4%     | 0.5%     |
| Total portfolio prepayment        speed              CPR(9)                                                                                                                                                                                                                                                                                | 31.7%                                                                                                                                                                                                                                                                                                                                   | N/A                                                                                                                                                                                                                                                                                                                                                                                                                                                              | 25.1%                 | 32.8%         | 38.4%     | 43.8%     |

| _______________                       |
|---------------------------------------|
| (1)                                   | We acquired all of the        issued and outstanding capital stock of SCI Services,        Inc. from Dominion Capital on July 6, 2001. |
| (2)                                   | During 2001, we had a        one-time change in the method of recording advances and        recoveries from the securitizations from a net basis to a        gross basis. |
| (3)                                   | Earnings per common share        for the periods prior to July 6, 2001 was calculated        based upon the assumption that the shares issued were        outstanding for all periods presented. |
| (4)                                   | Principal balance only. |
| (5)                                   | Includes area and        regional sales management positions. |
| (6)                                   | Data for incomplete years        have been annualized. |
| (7)                                   | Excludes impairment of        residual assets and impairment of SCI Services, Inc.        goodwill. |
| (8)                                   | Seriously delinquent is        defined as loans that are 60 or more days delinquent,        foreclosed, REO, or held by a borrower who has declared        bankruptcy and is 60 or more days contractually        delinquent. |
| (9)                                   | The constant prepayment        rate (CPR) means a prepayment assumption which represents        a constant assumed rate of prepayment each month relative        to the then outstanding principal balance of a pool of        mortgage loans for the life of such mortgage loans. |
| N/A Information not        available. |

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| **Item 7.** | **Management's Discussion and Analysis of Financial        Condition and Results of Operations** |
|-------------|--------------------------------------------------------------------------------------------------|

          Management'sdiscussion and analysis of financial condition and results ofoperations contained within this Annual Report is more clearlyunderstood when read in conjunction with our consolidatedfinancial statements and the related notes. The notes to theconsolidated financial statements provide information about usand the basis of presentation used in this Annual Report.

**Acquisition of SCI Services, Inc.**

          Wepurchased all of the issued and outstanding shares of capitalstock of SCI Services, Inc. on July 6, 2001. We accounted for theacquisition as a purchase in accordance with Statement ofFinancial Accounting Standards No. 141, *Business Combinations*,(SFAS No. 141). Historical results on or prior to July 5, 2001are those of SCI Services, Inc. ("Predecessor") andresults subsequent to July 5, 2001 are those of Saxon Capital,Inc. ("Successor"). For the purpose of management'sdiscussion and analysis, we have combined the results of SaxonCapital, Inc. and SCI Services, Inc. and unless the contextrequires otherwise, reference to "we," "us"and "our" refer to the combined results of SaxonCapital, Inc. and SCI Services, Inc. See "—ConsolidatedResults—Comparability of Saxon Capital, Inc. and SCIServices, Inc."

**General**

          Weoriginate or purchase loans through three separate originationchannels. Our wholesale channel originates or purchases loansthrough our network of approximately 3,000 brokers throughout thecountry. Our retail channel originates mortgage loans directly toborrowers through our retail branch network of 17 locations. Ourcorrespondent channel purchases mortgage loans from approximately300 correspondents following a complete re-underwriting of eachmortgage loan. Once a loan is purchased or originated, ourwholly-owned subsidiary, Meritech, begins the process ofperforming the day-to-day administrative services for the loan.These activities are called "servicing" in theindustry. Meritech seeks to ensure that the loan is repaid inaccordance with its terms.

          Initially,we finance each of our mortgage loans under one or more ofseveral different secured and committed warehouse financingfacilities. We then securitize our mortgage loans and pay off theassociated warehouse borrowings. Historically our securitizationswere structured as a sale of the loans, with a correspondingone-time recognition of gain or loss, under GAAP. As a result ofthis accounting treatment, the mortgage loans were removed fromour balance sheet except for certain residual interests retainedin our securitizations. See "Critical AccountingPolicies—Securitizations." Since May 1996, we havesecuritized approximately $11.0 billion in mortgage loans throughour quarterly securitization program. Beginning July 6, 2001, westructure our securitizations as financing transactions. Thesesecuritizations do not meet the qualifying special purpose entitycriteria under SFAS 140 and related interpretations because afterthe loans are securitized, the securitization trust may acquirederivatives relating to beneficial interests retained by us. We,as servicer, subject to applicable contractual provisions, havesole discretion to use our best commercial judgment indetermining whether to sell or work 

40

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out any loans securitized through the securitization trustthat become troubled. Accordingly, following a securitization,the mortgage loans remain on our balance sheet, and thesecuritization indebtedness replaces the warehouse debtassociated with the securitized mortgage loans. We now recordinterest income on the mortgage loans and interest expense on thesecurities issued in the securitization over the life of thesecuritization, instead of recognizing a gain or loss uponcompletion of the securitization. This change to"portfolio-based" accounting will significantly impactour future results of operations compared to our historicalresults. Therefore, our historical results and management'sdiscussion of such results may not be indicative of our futureresults. This accounting treatment, however, more closely matchesthe recognition of income with the actual receipt of cashpayments on individual loans, and is expected to decrease ourearnings volatility compared to structuring securitizations assales for GAAP purposes.

**Critical Accounting Policies**

          Management'sDiscussion and Analysis of Financial Condition and Results ofOperations discusses our consolidated financial statements, whichhave been prepared in accordance with accounting principlesgenerally accepted in the United States. The preparation of thesefinancial statements requires management to make estimates andassumptions that affect the reported amounts of assets andliabilities and the disclosure of contingent assets andliabilities at the date of the financial statements and thereported amounts of revenues and expenses during the reportingperiod. On an on-going basis, management evaluates its estimatesand judgments. Management bases its estimates and judgments onhistorical experience and on various other factors that arebelieved to be reasonable under the circumstances, the results ofwhich form the basis for making judgments about the carryingvalues of assets and liabilities that are not readily apparentfrom other sources. Actual results may differ from theseestimates under different assumptions or conditions.

          Criticalaccounting policies are defined as those that are reflective ofsignificant judgments and uncertainties, and potentially resultin materially different results under different assumptions andconditions. We believe that our critical accounting policies arelimited to those described below. For additional discussion onthe application of these and other accounting policies, see Note1 in the notes to the consolidated financial statements.

          Webelieve the following represent our critical accounting policiesand are discussed in detail below:

> - Securitizations;
- Reserve for Loan Losses;

> - Mortgage Servicing Rights Valuation;

> - Revenue Recognition;

> - Hedging; and

> - Deferred Taxes.

41

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***Securitizations***

          *Accountingfor Securitizations Structured as Sales*

          Weengage in securitization activities in connection with ourbusiness. Gains and losses from securitizations are recognized inthe consolidated statements of operations when we relinquishcontrol of the transferred financial assets in accordance withSFAS No. 140, *Accounting for Transfers and Servicing ofFinancial Assets and Extinguishments of Liabilities—areplacement of FASB Statement No. 125* and other relatedpronouncements. The gain or loss on the sale of financial assetsdepends in part on the previous carrying amount of the assetsinvolved in the transfer, allocated between the assets sold andthe retained interests based upon their respective fair values atthe date of sale. Prior to July 6, 2001, we recognized anyinterests in the transferred assets and any liabilities incurredin securitization transactions on our consolidated balance sheetsat fair value. Subsequently, changes in the fair value of suchinterests were recognized in the consolidated statements ofoperations. The use of different pricing models or assumptionscould produce different financial results.

          Specifically,we sold our mortgage loans, while retaining certain residualinterests, through securitizations structured as sales of themortgage loans, with a corresponding one-time recognition of gainor loss under GAAP. In these securitizations, we sold our loansto a special-purpose corporation for a cash purchase price. Thespecial-purpose corporation, in turn, financed the purchase ofthe pool of loans by selling securities or bonds, whichrepresented undivided ownership interests in a trust. Holders ofthe securities were entitled to receive monthly distributions ofall principal received on the underlying mortgages and aspecified amount of interest, as determined at the time of thetrust offering.

          Whenwe sold a pool of loans to a securitization trust, we receivedthe following economic interests in the trust: (1) the differencebetween the interest payments due on the mortgage loans sold tothe trust, net of realized losses on the loans, othertrust-related fees, and the interest payments made to thesecurity-holders, represented by interest-only residual assets(I/Os); and (2) the right to service the loans on behalf of thetrust and to earn a servicing fee paid out of interestcollections, as well as to earn other ancillary servicing-relatedfees directly from the borrowers on the underlying loans. I/Osrepresent the right to future cash flows, excluding principalcollected from the interest payments, net of interest expense,losses, and other trust expenses, made on the mortgage loanssecuritized.

          Ournet investment in the pool of loans sold at the date ofsecuritization represented the amount originally paid tooriginate or purchase the loans, adjusted for the principalpayments received during the period we held the loans beforetheir securitization. Any corresponding derivatives used to hedgethese loans are recorded as distinct assets and liabilities withchanges in the fair value recorded in the consolidated statementof operations. See "—Interest Rate RiskManagement."

          Uponsecuritization of a pool of loans, we have historicallyrecognized a gain on sale of loans equal to the differencebetween cash received from the trust and the investment in theloans remaining after the allocation of portions of thatinvestment to record retained interests from the securitizationin the form of I/Os or mortgage servicing rights (MSRs).

42

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          TheI/Os we retained upon the securitization of a pool of loans wereaccounted for as trading investments. The amount initiallyallocated to the I/Os at the date of a securitization reflectedthe allocated original basis of the relative fair values of thoseinterests. The amount recorded for the I/Os was reduced fordistributions on I/Os, which we received from the related trust,and was adjusted for changes in the fair value of the I/Os, whichwere reflected in our consolidated statements of operations.Because there is not a highly liquid market for these assets, weestimated the fair value of the I/Os primarily based upondiscount, prepayment and default (frequency and severity) rateswe estimated that another market participant would use topurchase the I/Os. The estimated market assumptions were appliedbased upon the underlying loan portfolio grouped by loan types,terms, credit quality, interest rates, geographic location, andvalue of loan collateral, which are the predominantcharacteristics that affect prepayment and default rates.

          Inrecording and accounting for I/Os, we made assumptions, which webelieved reasonably reflected economic and other relevantconditions that affect fair value which were then in effect,about rates of prepayments, and defaults and the value ofcollateral. Due to subsequent changes in economic and otherrelevant conditions, the actual rates of prepayments and defaultsand the value of the collateral generally differed from ourinitial estimates, and these differences were sometimes material.If actual prepayment and default rates were higher thanpreviously assumed, the value of the I/Os would be impaired andthe declines in fair value were recorded in our consolidatedstatements of operations. Conversely, if actual prepayment anddefault rates were lower than previously assumed, the value ofthe I/Os would be higher and the increases in fair value wererecorded in our consolidated statements of operations.

          MSRswere initially recorded by similarly allocating the carryingamount of the initial loan asset, based on estimated fair valueof the MSRs, I/Os, and the sold loans. To determine estimatedfair value for MSRs, we used market assumptions that we believedanother industry participant would use to purchase the MSR,including discount, prepayment and default rates, servicing costsand ancillary fees. The estimates of MSR fair value are alsobased on the stated terms of the serviced loans.

          TheI/Os and related hedges, and subordinate bonds we had recorded atJuly 5, 2001 were assigned to Dominion Capital and will no longerbe included on our balance sheet. We retained the MSRs, whichwill continue to be accounted for in the manner described in theMortgage Servicing Rights Valuation section.

          *Accountingfor Securitizations Structured as Financings*

          AfterJuly 6, 2001, our securitizations continued to be structuredlegally as sales, but for accounting purposes are treated asfinancings under SFAS No. 140. These securitizations do not meetthe qualifying special purpose entity criteria under SFAS 140 andrelated interpretations because after the loans are securitized,the securitization trust may acquire derivatives relating tobeneficial interests retained by us. We, as servicer, subject toapplicable contractual provisions, have sole discretion to useour best commercial judgment in determining whether to sell orwork out any loans securitized through the securitization trustthat become troubled. Accordingly, the loans will remain on ourbalance sheet, retained interests are not created, andsecuritization indebtedness will replace warehouse debtoriginally associated with the securitized mortgage 

43

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loans. We record the principal balance of our loans on ascheduled basis as compared to the loan's actual balance.Accordingly, principal or interest that is delinquent is includedas a component of Servicing Advances on our consolidated balancesheet. Our historical losses are reported on a scheduled basis,which includes, interest advanced on a scheduled basis (commonlyreferred to as accrued interest). Therefore, a component of thereported losses is advanced interest. The amount of advancedinterest is evaluated as a component of our allowance for loanloss valuation. A separate provision out of interest income ismade for all uncollected accrued interest greater than threemonths. See "Revenue Recognition - Interest Income."

          Werecord interest income on the mortgage loans and interest expenseon the issued securities, as well as contract servicing fees andancillary fees related to servicing, over the life of thesecuritization, and we will not recognize a gain or loss uponcompletion of the securitization. This may result in materialdifferences in expected future results from operations ascompared to our historical results.

***Reserve for Loan Losses***

          Theallowance for loan losses is established through a charge to theprovision for loan losses. Provisions are made to reserve forestimated existing losses in outstanding loan balances and foruncollected and advanced interest. The allowance for loan lossesis a significant estimate and is regularly evaluated bymanagement for adequacy by taking into consideration factors suchas changes in the nature and volume of the loan portfolio; trendsin actual and forecasted portfolio performance and creditquality, including delinquency, charge-off and bankruptcy rates;and current economic conditions that may affect a borrower'sability to pay. The use of different estimates or assumptionscould produce different provisions for loan losses.

***Mortgage Servicing Rights Valuation***

          Therecorded value of the MSRs are amortized in proportion to, andover the period of the anticipated net cash flows from servicingthe loans. MSRs are assessed periodically to determine if therehas been any impairment to the recorded balance, based on thefair value at the date of the assessment and by stratifying theMSRs based on underlying loan characteristics, including the yearof capitalization.

          Dueto subsequent changes in economic and other relevant conditions,the actual rates of prepayments and defaults and the value ofcollateral generally differed from our initial estimates, andthese differences were sometimes material. If actual prepaymentand default rates are higher than those assumed, less mortgageservicing income would be expected, which would adversely affectthe value of the MSRs. Significant changes in prepayment speeds,delinquencies, and losses may result in impairment of most MSRs,and would be recorded in our consolidated statements ofoperations.

***Revenue Recognition***

          *InterestIncome*

          TheCompany earns interest income on mortgage loans held prior tosecuritization and securitized loans as contractually due on themortgage loan. The Company does not accrue more than three monthsof interest on mortgage loans at any given point of time.

44

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          *ServicingIncome*

          Mortgageloans serviced require regular monthly payments from borrowers.Income on loan servicing is generally recorded as payments arecollected and is based on a percentage of the principal balanceof loans serviced. Loan servicing expenses are charged tooperations when incurred.

***Hedging***

          Wemay use a variety of financial instruments to hedge our exposureto changes in interest rates. We may enter into interest rateswap agreements, interest rate cap agreements, interest ratefloor agreements, financial forwards, financial futures andoptions on financial futures ("Interest RateAgreements") to manage our sensitivity to changes in marketinterest rates. The Interest Rate Agreements we use have anactive secondary market, and none are obtained for a speculativenature, for instance, trading. These Interest Rate Agreements areintended to provide income and cash flow to offset potentialreduced net interest income and cash flow under certain interestrate environments. In accordance with SFAS 133, *Accounting forDerivative Instruments and Hedging Activities*, as amended, attrade date, these instruments and their hedging relationship areidentified, designated, and documented.

          ForInterest Rate Agreements designated as hedge instruments, weevaluate the effectiveness of these hedges periodically againstthe financial asset being hedged to ensure there remains adequatecorrelation in the hedge relationship. Since our concern withinterest rates is the potential change in fair market value ofthe loans, we are treating these as fair market value hedges perSFAS 133. Once the hedge relationship is established, therealized and unrealized changes in fair value of both the hedgeinstruments and financial asset are recognized in theconsolidated statement of operations in the period in which thechanges occur. The net amount recorded in our consolidatedstatement of operations is referred to as hedge ineffectiveness.

          Theimpact of accounting for our risk management activities accordingto SFAS No. 133 may create a level of ongoing non-economicvolatility to reported earnings not experienced in the past dueto the application of the hedge accounting requirements.

***Deferred Taxes***

          Werecognize deferred tax assets and liabilities based on thedifferences between the financial statement carrying amounts andthe tax bases of assets and liabilities. Saxon Capital regularlyreviews its deferred tax assets for recoverability andestablishes a valuation allowance, if required, based onhistorical taxable income, projected future taxable income, andthe expected timing of the reversals of existing temporarydifferences. If we continue to operate at a loss or are unable togenerate sufficient future taxable income, or if there is amaterial change in the actual effective tax rates or time periodwithin which the underlying temporary differences become taxableor deductible, we could be required to establish a valuationallowance against all or a significant portion of our deferredtax assets resulting in a substantial increase in our effectivetax rate and a material adverse impact on our operating results.

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**Consolidated Results**

          *Comparabilityof Saxon Capital, Inc. and SCI Services, Inc.*

          Dueto the varying time periods caused by our divestiture fromDominion Capital, Inc. and the nuances of changes insecuritization structures more fully discussed above, directcomparison of net earnings for Saxon Capital, Inc. versus SCIServices, Inc. will be difficult. Specifically, the followingline items from our statement of operations are impacted by thedivestiture or change in securitization structure:

> - Net interest income before provision for loan loss;

> - Provision for loan loss;

> - Gain on securitization;

> - Impairment of residual assets, net; and

> - Impairment of SCI Services, Inc. goodwill.

          Wehave added the results of SCI Services, Inc. and Saxon Capital,Inc. for their respective periods during 2001 to determine theresults for the year ended December 31, 2001 for comparisonpurposes with the year ended December 31, 2000. However, becauseof the limited comparability as a result of the divestiture andthe change in securitization structure, as discussed above, thepro-forma combined results of Saxon Capital, Inc. and SCIServices, Inc. for the year ended December 31, 2001 is notindicative of what the results of Saxon Capital, Inc. would havebeen assuming our divestiture would have happened on January 1,2001.

**Results of Operations**

|   | **Saxon****Capital, Inc.(1)**                                                                                                                                                                                 | **SCI****Services, Inc.**                                                                                                                                                                                       |                                                                                                                           | **           SCI        Services,        Inc.         **                   |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | **For the        Period July         6, 2001 to        December 31,            ****        2001        ** | **For the           Period         January 1,         2001 to July 5,****         2001         ** | **For the Year        Ended         December 31, 2001        Pro-Forma****    Combined   ** | **For the         Year Ended        December 31,          ****        2000        ** | **For the        Year Ended         December 31,****             1999       ** |
|   | (amounts        in thousands, except per share data)                                                                                                                                                          |

| **Revenues:**                                                                                                                                                                                                                                                |                                       |                                              |                                                   |                                                   |                                                    |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------------------|---------------------------------------------------|--------------------------------------------------------|--------------------------------------------------------|---------------------------------------------------------|
|       Interest        income                                                                                                                                                                                                   | $     50,328      | $      15,331       | $       65,659      | $       34,444      | $       45,818       |
|       Interest        expense                                                                                                                                                                                                  |      (23,457)     |       (11,524)      |       (34,981)           |       (24,875)           |        (21,342)      |
|             Net        interest income                                                                                                                                                           | 26,871                                     | 3,807                                             | 30,678                                                 | 9,569                                                  | 24,476                                                  |
|       Provision        for loan loss                                                                                                                                                                                           |      (11,861)     |        (8,423) |        (20,284)     |        (6,403)      |         (9,107) |
|             Net        interest income after provision                          for        loan losses | 15,010                                     | (4,616)                                           | 10,394                                                 | 3,166                                                  | 15,369                                                  |
|       Gain        on sale of loans                                                                                                                                                                                             | —                                     | 32,892                                            | 32,892                                                 | 79,234                                                 | 98,369                                                  |
|       Servicing        income, net of amortization                                                                                                                                                                             |       11,681 |        16,550  |         28,231 |         24,885 |         15,984  |
|             Total        net revenues                                                                                                                                                            | 26,691                                     | 44,826                                            | 71,517                                                 | 107,285                                                | 129,722                                                 |
| **Expenses:**                                                                                                                                                                                                                                                |                                       |                                              |                                                   |                                                   |                                                    |
|       Payroll        and related expenses                                                                                                                                                                                      | 19,531                                     | 25,220                                            | 44,751                                                 | 32,445                                                 | 29,871                                                  |
|       General        and administrative expenses                                                                                                                                                                               | 15,662                                     | 16,684                                            | 32,346                                                 | 27,681                                                 | 27,264                                                  |
|       Depreciation        and amortization                                                                                                                                                                                     | 503                                        | 3,736                                             | 4,239                                                  | 7,308                                                  | 7,255                                                   |

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|       Impairment        of residual assets, net                                                                                                                         | —                                                                                           | 7,301                                                                                                        | 7,301                                                                                                  | 108,445                                                                       | 8,308                                                                   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------|-------------------------------------------------------------------------|
|       Impairment        of SCI Services, Inc.                     goodwill                                  | —                                                                                           | 44,963                                                                                                       | 44,963                                                                                                 | —                                                                        | —                                                                  |
|       Other        expense (income)                                                                                                                                     |          1,239                                      |         (1,962)                                                      |           (723)                                      |          4,010                   |            (852) |
|             Total        expenses                                                                                                         | 36,935                                                                                           | 95,942                                                                                                       | 132,877                                                                                                | 179,889                                                                       | 71,846                                                                  |
|       (Loss)        income before taxes                                                                                                                                 | (10,244)                                                                                         | (51,116)                                                                                                     | (61,360)                                                                                               | (72,604)                                                                      | 57,876                                                                  |
|        Income        tax (benefit) expense                                                                                                                         |         (3,957)                                          |                (21,609)                                                   |        (25,566)                                                     |        (24,084)                            |          21,228            |
| **      Net        (loss) income**                                                                                                                                      | $      (6,287)                                                     | $     (29,507)                                                                      | $    (35,794)                                                                      | $    (48,520)                                             | $      36,648                             |
| **Other comprehensive        income (loss):**                                                                                                                                                         |                                                                                             |                                                                                                         |                                                                                                   |                                                                          |                                                                    |
| Unrealized        gain (loss) on residuals               assets, net of tax of        $-0-,$-0-, $-0-,               $2,496, and $(2,439) |                — |                  — |                 — |             6,400 |         (6,418)                 |
|                                                                                                                                                                                                  |                                                                                             |                                                                                                         |                                                                                                   |                                                                          |                                                                    |
| **Total comprehensive        (loss) income**                                                                                                                                                          | $      (6,287)                                                     | $     (29,507)                                                                      | $    (35,794)                                                                      | $     (42,120)                                       | $     30,230                                   |
|                                                                                                                                                                                                  |                                                                                             |                                                                                                         |                                                                                                   |                                                                          |                                                                    |
| **Earnings        per common share:(2)**                                                                                                                                                              |                                                                                             |                                                                                                         |                                                                                                   |                                                                          |                                                                    |
|       Average        common shares (basic and                            diluted)                           | 28,050                                                                                           | 28,050                                                                                                       | 28,050                                                                                                 | 28,050                                                                        | 28,050                                                                  |
|       Basic        and diluted earnings per common                           share                               | $          (.22)                               | $         (1.05)                                                | $       (1.28)                                                      | $       (1.73)                             | $         1.31             |

| _______________ |
|-----------------|
| (1)             | Saxon Capital, Inc. acquired all of        the issued and outstanding capital stock of SCI Services,        Inc. from Dominion Capital, Inc. on July 6, 2001. |
| (2)             | Earnings per common share was        calculated based upon the assumption that the shares        issued were outstanding for all periods presented. |

> 
*Year Ended December 31, 2001 compared to Year Ended    December 31, 2000*

***General***

          Wereported a net loss of $35.8 million for 2001 compared to a netloss of $48.5 million for 2000. The net loss in 2001 wasprimarily the result of the impairment of SCI Services, Inc.goodwill of $45.0 million leading up to the divestiture of Saxonand the move away from gain on sale of loans to portfolioaccounting. The net loss in 2000 was primarily the result of theimpairment of retained interests in ABS securitizations, orresiduals, of $108.4 million.

***Net Revenues***

          Netrevenues decreased $35.8 million to $71.5 million for 2001, from$107.3 million for 2000. The decrease in net revenues wasprimarily attributable to our change in securitization structuresubsequent to July 5, 2001, as discussed above. After July 5,2001, we no longer record a gain at the time of securitizationand we record interest income and loan loss provision over thelife of the mortgage loans. 

          *Netinterest income after provision for loan losses*. Interestincome primarily represents the sum of interest earned onmortgage loans securitized and held prior to securitization, andinterest earned on cash collection balances. Interest expenseincludes the borrowing costs to finance mortgage loanoriginations and purchases from our securitizations and from ourcredit facilities used to finance our mortgage loans prior tosecuritization. For the periods prior to July 6, 2001, theprovision for mortgage loan loss includes expenses recorded forlosses we incurred for defaults on loans held for sale beforetheir securitization, and for losses incurred on certaindefaulted loans repurchased from a securitization due to eithernoncompliance with certain representations and warranties or todecrease the level of delinquent loans in a securitization torelease excess cash flow. For the period July 6, 2001 to December31, 2001, the provision for 

47

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mortgage loan loss includes expenses recorded for losses weincurred for defaults on loans held prior to securitization andfor estimated losses on securitized mortgage loans. See"-Critical Accounting Policies - Allowance for LoanLoss."

          Netinterest income after provision for loan losses increased $7.2million to $10.4 million for 2001, from $3.2 million for 2000.This increase was due to the following:

          *InterestIncome*

          Interestincome increased $31.3 million to $65.7 million for 2001, from$34.4 million for 2000. The increase in interest income is dueprimarily from a result of our change in securitizationstructure, which requires portfolio accounting, as discussedabove. We are now recording interest income on our securitizedloans and loans held prior to securitization. Prior to July 5,2001, we only recorded interest income on loans held prior tosecuritization. Table 1 below represents the average yield on ourinterest-earning assets for the years ended December 31, 2001 and2000, respectively.

*Table 1 – Interest Income Yield Analysis Fiscal Year2001 compared to Fiscal Year 2000*

|                                      | **       Year        Ended  December 31,        2001        ** | **  Year        Ended  December 31,        2000        ** |
|-------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------|
|                                      | **Average****        Balance        **                              | ******  Interest(1)  **                                                                           | **Average****  Yield  ** | **Average****  Balance  ** | ******Interest(1)** | **Average****  Yield  ** |
|                                      | ($ in thousands)                                                                                                                                    |
| Loans        held prior to securitization | $350,475                                                                                                                                            | $33,508                                                                                                               | 9.56% | $235,191 | $27,520 | 11.70% |
| Securitized        loans                  | $382,822                                                                                                                                            | $37,459                                                                                                               | 9.78% |             — |           — |          — |
| Total        interest-earning assets      | $733,297                                                                                                                                            | $70,967                                                                                                               | 9.68% | $235,191 | $27,520 | 11.70% |

| _______________ |
|-----------------|
| (1)             | Amount excludes provision for advanced        interest and residual income. |

          *InterestExpense*

          Interestexpense increased $10.1 million to $35.0 million for 2001, from$24.9 million for 2000. The increase in interest expense isprimarily related to our change in securitization structure,which requires portfolio accounting, as discussed previously. Weare now recording interest expense on non-recourse debt used tofinance our securitized loans and on recourse warehouse financingprior to securitization. Prior to July 5, 2001, we only recordedinterest expense to finance loans held prior to securitization.Table 2 below represents the average yield on ourinterest-bearing liabilities for the years ended December 31,2001 and 2000, respectively.

*Table 2 – Interest Expense Yield Analysis Fiscal Year2001 compared to Fiscal Year 2000*

|                                             | **       Year        Ended  December 31,        2001        ** | **      Year        Ended  December 31,        2000        ** |
|--------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------|
|                                             | **Average****        Balance        **                              | ******  Interest(1)  **                                                                                                   | **Average****  Yield  ** | **Average****        Balance        ** | ******  Interest(1)  ** | **Average****  Yield  ** |
|                                             | ($ in thousands)                                                                                                                                    |
| Warehouse        financing                       | $231,566                                                                                                                                            | $14,355                                                                                                                                       | 6.20% | $235,379 | $16,180 | 6.87% |
| Limited        recourse securitization financing | $453,339                                                                                                                                            | $17,000                                                                                                                                       | 3.75% | — | — | — |
| Note        payable                              | $  12,283                                                                                                                                      | $     985                                                                                                                 | 8.00% | — | — | — |
| Due to        Dominion Capital                   | $  61,575                                                                                                                                      | $  3,650                                                                                                                                 | 5.93% | $119,170 | $  8,044 | 6.75% |
| Total        interest-bearing liabilities        | $758,763                                                                                                                                            | $35,990                                                                                                                                       | 4.74% | $354,549 | $24,224 | 6.83% |

| _______________ |
|-----------------|
| (1)             | Amount excludes loan        buydown and legal fees associated with the facility. |

48         

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> 
*Provision for Loan Losses*

          Provisionfor loan losses increased $13.9 million to $20.3 million for2001, from $6.4 for 2000. The increase is a result of our changein securitization structure and required use of portfolioaccounting. We are now recording provisions for loan losses onsecuritized loans for likely losses in the retained portfolio inaddition to likely losses in loans held prior to securitization.Before July 5, 2001, we only recorded provision for loan lossesfor mortgage loans held prior to securitization. Before July 5,2001, estimated losses for securitized loans were accounted foras a component of our gain on sale of loans.

          Ourreserve at December 31, 2001, as a percentage of our securitizedmortgage loan balance, was 1.3%, which is comparable to ourhistorical losses on securitizations. We did not make anysignificant changes in our reserve methodologies or assumptionsduring the period July 6, 2001 to December 31, 2001. There hasnot been any significant changes in our loan quality or loanconcentrations during the period July 6, 2001 to December 31,2001. As expected, we did see a slight increase in our delinquentaccount levels at December 31, 2001, and increased our provisionaccordingly. We have determined that the increase was due, inpart, to the downturn in the economy as well as the aging of theloan portfolio, as expected. We do expect that futuredelinquencies will increase primarily as a result of the aging ofour loan portfolio. Therefore, we expect our future provision forloan losses to increase.

> 
*Gain on Securitization*

          Theinformation relating to the gain on sale of loans is shown onTable 3 below:

*Table 3—Gain on sale of loans Fiscal Year 2001compared to Fiscal Year 2000*

|                                               | **                        SCI        Services,        Inc.               ** |
|----------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                               | **Period Ended**** July 5,        2001(1)     **                                                                                                                                                                                                 | **Year        Ended           ****  December 31,        2000  ** |
|                                               | ($ in thousands)                                                                                                                                                                                                                                                               |
| Principal        balance of loans securitized      | $661,456                                                                                                                                                                                                                                              | $2,098,659 |
| Gain        on sale of loans                       | $  32,892                                                                                                                                                                                                                                   | $     79,234 |
| Weighted        average gain on securitization (2) | 497                                                                                                                                                                                                                                                   | 378 |
| Premiums        on loans securitized (3)           | 208                                                                                                                                                                                                                                                   | 229 |
| Securitization        related costs (2)(3)         | 60                                                                                                                                                                                                                                                    | 29 |

| _______________ |
|-----------------|
| (1)             | Because of our change in        securitization structure, which requires portfolio        accounting, we did not record any gains from        securitizations for the period July 6, 2001 to December        31, 2001. |
| (2)             | In basis points. |
| (3)             | Includes, for example, underwriting,        accounting, and legal costs, and Securities and Exchange        Commission registration fees directly related to the        securitizations and net hedge activity. |

          Theweighted average net gain on securitization increased in 2001compared to 2000 due to lower premiums on loans securitized, moreeffective pricing of the 2001 securitization, and a 

49

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more favorable interest rate environment during 2001. Ourlower premiums on loans securitized in 2001 was a direct resultof lower mortgage loan originations in our correspondent channelwhich typically carry higher premiums. Our more effective pricingof the 2001 securitizations was a result of a declining interestrate environment during the accumulation period for thatsecuritization.

          *ServicingIncome*

          Servicingincome, net of servicing rights amortization, represents allcontractual and ancillary servicing revenue (primarily late feesand electronic payment processing fees) for loans we sold priorto July 6, 2001. Beginning July 6, 2001, servicing incomerelating to loans securitized thereafter is a component ofinterest income due to the move to portfolio accounting.Servicing income, net of servicing rights amortization, increased$3.3 million to $28.2 million for 2001, from $24.9 million for2000. The increase was due primarily to a higher averageservicing portfolio balance. The information relating to theservicing income is shown on Table 4 below:

*Table 4—Servicing Income Fiscal Year 2001 compared toFiscal Year 2000*

|                                                     | **                   Year        Ended December        31,        ** |
|----------------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                     | **     2001     **                                                                                                                                        | **     2000     ** |
|                                                     | ($ in thousands)                                                                                                                                                                                            |
| Average        servicing portfolio                       | $5,971,951                                                                                                                                                                                                  | $5,233,423 |
| Servicing        income                                  | $     49,059                                                                                                                                                                            | $     47,217 |
| Amortization        of MSRs and prepayment penalties     | $     20,828                                                                                                                                                                            | $     22,332 |
| Servicing        fees (1)(2)                             | 53                                                                                                                                                                                                          | 48 |
| Prepayment        penalty income (1)(3)                  | 15                                                                                                                                                                                                          | 27 |
| Other        servicing income (1)(4)                     | 14                                                                                                                                                                                                          | 14 |
| Total        servicing income (1)                        | 82                                                                                                                                                                                                          | 89 |
| Amortization        of MSRs and prepayment penalties (1) | 35                                                                                                                                                                                                          | 43 |

| _______________ |
|-----------------|
| (1)             | In basis points. |
| (2)             | Includes master servicing        fees. |
| (3)             | Prepayment penalty income        decreased during the period July 6, 2001 to December 31,        2001 as the right to prepayment penalty income related to        loans securitized prior to July 6, 2001 was retained by        Dominion Capital, Inc. |
| (4)             | Includes primarily late        fees and electronic processing fees. |

          Ourmortgage loan servicing portfolio, including loans recorded onthe consolidated balance sheet, increased $0.8 billion to $6.4billion at December 31, 2001, from $5.6 billion at December 31,2000. The increase was due primarily to the origination andpurchase of mortgage loans, and acquisition of $602.4 million ofthird party servicing, with the remainder of the increase due tohigher mortgage originations during 2001 of $244.7 million,partially offset by decreases caused by prepayments and losses.

50

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***Expenses***

          Totalexpenses decreased $47.0 million to $132.9 million for 2001, from$179.9 million for 2000. The items that impacted this decreasewere primarily 2000's impairment of residual assets and 2001'simpairment of SCI Services, Inc.'s goodwill. These items arediscussed in greater detail below.

          *Payrolland Related Expenses*. Payroll and related expenses includesalaries, benefits, and payroll taxes for all employees. Payrolland related expenses increased $12.4 million to $44.8 million for2001, from $32.4 million for 2000. The increase was primarily dueto the increase in employees in 2001 versus 2000. In addition,certain management received retention bonuses in 2001 whichtotaled $1.1 million.

          Weexpect payroll and related expenses to increase in the future aswe increase the number of employees based on loan originationgrowth and for additional employees needed for being a publiccompany. We employed 899 full-time employees as of December 31,2001, compared to 843 full-time employees as of December 31,2000.

          *Generaland Administrative Expenses*. General and administrativeexpenses consist primarily of office rent, insurance, telephone,license fees, legal and accounting fees, travel and entertainmentexpenses, and advertising and promotional expenses. General andadministrative expenses increased $4.6 million to $32.3 millionfor 2001, from $27.7 million for 2000. The increase was primarilydue to increased costs associated with higher mortgageoriginations. In addition, we incurred $1.0 million due to costsassociated with becoming an independent company. We expectgeneral and administration expenses to increase in future periodsas we incur additional costs of being a publicly traded companyand to some extent in proportion to future loan originationgrowth.

          *Impairmentof Residual Assets*. Impairment of residual assets decreasedto $7.3 million for 2001 from $108.4 million for 2000. Thedecrease was primarily due to the impairment charge taken in Juneof 2000 related to our increase of the discount rate on ourresidual and servicing investments from 12% to 17% and theincrease of the discount rate on our MSR's from 12% to 15% toreflect changes in the estimates for the long term marketdiscount rates. We do not expect to incur any future impairmentof residual asset charges since we account for oursecuritizations under portfolio accounting and do not recordresidual assets in accordance with SFAS No. 140.

          *Impairmentof SCI Services, Inc. Goodwill*. Impairment of SCI Services,Inc. goodwill of $45.0 million for 2001, was due to the pendingsale of SCI Services, which resulted in the estimated proceedsfrom the transaction being substantially the same as the adjustedbook value of SCI Services, excluding SCI Services, Inc.'shistorical goodwill. SCI Services, Inc.'s historical goodwillrelated to Dominion's acquisition of Saxon in May 1996. Noimpairment of goodwill occurred in 2000. We do not expect toincur future goodwill impairment charges.

          *IncomeTaxes*. We recorded tax benefits of $25.6 million and $24.1million for the years ended December 31, 2001 and 2000,respectively. We experienced a 41.7% effective tax benefit ratefor 2001, compared to a 33.2% effective tax benefit rate for2000. During the quarter ended March 31, 2001, Dominion ResourcesInc., the parent company of Dominion Capital, Inc., recorded astate income tax benefit at the consolidated tax return levelthat was related to the recognition of net operating lossesattributable to impairment writedowns of our assets. We 

51

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recorded a state income tax benefit of approximately $3.0million in the first six months of 2001. Due to our divestiturefrom Dominion Capital, Inc., the aforementioned effective taxrates may not be indicative of future tax rates. If we had notbeen subject to a consolidated tax return filing with DominionResources, Inc. our tax benefit would have been reduced by $3.1million and our effective tax rate for 2001 and 2000 would havebeen 36.6% and 37.5%, respectively.

*Year Ended December 31, 2000 compared to Year EndedDecember 31, 1999*

***General***

          Ournet loss for the year ended December 31, 2000 was $48.5 million,compared to net income of $36.6 million for the year endedDecember 31, 1999.

***Net Revenues***

          Netrevenues decreased $22.4 million, to $107.3 million for the yearended December 31, 2000, from $129.7 million for 1999. Thedecrease in net revenues was primarily a result of a decline ingain on sale of loans, as discussed below.

          *NetInterest Income after provision for loan losses*. Net interestincome after provision for loan losses decreased $12.2 million,to $3.2 million for the year ended December 31, 2000, from $15.4million for 1999. This decrease was due to the following:

> 
          *Interest    Income*

          Interestincome decreased $11.4 million during 2000 compared to 1999primarily as a result of lower mortgage loan originations. Loanoriginations decreased $0.6 billion to $2.1 billion in 2000 from$2.7 million in 1999.

> 
          *Interest    Expense*

          Interestexpense increased $3.6 million during 2000 compared to 1999primarily as a result of higher borrowing costs offset slightlyby lower loan originations in 2000. Our higher borrowing costsresulted in approximately $5.3 million in additional interestexpense and the effect of our lower loan originations resulted inlower interest expense of $1.7 million.

> 
          *Provision    for Loan Losses*

          Provisionfor loan losses decreased $2.7 million during 2000 compared to1999 primarily as a result of higher charge-offs of delinquentloans held for sale in 1999. At December 31, 2000, our loan lossreserve as a percentage of mortgage loans held for sale was 3.4%compared to 0.8% at December 31, 1999. The primary result for theincrease was a higher percentage of delinquent loans held forsale at December 31, 2000 compared to December 31, 1999. Wecompleted a sale of $20.7 million in delinquent loans in December1999 which reduced the balance of delinquent loans held for sale.

52

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> 
          *Gain    on Securitization*

          Ourgain on sale of loans decreased from $98.4 million to $79.2million, primarily as a result of lower principal balance ofloans securitized. The information relating to gain on sale ofloans is shown on Table 5 below.

*Table 5—Gain on sale of loans 2000 compared to 1999*

|                                              | **        Year        Ended December        31,        ** |
|---------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------|
|                                              | **     2000     **                                                                      | **     1999     ** |
|                                              | ($ in thousands)                                                                                                                          |
| Principal        balance of loans securitized     | $2,098,659                                                                                                                                | $2,679,556 |
| Gain        on sale of loans                      | $     79,234                                                                                                     | $     98,369 |
| Weighted        average gain on securitization(1) | 378                                                                                                                                       | 367 |
| Premiums        on loans securitized(2)           | 229                                                                                                                                       | 214 |
| Securitization        related costs(1)(2)         | 29                                                                                                                                        | 57 |

| _______________ |
|-----------------|
| (1)             | In basis points. |
| (2)             | Includes, for example,        underwriting, accounting, and legal costs, and Securities        and Exchange Commission registration fees directly        related to the securitizations and net hedge activity. |

*Servicing Income*

          Servicingincome, net of servicing rights amortization, increased $8.9million, to $24.9 million for the year ended December 31, 2000,from $16.0 million for 1999. The increase in net servicing incomewas due primarily to an increase in our servicing portfolio andlower amortization of MSRs due to slower prepayment rates in 2000compared to 1999 due to a rising interest rate environment in2000. The information relating to our servicing income is shownon Table 6 below:

*Table 6—Servicing Income 2000 compared to 1999*

|                                                     | **        Year        Ended December        31,        ** |
|----------------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------|
|                                                     | **     2000     **                                                                      | **     1999     ** |
|                                                     | ($ in thousands)                                                                                                                          |
| Average        servicing portfolio                       | $5,233,423                                                                                                                                | $4,202,953 |
| Servicing        income                                  | $     47,217                                                                                                     | $     35,494 |
| Amortization        of MSRs and prepayment penalties     | $     22,332                                                                                                     | $     19,510 |
| Servicing        fees(1)(2)                              | 48                                                                                                                                        | 47 |
| Prepayment        penalty income(1)                      | 27                                                                                                                                        | 25 |
| Other        servicing income(1)(3)                      | 14                                                                                                                                        | 12 |
| Total        servicing income(1)                         | 89                                                                                                                                        | 84 |
| Amortization        of MSRs and prepayment penalties (1) | 43                                                                                                                                        | 46 |

| _______________ |
|-----------------|
| (1)             | In basis points. |
| (2)             | Year ended December 31,        2000 includes master servicing fees. |
| (3)             | Includes primarily late        fees and electronic payment processing fees. |

53

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          Ourincrease in total servicing portfolio was a result of our $2.1billion of securitizations during 2000, and the prepayment,payoff, or foreclosure of $1.1 billion of serviced mortgage loansin 2000.

***Expenses***

          Totalexpenses increased $108.1 million to $179.9 million for the yearended December 31, 2000, from $71.8 million for 1999. Theincrease in expenses was primarily attributable to impairment ofour residual asset, as discussed below.

          *Payrolland Related Expenses*. Payroll and related expenses increased$2.5 million to $32.4 million for the year ended December 31,2000, from $29.9 million for 1999. The increase was due primarilyto an increase of $1.3 million in salary costs from annual meritincreases and an increase of $1.2 million from a net increase inthe number of our employees. We employed 843 full-time employeesas of December 31, 2000, compared to 799 full-time employees asof December 31, 1999.

          *ImpairmentOn Residual Assets*. Impairment of residual assets increasedto $108.4 million for the year ended December 31, 2000 from $8.3million for 1999. The increase in impairment was primarily due tothe increase in the discount rate on our residual and servicinginvestments from 12% to 17% and the discount rate on our MSRsfrom 12% to 15% to reflect changes in the estimates for the longterm market discount rates. In addition, we transferred theseinvestments from our available-for-sale portfolio to our tradingportfolio because of Dominion Resource's intention to divest itsinterest in SCI Services. We reflected the impairment loss of$106.5 million, combined with $1.9 million in losses on tradingsecurities, in our consolidated statements of operations for2000. During 1999, we recognized a permanent impairment of $8.3million on our residual and servicing investments. In addition,during 1999, we recognized a $6.4 million unrealized loss, net oftax, on our residual and servicing investments due to an increasein the discount rate from 11% to 12% that was recorded as othercomprehensive loss.

          *IncomeTaxes*. We recorded a tax benefit of $24.1 million and a taxprovision of $21.2 million for the years ended December 31, 2000and 1999, respectively. We experienced a 33.2% effective tax ratefor the year ended December 31, 2000 compared to a 36.7%effective tax rate for the year ended December 31, 1999.

**Business Segment Results**

          Theoperating segments reported below are the segments of the Companyfor which separate financial information is available and forwhich revenues and operating income amounts are evaluatedregularly by management in deciding how to allocate resources andin assessing performance.

          Segmentrevenues and operating income amounts are evaluated and includethe economic value of mortgage loans originated, servicingincome, other income and expense, and general and administrativeexpenses. Economic value of mortgage loans originated representsthe amount in excess of the segment's basis in its loanoriginations that generate a required after tax return ofcapital.

54

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          Certainamounts are not evaluated at the segment level and are includedin the segment net operating income (loss) reconciliation below.The unallocated gain (loss) on securitizations represents thedifference between the segment's economic value of mortgage loansoriginated and the actual gain on securitization. For the periodJuly 6, 2001 to December 31, 2001, the segment's economic valueof mortgage loans originated was required to be eliminated sincewe now structure our securitizations as financing transactions.

          Managementdoes not identify assets to the segments and evaluates assetsonly at the consolidated level. As such, only operating resultsfor the segments are included herein.

|                                                                                                                                                                                                                                       |                                                                                         |                                                                                                                                                       | **                        Predecessor                   ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                       | **2001****      Combined      ** | **July 6 to December 31,****          2001          ** | **January 1 to        July 5,****         2001        **                                                                                                                                     |   | **     2000     ** | **     1999     ** |
|                                                                                                                                                                                                                                       |                                                                                         | ($ in thousands)                                                                                                                                           |
| **Segment        Revenues:**                                                                                                                                                                                                               |                                                                                         |                                                                                                                                                       |                                                                                                                                                                                                                                                                              |   |   |   |
|       Wholesale                                                                                                                                                                                              | $  51,829                                                                          | $   27,760                                                                                                                                  | $  24,069                                                                                                                                                                                                                                                               |   | $    24,309 | $  29,587 |
|       Correspondent                                                                                                                                                                                          | 18,113                                                                                       | 9,229                                                                                                                                                      | 8,884                                                                                                                                                                                                                                                                             |   | 12,047 | 30,878 |
|       Retail                                                                                                                                                                                                 | 24,717                                                                                       | 13,845                                                                                                                                                     | 10,872                                                                                                                                                                                                                                                                            |   | 14,551 | 12,554 |
|       Servicing                                                                                                                                                                                              |     28,231                                                               |      11,681                                                                                                                       |     16,550                                                                                                                                                                                                                                                    |   |       25,208 |      15,984 |
|             Total        Segment Revenues                                                                                                                                      | $122,890                                                                                     | $   62,515                                                                                                                                  | $  60,375                                                                                                                                                                                                                                                               |   | $    76,115 | $  89,003 |
|                                                                                                                                                                                                                                       |                                                                                         |                                                                                                                                                       |                                                                                                                                                                                                                                                                              |   |   |   |
| **Segment        Operating Income (Loss):**                                                                                                                                                                                                |                                                                                         |                                                                                                                                                       |                                                                                                                                                                                                                                                                              |   |   |   |
|       Wholesale                                                                                                                                                                                              | $  36,985                                                                          | $   21,128                                                                                                                                  | $  15,857                                                                                                                                                                                                                                                               |   | $      8,918 | $    4,540 |
|       Correspondent                                                                                                                                                                                          | 12,110                                                                                       | 6,504                                                                                                                                                      | 5,606                                                                                                                                                                                                                                                                             |   | 5,558 | 24,861 |
|       Retail                                                                                                                                                                                                 | 6,416                                                                                        | 4,292                                                                                                                                                      | 2,124                                                                                                                                                                                                                                                                             |   | (1,225) | 751 |
|       Servicing                                                                                                                                                                                              |       8,283                                                    |        1,171                                                                                                            |       7,112                                                                                                                                                                                                                                         |   |       10,836 |      2,588 |
|             Total        Segment Net Operating                           Income | $  63,794                                                                          | $   33,095                                                                                                                                  | $  30,699                                                                                                                                                                                                                                                               |   | $    24,087 | $ 32,740 |
|                                                                                                                                                                                                                                       |                                                                                         |                                                                                                                                                       |                                                                                                                                                                                                                                                                              |   |   |   |
| **Segment        Net Operating Income Reconciliation**                                                                                                                                                                                     |                                                                                         |                                                                                                                                                       |                                                                                                                                                                                                                                                                              |   |   |   |
| Total        segment operating income                                                                                                                                                                                                      | $  63,794                                                                          | $   33,095                                                                                                                                  | $  30,699                                                                                                                                                                                                                                                               |   | $   24,087 | $ 32,740 |
| Net        interest income                                                                                                                                                                                                                 | 30,678                                                                                       | 26,871                                                                                                                                                     | 3,807                                                                                                                                                                                                                                                                             |   | 9,569 | 24,476 |
| Provision        for loan losses                                                                                                                                                                                                           | (20,284)                                                                                     | (11,861)                                                                                                                                                   | (8,423)                                                                                                                                                                                                                                                                           |   | (6,403) | (9,107) |
| Unallocated        gain (loss) on              securitizations                                                                                                                                               | (8,518)                                                                                      | —                                                                                                                                                     | (8,518)                                                                                                                                                                                                                                                                           |   | 23,994 | 26,202 |
| Elimination        of segment economic              value of mortgage        loans originated                                                                                                                | (50,604)                                                                                     | (50,604)                                                                                                                                                   | —                                                                                                                                                                                                                                                                            |   | — | — |
| Unallocated        shared general and              administrative        expenses                                                                                                                            | (24,162)                                                                                     | (7,745)                                                                                                                                                    | (16,417)                                                                                                                                                                                                                                                                          |   | (15,406) | (8,127) |
| Residual        losses                                                                                                                                                                                                                     | (7,301)                                                                                      | —                                                                                                                                                     | (7,301)                                                                                                                                                                                                                                                                           |   | (108,445) | (8,308) |
| Impairment        of SCI Services, Inc.              goodwill                                                                                                                                                |    (44,963)                                                                   |               —                                                                 |      (44,963)                                                                                                                                                                                                                                            |   |              — |            — |
| Total        consolidated (loss) income              before taxes                                                                                                                                            | $  (61,360                                                                         | $  (10,244)                                                                                                                                      | $  (51,116)                                                                                                                                                                                                                                                             |   | $ (72,604) | $ 57,876 |

**Wholesale**

          Ourwholesale channel purchases and originates non-conformingresidential mortgage loans through relationships with variousmortgage companies and mortgage brokers. We provide a variety ofmortgage products to help our brokers better service theirborrowers. Mortgage brokers identify applicants, help themcomplete loan application paperwork, gather required informationand documents, and act as our liaison with the borrower duringthe lending process. 

55

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We review and underwrite an application submitted by a broker,accept or reject the application, determine the range of interestrates and other loan terms and, upon acceptance by the borrowerand satisfaction of all conditions to the loan, fund the loan. Insome instances, brokers will close the loan using their sourcesof funds, and then sell us the closed loan after we underwriteit. By relying on brokers to market our products and assist theborrower throughout the loan application process, we can increaseloan volume through the wholesale channel without increasingmarketing, labor, and other overhead costs incurred in connectionwith retail loan production.

          Newbrokers enter our wholesale network from various sources. Ouraccount executives and our Website are the main sources for newbrokers. Brokers must meet various requirements and must completethe broker application package, provide evidence of a statelicense, articles of incorporation, financial statements, resumesof key personnel, and other information as needed. The wholesalechannel's management reviews this information to determine if thebroker should be approved. When appropriate, the application maybe reviewed and investigated by the QC Department before finalapproval.

          Throughthe implementation of ScorePlus and our Website, we are able toprovide our brokers with the ability to obtain online loanapprovals and pricing in seconds. We believe the power andconvenience of online loan approvals increases loan volume forthe broker and us. In addition, our Website provides brokers withloan status reports, product guidelines, loan pricing andlock-ins, and many added features. We expect to continue to adaptWeb-based technologies to enhance our one-on-one relationshipswith our brokers.

          For2002, management established the following key initiatives forour Wholesale business channel. We expect the wholesale businesschannel will focus appropriate resources on achieving theirrespective initiatives:

> - Implement an automated underwriting program            accessible to our broker customers.

> - Implement additional automation of loan processing.

> - Expand account executive sales force.

          Thefollowing table sets forth selected information about ourwholesale loan originations for the years ended December 31,2001, 2000, and 1999:

|                                                                                  | **                       For        the Year Ended December        31,             ** |
|---------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                  |               **     2001     **                                                                                                                  | **     2000     ** | **     1999     ** |
| Average principal balance per        loan                                             |     $107.3                                                                                                                                                                                                                                                 | $92.2               | $93.3 |
| Combined weighted average initial LTV                                                 |     79.47%                                                                                                                                                                                                                                                 | 78.94%               | 79.26% |
| Percentage of first mortgage loans owner        occupied                              |     94.86%                                                                                                                                                                                                                                                 | 94.15%               | 93.41% |
| Percentage with prepayment penalty                                                    |     82.38%                                                                                                                                                                                                                                                 | 83.04%               | 71.34% |
| Weighted average credit score                                                         |     **    **588**   **                                                                                                                                                                                                  | 583               | 592 |
| Percentage FRMs                                                                       |     37.81%** **                                                                                                                                                                                                                                       | 70.12%               | 70.35% |
| Percentage ARMs                                                                       |     62.19%** **                                                                                                                                                                                                                                       | 29.88%               | 29.65% |
| Weighted average interest rate:                                                       |                                                                                                                                                                                                                                                                      |         |   |
|           FRMs                      |     10.40%                                                                                                                                                                                                                                                 | 11.31%               | 10.14% |
|           ARMs                      |     9.94%                                                                                                                                                                                                                                                  | 11.12%               | 10.09% |
|           Margin        – ARMs |     5.65%                                                                                                                                                                                                                                                  | 5.89%               | 6.05% |

56

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          Thefollowing table highlights the net cost to produce loans for ourwholesale channel for the years ended December 31, 2001, 2000,and 1999:

|                                   | **                            For        the Year Ended December        31,               ** |
|----------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                   | **       ****     2001     **                                                                                                                                                                                                  | **   ****     2000     ** | **     1999     ****       ** |
| Fees collected(1)                      |                     44                                                                                                                                                                 |                        35      |                               35**          **      |
| General and administrative costs(1)(2) |                     246                                                                                                                                                                |                     317      |                               303**          **      |
| Premium paid(1)                        |                     122                                                                                                                                                                |                     169      |                               167**          **      |
| Net cost to produce(1)(3)              |                         323                                                                                                                                        |                     451      |                               435**          **      |

| _______________ |
|-----------------|
| (1)             | In basis points. |
| (2)             | Excludes corporate        overhead costs and the impact of net deferred origination        costs. Includes depreciation expense. |
| (3)             | Defined as general and        administrative costs and premium paid, net of fees        collected, divided by volume. |

          Wehave been able to increase the profitability of our wholesalechannel by successfully increasing the amount of underwritingfees we collect, and reducing our general and administrativecosts by consolidating three processing centers into two.Additionally, we anticipate that premiums paid to brokers willcontinue to decline as we generate more of our wholesaleproduction through our ScorePlus system.

          ***December31, 2001 Compared to December 31, 2000***

          Wholesalesegment revenues increased $27.5 million to $51.8 million for2001 compared to $24.3 million in 2000. The increase was dueprimarily to an increase in mortgage loan originations of $965.4million in 2001 compared to $712.7 million in 2000.

          Wholesalesegment net operating income increased $28.1 million to $37.0million for 2001 compared to $8.9 million in 2000. The increasewas due to higher segment revenues of $27.5 million and $0.6million overall lower general and administrative costs. Ouroverall general and administrative costs decreased primarily bythe consolidation of our three processing centers into two.

          ***December31, 2000 Compared to December 31, 1999***

          Wholesalesegment revenues decreased $5.3 million to $24.3 million for 2000compared to $29.6 million in 1999. The decrease was due primarilyto a decrease in mortgage loan originations of $712.7 million in2000 compared to $1,012.7 million in 1999.

          Wholesalesegment net operating income increased $4.4 million to $8.9million for 2000 compared to $4.5 million in 1999. The increasewas due to a decrease in overall general and administrativeexpenses of $9.6 million since 1999 related to lower mortgageloan originations, offset by a decrease in segment revenues of$5.3 million.

**Correspondent**

          Weenter into loan purchase and sale agreements with mortgagebankers, banks, thrifts, and credit unions to sell non-conformingresidential mortgage loans to us through our 

57

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correspondent channel. Our correspondents close their loansthrough their own financing. After the loans are closed, thecorrespondent sells them to us through either flow or bulkdelivery. We had approximately 300 approved correspondents as ofDecember 31, 2001.

          Weseek to buy most of the loans we purchase from correspondents onan individual basis. That is, we re-underwrite and review thecollateral for each loan on an individual basis. This"flow-delivery" method of purchasing loans is the mostprofitable, and, therefore, our preferred, option. We also makebulk purchases of loans in which our correspondents close theloans and hold them until they have several loans ready to besold at one time. We still re-underwrite each loan and review allcollateral before purchasing but, in this case, the pool of loansis put up for bid by the correspondent and typically sold to thepurchaser offering the highest price. For the year ended December31, 2001, our correspondent flow loan volume accounted forapproximately 39% of our total correspondent channel loanproduction.

          Newcorrespondents become our customers from various sources. Ouraccount executives and our Website are the main sources for newcorrespondents. Generally, to become one of our approvedcorrespondents, a correspondent must meet the followingeligibility requirements:

> - a minimum GAAP tangible net worth (defined as GAAP            total net worth minus goodwill) of at least $500,000;

> - three years experience in conventional mortgage loan            originations or a viable business plan;

> - $25 million in conventional mortgage loan            originations in the 12 months immediately preceding            application; and

> - delinquency rates in line with industry standards and            acceptable to us.

          Correspondentsmeeting these requirements must complete the seller applicationpackage, provide evidence of state license, articles ofincorporation, financial statements, evidence of insurance andregulatory compliance, a copy of quality control procedures,resumes of key personnel, and other information as needed. Our QCDepartment reviews this information for final approval.

          For2002, management established the following key initiatives forour Correspondent business channel:

> - Increase the number and broaden the base of            customers, while adding sales staff to handle the            additional customers.

> - Implement an automated underwriting program            accessible to our correspondent customers.

          In2000, we implemented our new Website and online pre-qualificationtools. These tools have given our correspondents the ability tocommunicate and work with us more directly and responsively.Correspondents can pre-qualify loans online, and e-mailinformation directly to the loan processors instead of usingfaxes, overnight mail, or telephones. In 2001, we have alsocontinued to increase our flow production. Furthermore, we haveenhanced the efficiency of our correspondent channel byconsolidating both the flow and bulk funding operations to allowfor a 

58

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more efficient process and better utilization of resources,since bulk and flow fundings tend to occur at different times ofthe month, while maintaining consistent loan volume levels.

          Thefollowing table sets forth selected information about loanspurchased by our correspondent channel through bulk delivery forthe years ended December 31, 2001, 2000, and 1999:

|                                                     | **                  For        the Year Ended December        31,            ** |
|----------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                     | **     2001     **                                                                                                                                                                  | **     2000     ** | **     1999     ** |
| Average principal balance per loan                       | $109.5                                                                                                                                                                                                                                | $105.8 | $107.1 |
| Combined weighted average initial LTV                    | 76.65%                                                                                                                                                                                                                                | 76.58% | 76.87% |
| Percentage of first mortgage loans owner        occupied | 94.07%                                                                                                                                                                                                                                | 94.15% | 93.30% |
| Percentage with prepayment penalty                       | 84.80%                                                                                                                                                                                                                                | 87.97% | 84.37% |
| Weighted average credit score                            | 589                                                                                                                                                                                                                                   | 580 | 584 |
| Percentage FRMs                                          | 37.66%                                                                                                                                                                                                                                | 29.20% | 30.45% |
| Percentage ARMs                                          | 62.34%                                                                                                                                                                                                                                | 70.80% | 69.55% |
| Weighted average interest rate:                          |                                                                                                                                                                                                                                  |   |   |
|       FRMs                 | 10.21%                                                                                                                                                                                                                                | 10.72% | 10.04% |
|       ARMs                 | 10.16%                                                                                                                                                                                                                                | 10.50% | 9.92% |
|      Margin – ARMs         | 6.53%                                                                                                                                                                                                                                 | 6.34% | 6.45% |

          Thefollowing table sets forth selected information about loanspurchased by our correspondent channel through flow delivery forthe years ended December 31, 2001, 2000, and 1999:

|                                                          | **                         For        the Year Ended December        31,                ** |
|---------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                          | **     2001     **                                                                                                                                                                                                                                    | **     2000     ** | **     1999     ** |
| Average        principal balance per loan                     | $124.8                                                                                                                                                                                                                                                                                                  | $98.5 | $106.3 |
| Combined        weighted average initial LTV                  | 72.56%                                                                                                                                                                                                                                                                                                  | 76.73% | 77.92% |
| Percentage        of first mortgage loans owner occupied      | 97.03%                                                                                                                                                                                                                                                                                                  | 96.33% | 94.17% |
| Percentage        with prepayment penalty                     | 86.76%                                                                                                                                                                                                                                                                                                  | 81.37% | 71.10% |
| Weighted        average credit score                          | 607                                                                                                                                                                                                                                                                                                     | 579 | 588 |
| Percentage        FRMs                                        | 59.47%                                                                                                                                                                                                                                                                                                  | 70.57% | 67.86% |
| Percentage        ARMs                                        | 40.53%                                                                                                                                                                                                                                                                                                  | 29.43% | 32.14% |
| Weighted        average interest rate:                        |                                                                                                                                                                                                                                                                                                    |   |   |
|       FRMs                      | 9.74%                                                                                                                                                                                                                                                                                                   | 11.20% | 10.35% |
|       ARMs                      | 9.96%                                                                                                                                                                                                                                                                                                   | 10.69% | 9.98% |
|       Margin        – ARMs | 5.51%                                                                                                                                                                                                                                                                                                   | 5.81% | 5.94% |

          Thefollowing table highlights the net cost to produce loans for ourcorrespondent channel for the years ended December 31, 2001,2000, and 1999:

|                                          | **                      For        the Year Ended December        31,            ** |
|-----------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                          | **     2001     **                                                                                                                                                                                          | **     2000     ** | **     1999     ** |
| Fees        collected(1)                      | 5                                                                                                                                                                                                                                                             | 3 | 2 |
| General        and administrative costs(1)(2) | 65                                                                                                                                                                                                                                                            | 57 | 57 |
| Premium        paid(1)                        | 302                                                                                                                                                                                                                                                           | 274 | 358 |
| Net        cost to produce(1)(3)              | 363                                                                                                                                                                                                                                                           | 328 | 413 |

| _______________ |
|-----------------|
| (1)             | In basis points. |
| (2)             | Excludes deferred        origination costs and corporate overhead costs. Includes        depreciation expense. |
| (3)             | Defined as general and        administrative costs and premium paid, net of fees        collected, divided by volume. |

59

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          Toincrease the profitability of our correspondent channel, we arecurrently assessing methods to increase our underwriting feeincome. Our general and administrative costs, as measured inbasis points, increased during the year ended December 31, 2001due to lower bulk purchase volume. The decreased volume of bulkpurchases was a result of a strategic decision to reduce the bulkproduction since volume in the more profitable flow productionand wholesale and retail channels increased significantly in2001. The premiums paid on correspondent loans we purchasefluctuate year to year based on market conditions. As we increaseour flow business and reduce our level of bulk purchases, weexpect to see the profitability of our correspondent channelincrease.

          ***December31, 2001 Compared to December 31, 2000***

          Correspondentsegment revenues increased $6.1 million to $18.1 million for 2001compared to $12.0 million in 2000. The increase was due primarilyto higher flow purchases, which have higher profit margins.

          Correspondentsegment net operating income increased $6.5 million to $12.1million for 2001 compared to $5.6 million in 2000. The increasewas due to higher segment revenues of $6.1 million offset by adecrease in general and administrative expenses of $0.4 million,primarily due to lower originations.

          ***December31, 2000 Compared to December 31, 1999***

          Correspondentsegment revenues decreased $18.9 million to $12.0 million for2000 compared to $30.9 million in 1999. The decrease was dueprimarily to higher bulk purchases, which have higher premiumcosts than flow production.

          Correspondentsegment net operating income decreased $19.3 million to $5.6million for 2000 compared to $24.9 million in 1999. The decreasewas due to lower segment revenues of $18.9 million combined withan overall increase of $0.5 million in general and administrativeexpenses associated with an increase in originations since 1999.

**Retail**

          Ourretail channel is operated by our wholly-owned subsidiary,America's MoneyLine Inc. We originate non-conforming mortgageloans directly to borrowers through America's MoneyLine's 17branch offices. These branches are located in the followingmetropolitan areas: Phoenix, AZ; Foothill Ranch, CA; Denver, CO;Ft. Lauderdale, FL; Atlanta, GA; Kansas City, KS; New Orleans,LA; Raleigh, NC; Cherry Hill, NJ; Buffalo, NY; Nashville, TN;Dallas, TX; Ft. Worth, TX; Glen Allen, VA (Internet / DirectUnit); Richmond, VA; Virginia Beach, VA; and Chicago, IL.

          Weinteract with our borrowers through loan officers in our branchlocations and direct-to-the-borrower tools such as the Internet,telemarketing, or direct mailings. As part of our efforts tomanage credit risk, all loan underwriting, closing, funding, andshipping is done 

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centrally out of our headquarters in Glen Allen, VA. A typicalretail branch consists of approximately twelve employees: abranch manager, nine loan officers, and two loan processors.

          In2000, we automated our mortgage loan pre-qualification processthrough our internal automated underwriting system and anunaffiliated Internet-based company. Loan volume increased by 34%in 2000 compared to 1999 primarily as a result of these changes.While most of our capital expenditures for our retail division in2000 were focused on the Internet, we also opened our 15th branchoffice in New Orleans, LA, transformed our Glen Allen, VA branchinto an Internet specialty office and renovated our Ft. Worth, TXoffice. The Ft. Worth branch can effectively cross-sell tocustomers that have requested payoff or refinancing informationfrom our servicing division. This helps maintain our relationshipwith our customers by offering them new retail loans that meettheir current needs.

          Duringthe year ended December 31, 2001, we made progress on our keyretail initiatives. We held focused sales training, whichresulted in an increase in our sales and customer service levels.We also invested in new marketing campaigns that led to anincreased number of loan originations. Additionally, our fees (inbasis points) increased from 238 for the year ended December 31,2000 to 283 for the year ended December 31, 2001, because we wereable to control our fixed costs to produce a retail loan. We haveautomated some of our critical functions within the loan processin an effort to make our underwriting and funding more efficient.During the year ended December 31, 2001, we funded approximately$141 of loans for every dollar of marketing expense. In 2001, were-opened our branch office in Phoenix, AZ and opened a newbranch office in Chicago, IL. to bring our total number of branchoffices to 17, and plan to open additional branches in selectedmarkets.

          For2002, management established the following key initiatives forour Retail business channel:

> - Expand our branch network in selected markets.

> - Implement additional automation of our underwriting            program for our staff.

> - Increase the number of internet alliances.

> - Increase our telemarketing capabilities.

> - Improve the abilities of third party sources of            business to access our automated underwriting            capabilities over the Internet.

          Weintend to grow our retail channel and increase market share byopening offices in selected markets. We review the top 40metropolitan statistical areas to identify our target marketsbased on the following initial statistics: number of households;homeownership rates; home price ranges; unemployment rates;delinquency rates; median household income; and available equity.In addition, we review competitors' performance in those marketsto identify strategic opportunities for growth.

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          Thefollowing table sets forth selected information about our retailloan originations for the years ended December 31, 2001, 2000,and 1999:

|                                                                                 | **                       For        the Year Ended December        31,              ** |
|--------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                 | **    2001    **                                                                                                                                                                                                                        | **    2000    ** | **    1999    ** |
|                                                                                 |                                                                                                                                                                                                                                                                            |   |   |
| Average        principal balance per loan                                            | $117.3                                                                                                                                                                                                                                                                          | $87.1 | $85.8 |
| Combined        weighted average initial LTV                                         | 78.04%                                                                                                                                                                                                                                                                          | 77.13% | 79.13% |
| Percentage        of first mortgage loans owner occupied                             | 97.82%                                                                                                                                                                                                                                                                          | 96.70% | 94.60% |
| Percentage        with prepayment penalty                                            | 81.59%                                                                                                                                                                                                                                                                          | 70.66% | 66.00% |
| Weighted        average credit score                                                 | 611                                                                                                                                                                                                                                                                             | 601 | 592 |
| Percentage        FRMs                                                               | 67.02%                                                                                                                                                                                                                                                                          | 94.44% | 88.46% |
| Percentage        ARMs                                                               | 32.98%                                                                                                                                                                                                                                                                          | 5.56% | 11.54% |
| Weighted        average interest rate:                                               |                                                                                                                                                                                                                                                                            |   |   |
|            FRMs               | 8.98%                                                                                                                                                                                                                                                                           | 10.39% | 10.36% |
|            ARMs               | 9.26%                                                                                                                                                                                                                                                                           | 10.91% | 10.06% |
|            Margin – ARMs | 5.57%                                                                                                                                                                                                                                                                           | 6.38% | 5.73% |

          Thefollowing table highlights the net cost to produce loans for ourretail channel for the years ended December 31, 2001, 2000, and1999:

|                                          | **                             For        the Year Ended December        31,                         ** |
|-----------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                          | **     2001     ****     **                                                                                                                                                                                                                                                                                | **     2000     ****     ** | **     1999     ** |
| Fees        collected(1)                      | 283                                                                                                                                                                                                                                                                                                                                                                                   | 238 | 268                 |
| General        and administrative costs(1)(2) | 509                                                                                                                                                                                                                                                                                                                                                                                   | 776 | 726                 |
| Net        cost to produce(1)(3)              | 226                                                                                                                                                                                                                                                                                                                                                                                   | 538 | 458                 |

| _______________ |
|-----------------|
| (1)             | In basis points. |
| (2)             | Excludes deferred        origination costs and corporate overhead costs. Includes        depreciation expense. |
| (3)             | Defined as general and        administrative costs and premium paid, net of fees        collected, divided by volume. |

          Feescollected from our retail channel include origination, discount,underwriting, and processing fees. As part of our strategicinitiative to increase profitability, we have increased the feeswe charge our borrowers. As volume continues to increase, ourgeneral and administrative costs per loan are expected tocontinue to decrease due to the increased utilization of ourfixed retail infrastructure. We expect profitability to increaseas our net cost to produce decreases, fixed costs remain stable,and our fee income and loan volume increase.

          ***December31, 2001 Compared to December 31, 2000***

          Retailsegment revenues increased $10.1 million to $24.7 million for2001 compared to $14.6 million in 2000. The increase wasprimarily due to an increase in mortgage loan originations of$447.5 million in 2001 compared to $233.8 million in 2000.

          Retailsegment net operating income increased $7.6 million to $6.4million for 2001 compared to $(1.2) million in 2000. The increasewas due to higher segment revenues of $10.1 million offset by$2.5 million in higher general and administrative costs relatedto the expansion of the branch network and call center.

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          ***December31, 2000 Compared to December 31, 1999***

          Retailsegment revenues increased $2.0 million to $14.6 million for 2000compared to $12.6 million in 1999. The increase was primarily dueto an increase in mortgage loan originations of $233.8 million in2000 compared to $174.6 million in 1999.

          Retailsegment net operating income decreased $2.0 million to $(1.2)million for 2000 compared to $0.8 million in 1999. The decreasewas due to higher general and administrative costs of $4.0million since 1999 related to an increase in mortgage loanoriginations and expansion of the branch network, offset byhigher segment revenues of $2.0 million.

**Servicing**

          Oncewe originate or purchase a mortgage loan, our wholly-ownedsubsidiary, Meritech, begins the process of servicing the loan,seeking to ensure that the loan is repaid in accordance with itsterms. Beginning with an introductory call made as soon as sevendays following the origination or purchase of a mortgage loan, weattempt to establish a consistent payment relationship with theborrower. In addition, our call center uses a predictive dialerto create calling campaigns for delinquent loans based upon theborrower's historical payment patterns and the borrower's riskprofile. Our Life of the Loan Credit Risk Management strategy isapplied to every loan in our servicing portfolio. The inherentrisk of delinquency and loss associated with sub-prime loansrequires active communication with our borrowers from originationthrough liquidation. Our technology delivers extensive dataregarding the loan and the borrower to the desktop of theindividual providing service. Contact with our borrower istailored to reflect the borrower's payment habit, loan riskprofile, and loan status. Borrower contact is initiated throughoutbound telephone campaigns, monthly billing statements, anddirect mail. Our Website provides borrowers with access toaccount information and online payment alternatives.

          Toenhance our relationship with our borrowers, we upgraded our callmanagement system to support more intuitive customer servicestrategies, increased our loss mitigation capabilities byimplementing an online decision support system, and launched anadvanced customer service Website delivering a full range ofservice and up-to-date information to our customer's desktop.Immediate access to information regarding the borrower'ssituation and desktop delivery of this information to ouremployees within a decision support framework (Asset Planner andour DRP system) remain critical to our success. In addition, wehave invested in technology for our payment processing departmentthat will not only allow quicker processing of payments, but,more importantly, will also improve our ability to handle paymentexceptions quickly—a key to successful sub-prime mortgageservicing.

          Weintend to continue to develop our Website to improve customerservice and expand business-to-business initiatives to enhanceperformance in default and timeline management. We are now ableto deliver online access to selected loan documents and an onlineinterview guiding our borrower through alternatives toforeclosure.

          Oncean account becomes thirty days delinquent, the borrower receivesa breach notice allowing thirty days, or more if required byapplicable state law, to cure the default before the 

63

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account is referred for foreclosure. The call center continuesactive collection campaigns and may offer the borrower reliefthrough a forbearance plan designed to resolve the delinquency inninety days or less.

          Accountsmoving from thirty days delinquent to sixty or more daysdelinquent are transferred to the Loss Mitigation department,which is supported by the predictive dialer, as well as the AssetPlanner system, our third generation loss mitigation decisionsupport engine. Asset Planner supports the loss mitigationrepresentatives in choosing a collection strategy that isdesigned to minimize the loss on the defaulted loan. AssetPlanner considers updated property value information, theborrower's current credit profile, and foreclosure and realestate marketing timelines to determine the best alternative toforeclosure. The Loss Mitigation department continues to activelyattempt to resolve the delinquency while our foreclosuredepartment refers the file to local counsel to begin theforeclosure process.

          Delinquentaccounts not resolved through collection and loss mitigationactivities are foreclosed in accordance with state and locallaws. Foreclosure timelines are managed through an event plannerbuilt into the loan servicing system. The event planner scheduleskey dates throughout the foreclosure process, enhancing ourability to monitor and manage foreclosure counsel. Propertiesacquired through foreclosure are transferred to the Real EstateOwned department to manage eviction and marketing of theproperties.

          Oncethe properties are vacant, they are listed with one of fournational asset management firms who develop a marketing strategydesigned to ensure the highest net recovery upon liquidation. TheReal Estate Owned department monitors asset managers. Propertylistings are reviewed monthly to ensure the properties areproperly maintained and actively marketed.

          *OurDelinquency and Loss Experience*

          Thefollowing tables set forth information about the delinquency andloss experience of the mortgage loans we service (which areprimarily loans we have originated or purchased and have been orwill be securitized for the periods indicated.)

|                                                                                                  | **                          Years        Ended December        31,                  ** |
|-------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                  | ($ in thousands)                                                                                                                                                                                                                                                                                                   |
| Total Delinquencies and Loss Experience(1)                                                            | **     2001     **                                                                                                                                                                                                                                               | **     2000     ** | **     1999     ** |   |
| Total        outstanding principal balance (at period end)                                            | $6,355,304                                                                                                                                                                                                                                                                                                         | $5,588,598 | $4,803,812 |   |
| Delinquency        (at period end):                                                                   |                                                                                                                                                                                                                                                                                                               |   |   |   |
|       30-59        days:                                                |                                                                                                                                                                                                                                                                                                               |   |   |   |
|             Principal        balance      | $  648,986                                                                                                                                                                                                                                                                                               | $381,574 | $  260,731 |   |
|             Delinquency        percentage | 10.21%                                                                                                                                                                                                                                                                                                             | 6.83% | 5.43% |   |
|       60-89        days:                                                |                                                                                                                                                                                                                                                                                                               |   |   |   |
|             Principal        balance      | $ 126,723                                                                                                                                                                                                                                                                                                     | $  92,011 | $    73,518 |   |
|             Delinquency        percentage | 1.99%                                                                                                                                                                                                                                                                                                              | 1.65% | 1.53% |   |
|       90        days or more:                                           |                                                                                                                                                                                                                                                                                                               |   |   |   |
|             Principal        balance      | $  78,121                                                                                                                                                                                                                                                                                                | $  31,287 | $    17,195 |   |
|             Delinquency        percentage | 1.23%                                                                                                                                                                                                                                                                                                              | 0.60% | 0.36% |   |
| Bankruptcies(2):                                                                                      |                                                                                                                                                                                                                                                                                                               |   |   |   |

|       Principal        balance      | $215,213            | $168,074            | $115,128            |   |
|-------------------------------------------------------------------|---------------------|---------------------|---------------------|--------|
|       Delinquency        percentage | 3.39%               | 3.01%               | 2.40%               |   |
| Foreclosures:                                                     |                |                |                |   |
|       Principal        balance      | $277,742            | $223,617            | $152,761            |   |
|       Delinquency        percentage | 4.37%               | 4.00%               | 3.18%               |   |
| Real        Estate Owned:                                         |                |                |                |   |
|       Principal        balance      | $115,605            | $  77,479 | $  51,136 |   |
|       Delinquency        percentage | 1.82%               | 1.39%               | 1.06%               |   |
| Total        Seriously Delinquent(3)                              | 12.18%              | 10.10%              | 8.00%               |   |
| Net        losses on liquidated loans                             | $  81,363 | $  44,086 | $  31,344 |   |
| Percentage        of losses on liquidated loans                   | 1.28%               | 0.84%               | 0.75%               |   |

| _______________ |
|-----------------|
| (1)             | Includes all loans        serviced by Saxon Capital, Inc. |
| (2)             | Bankruptcies include        certain loans that are contractually current. |
| (3)             | Seriously delinquent is        defined as loans that are 60 or more days delinquent,        foreclosed, REO, or held by a borrower who has declared        bankruptcy and is 60 or more days contractually        delinquent. |

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|                                                                                                  | **                     For        the Year Ended December        31,                  ** |
|-------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Bankruptcy        Delinquencies and Loss Statistics(1)                                                | **     2001     **                                                                                                                                                                                                                        | **     2000     ** | **     1999     ** |
|                                                                                                  | ($ in thousands)                                                                                                                                                                                                                                                                            |
| Contractually current bankruptcies:                                                                   |                                                                                                                                                                                                                                                                                        |   |   |
|       Principal        balance                                          | $  31,641                                                                                                                                                                                                                                                                         | $  23,816 | $24,104 |
|       Delinquency        percentage                                     | 0.50%                                                                                                                                                                                                                                                                                       | 0.43% | 0.50% |
| Bankruptcy delinquency (at period end):                                                               |                                                                                                                                                                                                                                                                                        |   |   |
|       30-59 days:                                                       |                                                                                                                                                                                                                                                                                        |   |   |
|             Principal        balance      | $    7,848                                                                                                                                                                                                                                                              | $    4,750 | $  3,974 |
|             Delinquency        percentage | 0.12%                                                                                                                                                                                                                                                                                       | 0.09% | 0.08% |
|       60-89 days:                                                       |                                                                                                                                                                                                                                                                                        |   |   |
|             Principal        balance      | $  10,981                                                                                                                                                                                                                                                                         | $    6,218 | $  4,509 |
|             Delinquency        percentage | 0.17%                                                                                                                                                                                                                                                                                       | 0.11% | 0.09% |
|       90 days or        more:                                           |                                                                                                                                                                                                                                                                                        |   |   |
|             Principal        balance      | $164,743                                                                                                                                                                                                                                                                                    | $133,290 | $82,541 |
|             Delinquency        percentage | 2.59%                                                                                                                                                                                                                                                                                       | 2.39% | 1.72% |
| Total bankruptcy delinquencies:                                                                       |                                                                                                                                                                                                                                                                                        |   |   |
|             Principal        balance      | $183,572                                                                                                                                                                                                                                                                                    | $144,258 | $91,024 |
|             Delinquency        percentage | 2.89%                                                                                                                                                                                                                                                                                       | 2.58% | 1.89% |

| _______________ |
|-----------------|
| (1)             | Includes all loans        serviced by Saxon Capital, Inc.                                      |

          Inaddition to servicing mortgage loans that we originate orpurchase, we service mortgage loans for other lenders andinvestors. Our loan servicing portfolio as of December 31, 2001is summarized below:

|                                                   | **Number of Loans**                                                               | **Principal Balance**                                                                            |
|--------------------------------------------------------|-----------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------|
|                                                   | ($ in thousands)                                                                  |
| Private        Investors(1)                            | 44,408                                    | $4,065,199                                               |
| Saxon        Capital, Inc.(2)                          | 13,179                                    | 1,537,309                                                |
| Credit        Suisse First Boston                      | 3,350                                     | 432,720                                                  |
| Dynex        Capital, Inc.                             | 1,413                                     | 154,297                                                  |
| Greenwich        Capital, Inc.                         | 1,246                                     | 88,600                                                   |
| Fannie        Mae, Freddie Mac, and Ginnie Mae         | 1,668                                     | 49,525                                                   |
| Various        government entities and other investors |      690         |        27,654         |
| Total                                                  | 65,954                                    | $6,355,304                                               |

| _______________ |
|-----------------|
| (1)             | Includes loans securitized by SCI        Services, Inc. from May 1996 to July 5, 2001. |
| (2)             | Includes loans securitized by Saxon        Capital, Inc. from July 6, 2001 to December 31, 2001. |

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          Webelieve we can increase our servicing portfolio becausecompetition in the sub-prime mortgage loan industry has beenadversely affected by limited access to capital, lower thananticipated performance of seasoned portfolios, and industryconsolidation. Competitors with limited access to capital haveshifted their operations to selling loans, along with the relatedservicing rights, or have entered into strategic alliances withinvestment banks to increase their liquidity and access to thecapital markets. Accordingly, an increasing number ofasset-backed securities are being issued by entities that do notperform servicing, presenting opportunities for us to increasethe size of our portfolio of loans serviced for others.

          *OurDelinquency and Loss Experience*

**Delinquency by Credit Grade by Year Funded**(1)(2)

|         |                       |                            | **Percentage 60+        Days Delinquent(3)** |
|--------------|----------------------------|---------------------------------|----------------------------------------------|
| ******Year** | **Original****Balance**    | **Current****Balance**          | **A+/A**                                     | **A-****     ** | **B****     ** | **C****     ** | **D****     ** |
|         | ($ in thousands)           |                            |                                         |   |   |   |
| 1996         | $   741,645 | $    72,793 | 8.88%                                        | 20.95% | 11.88% | 25.02% | 16.49% |
| 1997         | $1,769,538                 | $  264,997            | 7.17%                                        | 14.48% | 17.21% | 30.26% | 21.37% |
| 1998         | $2,084,718                 | $  626,544            | 7.23%                                        | 15.00% | 23.07% | 27.13% | 34.44% |
| 1999         | $2,381,387                 | $1,236,162                      | 8.14%                                        | 15.85% | 21.56% | 29.07% | 33.98% |
| 2000         | $2,078,637                 | $1,474,178                      | 7.67%                                        | 13.55% | 19.39% | 29.79% | 40.80% |
| 2001         | $2,364,234                 | $1,926,776                      | 1.80%                                        | 5.32% | 7.82% | 12.60% | 14.51% |

**Delinquency by Product—FRM**(1)(2)

| **Year** | **Original****Balance**    | **Current****Balance**                                  | **Percentage           60+ Days    ****Delinquent(4)** | **Cumulative           Loss       ****Percentage(5)** |
|----------|----------------------------|---------------------------------------------------------|--------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------|
|     | ($ in thousands)           |                                                    |                                                                                 |
| 1996     | $   252,994 | $  49,478       | 13.02%                                                 | 2.07%                                                                     |
| 1997     | $   628,956 | $172,760                  | 10.93%                                                 | 2.84%                                                                     |
| 1998     | $1,146,291                 | $492,386                  | 12.51%                                                 |       2.09%                                 |
| 1999     | $1,287,740                 | $762,007                  | 14.48%                                                 | 1.72%                                                                     |
| 2000     | $1,145,798                 | $818,196                  | 17.13%                                                 | 0.78%                                                                     |
| 2001     | $1,148,697                 | $856,256                  | 5.73%                                                  | 0.02%                                                                     |

**Delinquency by Product—ARM**(1)(2)

| **Year**                                                                     | **Original****Balance**    |   **Current****Balance**                                        | **Percentage           60+ Days    ****Delinquent(4)** | **Cumulative           Loss       ****Percentage(5)** |
|------------------------------------------------------------------------------|----------------------------|---------------------------------------------------------------------------|--------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------|
|                                                                         | ($ in thousands)           |                                                                      |                                                                                 |
| 1996             | $   488,651 | $     23,316       | 12.13%                                                 | 1.25%                                                                     |
| 1997                                                                         | $1,140,582                 | $     92,237       | 18.66%                                                 | 2.20%                                                                     |
| 1998                                                                         | $   938,427 | $   134,158                  | 21.93%                                                 | 2.77%                                                                     |
| 1999                                                                         | $1,093,647                 | $   474,155                  | 21.33%                                                 | 1.62%                                                                     |
|  2000                                                                   | $   932,839 | $   655,982                  | 16.79%                                                 |       0.47%                                 |
| 2001                                                                         | $1,215,537                 | $1,070,520                                  | 5.13%                                                  | 0.07%                                                                     |

| _______________ |
|-----------------|
| (1)             | Includes loans originated        by Saxon Capital, Inc. |
| (2)             | As of December 31, 2001. |
| (3)             | The letter grade applied        to each risk classification reflects our internal        standards and do not necessarily correspond to        classifications used by other mortgage lenders. |
| (4)             | 60+ days delinquent        comprises both securitized and unsecuritized loans.        Includes loans foreclosed, REO, or held by a borrower who        has declared bankruptcy. |
| (5)             | Includes securitization        losses and losses incurred from loan repurchases,        delinquent loan sales, and unsecuritized loans. |

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***December 31, 2001 Compared to December 31, 2000***

          Servicingsegment revenues increased $3.0 million to $28.2 million for 2001compared to $25.2 million in 2000. The increase was due primarilyto an increase in the servicing portfolio of $6.4 billion in 2001compared to $5.6 billion in 2000.

          Servicingsegment net operating income decreased $2.5 million to $8.3million for 2001 compared to $10.8 million in 2000. The decreasewas due to an overall increase of $5.5 million in general andadministrative expenses related to the increase in the servicingportfolio offset by an increase in segment revenues of $3.0million.

          ***December31, 2000 Compared to December 31, 1999***

          Servicingsegment revenues increased $9.2 million to $25.2 million for 2000compared to $16.0 million in 1999. The increase was due primarilyto an increase in the servicing portfolio of $5.6 billion in 2000compared to $4.8 billion in 1999.

          Servicingsegment net operating income increased $8.2 million to $10.8million for 2000 compared to $2.6 million in 1999. The increasewas due to higher segment revenues of $9.2 million offset by anincrease in general and administrative expenses of $1.0 millionrelating to the increase in the servicing portfolio.

**Financial Condition**

          ***December31, 2001 Compared to December 31, 2000***

          Mortgageloans held prior to securitization increased to $369.2 million atDecember 31, 2001, from $108.8 million at December 31, 2000. Thisincrease was the result of the timing of our securitizations.

          Securitizedloans increased to $1.4 billion at December 31, 2001 from $0.0billion at December 30, 2000. This increase was the result of thechange in securitization structures from sale to financing andthe related change to portfolio-based accounting in accordancewith SFAS 140.

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          Interest-onlyresidual assets (I/Os) decreased from $298.4 million at December31, 2000 to $0.0 million at December 31, 2001. This decrease wasthe result of our divestiture from Dominion on July 6, 2001.Under the stock purchase agreement, our former parent companyretained all interest-only residuals. In addition, underportfolio accounting, we no longer record residual assets at thetime of securitization.

          MSRsdecreased to $33.8 million at December 31, 2001, from $47.8million at December 31, 2000. The decrease was due toamortization of servicing rights of $23.0 million during 2001,the addition of $5.4 million in servicing rights from oursecuritization recorded during the period January 1, 2001 to July5, 2001 and the purchase of $3.6 million in servicing rights.After July 6, 2001 our securitizations are structured asfinancing, and in accordance with SFAS 140, servicing assets arenot recorded related to those transactions.

          Subordinatebonds decreased to $0.0 million at December 31, 2001, from $13.6million at December 31, 2000. The decrease was due to ourdivestiture from Dominion. Under the stock purchase agreement,Dominion retained all subordinate bonds.

          SCIServices, Inc. goodwill decreased to $0.0 million at December 31,2001 from $46.1 million at December 31, 2000. SCI Services, Inc.goodwill of $46.1 was impaired due to the terms of the sale ofSCI Services, which resulted in the proceeds from the transactionbeing substantially the same as the adjusted book value of SCIServices, excluding historical goodwill. SCI Services, Inc.'sgoodwill was a result of Dominion's acquisition of Saxon in May1996.

          Servicingrelated advances increased $70.6 million to $101.4 million atDecember 31, 2001, from $30.8 million at December 31, 2000. Anincrease of $61.0 million was due to a change in the method ofreporting the advances and recoveries from the securitization ona gross basis and $9.6 million was due to an increase in ourservicing portfolio of $766.7 million.

          Warehousefinancing increased $195.2 million to $283.4 million at December31, 2001, from $88.2 million at December 31, 2000. This increasewas the result of the timing of our securitizations.

          Limitedrecourse securitization financing increased to $1.3 billion atDecember 31, 2001 from $0.0 billion at December 31, 2000. Thisincrease was due to the new structuring of our securitizations asfinancing in accordance with SFAS 140.

          Amountsdue to Dominion Capital decreased to $0.0 million at December 31,2001, from $99.8 million at December 31, 2000. The decrease wasdue to Predecessor's divestiture from Dominion on July 6, 2001.

          Notespayable increased to $25.0 million at December 31, 2001 from $0.0million at December 31, 2000. This increase was due to a notefrom Dominion related to the divestiture of Saxon.

          Stockholders'equity decreased $91.5 million to $252.0 million at December 31,2001, from $343.5 million at December 31, 2000. The decrease instockholders' equity is due primarily to the divestiture andsubsequent recapitalization of Saxon Capital, Inc. in connectionwith the divestiture.

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**Liquidity and Capital Resources**

          Asa mortgage lending company, we need to borrow substantial sums ofmoney each quarter to originate and purchase mortgage loans.Currently, our primary cash requirements include the funding of:

> - mortgage originations and purchases pending their            pooling and securitization,
- the points and expenses paid in connection with the            acquisition of correspondent and wholesale loans,
- ongoing general and administrative expenses,
- overcollateralization requirements on our ABS            securitzations,
- servicing advances,
- interest expense on our warehouse lines of credit,
- fees, expenses, and tax payments incurred in            connection with our securitization program,
- hedge losses,
- margin requirements on hedging instruments.

          Wefund these cash requirements with cash received from:

> - borrowings secured by our mortgage loan portfolio and            servicing advances,
- principal and interest collections on our mortgage            loan portfolio,\
- cash distributions from our securitizations after            July 6, 2001 (in conjunction with our divestiture,            Dominion Capital will receive all residual cash flows            from prior securitizations, excluding servicing            fees),\
- servicing fees and other servicing income,
- points and fees collected from the origination of            retail and wholesale loans, and
- our issuance of equity and debt securities.

> 
***Liquidity Strategy***

          Ourliquidity strategy is to finance our mortgage portfolio on along-term basis by issuing asset-backed securities. We believethat issuing asset backed securities provides us a low costmethod of financing our mortgage portfolio. In addition, ourstrategy allows us to reduce our interest rate risk on our fixedrate loans by securitizing them. An integral part of ourliquidity strategy is our requirement to have sufficientcommitted warehouse financing, with a diverse group ofcounterparties. This provides us with the ability to issue ourasset-backed securities at optimal points in time. Our ability toissue asset-backed securities depends on the overall performanceof our assets, as well as the strength of the capital markets. Weseek to have committed financing facilities that approximate sixmonths of our mortgage production, even though we expect to issueasset-backed securities on a quarterly basis. If it is notpossible or 

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economical for us to complete the securitization at optimalpoints in time, we may exceed our capacity under our warehousefinancing. This could require us to sell the accumulated loans ata time when the market value of the loans is low, and potentiallyto incur a loss in the sale transaction. If we cannot generatesufficient liquidity, we will be unable to continue ouroperations, grow our loan portfolio, and maintain our hedgingpolicy.

          Anothercomponent of our liquidity strategy is to have sufficient workingcapital to enable us to fund operating cash flow requirementsuntil our mortgage portfolio generates sufficient cash flows tocover our daily operating requirements. As of December 31, 2001,we have approximately $132.4 million of working capital. Weanticipate using a substantial portion of this working capital tobuild our mortgage portfolio so that it generates sufficient cashflows to cover our operating requirements. We cannot be certainas to the amount or timing of the working capital that we willrequire for us to build our portfolio so that it will generatesufficient cash flows, as this can be impacted by several issues,including a prolonged economic downturn or recession,fluctuations in interest rates, and management's short-term andlong-term planning horizons.

          Asof December 31, 2001, the United States economy was undergoing aperiod of slowdown, which some observers view as a recession.This economic condition was worsened by the September 11thterrorist attacks in New York City and Washington, D.C. Althoughwe have not operated during a period of prolonged generaleconomic downturn or a recession, these events have historicallyresulted in a reduction in mortgage origination activity and anincrease in the rate of mortgage defaults. A continued economicdownturn or recession would have a significant adverse impact onour operations and our financial condition. For example, areduction in new mortgages will adversely affect our ability toexpand our mortgage portfolio, which is our principal means ofincreasing our earnings. In addition, because we make asubstantial number of loans to credit-impaired borrowers, theactual rates of delinquencies, foreclosures, and losses on theseloans could be higher during economic slowdowns. Any sustainedperiod of increased delinquencies, foreclosures, or losses couldadversely affect our ability to originate, purchase, andsecuritize loans.

          Duringthe December 2001 monthly period for which we report tosecuritization trusts the performance of the related pools ofsecuritization mortgage loans, certain pools of securitizedloans, primarily those from our securitizations of 1998 and early1999, experienced a significant increase in realized losses ascompared to losses in prior periods for these pools. We believethat this increase in realized losses resulted primarily from ourdecision to sell in December 2001, on behalf of thesecuritization trusts, a number of delinquent loans on awhole-loan basis. This had the effect of accelerating into asingle month all of the losses with respect to the related loansthat otherwise would have been spread over several future monthshad the loans been liquidated through foreclosure instead ofbeing sold. We believe that this will have no material effect onour financial results or the execution of our securitizationsgoing forward.

          Ourbusiness, financial condition, liquidity, and results ofoperations may be materially and adversely affected in many waysas a result of interest rate levels and fluctuations. Ourprofitability is likely to be adversely affected during anyperiod of unexpected or rapid changes in interest rates. Thefollowing are some of the interest rate related risks we face:

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> - Our profitability may be directly affected by the            level of, and fluctuations in, interest rates, which            affect our ability to earn a spread between interest            received on mortgage loans and the cost of our            borrowings, which is tied to yields on United States            Treasury obligations, swaps, and LIBOR.

> - The cost of our borrowing is a function of various            benchmark rates plus a spread which represents            compensation to the holders of our asset-backed            securities. This spread may increase at any time due            to concerns that may be specific to our industry or            due to more generic credit concerns. An increase in            this spread will increase our cost of borrowing.

> - A substantial and sustained increase in interest            rates could adversely affect our ability to purchase            or originate loans, because borrowers will be less            likely to obtain, or refinance existing, mortgage            loans; and

> - Certain classes of securities issued to investors in            our securitizations pay a variable rate of interest            based on one-month LIBOR. Many of the mortgage loans            in those securitizations pay a fixed rate of interest            for two, three, or five years after origination            before converting to a variable rate of interest and            are referred to as hybrid loans. During the period            when the hybrid loans pay a fixed rate of interest,            we are exposed to the risk that one-month LIBOR may            increase to levels that cause the interest rates            payable on the issued securities to exceed the            fixed-rate payable on the hybrid loans.

          Weuse various hedging strategies to provide a level of protectionagainst interest rate risks, but no hedging strategy cancompletely protect us. We cannot guarantee that our hedgingtransactions will offset the risks of changes in interest rates,and it is possible that there will be periods during which wewill incur losses after accounting for our hedging activities.Additionally, the change in the fair market value of our hedgesmay require immediate payment of cash for margin requirementswhile the hedged cash flows will not generate cash until thefuture.

> 
***Liquidity Resources***

          Weneed to borrow substantial sums of money each quarter in order toaccumulate loans for securitization. We have relied upon severallenders to provide us with credit facilities to fund our loanoriginations and purchases, as well as fund a portion of ourservicing advances. We must be able to securitize loans andobtain adequate credit facilities and other sources of funding tobe able to continue to originate and purchase loans. Our abilityto fund current operations and accumulate loans forsecuritization depends to a large extent upon our ability tosecure short-term financing on acceptable terms. The availabilityof these financing sources depends to some extent on factorsoutside of our control, including regulatory capital treatmentfor unfunded bank lines of credit and the availability of bankliquidity in general. If we are unable to extend or replace anyof these facilities, we will have to curtail our loan productionactivities, which would have a material adverse effect on ourbusiness, financial condition, liquidity, and results ofoperations.

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          Toaccumulate loans for securitization, we borrow money on ashort-term basis through secured warehouse lines of credit andcommitted repurchase agreements. In addition to funding loansthat are not securitized, we also use committed facilities tofinance the advances required by our servicing contracts. As ofDecember 31, 2001, we had $101.4 million of servicing advances,of which $6.0 million was financed.

          Whenwe acquired SCI Services, we entered into new credit agreementsand re-negotiated the terms and conditions of four of our oldcredit agreements. These agreements require us to comply withvarious customary operating and financial covenants and crossdefault features. We do not believe that these existing financialcovenants will restrict our operations or growth. We believe thatwe were in compliance with all such covenants under theseagreements as of December 31, 2001. Failure to meet or satisfyany of these covenants, financial ratios, or financial testscould result in an event of default under these agreements. Theseagreements also contain cross-default provisions, so that if adefault occurs under any agreement, the lenders could elect todeclare all amounts outstanding under all of our agreements to beimmediately due and payable, enforce their interests againstcollateral pledged under such agreements, and restrict ourability to make additional borrowings under these agreements. Ourability to meet those financial ratios and satisfy financialtests may be affected by general economic conditions. Forexample: an overall decline in residential mortgage interestrates may tend to accelerate refinancings of our loans, tendingto reduce the value and performance of our residual interests inour securitization trusts; an economic recession or increase inunemployment levels may adversely affect the performance of ourloan portfolio; or an overall decline in the value of mortgageloan collateral within the capital markets of the United Statesmay reduce or eliminate the amount of credit available to usthrough these facilities. We cannot assure you that we willcontinue to be able to meet those financial ratios and satisfythose financial tests. The material terms and features of oursecured credit facilities in place are as follows:

          *JPMorganChase Bank Warehouse Facility*. We have a $140 million,expandable to $150 million, warehouse line of credit led by theJPMorgan Chase Bank. The facility contains a sub-limit for"Wet Collateral" (loans funded by us but for which thecollateral custodian has not yet received the related loandocuments) that can reach 40% of the facility amount and a sublimit for servicing advances for 20% of the facility amount. Thefacility expires December 10, 2002. The facility allows us toborrow against (1) the lesser of 98% of the principal balance ofthe mortgage loans or 95% of the fair market value of themortgage loans, and (2) generally 90% of the servicing advancereceivables pledged to the facility. In all circumstances, we areonly able to borrow against the mortgage loan or servicingadvance asset provided the asset meets certain credit anddocumentation characteristics as reviewed by the custodian,Bankers Trust Company.

          *GreenwichCapital Warehouse Facility*. We have a $350 million committedand secured warehouse facility with Greenwich Capital FinancialProducts, Inc. The facility provides for both the ability toborrow at the lesser of 97% of fair market value and 100% of thepar amount of the mortgage loans 0-59 days delinquent. Mortgageloans 60-180 days delinquent may be financed at lower borrowingpercentages. The facility expires on June 27, 2002.

          *WachoviaWarehousing Facility*. We have a $350 million committed andsecured warehouse facility with Wachovia Bank, N.A. that providesus with the ability to borrow against the 

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lesser of 95% of the fair market value or 98% of the paramount of our mortgage loans, including wet loans up to $50million. The facility expires on June 27, 2002.

          *CSFBWarehouse Facility*. We have a $250 million committed andsecured warehouse facility with Credit Suisse First BostonMortgage Capital, LLC. The facility provides us with the abilityto borrow against mortgage loans, including wet collateral, atthe lesser of 97.5% of the fair market value of the mortgageloans and 100% of the par amount of the mortgage loans. Thefacility expires March 1, 2003.

          *CSFBServicing Advance Facility*. We have a $30 million committedand secured facility with Credit Suisse First Boston MortgageCapital, LLC. The facility provides us with the ability to borrowagainst a portion of the Company's servicing advances. Thefacility allows us to borrow from 85% to 90% of the balance ofthe eligible servicing advances. The facility expires on July 2,2002.

          *MerrillLynch Warehouse Facility*. We have a $250 million committed,secured warehouse facility with Merrill Lynch Mortgage Capital,Inc. which provides us with the ability to borrow against thelesser of 97% of the fair market value or 98% of the principalamount of the pledged mortgage loans. The facility expires onMarch 21, 2003.

> 
*Contractual Obligations and Commercial Commitments*

          Thefollowing tables summarize our contractual obligations by paymentdue date and commercial commitments by expiration dates.

| Payments Due by Period                                           ($        in        thousands)                                              |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Contractual        Obligations                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |             Total             | Less than         1        year         |       1-3        years       |      4-5        years      | After         5        years         |
| Warehouse        financing facility – line of credit                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | $      64,980 | $  64,980 | $                  — | $                 — | $                 — |
| Warehouse        financing facility - repurchase agreements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | 218,390 | 69,890 | 148,500 | — | — |
| Limited        recourse securitization financing(1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | 1,329,568 | 322,811 | 489,722 | 247,334 | 269,701 |
| Note        payable                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | 25,000 | — | — | 25,000 | — |
| Capital        lease obligations                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | 81 | 41 | 40 | — | — |
| Operating        leases                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |        18,083 |         4,694 |       6,980 |       3,992 |        2,417 |
| Total        contractual cash obligations                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | $1,656,102 | $462,416 | $645,242 | $276,326 | $272,118 |

| ***________________*** |
|------------------------|
| (1)                    | Amounts        listed are bond payments based on anticipated receipt of        principal and interest on underlying mortgage loan        collateral using historical prepayment speeds. |

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| Other Commercial Commitments                                                                                 | Amount of Commitment        Expiration Per Period        ($ in thousands)                                                                            |
|--------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                         | Total        Amount          Committed           | Less than         1        year         |       1-3        years       |      4-5        years      | Over        5        years         |
| Warehouse        financing facility -               line of credit             | $   140,000                                                                                                                           | $140,000 | $        — | $       — | $          — |
| Warehouse        financing facility –               repurchase agreements |   1,230,000                                                                                                                                |   730,000 |   500,000 |          — |            — |
| Total        commercial commitments                                                                          | $1,370,000                                                                                                                                           | $870,000 | $500,000 | $       — | $         — |

> 
***Cash Flows***

          Forthe year ended December 31, 2000, we had operating cash flows of$26.1 million, compared to operating cash flows of $12.5 millionfor the year ended December 31, 1999. For the period July 6, 2001to December 31, 2001, we had negative operating cash flows of$50.6 million, due primarily to the increase in servicing relatedadvances and net loss for the period. For the period January 1,2001 to July 5, 2001, we had negative operating cash flows of$583.3 million due to the delay in the timing of our 2001-2securitization until August 2001. Operating cash flows, aspresented in our consolidated statements of cash flows, excludethe net proceeds from or repayments of mortgage warehousefinancing.

          BecauseDominion Capital retained the residual cash flows associated withall securitizations which occurred prior to our sale, asignificant source of our operating cash flows was removed fromour balance sheet with our divestiture. Accordingly, our sourcesof cash from operations will not be sufficient to fund ouroperating cash flow requirements in the future until we rebuildour mortgage investment portfolio, through our monthly mortgageoriginations and purchases, to such a point whereby the cashflows from the securitized loans are sufficient to balance ournet cash flow requirements, net of warehouse financing proceeds.

          Historically,we have funded our working capital requirements, with anunsecured facility with Dominion Capital. With the 144A Offeringwe raised $118.6 million of additional working capital to providethe company with a source of working capital until such time thatthe cash flow requirements, net of warehouse financings, arestabilized. At December 31, 2001 we had $132.4 million of workingcapital. Working capital is defined as un-restricted cash on handand borrowing availability under committed lines of credit onassets eligible for borrowing under the facilities andcertificated but unissued and unrecorded AAA ABS bonds retainedby the Company. We anticipate that we will use a substantialportion of this working capital as we build our mortgageportfolio and balance sheet to a cash flow neutral position. Wecan not be certain as to the amount or timing of the workingcapital that we will require for us to reach the point of cashflow neutrality.

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**Off Balance Sheet Items**

          Asa fundamental part of our business and financing strategy wesecuritize our mortgage loans. Prior to July 6, 2001, we soldloans to an unconsolidated special purpose loan securitizationtrust in exchange for cash proceeds and an interest in the loanssecuritized. When we sold receivables through specificsecuritizations of mortgage loans we would retain variousinterests in the securitizations. Subsequent to July 6, 2001, wecontinue to securitize our mortgage loans through the use of aspecial purpose entity; however these entities are included inour consolidated financial statements, and we no longer recordretained interests.

          Inconnection with the approximately $5.6 billion of mortgage loanssecuritized by us since May 1996 and which are still outstanding,we made representations and warranties about certaincharacteristics of the loans, the borrowers, and the underlyingproperties. In the event of a breach of these representations andwarranties, we may be required to remove loans from asecuritization and replace them with cash or substitute loans.While we may have recourse to the sellers of loans we purchased,we cannot assure you that the sellers will be able to honor theirrespective obligations to us.

**Other Matters**

> 
***Related Party Transactions***

          AtDecember 31, 2001 and 2000, the Company had $10.9 million and$7.3 million, respectively, of unpaid principal balances, relatedto first mortgage loans originated for employees of the Companyand certain officers of Dominion Resources. These mortgage loanswere underwritten to our underwriting guidelines. When makingloans to our employees, we waive loan origination fees thatotherwise would be paid to us by the borrower, and reduce theinterest rate by 25 basis points from the market rate.

          During2001, the Company paid $0.4 million to OIC Design, Inc.("OIC") for marketing and printing materials.  Ofthis amount, $0.1 million represented design fees and $0.3million were primarily for printing and postage fees incurred byOIC on behalf of the Company. No amounts were paid during 2000.The owner and principal officer of OIC is the spouse of theCompany's Vice President of Capital Markets. Payments made to OICfor services rendered are not in excess of fair market prices forsimilar services.

> 
***Impact of New Accounting Standards***

          InSeptember 2000, the Financial Accounting Standards Board("FASB") issued Statement of Financial AccountingStandards (SFAS) No. 140 *Accounting for Transfers andServicing of Financial Assets and Extinguishments of Liabilities*.SFAS No. 140 revises the standards for accounting forsecuritizations and other transfers of financial assets andcollateral and requires certain disclosures, but it carries overmost of the provisions of SFAS No. 125 without reconsideration.SFAS No. 140 is effective for transfers and servicing offinancial assets and extinguishments of liabilities occurringafter March 31, 2001. SFAS No. 140 is effective for recognitionand reclassification of collateral and for disclosures relatingto securitization transactions and collateral for fiscal yearsending after December 15, 2000. The adoption of SFAS No. 140 didnot have a material impact on our financial statements.

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          InJune 2001, the FASB issued SFAS No. 141, *Business Combinations*and SFAS No.142, *Goodwill and Other Intangible Assets*.SFAS No. 141 requires that all business combinations initiatedafter June 30, 2001 be accounted for under the purchase methodand addresses the initial recognition and measurement of goodwilland other intangible assets acquired in a business combination.SFAS No. 142 addresses the initial recognition and measurement ofintangible assets acquired outside of a business combination andthe accounting for goodwill and other intangible assets aftertheir acquisition. SFAS No. 142 provides that intangible assetswith finite useful lives be amortized and that goodwill andintangible assets with indefinite lives will not be amortized,but will rather be tested at least annually for impairment. Forthe acquisition of SCI Services, we will apply the purchasemethod of accounting and any related goodwill will not beamortized. Accordingly, we will not amortize the $4.8 million ofgoodwill recorded from the acquisition of SCI Services.

          InJune 2001, the FASB issued SFAS No. 143, *Accounting for AssetRetirement Obligations*, which requires that the fair value ofa liability for an asset retirement obligation be recognized inthe period in which it is incurred if a reasonable estimate offair value can be made. The associated asset retirement costswould be capitalized as part of the carrying amount of thelong-lived asset and depreciated over the life of the asset. Theliability is accreted at the end of each period through chargesto operating expense. If the obligation is settled for other thanthe carrying amount of the liability, the Company will recognizea gain or loss on settlement. The provisions of SFAS No. 143 areeffective for fiscal years beginning after June 15, 2002.Management has not yet determined the impact, if any, of adoptionof SFAS No. 143.

          InAugust 2001, the FASB issued SFAS No. 144, Accounting for theImpairment or Disposal of Long-Lived Assets, which supersedesboth SFAS No. 121, Accounting for the Impairment of Long-LivedAssets and for Long-Lived Assets to Be Disposed Of and theaccounting and reporting provisions of APB Opinion No. 30,Reporting the Results of Operations—Reporting the Effects ofDisposal of a Segment of a Business, and Extraordinary, Unusualand Infrequently Occurring Events and Transactions (Opinion 30),for the disposal of a segment of a business (as previouslydefined in that Opinion). SFAS No. 144 retains the fundamentalprovisions of SFAS No. 121 for recognizing and measuringimpairment losses on long-lived assets held for use andlong-lived assets to be disposed of by sale, while also resolvingsignificant implementation issues associated with SFAS No. 121.For example, SFAS No. 144 provides guidance on how a long-livedasset is held for sale, and prescribes the accounting for along-lived asset that will be disposed of other than by sale.SFAS No. 144 retains the basic provisions of Opinion 30 on how topresent discontinued operations in the income statement butbroadens that presentation to include a component of an entity(rather than a segment of a business).

          TheCompany is required to adopt SFAS No. 144 no later than the yearbeginning after December 15, 2001, and plans to adopt itsprovisions for the quarter ending March 31, 2002. Management doesnot expect the adoption of SFAS No. 144 for long-lived assetsheld for use to have a material impact on the Company's financialstatements because the impairment assessment under SFAS No. 144is largely unchanged from SFAS No. 121. The provisions of theStatement for assets held for sale or other disposal generallyare required to be applied prospectively after the adoption dateto newly initiated disposal activities. Therefore, managementcannot determine the potential effects that adoption of SFAS No.144 will have on the Company's financial statements.

76

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**Effect of Inflation**

          Inflationaffects us most significantly in the area of loan originationsand can have a substantial effect on interest rates. Interestrates normally increase during periods of high inflation (or inperiods when the Federal Reserve Bank attempts to preventinflation) and decrease during periods of low inflation. See" Item 7A—Quantitative and Qualitative Disclosuresabout Market Risk—Interest Rate Risk Management."

**Summary of Selected Quarterly Results (unaudited)**

|                                                                          |                                         **                          SCI        Services, Inc.        (Predecessor)                            ** |
|-------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                          | **Saxon Capital,        Inc.(1)**

**       2001       **                                                                                                                                                                                                                                                                                                                                                                                                                                                                | **             2001          ** | **                            2000                           ** |
|                                                                          | **Dec. 31**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | **Sept. 30** | **June 30** | **March 31** | **Dec. 31** | **Sept. 30** | **June 30** | **March 31** |
|                                                                          | ($ in thousands)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| Net        interest income                                                    | $17,787                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | $   9,434 | $     2,090 | $   1,367 | $(1,999) | $4,953 | $    3,127 | $3,488 |
| Provision        for loan losses                                              |   (6,431)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   (6,108) |      (2,993) |    (4,752) |   (3,459) |    (620) |    (1,404) |   (920) |
| Net        interest income after          provision for loan losses |    11,356                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |     3,326 |        (903) |    (3,385) |   (5,458) |    4,333 |      1,723 |   2,568 |
| Net        (loss) income                                                      | (1,348)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | (6,910) | (37,692) | 10,156 | 5,235 | 8,213 | (62,120) | 152 |
| Basic        and diluted earnings per          common share(2)      | $    (.05)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | $    (.25) | $    (1.34) | $      .36 | $     .19 | $   .29 | $   (2.21) | $   .01 |

| _______________ |
|-----------------|
| (1)             |  Saxon        Capital, Inc. acquired all of the issued and outstanding        capital stock of SCI Services, Inc. from Dominion Capital        on July 6, 2001. |
| (2)             | Earnings per        common share for the periods prior to July 6, 2001 was        calculated based upon the assumption that the shares        issued were outstanding for all periods presented. |

**Item 7A. Quantitative and Qualitative Disclosures AboutMarket Risk**

**Credit Risk Management**

> 
We seek to reduce credit risk through

> - the review of each mortgage loan before                origination or purchase to ensure that it meets                our underwriting guidelines,

> - use of early intervention, proactive collection,                and loss mitigation techniques in the servicing                process,

> - maintenance of appropriate capital and reserve                levels,

> - obtaining representations and warranties, to the                extent possible, from our correspondents, and

> - analysis of performance trends of our portfolio                and our peers to ensure the underwriting                guidelines are consistent with our risk                tolerances and rate of return requirements.

77

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          Althoughwe do not set specific geographic diversification requirements,we monitor the geographic dispersion of the property securingmortgage loans and make decisions on a portfolio-by-portfoliobasis about adding to specific concentrations.

**Interest Rate Risk Management**

          Theobjective of interest rate risk management is to minimize theeffects that interest rate fluctuations have on the net presentvalue of our assets, liabilities, and derivative instruments.Interest rate risk is measured using asset/liability net presentvalue sensitivity analyses. Simulation tools serve as the primarymeans to gauge interest rate exposure. The net present valuesensitivity analysis is the means by which our long-term interestrate exposure is evaluated. These analyses provide anunderstanding of the range of potential impacts on net interestrevenue and portfolio equity caused by interest rate movements.

          Interestrate risk generally represents the risk of loss that may resultfrom the potential change in the value of a financial instrumentdue to fluctuations in interest rates. Interest rate risk isinherent to both derivative and non-derivative financialinstruments, and accordingly, the scope of our interest rate riskmanagement extends beyond derivatives to include all interestrisk sensitive financial instruments.

          Ourprofitability may be directly affected by the level of, andfluctuations in, interest rates, which affect our ability to earna spread between interest received on our loans and the cost ofour borrowings, which are tied to yields on various United StatesTreasury obligations, interest rate swaps, or LIBOR. Ourprofitability is likely to be adversely affected during anyperiod of unexpected or rapid changes in interest rates. Asubstantial and sustained increase in interest rates couldadversely affect our ability to purchase and originate loans. Asignificant decline in interest rates could increase the level ofloan prepayments, thereby adversely affecting our net interestincome. Declining interest rates, which often lead to an increasein the rate of loan prepayment, could also adversely impact ourservicing income. In an effort to mitigate the effect of interestrate risk, we have reviewed our various mortgage products andhave identified and modified those that have proven historicallymore susceptible to prepayments. We cannot assure you, however,that such modifications to our product line will effectivelymitigate prepayment risk in the future.

          Fluctuatinginterest rates may affect the net interest income earned by usresulting from the difference between the yield to us on loansheld pending securitization and the interest paid by us for fundsborrowed under our warehouse facilities, although we undertake tohedge our exposure to this risk by using Eurodollar futures,options on futures, interest rate swaps, and swaptions. Wemonitor the aggregate cash flow, projected net yield, and marketvalue of our investment portfolio under various interest rate andloss assumptions.

          Weuse several tools and risk management strategies to monitor andaddress interest rate risk. Such tools allow us to monitor andevaluate our exposure to these risks and to manage the riskprofile of our investment portfolio in response to changes in themarket risk. We cannot assure you, however, that we willadequately offset all risks associated with our investmentportfolio.

78

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          Themeasurement of interest rate risk is meaningful only when allrelated risk items are aggregated and the net positions areidentified. Financial instruments that we use to manage interestrate sensitivity include: interest rate swaps, caps and floors;financial futures and forwards; and financial options (calledhedges). Historically, we measured the sensitivity of the currentfair value of our mortgage loans held prior to securitization,mortgage loan commitments, securitized mortgage loans, and allhedge positions to changes in interest rates. Changes in interestrates are defined as instantaneous and sustained interest ratemovements in 50 basis point increments across the yield curve. Weestimated the fair value of our collateral assuming there wouldbe no changes in interest rates from those at period end. Once weestablished the base case, we projected cash flows for each ofthe defined interest rate scenarios. Those projections were thencompared with the base case to determine the estimated change tothe fair value of our collateral and hedges. The table belowillustrates the simulation analysis of the impact of a 50, 100,and 200 basis point parallel shift in the yield curve upward ordownward in interest rates on the fair value of our collateraland hedges at December 31, 2001.

**Interest rate simulation sensitivity analysis**

          Changesin fair value that are stated below are derived based uponimmediate and parallel shifts in the yield curve. The base yieldcurve used in this analysis is the forward curve posted upon theclose of business December 31, 2001:

|                                                                                                                                                                                                                                                                                                                                               |                                       Increase                                       |                                    Decrease                            |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                               |     +50        Bp                                                                                                                                                                                                                                                                                                                                                                                                                        |     +100        Bp                                                                                                                                                                                                                                                                                                                                   |     +200        Bp     |     -50        Bp     |     -100        Bp     |     -200        Bp     |
| Change        in fair value of                 fixed        rate mortgage                 loans        held prior to                 securitization                                                         | $(3,225,109)                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | $(6,450,218)                                                                                                                                                                                                                                                                                                                                                                                 | $(12,900,436) | $3,225,109 | $6,450,218 | $12,900,436 |
| Change        in fair value of                hedges        related to                fixed        rate mortgage                       loans held prior to               securitization | 800,000                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | 1,600,000                                                                                                                                                                                                                                                                                                                                                                                    | 3,200,000 | (800,000) | (1,600,000) | (3,200,000) |
| Change        in fair value               of securitized               mortgage loans                                                                                                                                                                                   | (14,053,100)                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | (28,106,200)                                                                                                                                                                                                                                                                                                                                                                                 | (56,212,400) | 14,053,100 | 28,106,200 | 56,212,400 |
| Change        in fair value               of hedges        related               to securitized               mortgage loans                                                                                                    |      6,640,624                                                                                                                                                                                                                                                                                                                                                                                                                                          |      13,860,624                                                                                                                                                                                                                                                                                                                                                     |      25,285,624 |   (5,060,828) |  (10,625,966) |  (20,983,299) |
| Net        change                                                                                                                                                                                                                                                                                                                                  | $(9,837,585)                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | $(19,095,794)                                                                                                                                                                                                                                                                                                                                                                                | $(40,627,212) |  $11,417,381 |  $22,330,452 |  $44,929,537 |

         Thesimulation analysis reflects our efforts to balance the repricingcharacteristics of our interest-earning assets and supportingfunds.

**Managing Interest Rate Risk With Derivative Instruments**

         We donot intend to implement any new derivative activity that, whenaggregated into our total interest rate exposure, would cause usto exceed our established interest rate risk limits. We will usefinancial futures, forwards, and options contracts provided that:

79

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> - the transactions occur in a market with a size that            reasonably ensures sufficient liquidity;
- the contract is traded on an approved exchange or, in            the case of over-the-counter option contracts, is            transacted with credit-appointed counterparty; and
- the types of contracts have been authorized for use            by our hedge committee.

         Theseinstruments provide us flexibility in adjusting our interest raterisk position without exposure to principal risk and fundingrequirements. By using derivative instruments to manage interestrate risk, the effect is a smaller, more efficient balance sheet,with a lower funding requirement and a higher return on assetsand net interest margin, but with a comparable level of netinterest revenue and return on equity. Use of derivativeinstruments for speculative purposes is not permitted.

**Item 8. Financial Statements and Supplementary Data**

         Theconsolidated financial statements of the Company and the relatednotes, together with the Independent Auditors' Report thereon areset forth on pages F-1 through F-35 of this Form 10-K.

**Item 9. Changes in and Disagreements with Accountants onAccounting and Financial             Disclosure**

         None.

**PART III**

**Item 10. Directors and Executive Officers of the Registrant**

         Thenames and ages of the executive officers of the Company and thepositions each of them has held for the past five years areincluded in Part I of this Form 10-K as permitted by the GeneralInstruction G(3). The information required by this item regardingthe Company's directors will be included in the Company'sdefinitive proxy statement relating to the registrants, 2002Annual Meeting of Stockholders to be held May 16, 2002, to befiled with the Commission within 120 days of December 31, 2001,under the caption "Board of Directors and Committees of theBoard" and "Section 16(a) Beneficial OwnershipCompliance" and is incorporated herein by this reference asif set forth in full herein.

         Theinformation required by this item regarding the Company'sdirectors will be included in the Company's Proxy Statement withrespect to its 2002 Annual Meeting of Stockholders to be filedwith the Commission within 120 days of December 31, 2001, underthe caption "Board of Directors and Committees of theBoard" and is incorporated herein by this reference as ifset forth in full herein.

80

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**Item 11. Executive Compensation**

         Theinformation called for by this item is incorporated by referenceto "Executive Compensation," "CompensationCommittee Interlocks and Insider Participation," and"Board Report on Compensation Committee ExecutiveCompensation" in the definitive proxy statement, relating tothe registrant's 2002 Annual Meeting of Stockholders to be heldMay 16, 2002, to be filed within 120 days of December 31, 2001.

**Item 12. Security Ownership of Certain Beneficial Ownersand Management**

         Theinformation called for by this item is incorporated by referenceto "Security Ownership of Principal Stockholders andManagement" in the registrant's definitive proxy statement,relating to its 2002 Annual Meeting of Stockholders to be heldMay 16, 2002, to be filed within 120 days of December 31, 2001.

**Item 13. Certain Relationships and Related Transactions**

         Theinformation called for by this item is incorporated by referenceto "Certain Relationships and Related Transactions" inthe registrant's definitive proxy statement relating to itsAnnual Meeting of Stockholders to be held May 16, 2002.

**PART IV**

**Item 14. Exhibits, Financial Statement Schedules andReports on Form 8-K**

> 
(a)          The    following documents are filed as part of this report:

> - Consolidated Financial Statements—See                "Index to Consolidated Financial                Statements"
- Exhibits—See "Exhibit Index"

            (b)          TheCompany did not file any reports on Form 8-K during the fourthquarter of 2001.

81

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**SIGNATURES**

         Pursuantto the requirements of Section 13 or 15(d) of the Securities Actof 1934, the Registrant has duly caused this Report to be signedon its behalf by the undersigned, thereunto duly authorized inthe city of Richmond, Commonwealth of Virginia, on March 28,2002.

 

|   | SAXON CAPITAL, INC.                                                                                                                                                                                                                                             |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                            |
|   |                                                                                                                                                                                                                                                            |
|   | By:         /s/        MICHAEL L.        SAWYER                   Name: Michael L. Sawyer        Title:    Chief Executive Officer |

         Eachperson whose signature appears below hereby authorizes Michael L.Sawyer and Robert G. Partlow or either of them, asattorneys-in-fact to sign on his behalf, individually, and ineach capacity stated below and to file all amendments and/orsupplements to the Annual Report on Form 10-K.

         Pursuantto the requirements of the Securities Exchange Act of 1934, thisreport has been signed below by the following persons on behalfof the Registrant and in the capacities and on the datesindicated.

| **Signature**                                                                                                                                                                                                                                                                                                                                                          | **Capacity        in which to Sign**                                                                                                    | **Date**       |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------|----------------|
|                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                    |           |
|                    /s/        Edward G.        Harshfield                      Edward G. Harshfield                                                       | Chairman        of the Board of             Directors                                                               | March 28, 2002 |
|                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                    |           |
|                       /s/        Richard A.        Kraemer                      Richard A. Kraemer                                         | Vice        Chairman of the Board of            Directors                                                           | March 28, 2002 |
|                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                    |           |
|                          /s/        Michael L.        Sawyer                             Michael L. Sawyer                       | Chief        Executive Officer and            Director (principal executive            officer) | March 28, 2002 |
|                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                    |           |
|                          /s/        Robert G.        Partlow                            Robert G. Partlow                             | Chief        Financial Officer and            Director (principal financial            officer) | March 28, 2002 |
|                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                    |           |
|                         /s/        Dennis G.        Stowe                              Dennis G. Stowe                           | President        and Director                                                                                                           | March 28, 2002 |
|                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                    |           |
|                          /s/        David D.        Wesselink                      David D. Wesselink                                                               | Director                                                                                                                                | March 28, 2002 |
|                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                    |           |
|                       /s/        Thomas J.        Wageman                           Thomas J. Wageman                                                     | Director                                                                                                                                | March 28, 2002 |
|                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                    |
|                          /s/        Robert B.        Eastep                                 Robert B. Eastep | Chief        Accounting Officer            (principal accounting officer)                                           | March 28, 2002 |
|                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                    |           |

82

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**INDEX TO FINANCIAL STATEMENTS**

|                                                                                                                                                                                                                                                                                                                                                                                                                                              | **Page** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                              |     |
| Independent        Auditors' Report                                                                                                                                                                                                                                                                                                                                                                                                               | F-1      |
|                                                                                                                                                                                                                                                                                                                                                                                                                                              |     |
| Consolidated        Balance Sheets as of December 31, 2001 (Saxon        Capital, Inc.) and               December 31,        2000 (SCI Services, Inc.)                                                                                                                                                                                                                                                   | F-2      |
|                                                                                                                                                                                                                                                                                                                                                                                                                                              |     |
| Consolidated        Statements of Operations for the period July 6, 2001        to December 31,              2001 (Saxon Capital,        Inc.), for the period January 1, 2001 to        July 5, 2001 (SCI              Services, Inc.), and        for the years ended December 31, 2000 and 1999 (SCI        Services, Inc.)                                         | F-3      |
|                                                                                                                                                                                                                                                                                                                                                                                                                                              |     |
| Consolidated        Statements of Stockholders' Equity for the period July 6,        2001 to              December 31, 2001        (Saxon Capital, Inc.), for the period January 1, 2001 to               July 5, 2001 (SCI        Services, Inc.), and for the years ended December 31,        2000 and               1999 (SCI Services,        Inc.) | F-4      |
|                                                                                                                                                                                                                                                                                                                                                                                                                                              |     |
| Consolidated        Statements of Cash Flows for the period July 6, 2001        to December 31,              2001 (Saxon Capital,        Inc.), for the period January 1, 2001 to        July 5, 2001 (SCI              Services, Inc.), and        for the years ended December 31, 2000 and 1999              (SCI Services, Inc.)     | F-5      |
| Notes to        Consolidated Financial Statements                                                                                                                                                                                                                                                                                                                                                                                                 | F-7      |

 

----

**INDEPENDENT AUDITORS' REPORT**

To the Board of DirectorsSaxon Capital, Inc.Glen Allen, Virginia

We have audited the accompanying consolidated balance sheetsof SCI Services, Inc. and subsidiaries ("Predecessor")as of December 31, 2000 and of Saxon Capital, Inc. andsubsidiaries (the "Company") as of December 31, 2001,and the related consolidated statements of operations,stockholders' equity, and cash flows for the years ended December31, 1999 and 2000 (Predecessor), the period ended July 5, 2001(Predecessor), and the period from July 6, 2001 through December31, 2001. These financial statements are the responsibility ofthe Company's management. Our responsibility is to express anopinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standardsgenerally accepted in the United States of America. Thosestandards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements arefree of material misstatement. An audit includes examining, on atest basis, evidence supporting the amounts and disclosures inthe financial statements. An audit also includes assessing theaccounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statementpresentation. We believe that our audits provide a reasonablebasis for our opinion.

In our opinion, such consolidated financial statements presentfairly, in all material respects, the financial position of thePredecessor and its subsidiaries as of December 31, 2000 and ofthe Successor and its subsidiaries as of December 31, 2001, andthe results of their operations and their cash flows for theyears ended December 31, 1999 and 2000 (Predecessor), the periodended July 5, 2001 (Predecessor), and the period from July 6,2001 through December 31, 2001 (Successor), in conformity withaccounting principles generally accepted in the United States ofAmerica.

Richmond, VirginiaJanuary 28, 2002

F-1

----

**Consolidated Balance Sheets(Dollars in thousands, except for share data)**

|                                                                                                                                                                                                                                       | **Saxon Capital,****                 Inc.                 ** | **SCI Services,        Inc.****      (Predecessor)      **                                                                    |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                       | **December 31,****                 2001              **                | **December 31,****              2000            ** |
| **Assets:**                                                                                                                                                                                                                                |                                                                                                                                                                                                                                   |                                                                                                                                                                                      |
| Cash                                                                                                                                                                                                                                       | $           5,629                                                                                                                                                               | $          435                                                                                                                          |
| Accrued        interest receivable                                                                                                                                                                                                         | 1,958                                                                                                                                                                                                                                  | 443                                                                                                                                                                                       |
| Income tax        receivable                                                                                                                                                                                                               | —                                                                                                                                                                                                                                 | 4,759                                                                                                                                                                                     |
|                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                   |                                                                                                                                                                                      |
| Mortgage loan        portfolio:                                                                                                                                                                                                            |                                                                                                                                                                                                                                   |                                                                                                                                                                                      |
| Mortgage        loans held prior to securitization                                                                                                                                                                                         | 369,206                                                                                                                                                                                                                                | 108,821                                                                                                                                                                                   |
| Securitized        loans                                                                                                                                                                                                                   | 1,371,816                                                                                                                                                                                                                              | —                                                                                                                                                                                    |
|       Gross        mortgage loan portfolio                                                                                                                                                                   | 1,741,022                                                                                                                                                                                                                              | 108,821                                                                                                                                                                                   |
| Loan loss        reserve                                                                                                                                                                                                                   |                     (21,327)                                                                                                       |                    (3,607)                                                                 |
|       Net        mortgage loan portfolio                                                                                                                                                                     |                  1,719,695                                                                                                                        |                  105,214                                                                             |
|                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                   |                                                                                                                                                                                      |
| Interest-only        residual assets and subordinate bonds                                                                                                                                                                                 | —                                                                                                                                                                                                                                 | 312,012                                                                                                                                                                                   |
| Servicing        related advances                                                                                                                                                                                                          | 101,378                                                                                                                                                                                                                                | 30,847                                                                                                                                                                                    |
| Mortgage        servicing rights, net                                                                                                                                                                                                      | 33,847                                                                                                                                                                                                                                 | 47,834                                                                                                                                                                                    |
| SCI Services,        Inc. goodwill, net                                                                                                                                                                                                    | —                                                                                                                                                                                                                                 | 46,095                                                                                                                                                                                    |
| Deferred tax        asset                                                                                                                                                                                                                  | 11,772                                                                                                                                                                                                                                 | —                                                                                                                                                                                    |
| Other assets                                                                                                                                                                                                                               |                       25,070                                                                                             |                   24,769                                                                        |
| Total assets                                                                                                                                                                                                                               |                $1,899,349                                                                                                                                   |               $572,408                                                                                              |
|                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                   |                                                                                                                                                                                      |
| **Liabilities        and stockholders' equity:**                                                                                                                                                                                           |                                                                                                                                                                                                                                   |                                                                                                                                                                                      |
| **Liabilities:**                                                                                                                                                                                                                           |                                                                                                                                                                                                                                   |                                                                                                                                                                                      |
| Accrued        interest payable                                                                                                                                                                                                            | $          289                                                                                                                                                                       | $    1,324                                                                                                                                                            |
| Warehouse        financing                                                                                                                                                                                                                 | 283,370                                                                                                                                                                                                                                | 88,225                                                                                                                                                                                    |
| Limited        recourse securitization financing                                                                                                                                                                                           | 1,329,568                                                                                                                                                                                                                              | —                                                                                                                                                                                    |
| Note        payable                                                                                                                                                                                                                        | 25,000                                                                                                                                                                                                                                 | —                                                                                                                                                                                    |
| Due to        Dominion Capital                                                                                                                                                                                                             | —                                                                                                                                                                                                                                 | 99,847                                                                                                                                                                                    |
| Deferred        tax liability                                                                                                                                                                                                              | —                                                                                                                                                                                                                                 | 31,539                                                                                                                                                                                    |
| Other        liabilities                                                                                                                                                                                                                   |                         9,124                                                                                  |                     7,936                                                             |
| Total        liabilities                                                                                                                                                                                                                   |                 1,647,351                                                                                                                              |                228,871                                                                                         |
| Commitments        and contingencies                                                                                                                                                                                                       | —                                                                                                                                                                                                                                 | —                                                                                                                                                                                    |
| **Stockholders'        equity:**                                                                                                                                                                                                           |                                                                                                                                                                                                                                   |                                                                                                                                                                                      |
| Common        stock, no par value, stated value $1 per share and 100        shares,              authorized, issued        and outstanding (SCI Services, Inc.)                                              | —                                                                                                                                                                                                                                 | —                                                                                                                                                                                    |
| Common        stock, $0.01 par value per share, 100,000,000 shares              authorized;        28,050,100 shares issued and outstanding (Saxon              Capital, Inc.) | 281                                                                                                                                                                                                                                    | —                                                                                                                                                                                    |
| Additional        paid-in capital                                                                                                                                                                                                          | 258,004                                                                                                                                                                                                                                | 294,113                                                                                                                                                                                   |
| (Accumulated        deficit) retained earnings                                                                                                                                                                                             |                     (6,287)                                                                                                        |                   49,424                                                                        |
| Total        stockholders' equity                                                                                                                                                                                                          |                    251,998                                                                                                              |                 343,537                                                                                   |
| Total        liabilities and stockholders' equity                                                                                                                                                                                          |               $1,899,349                                                                                                                                         |              $572,408                                                                                                    |

The accompanying notes are an integral part ofthese financial statements.

F-2

----

**Consolidated Statements of Operations(Dollars in thousands, except for share data)**

|                                                                                                                                                                                                                                                  | **Saxon Capital, Inc.**                                                                                                                                                | **SCI Services, Inc.        (Predecessor)**                                            |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                  |                                                                                                                                                                   |                                                                                   |   |   |
|                                                                                                                                                                                                                                                  | **For the         Period July 6,        2001 to        December 31,****       2001       ** | **For the         Period        January 1,         2001 to****July 5, 2001** | **For the         Year Ended        December 31,****       2000       ** | **For the Year         Ended        December 31,****       1999       ** |
| **Revenues:**                                                                                                                                                                                                                                         |                                                                                                                                                                   |                                                                                   |   |   |
|       Interest        income                                                                                                                                                                                            | $           50,328                                                                                              | $       15,331                                      | $   34,444 | $   45,818 |
|       Interest        expense                                                                                                                                                                                           |            (23,457)                                                                                             |         (11,524)                               |            (24,875) |          (21,342) |
|             Net        interest income                                                                                                                                                    | 26,871                                                                                                                                                                 | 3,807                                                                                  | 9,569 | 24,476 |
|       Provision        for loan losses                                                                                                                                                                                  |            (11,861)                                                                                             |           (8,423)                    |             (6,403) |           (9,107) |
|             Net        interest income after provision for loan                          losses | 15,010                                                                                                                                                                 | (4,616)                                                                                | 3,166 | 15,369 |
|       Gain        on sale of loans                                                                                                                                                                                      | —                                                                                                                                                                 | 32,892                                                                                 | 79,234 | 98,369 |
|       Servicing        income, net of amortization                                                                                                                                                                      |              11,681                                                                                   |            16,550               |               24,885 |             15,984 |
|             Total        net revenues                                                                                                                                                     | 26,691                                                                                                                                                                 | 44,826                                                                                 | 107,285 | 129,722 |
| **Expenses:**                                                                                                                                                                                                                                         |                                                                                                                                                                   |                                                                                   |   |   |
|       Payroll        and related expenses                                                                                                                                                                               | 19,531                                                                                                                                                                 | 25,220                                                                                 | 32,445 | 29,871 |
|       General        and administrative expenses                                                                                                                                                                        | 15,662                                                                                                                                                                 | 16,684                                                                                 | 27,681 | 27,264 |
|       Depreciation        and amortization                                                                                                                                                                              | 503                                                                                                                                                                    | 3,736                                                                                  | 7,308 | 7,255 |
|       Impairment        of residual assets, net                                                                                                                                                                         | —                                                                                                                                                                 | 7,301                                                                                  | 108,445 | 8,308 |
|       Impairment        of SCI Services, Inc. goodwill                                                                                                                                                                  | —                                                                                                                                                                 | 44,963                                                                                 | — | — |
|       Other        expense (income)                                                                                                                                                                                     |                  1,239                                                            |            (1,962)              |                 4,010 |                (852) |
|             Total        expenses                                                                                                                                                         | 36,935                                                                                                                                                                 | 95,942                                                                                 | 179,889 | 71,846 |
|       (Loss)        income before taxes                                                                                                                                                                                 | (10,244)                                                                                                                                                               | (51,116)                                                                               | (72,604) | 57,876 |
|       Income        tax (benefit) expense                                                                                                                                                                               |                 (3,957)                                                                |           (21,609)                   |              (24,084) |               21,228 |
|       **Net        (loss) income**                                                                                                                                                                                      |        $        (6,287)                                                                     |     $    (29,507)                              |        $    (48,520) |     $        36,648 |
| **Earnings        per common share:(1)**                                                                                                                                                                                                              |                                                                                                                                                                   |                                                                                   |   |   |
|       Average        common shares                                                                                                                                                                                      | 28,050,100                                                                                                                                                             | 28,050,100                                                                             | 28,050,100 | 28,050,100 |
|       Basic        and diluted earnings per common share                                                                                                                                                                | $           (.22)                                                                                               | $        (1.05)                                | $        (1.73) | $           1.31 |

| ________________ |
|------------------|
| (1)              | Earnings per        common share for the periods prior to July 6, 2001 was        calculated based upon the assumption that the shares        issued were outstanding for all periods presented. |

The accompanying notes are an integral part ofthese financial statements.

F-3

----

**Consolidated Statements of Stockholders'Equity(Dollars in thousands)**

|                                                                                                             | **Common****    Stock    **      | **Additional        Paid-in****    Capital    **   | **Accumulated        Other         Comprehensive****  Income (Loss)  **                              | **Retained        Earnings        (Accumulated****    Deficit)    ** | **    Total    ** |
|------------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------|--------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------|
| **SCI        Services, Inc. (Predecessor)**                                                                      |                                                                     |                                                                                       |                                                                                                                     |                                                                                                         |                                                      |
| Balance        at December 31, 1998                                                                              | $—                                                                  | $ 227,613                                                                             | $18                                                                                                                      | $61,296                                                                                                      | $288,927                                                  |
| 1999        Capital infusions from Dominion Capital                                                              | —                                                                   | 26,500                                                                                     | —                                                                                                                   | —                                                                                                       | 26,500                                                    |
| Unrealized        loss on mortgage securities, net              of tax of ($2,439) | —                                                                   | —                                                                                     | (6,418)                                                                                                                  | —                                                                                                       | (6,418)                                                   |
| Net        income                                                                                                | —                                                                   | —                                                                                     | —                                                                                                                   | 36,648                                                                                                       | 36,648                                                    |
| Balance        at December 31, 1999                                                                              | —                                                                   | 254,113                                                                                    | (6,400)                                                                                                                  | 97,944                                                                                                       | 345,657                                                   |
| 2000        Capital infusions from Dominion Capital                                                              | —                                                                   | 40,000                                                                                     | —                                                                                                                   | —                                                                                                       | 40,000                                                    |
| Unrealized        gain on mortgage securities, net of              tax of $2,496   | —                                                                   | —                                                                                     | 6,400                                                                                                                    | —                                                                                                       | 6,400                                                     |
| Net        loss                                                                                                  | —                                                                   | —                                                                                     | —                                                                                                                   | (48,520)                                                                                                     | (48,520)                                                  |
| Balance        at December 31, 2000                                                                         | —                                                                   | 294,113                                                                                    | —                                                                                                                   | 49,424                                                                                                       | 343,537                                                   |
| Net        loss                                                                                                  | —                                                                   | —                                                                                     | —                                                                                                                   | (29,507)                                                                                                     | (29,507)                                                  |
| Disposition        of SCI Services, Inc. on              July 5, 2001.             | —                                                                   | (294,113)                                                                                  | —                                                                                                                   | (19,917)                                                                                                     | (314,030)                                                 |
| Balance        at July 5, 2001                                                                                   | —                                                                   | —                                                                                     | —                                                                                                                   | —                                                                                                       | —                                                    |
|                                                                                                             |                                                                     |                                                                                       |                                                                                                                     |                                                                                                         |                                                      |
| **Saxon        Capital, Inc.**                                                                                   |                                                                     |                                                                                       |                                                                                                                     |                                                                                                         |                                                      |
| Balance        at July 6, 2001                                                                                   | —                                                                   | —                                                                                     | —                                                                                                                   | —                                                                                                       | —                                                    |
| Common        stock issued in purchase acquisition                                                               | 281                                                                      | 260,619                                                                                    | —                                                                                                                   | —                                                                                                       | 260,900                                                   |
| Costs        associated with issuance of common stock                                                            | —                                                                   | (2,615)                                                                                    | —                                                                                                                   | —                                                                                                       | (2,615)                                                   |
| Net        loss                                                                                                  |            — |               — |                    — |        (6,287)                                                            |   (6,287)                                       |
| Balance        at December 31, 2001                                                                              |         $281                     |    $ 258,004                                                           |       $            —      |      ($6,287)                                                                       |     $251,998                          |

The accompanying notes are an integral part ofthese financial statements.

F-4

----

**Consolidated Statements of Cash Flows(Dollars in thousands)**

|                                                                                                                                                                                                                                                  | **Saxon Capital,****           Inc.      **                          | **               SCI        Services, Inc.        (Predecessor)        ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                  | **For the Period        July 6, 2001 to        December 31,****       2001       ** | **For the Period        January 1,         2001 to July 5,****       2001      **                                      | **For the Year        Ended         December****    31,        2000    ** | **For the Year         Ended         December 31,****       1999       ** |
| **Operating        Activities:**                                                                                                                                                                                                                      |                                                                                                                                                      |                                                                                                                                                                                         |   |   |
| Net        (loss) income from operations                                                                                                                                                                                                              | $    (6,287)                                                                                                                          | $     (29,507)                                                                                                                                                      | $     (48,520) | $       36,648 |
| Adjustments        to reconcile net (loss) income to net cash              provided by (used in)        operating activities:                                                                                           |                                                                                                                                                      |                                                                                                                                                                                         |   |   |
|       Depreciation        and amortization                                                                                                                                                                              | 7,602                                                                                                                                                     | 16,117                                                                                                                                                                                       | 29,640 | 26,805 |
|       Deferred        income tax (benefit) expense                                                                                                                                                                      | (11,772)                                                                                                                                                  | (20,492)                                                                                                                                                                                     | (24,576) | 8,938 |
|       Permanent        impairment on assets                                                                                                                                                                             | —                                                                                                                                                    | 51,987                                                                                                                                                                                       | — | — |
|       Purchase        and origination of mortgage loans,                    including        premiums                                                       | —                                                                                                                                                    | (1,224,885)                                                                                                                                                                                  | (2,103,228) | (2,711,126) |
|       Proceeds        from sale of mortgage loans                                                                                                                                                                       | —                                                                                                                                                    | 661,456                                                                                                                                                                                      | 2,098,659 | 2,679,556 |
|       Principal        collections and liquidations on mortgage                    loans                                                                    | —                                                                                                                                                    | 4,959                                                                                                                                                                                        | 15,057 | 38,862 |
|        Interest-only        residual assets retained from                    securitizations                                                           | —                                                                                                                                                    | (32,365)                                                                                                                                                                                     | (107,824) | (161,395) |
|       Cash        received from residuals                                                                                                                                                                               | —                                                                                                                                                    | 25,542                                                                                                                                                                                       | 51,461 | 78,463 |
|       Subordinate        bonds retained from securitizations                                                                                                                                                            | —                                                                                                                                                    | —                                                                                                                                                                                       | — | (12,683) |
|       Subordinate        bonds sold                                                                                                                                                                                     | —                                                                                                                                                    | —                                                                                                                                                                                       | 14,770 | 28,300 |
|       Fair        value adjustments on interest-only residual assets                                                                                                                                                    | —                                                                                                                                                    | —                                                                                                                                                                                       | 100,697 | 22,955 |
|       Payments        received on subordinate bonds                                                                                                                                                                     | —                                                                                                                                                    | 462                                                                                                                                                                                          | — | — |
|        Provision        for loan losses                                                                                                                                                                            | 11,861                                                                                                                                                    | 8,423                                                                                                                                                                                        | 6,403 | 9,107 |
|       Provision        for advanced interest losses                                                                                                                                                                     | 3,400                                                                                                                                                     | —                                                                                                                                                                                       | — | — |
|       Increase        in fair value of mortgage loans and related                  derivative        instruments                                                      | (17,100)                                                                                                                                                  | —                                                                                                                                                                                       | — | — |
|       Increase        in servicing related advances                                                                                                                                                                     | (23,806)                                                                                                                                                  | (49,398)                                                                                                                                                                                     | (4,222) | (13,000) |
|       Increase        in accrued interest receivable on                   securitized        loans                                                                    | (10,823)                                                                                                                                                  | —                                                                                                                                                                                       | — | — |
|       Increase        in accrued interest payable on limited                 recourse        securitization debt                                                           | 2,908                                                                                                                                                     | —                                                                                                                                                                                       | — | — |
|       Net        change in other assets and other liabilities                                                                                                                                                           |             (6,556)                                                                           |              4,447                                                                                                          |            (2,181) |          (18,952) |
|             Net        cash provided by (used in) operating                          activities |           (50,573)                                                                                      |       (583,254)                                                                                                                                                |            26,136 |            12,478 |
| **Investing        Activities:**                                                                                                                                                                                                                      |                                                                                                                                                      |                                                                                                                                                                                         |   |   |
| Origination        of mortgage loans                                                                                                                                                                                                                  | (1,151,498)                                                                                                                                               | —                                                                                                                                                                                       | — | — |
| Principal        payments on securitized loans                                                                                                                                                                                                        | 39,948                                                                                                                                                    | —                                                                                                                                                                                       | — | — |
| Proceeds        from the sale of mortgage loans                                                                                                                                                                                                       | 69,580                                                                                                                                                    | —                                                                                                                                                                                       | — | — |
| Acquisition        of Predecessor                                                                                                                                                                                                                     | (170,325)                                                                                                                                                 | —                                                                                                                                                                                       | — | — |
| Capitalization        of mortgage servicing rights                                                                                                                                                                                                    | (797)                                                                                                                                                     | (8,229)                                                                                                                                                                                      | (18,575) | (16,040) |
| Net        capital expenditures                                                                                                                                                                                                                       |               (1,518)                                                               |              (4,064)                                                                                                        |            (3,285) |            (4,331) |
|             Net        cash used in investing activities                                                                                                                                  |         (1,214,610)                                                                                               |            (12,293)                                                                                                                   |           (21,860) |          (20,371) |
| **Financing        Activities:**                                                                                                                                                                                                                      |                                                                                                                                                      |                                                                                                                                                                                         |   |   |
| Limited        recourse debt:                                                                                                                                                                                                                         |                                                                                                                                                      |                                                                                                                                                                                         |   |   |
|       Proceeds        from issuance of limited recourse debt                                                                                                                                                            | 1,374,983                                                                                                                                                 | —                                                                                                                                                                                       | — | — |
|       Principal        payments on limited recourse debt                                                                                                                                                                | (45,404)                                                                                                                                                  | —                                                                                                                                                                                       | — | — |
| Repayment        of (proceeds from) warehouse financing, net                                                                                                                                                                                          | (347,666)                                                                                                                                                 | 552,311                                                                                                                                                                                      | (12,740) | (26,658) |
| Proceeds        received from issuance of stock                                                                                                                                                                                                       | 260,900                                                                                                                                                   | —                                                                                                                                                                                       | — | — |
| Proceeds        received from note payable                                                                                                                                                                                                            | 25,000                                                                                                                                                    | —                                                                                                                                                                                       | — | — |
| Repayment        of Dynex Capital, Inc. note                                                                                                                                                                                                     | —                                                                                                                                                    | (9,500)                                                                                                                                                                                      | (9,500) | — |
| Contributions        from Dominion Capital                                                                                                                                                                                                            |                    —                                  |             55,300                                                                                                               |           17,983 |               34,254 |
| Net        cash provided by (used in) financing activities                                                                                                                                                                                            |         1,267,813                                                                                                 |           598,111                                                                                                                          |          (4,257) |                7,596 |
| Net        (decrease) increase in cash                                                                                                                                                                                                                | 2,630                                                                                                                                                     | 2,564                                                                                                                                                                                        | 19 | (297) |
| Cash        at beginning of period                                                                                                                                                                                                                    |                 2,999                                                     |                  435                                                                                    |                416 | 713 |
| Cash        at end of period                                                                                                                                                                                                                          |        $       5,629                                                                |    $        2,999                                                                                                                     |    $          435 |    $             416 |
| **Supplemental        Cash Flow Information:**                                                                                                                                                                                                        |                                                                                                                                                      |                                                                                                                                                                                         |   |   |
| Cash        paid for interest                                                                                                                                                                                                                         | $      24,456                                                                                                               | $      11,420                                                                                                                                                  | $     25,478 | $        21,162 |
| Cash        paid (refunds received) for taxes                                                                                                                                                                                                         | 5,762                                                                                                                                                     | (2,475)                                                                                                                                                                                      | (6,818) | 7,153 |
| **Non-Cash        Financing Activities:**                                                                                                                                                                                                             |                                                                                                                                                      |                                                                                                                                                                                         |   |   |
| Conversion        of intercompany borrowings from               parent to        capital                                                                                                                           | $                   —                                                                         | $                    —                                                                                                      | $     40,000 | $        26,500 |
| Securitization        of mortgage loans                                                                                                                                                                                                               |    $1,394,971                                                                                                                              |    $                    —                                                                                    | $                   — | $                      — |

The accompanying notes are an integral part ofthese financial statements.

F-5

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**Notes to Consolidated Financial Statements**

**(1)      Organization andSummary of Significant Accounting Policies**

> 
**(a)     The Company and    Principles of Consolidation**

          SaxonCapital, Inc. (the "Company") was formedApril 23, 2001. The Company acquired all of the issued andoutstanding capital stock of SCI Services, Inc.("Predecessor") from Dominion Capital, Inc.("Dominion Capital") on July 6, 2001. The Companyhad no activities between April 23, 2001 and the acquisitionof SCI Services, Inc. In connection with the acquisition ofSaxon Capital, Inc., the Company sold 28.1 million shares in aprivate placement offering. See Note 21 for further discussion.

          Theacquisition of SCI Services, Inc. was recorded as apurchase. As such, the consolidated financial statements includethe results of operations for the Company from July 6, 2001to December 31, 2001 and for SCI Services, Inc. fromJanuary 1, 2001 to July 5, 2001.

          TheCompany, through its wholly-owned subsidiaries SaxonMortgage, Inc. ("Saxon Mortgage") and America'sMoneyLine, Inc. ("America's MoneyLine") islicensed to originate loans or is exempt from licensingrequirements, in 49 states. Its activities consist primarily oforiginating and purchasing single-family residential mortgageloans and home equity loans through three productionchannels—brokers, correspondents, and direct consumers. Inaddition, the Company, through its wholly-owned subsidiaryMeritech Mortgage Services, Inc. ("Meritech"),services and sub-services single-family mortgage loans throughoutthe country that primarily have been purchased or originated bythe Company. The Company, headquartered in Richmond, Virginia,has operation centers in Fort Worth, Texas and Foothill Ranch,California and 17 branch offices located throughout the countryat December 31, 2001. The focus of the Company is on originating,purchasing and securitizing loans to homebuyers who generally donot meet the underwriting guidelines of one of thegovernment-sponsored agencies such as Freddie Mac, Fannie Mae,and Ginnie Mae. Loans originated or purchased by the Company areextended on the basis of equity in the borrower's property andthe creditworthiness of the borrower. The Company accumulatessuch loans in its warehouse until a sufficient volume has beenreached to securitize into an asset-backed security.

          Theconsolidated financial statements of the Company include theaccounts of all wholly owned subsidiaries. All significantinter-company balances and transactions have been eliminated inconsolidation.

> 
**(b)     Use of Estimates**

          Thepreparation of financial statements in conformity with accountingprinciples generally accepted in the United States of America("GAAP") requires management to make estimates andassumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilitiesat the date of the financial statements and the reported amountof revenues and expenses during the reporting period. Actualresults could differ from those estimates.

F-6

----

> 
**(c)     Mortgage Loans Held    Prior to Securitization**

          Mortgageloans held prior to securitization are held for sale and consistof mortgage loans secured by single-family residentialproperties. Loan origination fees and certain direct loanorigination costs, as well as any premiums or discounts fromacquiring mortgage loans are deferred as an adjustment to thecost basis of the loans. These fees and costs are amortized overthe life of the loan on a level yield. Mortgage loans held forsale are carried at the lower of cost or fair value in theaggregate.

          TheCompany records the principal balance of the loans on a scheduledbasis as compared to the loans actual balance. Accordingly,principal or interest that is delinquent is included as acomponent of Servicing Advances on the consolidated balancesheet. The amount of advanced interest is evaluated as acomponent of the allowance for loan loss valuation.

          *Provisionfor Loan Loss.* The Company periodically evaluates the needfor or the adequacy of reserves for credit losses on its loans.Any loan not eligible for securitization is reserved forseparately. In addition, the Company reviews the overalldelinquency of the loans and determines the need for additionalreserves. Reserve amounts are charged as a current period expenseto operations. Provision for loan losses on mortgage loans ismade in an amount sufficient to maintain credit loss reserves ata level considered adequate to cover probable losses ofprincipal, interest and fees in the existing portfolio ofmortgage loans and for uncollected and advanced interest. TheCompany defines a loan as impaired at the time the loan becomescontractually delinquent under its payment terms. Probable lossesare determined based on segmenting the portfolio relating totheir contractual delinquency status and applying our historicalloss experience. Loss reserve estimates are reviewed periodicallyand adjustments are reported in earnings when they become known.As these estimates are influenced by factors outside of ourcontrol and due to the granularity on the portfolio and migrationinto various credit risks, such as mortgagee payment patterns andeconomic conditions, there is uncertainty inherent in theseestimates, making it reasonably possible that they could change.Carrying values are written down to net realizable value when theloan is foreclosed or deemed uncollectible.

          *NonaccrualLoans.* Nonaccrual loans are loans on which accrual ofinterest has been suspended. Interest income is suspended on allmortgage loans when principal or interest payments are more thanthree months contractually past due. Accrual of income onnonaccrual mortgage loans is resumed if the receivable becomesless than three months contractually past due.

> 
**(d)     Securitization and    Sale of Mortgage Loans**

          ThePredecessor structured its securitizations as a sale of theloans, with a corresponding one-time recognition of gain or loss.As a result of this accounting treatment, the mortgage loans wereremoved from our balance sheet except for certain residualinterests we retained in our securitizations (seefootnote 4).

          AfterJuly 6, 2001, the Company structures securitizations asfinancing transactions because these securitizations do not meetthe qualifying special purpose entity criteria because after theloans are securitized, the securitization trust may acquirederivatives relating to 

F-7

----

beneficial interests retained by the Company. Also, theCompany, as servicer, subject to applicable contractualprovisions, has sole discretion to use our best commercialjudgment in determining whether to sell or work out any loanssecuritized through the securitization trust that becometroubled. Accordingly, following a securitization in accordancewith provisions in SFAS 140, the mortgage loans remain onthe balance sheet, and the securitization indebtedness replacesthe warehouse debt associated with the securitized mortgageloans. The Company now records interest income on the mortgageloans and interest expense on the securities issued in thesecuritization over the life of the securitization, instead ofrecognizing a gain or loss upon completion of the securitization.

> 
**(e)     Interest Income**

          TheCompany earns interest income on mortgage loans held prior tosecuritization and securitized loans as contractually due on themortgage loan. The Company does not accrue more than three monthsof interest on mortgage loans at any given point of time.

> 
**(f)     Interest-only Residual    Assets and Subordinate Bond Investments**

          Residualassets at December 31, 2000 consist of subordinate bonds andinterest-only ("I/O") strips retained at securitizationof the mortgage loans. As a result of Dominion Capital's intentto sell the company during the second quarter of 2000, theseinstruments were reclassified as trading investments. As part ofthe divestiture from Dominion, the I/Os were retained by DominionCapital and are not recorded on Saxon Capital, Inc.'s balancesheet as of December 31, 2001.

          Theamount initially allocated to the I/Os at the date of asecuritization reflected the allocated original basis of therelative fair values of those interests. The amount recorded forthe I/Os was reduced for distributions on I/Os, which the Companyreceived from the related trust, and was adjusted for changes inthe fair value of the I/Os, which were reflected in theconsolidated statements of operations. Because there is not ahighly liquid market for these assets, the Company estimated thefair value of the I/Os primarily based upon discount, prepaymentand default (frequency and severity) rates the Company estimatedthat another market participant would use to purchase the I/Os.The estimated market assumptions were applied based upon theunderlying loan portfolio grouped by loan types, terms, creditquality, interest rates, geographic location, and value of loancollateral, which are the predominant characteristics that affectprepayment and default rates.

          Inrecording and accounting for I/Os, the Company made assumptions,which were believed to reasonably reflected economic and otherrelevant conditions that affect fair value, which were then ineffect, about rates of prepayments, and defaults and the value ofcollateral. Due to subsequent changes in economic and otherrelevant conditions, the actual rates of prepayments and defaultsand the value of the collateral generally differed from theinitial estimates, and these differences were sometimes material.If actual prepayment and default rates were higher thanpreviously assumed, the value of the I/Os would be impaired andthe declines in fair value were recorded in the consolidatedstatements of operations for the period January 1, 2001 to July5, 2001 and for the year ended December 31, 2000. For the yearending December 31, 1999 declines in fair value were recorded inother comprehensive income. Conversely, if 

F-8

----

actual prepayment and default rates were lower than previouslyassumed, the value of the I/Os would be higher and the increasesin fair value were recorded in the consolidated statements ofoperations.

          TheBond and Certificate holders and their securitization trusts haveno recourse to the Company for failure of mortgage loan borrowersto pay when due. The Company's residuals were subordinate to theBonds and Certificates until the Bond and Certificate holders arefully paid.

> 
**(g)     Mortgage Servicing    Rights**

          TheCompany recognizes as a separate asset the rights to servicemortgage loans for others once such rights are contractuallyseparated from the underlying loans. Mortgage servicing rightsare amortized in proportion to and over the period of theestimated net servicing income and are recorded at the lower ofamortized cost or fair value on the consolidated balance sheets.Mortgage servicing rights are assessed periodically to determineif there has been any impairment to the recorded balance, basedon fair value at the date of the assessment and by stratifyingthe mortgage servicing rights based on underlying loancharacteristics, including the year of capitalization.

> 
**(h)     Servicing Revenue    Recognition**

          Mortgageloans serviced require regular monthly payments from borrowers.Income on loan servicing is generally recorded as payments arecollected and is based on a percentage of the principal balanceof loans serviced. Loan servicing expenses are charged tooperations when incurred.

> 
**(i)     Federal Income Taxes**

          TheCompany accounts for certain income and expense items differentlyfor income tax purposes than for financial reporting purposes.Deferred taxes represent temporary differences between GAAP andtax basis of assets and liabilities. Saxon Capital, Inc. and itssubsidiaries file consolidated federal income tax returns. BeforeJuly 6, 2001, the Company's results of operations were includedin the consolidated Federal income tax return of DominionResources.

          TheCompany measures and records deferred tax assets and liabilitiesfor all temporary differences. Temporary differences occur whenevents and transactions recognized for financial reporting resultin taxable or tax deductible amounts in future periods.

> 
**(j)     Derivative Financial    Instruments**

          TheCompany may use a variety of financial instruments to hedge theexposure to changes in interest rates. The Company may enter intointerest rate swap agreements, interest rate cap agreements,interest rate floor agreements, financial forwards, financialfutures and options on financial futures ("Interest RateAgreements") to manage the sensitivity to changes in marketinterest rates. The Interest Rate Agreements used have an activesecondary market, and none are obtained for a speculative nature;for instance, trading. These Interest Rate Agreements areintended to provide income and cash flow to offset potentialreduced net interest income and 

F-9

----

cash flow under certain interest rate environments. Inaccordance with SFAS 133, *Accounting for DerivativeInstruments and Hedging Activities*, as amended, at tradedate, these instruments and their hedging relationship areidentified, designated and documented.

          ForInterest Rate Agreements designated as hedge instruments, theCompany evaluates the effectiveness of these hedges periodicallyagainst the financial asset being hedged to ensure there remainsadequate correlation in the hedge relationship. Since theCompany's concern with interest rates is the potential change infair market value of the loans, the Company is treating these asfair market value hedges per SFAS 133. Once the hedgerelationship is established, the realized and unrealized changesin fair value of both the hedge instruments and financial assetare recognized in the consolidated statement of operations in theperiod in which the changes occur. The net amount recorded in theconsolidated statement of operations is referred to as hedgeineffectiveness.

> 
**(k)     Furniture, Fixtures    and Equipment**

          Furniture,fixtures and equipment are stated at cost. Depreciation iscomputed using the straight-line method over a period of three tofive years. Additions to equipment, leasehold improvements, andmajor replacements or improvements are capitalized at cost.Maintenance, repairs and minor replacements are expensed whenincurred.

          Capitalleases are classified as furniture, fixtures and equipment in theaccompanying consolidated balance sheet. The amounts representingcapital lease obligations are amortized using the interest methodto allocate payments between principal reduction and interestexpense. The initial carrying amounts represent the present valueof the future rental payments discounted at the lower of theincremental borrowing rate of the lessee or the interest rateimplicit in the lease.

> 
**(l)     Goodwill**

          Goodwillis the excess of the cost of net identifiable assets acquired inbusiness combinations over their fair value. SCI Services, Inc.goodwill was amortized on a straight-line basis over 40 years andwas evaluated for impairment at least annually. See Note 17 for adiscussion of SCI Services, Inc. goodwill impairment.

          Theacquisition of Saxon Capital, Inc. resulted in goodwill("new goodwill") of $4.8 million. In accordance withSFAS No. 142, *Goodwill and Other Intangible Assets*,which was issued in June 2001, new goodwill, which isincluded in other assets, will be not be amortized but will beevaluated periodically for impairment.

> 
**(m)     Reclassification**

          Certainamounts for 2000 and 1999 have been reclassified to conform tothe presentation for 2001.

F-10

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> 
**(n)     Recently Issued    Accounting Standards**

          InJune 2001, the Financial Accounting Standards Board issuedStatement of Financial Accounting Standard (SFAS) No. 141, *BusinessCombinations*and SFAS No.142, *Goodwill and OtherIntangible Assets*. SFAS No. 141 requires that allbusiness combinations initiated after June 30, 2001 beaccounted for under the purchase method and addresses the initialrecognition and measurement of goodwill and other intangibleassets acquired in a business combination. SFAS No. 142addresses the initial recognition and measurement of intangibleassets acquired outside of a business combination and theaccounting for goodwill and other intangible assets after theiracquisition. SFAS No. 142 provides that intangible assetswith finite useful lives be amortized and that goodwill andintangible assets with indefinite lives will not be amortized,but will rather be tested at least annually for impairment.Accordingly, the Company will not amortize the $4.8 million ofgoodwill recorded from the acquisition of the Predecessor.

          InJune 2001, FASB issued SFAS No. 143, *Accounting forAsset Retirement Obligations*, which requires that the fairvalue of a liability for an asset retirement obligation berecognized in the period in which it is incurred if a reasonableestimate of fair value can be made. The associated assetretirement costs are to be capitalized as part of the carryingamount of the long-lived asset and depreciated over the life ofthe asset. The liability is accreted at the end of each periodthrough charges to operating expense. If the obligation issettled for other than the carrying amount of the liability, theCompany will recognize a gain or loss on settlement. Theprovisions of SFAS No. 143 are effective for fiscal yearsbeginning after June 15, 2002. Management has not yetdetermined the impact, if any, of adoption of SFAS No. 143.

          InAugust 2001, FASB issued SFAS No. 144, Accounting forthe Impairment or Disposal of Long-Lived Assets, which supersedesboth SFAS No. 121, Accounting for the Impairment ofLong-Lived Assets and for Long-Lived Assets to Be Disposed Of andthe accounting and reporting provisions of APB OpinionNo. 30, Reporting the Results of Operations-Reporting theEffects of Disposal of a Segment of a Business, andExtraordinary, Unusual and Infrequently Occurring Events andTransactions (Opinion 30), for the disposal of a segment of abusiness (as previously defined in that Opinion). SFASNo. 144 retains the fundamental provisions of SFAS No. 121for recognizing and measuring impairment losses on long-livedassets held for use and long-lived assets to be disposed of bysale, while also resolving significant implementation issuesassociated with SFAS No. 121. For example, SFAS No. 144provides guidance on how a long-lived asset is held for sale, andprescribes the accounting for a long-lived asset that will bedisposed of other than by sale. SFAS No. 144 retains thebasic provisions of Opinion 30 on how to present discontinuedoperations in the income statement but broadens that presentationto include a component of an entity (rather than a segment of abusiness).

          TheCompany is required to adopt SFAS No. 144 no later than theyear beginning after December 15, 2001, and plans to adoptits provisions for the quarter ending March 31, 2002.Management does not expect the adoption of SFAS No. 144 forlong-lived assets held for use to have a material impact on theCompany's financial statements because the impairment assessmentunder SFAS No. 144 is largely unchanged from SFAS No. 121.The provisions of the Statement for assets held for sale or otherdisposal generally are required to be applied prospectively afterthe adoption date to newly initiated disposal activities.Therefore, 

F-11

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management cannot determine the potential effects thatadoption of SFAS No. 144 will have on the Company'sfinancial statements.

**(2)     Net Loss Per Share**

          Netloss per common share is presented for the period July 6,2001 to December 31, 2001 on both a basic and diluted net lossper common share basis. Diluted net loss per common share assumesthe conversion of stock options and warrants, using the treasurystock method, but only if these items are dilutive. For theperiod July 6, 2001 to December 31, 2001, 3.2 million stockoptions and 1.2 million warrants are excluded from thecalculation of diluted earnings per share because their effect isanti-dilutive. Thus, basic and diluted net loss and weightedaverage shares are the same.

**(3)     Mortgage Loans Held Priorto Securitization**

          TheCompany purchases and originates fixed-rate and adjustable-ratemortgage loans that have a contractual maturity of up to 30years. These loans are secured by single-family residential,condominium and one-to-four unit properties, and are beingrecorded at the lower of cost or estimated fair value, adjustedfor any hedge activity. Certain of these mortgages are pledged ascollateral for a portion of the warehouse financing and otherborrowings.

          Approximately24% and 16% of the property securing our mortgage loan portfoliois located in the state of California at December 31, 2001 and2000, respectively. No other state comprised more than 8% of ourmortgage loan portfolio at December 31, 2001 and 2000.

          Mortgageloans held prior to securitization as of December 31, 2001 and2000 were as follows:

|                                                                      | ******    Saxon Capital,        Inc.    **                                                                                              | **SCI Services, Inc.****         (Predecessor)         ** |
|---------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                      | **    December 31,        2001    **                                                                                                    | **    December 31,        2000    **                                                                        |
|                                                                      | ($ in thousands)                                                                                                                                                                |
| Mortgage        loan principal balance, including hedge basis adjustments | $366,658                                                                                                                                                                        | $105,160                                                                                                                                            |
| Unamortized        basis adjustments, net(1)                              | 2,548                                                                                                                                                                           | 3,661                                                                                                                                               |
| Ending        balance                                                     | 369,206                                                                                                                                                                         | 108,821                                                                                                                                             |
| Reserve        for losses                                                 |                             (2,209) |                     (3,607)                     |
| Mortgage        loan held prior to securitization, net                    |                          $366,997                  |                 $105,214                                            |

| ________________ |
|------------------|
| (1)              | Included in the        unamortized basis adjustments are premiums, discounts,        and net deferred origination costs. |

          DuringDecember 2001 and 1999, the Company sold $5.1 and $20.7million in delinquent loans resulting in a loss of $1.1 and $5.3million, respectively. There were no delinquent loan sales in2000.

F-12

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**(4)     Securitized Loans**

          Duringthe period July 6, 2001 to December 31, 2001, the Companysecuritized $1.4 billion in principal balances of mortgage loans.The components of securitized loans at December 31, 2001 areas follows:

|                                      | **          Saxon        Capital,        Inc.          **                              |
|-------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                      | **          December        31,        2001          **                                |
|                                      | ($ in thousands)                                                                                                                                                                           |
| Mortgage        loan principal balances   | $1,317,959                                                                                                                                                                                 |
| Unamortized        basis adjustments, net | 43,034                                                                                                                                                                                     |
| Accrued        interest receivable(1)     |                               10,823 |
| Ending        balance                     | 1,371,816                                                                                                                                                                                  |
| Reserve        for losses                 |                            (19,118)                 |
|                                      |                        $1,352,698                                       |

| _________________ |
|-------------------|
| (1)               | Included in securitized        loans since amount is pledged to the related        securitization trust. |

**(5)     Loan Loss Reserve**

          TheCompany is exposed to risk of loss from its mortgage loanportfolio and establishes this reserve taking into account avariety of criteria including the contractual delinquency statusand historical loss experience. The adequacy of this reserve isevaluated monthly and adjusted as needed based on this review.

          Activityrelated to the loan loss reserve for the mortgage loan portfoliofor the periods July 6, 2001 to December, 31, 2001 and January 1,2001 to July 5, 2001 and the years ended December 31, 2000 and1999 is as follows:

|                                  | **                  Saxon        Capital,        Inc.                  **                           | **         SCI        Services, Inc. (Predecessor)    **                                            |
|---------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                  | **For the Period July 6, 2001 to****                      December        31,        2001             ** | **For the Period        January 1,         2001 to July 5,****        2001        ** | **Year        Ended         December****  31, 2000  ** | **Year        Ended         December****   31, 1999 ** |
|                                  | ($ in thousands)                                                                                                                                                                                                                                                                        |
|                                  | Loan Loss    Reserve                                                                                                                                                                                                                            | Reserve for        Advanced     Interest                                                                                     |     Total     | Loan Loss    Reserve     | Loan Loss    Reserve     | Loan Loss     Reserve     |
| Beginning        balance              | $   3,978                                                                                                                                                                                                                                                                | —                                                                                                                                                               | $  3,978 | $ 3,607 | $ 1,035 | $ 4,511 |
| Acquisition        related allowances | 3,072                                                                                                                                                                                                                                                                                   | —                                                                                                                                                               | 3,072 | — | — | — |
| Provision        for loan losses      | 11,861                                                                                                                                                                                                                                                                                  | 3,400                                                                                                                                                                | 15,261 | 8,423 | 6,403 | 9,107 |
| Charge        offs                    |           (984)                                                                                                                                                                                                                       |             —                                                                                       |          (984) |       (8,052) |       (3,831) |      (12,583) |
|                                  |       $17,927                                                                                                                                                                                                                                             |       $3,400                                                                                                                           |       $21,327 |       $ 3,978 |       $ 3,607 |       $ 1,035 |

          Therewere no charge-offs related to securitized loans during theperiod July 6, 2001 to December 31, 2001. Provision forlosses on advanced interest is included as a component ofinterest income in the consolidated statements of operations.

F-13

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**(6)     Mortgage Servicing Rights**

          Mortgageservicing rights represent the carrying value of the Company'sservicing portfolio. The following table summarizes activity inmortgage servicing rights for the period July 6, 2001 toDecember 31, 2001, the period January 1, 2001 toJuly 5, 2001, and the years ended December 31, 2000 and1999:

|                                 | **Saxon Capital,****                Inc.           ** | **               SCI        Services, Inc.        (Predecessor)                  ** |
|--------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                 | **For the Period        July 6, 2001 to        December 31,****         2001        **                  | **For the Period        January 1, 2001****   to July 5,        2001   **                                                                                                                                                  | **Year Ended         December 31,****         2000     ** | **Year Ended         December 31,****          1999         ** |
|                                 | ($ in thousands)                                                                                                                                                                             |
| Balance,        beginning of period  | $41,616                                                                                                                                                                                      | $47,834                                                                                                                                                                                                                                                  | $40,416 | $36,337 |
| Retained        from securitizations | 3⁄4                                                                                                                                                                                        | 5,439                                                                                                                                                                                                                                                    | 18,575 | 16,040 |
| Purchased                            | 797                                                                                                                                                                                          | 2,790                                                                                                                                                                                                                                                    | — | — |
| Amortization                         |            (8,566)                                                                                                                    |           (14,447)                                                                                                                                                                                     |           (11,157) |           (11,961) |
| Balance,        end of period        |           $33,847                                                                                                                          |           $41,616                                                                                                                                                                                      |           $47,834 |           $40,416 |

          Priorto July 6, 2001, MSRs were recorded on the balance sheet at thetime of securitization; however, subsequent to July 6, 2001 inaccordance with SFAS 140, no MSRs are recorded at the time ofsecuritization. Key economic assumptions used in measuring themortgage servicing rights at the date of securitization resultingfrom securitizations completed during 2001 and 2000 were asfollows (rate* per annum):

|                                               | **                      2001                     ** | **                       2000                  ** |
|----------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Prepayments        speed                           | 22 CPR – 65 CPR(1)                                                                                                                                                                                                                                                    | 24 CPR – 57 CPR(3)                                                                                                                                                                                                                                        |
| Weighted        average life—loans (in years) | 3.28                                                                                                                                                                                                                                                                       | 3.63                                                                                                                                                                                                                                                           |
| Expected        credit losses                      | 3.22%                                                                                                                                                                                                                                                                      | 2.26%                                                                                                                                                                                                                                                          |
| Residual        cash flow discounted at            | 15.00%                                                                                                                                                                                                                                                                     | 14.04%(2)                                                                                                                                                                                                                                                      |

| ___________ |
|-------------|
| *           | Weighted-average        rates for securitizations entered into during the period        for securitizations of loans with similar        characteristics. |
| (1)         | Fixed rate loans        ramp up to 25 CPR ("Constant Prepayment Rate")        over 16 months and thereafter. |
|        | Adjustable rate        loans ramp up to 65 CPR over 16 months; ramping down to        40 CPR over 12 months and thereafter. |
|        | Second liens ramp        up to 35 CPR over 16 months; ramping down to 22 CPR over        26 months and thereafter. |
|        | Two-year hybrid        loans ramp up to 32 CPR over 14 months; ramping up to 65        CPR in month 25; ramping down to 31 CPR over 7 months and        thereafter. Three-year hybrid loans ramp up to 32 CPR        over 14 months; ramping up to 60 CPR in month 37; ramping        down to 31 CPR over 7 months and thereafter. |
| (2)         | Discount rate used        for 2000-1, 2000-2, 2000-3 and 2000-4 was 12%, 12%, 17%        and 15%, respectively. |
| (3)         | Fixed rate loans        ramp up to 24 CPR over 13 months and thereafter. |
|        | Adjustable rate        loans ramp up to 40 CPR over 13 months; ramping down to        24 CPR over 32 months and thereafter. |
|        | Two-year hybrid loans ramp up to 29        CPR over 13 months; ramping up to 57 CPR in month 21;        ramping down to 29 CPR over 18 months and thereafter.        Three-year hybrid loans ramp up to 29 CPR over 13 months;        ramping up to 57 CPR in month 34; ramping down to 29 CPR        over 18 months and thereafter. |

F-14

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          AtDecember 31, 2001 and 2000, the fair value and weightedaverage life in years of the mortgage servicing rights were asfollows:

|              | **                     2001(1)                 ** | **                 2000(1)                 ** |
|-------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|              | **    Fair        Value    **                                                                                                                                                                           | **Weighted-        average life of****     collateral     **                                                                                                          | **    Fair        Value    ** | **Weighted-        average life of****     collateral     ** |
|              | ($ in millions)                                                                                                                                                                                                                                 |
| 1996        Deals | $0.4                                                                                                                                                                                                                                            | 2.47                                                                                                                                                                                                                    | $0.7 | 3.78 |
| 1997        Deals | 1.2                                                                                                                                                                                                                                             | 2.35                                                                                                                                                                                                                    | 2.7 | 3.59 |
| 1998        Deals | 4.4                                                                                                                                                                                                                                             | 2.71                                                                                                                                                                                                                    | 8.6 | 3.91 |
| 1999        Deals | 9.5                                                                                                                                                                                                                                             | 2.67                                                                                                                                                                                                                    | 15.6 | 3.63 |
| 2000        Deals | 13.4                                                                                                                                                                                                                                            | 2.69                                                                                                                                                                                                                    | 19.0 | 3.52 |
| 2001        Deals |                3.7                                                                                                                                                   |        2.83                                                                                                                                                                          |               — |       — |
| Total             |            $32.6                                                                                                                                                                         |                                                                                                                                                                                                                    |           $46.6 |   |

| ______________ |
|----------------|
| (1)            | Excludes purchased        mortgage servicing rights. |

          Thetable below indicates the key economic assumptions and thesensitivity to immediate 20%, 25% and 50% adverse prepaymentspeeds used to value mortgage servicing rights as ofDecember 31, 2001:

|              | **                                              Mortgage        Servicing        Rights                                                ** |
|-------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|              | **Current****          Assumptions          **                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | **20%        Adverse****        Effect        ** | **25%        Adverse****        Effect        ** | **50%        Adverse****        Effect        ** |
|              | ($ in millions)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 1996        Deals | (1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | ($0.1) | ($0.1) | ($0.1) |
| 1997        Deals | (1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | (0.3) | (0.3) | (0.6) |
| 1998        Deals | (1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | (0.9) | (1.1) | (1.8) |
| 1999        Deals | (1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | (2.1) | (2.6) | (4.0) |
| 2000        Deals | (1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | (3.2) | (3.6) | (5.3) |
| 2001        Deals |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |               (0.9) |               (1.0) |               (1.6) |
| Total             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |             ($7.5) |              ($8.7) |           ($13.4) |

| ___________________ |
|---------------------|
| (1)                 | Fixed rate loans ramp up        to 25 CPR over 16 months and thereafter. |
|                | Adjustable rate loans ramp up to 65        CPR over 16 months; ramping down to 40 CPR over 12 months        and thereafter. |
|                | Second liens ramp up to 35 CPR over 16        months; ramping down to 22 CPR over 26 months and        thereafter. |
|                | Two-year hybrid loans ramp up to 32        CPR over 14 months; ramping up to 65 CPR in month 25;        ramping down to 31 CPR over 7 months and thereafter.        Three-year hybrid loans ramp up to 32 CPR over 14 months;        ramping up to 60 CPR in month 37; ramping down to 31 CPR        over 7 months and thereafter. |

F-15

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          Thetable below indicates the immediate sensitivity on the currentfair value of mortgage servicing rights using a 20%, 22% and 24%discount rate as of December 31, 2001:

|              | **                                                  Mortgage        Servicing        Rights                                                  ** |
|-------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|              | **Current****       Assumptions       **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | **20%        Discount****     Rate     ** | **22%        Discount****     Rate     ** | **24%        Discount****     Rate     ** |
|              | ($ in thousands)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 1996        Deals | 15%                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | ($0.0) | ($0.0) | ($0.1) |
| 1997        Deals | 15%                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | (0.2) | (0.2) | (0.3) |
| 1998        Deals | 15%                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | (0.6) | (0.8) | (1.0) |
| 1999        Deals | 15%                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | (1.3) | (1.7) | (2.1) |
| 2000        Deals | 15%                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | (1.7) | (2.3) | (2.9) |
| 2001        Deals |             15%                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |               (0.6) |               (0.8) |              (0.9) |
| Total             |             15%                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |             ($4.4) |             ($5.8) |            ($7.3) |

          Mortgageservicing rights are not impacted by sensitivities to creditlosses or to interest rates.

          Thesesensitivities are hypothetical and should be used with caution.As the figures indicate, changes in fair value based on aconstant percent variation in assumptions generally cannot beextrapolated because the relationship of the change in assumptionto the change in fair value may not be linear. The effect of avariation in a particular assumption on the fair value of theretained interest is calculated without changing any otherassumption; in reality, changes in one factor may result inchanges in another (for example, increases in market interestrates may result in lower prepayments and increased creditlosses), which might magnify or counteract the sensitivities.

**(7)     Loan Servicing Portfolio**

          Asof December 31, 2001 and 2000, the Company serviced aportfolio consisting of loans in all 50 states. The Companyservices mortgage loans for private investors, DynexCapital, Inc., Ginnie Mae, Fannie Mae, Freddie Mac, variousgovernment entities and other investors in addition to the loansin the Company's portfolio. The loan servicing portfolios as ofDecember 31, 2001 and 2000 are summarized below:

|                                                   | **            Saxon        Capital,        Inc.          ** | **SCI Services, Inc.****       (Predecessor)       **              |
|--------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------|
|                                                   | **              December        31, 2001       **                | **           December        31, 2000       ** |
|                                                   | **Number of****    Loans    **                                                                                                    | **Principal****    Balance    **                                                                 | **Number of****     Loans     ** | **Principal****   Balance   ** |
|                                                   | ($ in thousands)                                                                                                                                                          |
| Private        Investors.                              | 44,408                                                                                                                                                                    | $4,065,199                                                                                                                               | 55,325 | $5,261,564 |
| Saxon        Capital, Inc.                             | 13,179                                                                                                                                                                    | 1,537,309                                                                                                                                | — | — |
| Credit        Suisse First Boston                      | 3,350                                                                                                                                                                     | 432,720                                                                                                                                  | — | — |
| Dynex        Capital, Inc                              | 1,413                                                                                                                                                                     | 154,297                                                                                                                                  | 2,001 | 231,350 |
| Greenwich        Capital, Inc                          | 1,246                                                                                                                                                                     | 88,600                                                                                                                                   | — | — |
| Fannie        Mae, Freddie Mac, and Ginnie Mae         | 1,668                                                                                                                                                                     | 49,525                                                                                                                                   | 2,002 | 61,623 |
| Various        government entities and other investors |                 690                                                                       |              27,654                                                     |                 848 |             34,061 |
| Total                                                  |            65,954                                                                                                  |       $6,355,304                                                                                           |            60,176 |      $5,588,598 |

F-16

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**(8)     Servicing Related Advances**

          Certaininvestors of the Company require payments to be made based onscheduled remittances as opposed to actual payments received fromthe borrower. To the extent there are delinquencies, the Companymay be required to make advances for principal and interest dueto the investors. In addition, the Company may also be requiredto make similar advances related to escrow collections. During2001, the Company changed the method of recording the advancesand recoveries from the securitizations from a net basis to agross basis.

          Inthe case of loans in foreclosure, the Company may be required tomake certain expenditures or to advance funds. These expendituresand advances are established as a receivable and are collectedonce the mortgage has been liquidated.

          Forservicing related advances made for loans associated withsecuritizations prior to July 5, 2001 there was no need toreserve for uncollectible amounts as all amounts are paid by therelated trust. Uncollectible servicing related advances made forloans associated with securitizations subsequent to July 5, 2001are reserved for within the securitized loan reserve. See Note 4.

          Thebalances of servicing related advances at December 31, 2001and December 31, 2000 were as follows:

|                                         | ******      Saxon        Capital, Inc.      **               | **SCI Services, Inc.****          (Predecessor)          ** |
|----------------------------------------------|--------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                         | **     December        31, 2001     **                                 | **     December 31,        2000     **                                                                        |
|                                         | ($ in thousands)                                                                                                         |
| Escrow        advances (taxes and insurance) | $  22,758                                                                                                           | $16,758                                                                                                                                                         |
| Foreclosure        and other advances        | 15,500                                                                                                                   | 9,984                                                                                                                                                           |
| Principal        and interest advances       |                    63,120 |                    4,105                                         |
| Total        servicing related advances      |                $101,378                       |                $30,847                                                               |

**(9)     Furniture, Fixtures andEquipment**

|                            | ******         Saxon        Capital,        Inc.         ** | **SCI Services, Inc.****        (Predecessor)        ** |
|---------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------|
|                            | **        December        31, 2001        **                          | **        December        31, 2000        **            |
|                            | ($ in thousands)                                                                                                                                      |
| Computers                       | $3,363                                                                                                                                                | $14,848                                                                                                                                 |
| Furniture        and equipment  | 574                                                                                                                                                   | 3,287                                                                                                                                   |
| Leasehold        improvements   | 731                                                                                                                                                   | 1,134                                                                                                                                   |
| Projects        in progress     |                  1,540                                           |                   2,480                       |
|                            | 6,208                                                                                                                                                 | 21,749                                                                                                                                  |
| Accumulated        depreciation |                   (677)                                     |                (10,439)                                      |
|                            |                 $5,531                                                |                $11,310                                       |

F-17

----

          Furniture,fixtures and equipment balances are included in other assets inthe consolidated balance sheets. Depreciation expense was $0.5million, $2.3 million, $4.2 million, and $4.1 million for theperiods July 6, 2001 to December 31, 2001 and January 1, 2001 toJuly 5, 2001 and the years ended December 31, 2000 and 1999,respectively.

**(10)     Investor Funds and Escrow**

          Investorfunds totaling $213.9 million and $104.0 million wereheld in segregated bank accounts at December 31, 2001 andDecember 31, 2000, respectively. These funds are applicableto mortgage loans serviced for investors. Included in investorfunds are escrow funds totaling $23.9 million, and$20.6 million at December 31, 2001 andDecember 31, 2000, respectively, which were also held insegregated bank accounts. These funds are applicable to mortgageloans being serviced. The funds and the related liabilities ofthe accounts are not included in the accompanying financialstatements.

**(11)     Interest-Only ResidualAssets**

          SCIServices, Inc.'s retained interest in loan securitizationsrepresented the net present value of the expected cash flows fromthe excess of interest received on the underlying mortgage loansover the interest paid to the purchaser of the sold classes of asecuritization, less servicing fees and expected credit lossesover the life of the security. The Company discounted the cashflows on the underlying loans sold at a rate it believes apurchaser would require as a rate of return, 17% as ofDecember 31, 2000, and 12%, as of December 31, 1999.

          SCIServices, Inc. revalued the residuals monthly, based upon theprepayment and loss experience of each particular residual'sunderlying mortgage collateral as well as management's estimateof future performance of the underlying loans. To the extent theresidual's carrying value exceeded fair market value, adjustmentswere taken during the month through SCI Services, Inc.'sconsolidated statements of operations. Separate prepayment andloss assumptions were utilized for each type of collateral (fixedrate, 6-month LIBOR ARM, 1-year Constant Maturity Treasury("CMT"), etc.). The prepayment assumptions varied basedupon:

> - the historical prepayment trends of the specific            collateral as well as that of similar loans in the            marketplace,
- the rate environment during the period of the            collateral's origination, and
- the duration and scope of prepayment penalties.

          Duringthe period January 1, 2001 to July 5, 2001, and the years endingDecember 31, 2000 and 1999, SCI Services, Inc. sold residentialmortgage loans in securitization transactions. In all thosesecuritizations, SCI Services, Inc. retained servicingresponsibilities and subordinated interests. Prior to July 5,2001, SCI Services, Inc. received annual servicing feesapproximating 50 basis points of the outstanding balance andrights to future cash flows arising after the investors in thesecuritization trust have received the return for which theycontracted. In addition, SCI Services, Inc. received future cashflows from prepayment penalties on mortgage loans that prepaidduring the contractual penalty period and other ancillarybenefits. The investors and the securitization trusts had norecourse to SCI Services, Inc.'s other assets for 

F-18

----

failure of debtors to pay when due. SCI Services, Inc.'sretained interests were subordinate to investor's interests.Their value was subject to credit, prepayment, and interest raterisks on the transferred financial assets.

          AfterJuly 6, 2001, the Company structures the securitizations asfinancing transactions because these securitizations do not meetthe qualifying special purpose entity criteria because after theloans are securitized, the securitization trust may acquirederivatives relating to beneficial interests retained by theCompany. The Company, as servicer, subject to applicablecontractual provisions, has sole discretion to use our bestcommercial judgment in determining whether to sell or work outany loans securitized through the securitization trust thatbecome troubled. Accordingly, following a securitization inaccordance with provisions in SFAS 140, the mortgage loansremain on the balance sheet, and the securitization indebtednessreplaces the warehouse debt associated with the securitizedmortgage loans. The Company now records interest income on themortgage loans and interest expense on the securities issued inthe securitization over the life of the securitization, insteadof recognizing a gain or loss upon completion of thesecuritization.

          Forthe period January 1, through July 5, 2001, and the years endingDecember 31, 2000 and 1999, SCI Services, Inc. recognized pretaxgains of $32.9 million, $79.2 million, and $98.4 million,respectively, on the securitization of residential mortgageloans.

          During2000, SCI Services, Inc. increased the discount rate on itsresidual assets from 12% to 17% and on its mortgage servicingrights from 12% to 15% to reflect changes in market discountrates. In addition, SCI Services, Inc. transferred theseinvestments from its available-for-sale portfolio to tradingbecause of Dominion Resources' intention to divest its interestin SCI Services, Inc. SCI Services, Inc. reflected the impairmentlosses of $106.5 million in its consolidated statement ofoperations.

          SaxonCapital, Inc. acquired all of the issued and outstanding capitalstock of SCI Services, Inc. from Dominion Capital, Inc.("Dominion Capital"), a wholly owned subsidiary ofDominion Resources, Inc. ("Dominion Resources") on July6, 2001. Dominion Resources retained all of the interest-onlyresidual assets during this transaction. As such, these assetsare not recorded on Saxon Capital, Inc.'s consolidated balancesheet at December 31, 2001.

          Activityfor the interest-only residual assets is summarized as follows:

|                                                           | **    SCI Services, Inc.        (Predecessor)    **                                                                                                                                                                                                         |
|----------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                           | **Interest-only Residual****                       Assets(1)                   ** |
|                                                           | ($ in thousands)                                                                                                                                                                                                                                                                                    |
| Balance        at January 1, 1999                         | $281,897                                                                                                                                                                                                                                                                                            |
| Retained        from securitizations, including related hedges | 161,395                                                                                                                                                                                                                                                                                             |
| Cash        received                                           | (78,463)                                                                                                                                                                                                                                                                                            |
| Temporary        impairment                                    | (9,846)                                                                                                                                                                                                                                                                                             |
| Permanent        impairment                                    |                      (8,308)                                                                                                                                                               |
| Balance        at December 31, 1999                            |                     346,675                                                                                                                                                                     |
|                                                           |                                                                                                                                                                                                                                                                                                |
| Retained        from securitizations, including related hedges | 107,824                                                                                                                                                                                                                                                                                             |
| Cash        received                                           | (51,461)                                                                                                                                                                                                                                                                                            |

| Loss        on trading securities, net of hedge activity      | (1,970)                                                                                                                                                   |
|---------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------|
| Permanent        impairment                                   |                  (102,653)                                           |
| Balance        at December 31, 2000                           |                    298,415                                 |
|                                                          |                                                                                                                                                      |
| Retained        from securitization, including related hedges | 32,365                                                                                                                                                    |
| Cash        received                                          | (25,542)                                                                                                                                                  |
| Gain        on trading securities, net of hedge activity      |                          111 |
| Balance        at July 5, 2001                           |                $ 305,349                                                  |

| __________________ |
|--------------------|
| (1)                | Includes        prepayment penalties. |

F-19

----

 

          Aspart of the sale agreement between Saxon Capital Inc. andDominion Capital, Inc., Inc. the retained interests were sold toDominion Capital, Inc. As a result, the following only reflectsinformation for the period January 1, 2001 to July 5, 2001. Keyeconomic assumptions used in measuring the retained interests atthe date of securitization resulting from securitizationscompleted during 2001 and 2000 were as follows (rate* per annum):

|                                               | **              2001              ** | **              2000             ** |
|----------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                               | **Residential****  Mortgage Loans(1)  **                                                                                                                     | **Residential****  Mortgage Loans(1)  **                                                                                                               |
| Prepayments        speed                           | 22 CPR – 65 CPR(2)                                                                                                                                                          | 24 CPR – 57 CPR(3)                                                                                                                                                    |
| Weighted        average life—loans (in years) | 3.28                                                                                                                                                                             | 3.63                                                                                                                                                                       |
| Expected        credit losses                      | 3.22%                                                                                                                                                                            | 2.26%(4)                                                                                                                                                                   |
| Residual        cash flow discounted at            | 17.00%                                                                                                                                                                           | 15.07%(5)                                                                                                                                                                  |

| ____________ |
|--------------|
| *            | Weighted-average        rates for securitizations entered into during the period        for securitizations of loans with similar        characteristics. |
| (1)          | Includes prepayment        penalties. |
| (2)          | Fixed rate loans ramp up        to 25 CPR ("Constant Prepayment Rate") over 16        months and thereafter. |
|         | Adjustable rate loans        ramp up to 65 CPR over 16 months; ramping down to 40 CPR        over 12 months and thereafter. |
|         | Second liens ramp up to        35 CPR over 16 months; ramping down to 22 CPR over 26        months and thereafter. |
|         | Two-year hybrid loans        ramp up to 32 CPR over 14 months; ramping up to 65 CPR in        month 25; ramping down to 31 CPR over 7 months and        thereafter. Three-year hybrid loans ramp up to 32 CPR        over 14 months; ramping up to 60 CPR in month 37; ramping        down to 31 CPR over 7 months and thereafter. |
| (3)          | Fixed rate loans ramp up        to 24 CPR over 13 months and thereafter. |
|         | Adjustable rate loans        ramp up to 40 CPR over 13 months; ramping down to 24 CPR        over 32 months and thereafter. |
|         | Two-year hybrid loans        ramp up to 29 CPR over 13 months; ramping up to 57 CPR in        month 21; ramping down to 29 CPR over 18 months and        thereafter. Three-year hybrid loans ramp up to 29 CPR        over 13 months; ramping up to 57 CPR in month 34; ramping        down to 29 CPR over 18 months and thereafter. |
| (4)          | Percentage of securitized        balance; with losses beginning in month five. |
| (5)          | Discount rate used for        2000-1, 2000-2, 2000-3 and 2000-4 was 12%, 14%, 17% and        17%, respectively. |

          Thetable below for the year ended December 31, summarizes certaincash flows received from and paid to securitization trusts duringthe period January 1, 2001 to July 5, 2001 and for the year endedDecember 31, 2000:

F-20

----

 

|                                                   | **       SCI        Services, Inc.        (Predecessor)         **                 |
|--------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                   | **For the Period        January 1, 2001 to****        July        5, 2001       ** | **Year Ended****December 31, 2000 ** |
|                                                   | ($ in millions)                                                                                                                                                    |
| Proceeds        from sale of mortgage loans            | $661.5                                                                                                                                                             | $2,098.7 |
| Servicing        fees received                         | 14.7                                                                                                                                                               | 24.3 |
| Other        cash flows received on retained interests | 25.5                                                                                                                                                               | 53.2 |
| Purchases        of delinquent or foreclosed assets    | (4.6)                                                                                                                                                              | (34.8) |
| Servicing        advances, net of repayments           | (49.4)                                                                                                                                                             | (4.2) |
| Prepayment        penalties received                   | 8.5                                                                                                                                                                | 14.2 |
| Master        servicing fees                           | 1.1                                                                                                                                                                | 1.0 |

**(12)    Subordinate Bond Investments**

          Atthe time of a securitization, SCI Services, Inc. retained some ofthe bonds being sold. All of the bonds retained by SCI Services,Inc. had been subordinate to senior classes of bonds. Interestincome recognized on the subordinate bonds for the period endedJanuary 1, 2001 to July 5, 2001, the twelve monthsended December 31, 2000 and 1999 was $0.7 million, $1.8 millionand $3.4 million, respectively. During the twelve months endedDecember 31, 2000, SCI Services, Inc. sold $14.8 million ofsubordinate bonds for a loss of $0.4 million. There were no salesof subordinate bonds during the period ended July 5, 2001.

          SCIServices, Inc. reclassed these bonds from available for sale totrading during June 2000, which resulted in a $1.6 milliongain recognized at the time of the reclassification.

          SaxonCapital, Inc. acquired all of the issued and outstanding capitalstock of SCI Services, Inc. from Dominion Capital, Inc.("Dominion Capital"), a wholly owned subsidiary ofDominion Resources, Inc. ("Dominion Resources") onJuly 6, 2001. Dominion Resources retained all of thesubordinate bond investments during this transaction. As such,these assets are not recorded on Saxon Capital, Inc.'sconsolidated balance sheet at December 31, 2001.

          Activityfor the subordinate bond investments for the periodJanuary 1, 2001 to July 5, 2001 and the twelve monthsended December 31, 2000 is summarized as follows:

|                                | **                   SCI        Services, Inc.        (Predecessor)                ** |
|-------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                | **For the Period        January 1, 2001 to****       July        5, 2001       **                                                                                                         | **Year Ended****   December 31,        2000   ** |
|                                | ($ in thousands)                                                                                                                                                                                                                                                     |
| Balance,        beginning of period | $13,597                                                                                                                                                                                                                                                              | $27,019 |
| Principal        payments           | (462)                                                                                                                                                                                                                                                                | (14,770) |
| Fair        value adjustment        |                       277                                                                                                                              |                     1,348 |
| Balance,        end of period       |                $13,412                                                                                                                                                                    |                $13,597 |

**(13)    Warehouse Financing, LimitedRecourse Debt and Note Payable**

          Asummary of the activity under these agreements at December 31,2001 and December 31, 2000, respectively, is as follows:

F-21

----

|                                        | **    Saxon Capital,        Inc.    **                                                                                                 | **SCI Services, Inc.****        (Predecessor)        ** |
|---------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------|
|                                        | **    December 31,        2001    **                                                                                                   | **    December 31,        2000    **                                                            |
|                                        | ($ in thousands)                                                                                                                                                               |
| **Amounts        Outstanding**              |                                                                                                                                                                           |                                                                                                                                    |
| Warehouse        Borrowing                  | $     64,980                                                                                                                                          | $   76,097                                                                                                               |
| Repurchase        Agreements                | 218,390                                                                                                                                                                        | 2,628                                                                                                                                   |
| Limited        Recourse Securitization Debt | 1,329,568                                                                                                                                                                      | —                                                                                                                                  |
| Note        Payable                         | 25,000                                                                                                                                                                         | —                                                                                                                                  |
| Due to        Dominion Capital              | —                                                                                                                                                                         | 99,847                                                                                                                                  |
| Due to        Dynex                         |                             — |                      9,500     |
| Total                                       |               $1,637,938                                                                                 |                $188,072                                      |
| **Outstanding        Collateral**           |                                                                                                                                                                           |                                                                                                                                    |
| Warehouse        Borrowing                  | $    146,551                                                                                                                                               | $98,652                                                                                                                                 |
| Repurchase        Agreements                | 221,498                                                                                                                                                                        | 2,693                                                                                                                                   |
| Limited        Recourse Securitization Debt | 1,317,959                                                                                                                                                                      | —                                                                                                                                  |
| Note        Payable                         | —                                                                                                                                                                         | —                                                                                                                                  |
| Due to        Dominion Capital              | —                                                                                                                                                                         | —                                                                                                                                  |
| Due to        Dynex                         | —                                                                                                                                                                         | —                                                                                                                                  |
| Total                                       |                $1,686,008                                                                           |                $101,345                                      |
| **Remaining        Capacity to Borrow**     |                                                                                                                                                                           |                                                                                                                                    |
| Warehouse        Borrowing                  | $     75,020                                                                                                                                          | $  43,903                                                                                                                     |
| Repurchase        Agreements                | 1,011,609                                                                                                                                                                      | —                                                                                                                                  |
| Limited        Recourse Securitization Debt | —                                                                                                                                                                         | —                                                                                                                                  |
| Note        Payable                         | —                                                                                                                                                                         | —                                                                                                                                  |
| Due to        Dominion Capital              | —                                                                                                                                                                         | 100,153                                                                                                                                 |
| Due to        Dynex                         | —                                                                                                                                                                         | —                                                                                                                                  |
| Total                                       |                $1,086,629                                                                           |                $144,056                                      |
| **Weighted        Average Cost of Funds**   |                                                                                                                                                                           |                                                                                                                                    |
| Warehouse        Borrowing                  | 5.30%                                                                                                                                                                          | 6.91%                                                                                                                                   |
| Repurchase        Agreements                | 6.44%                                                                                                                                                                          | 6.87%                                                                                                                                   |
| Limited        Recourse Securitization Debt | 3.75%                                                                                                                                                                          | —                                                                                                                                  |
| Note        Payable                         | 8.00%                                                                                                                                                                          | —                                                                                                                                  |
| Due to        Dominion Capital              | 5.93%                                                                                                                                                                          | 6.75%                                                                                                                                   |
| Due to        Dynex                         | —                                                                                                                                                                         | 6.50%                                                                                                                                   |

          Thefollowing table summarizes our contractual obligations atDecember 31, 2001:

| ******Payments Due by Period**                                                                              | ******        Total        ** | **Less than****    1        year    **                | ******  1-3 years  **                                               | ******  4-5 years  **    | **After 5****      years      **        |
|-------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------|----------------------------------------------|-----------------------------------------------------------------------------------------------------|
|                                                                                                        | ($ in thousands)                                                                                              |
| Warehouse        financing facility – line of credit                                                   | $     64,980                                                                         | $  64,980                                                                                | $ —                                                                                | $ —                                     | $ —                                                                                            |
| Warehouse        financing facility – repurchase              agreements | $   218,390                                                                                    | $  69,890                                                                                | $148,500                                                                                | $ —                                     | $ —                                                                                            |
| Limited        recourse securitization financing(1)                                                         | $1,329,568                                                                                                    |     $322,811                                                              | $489,722                                                                                | $247,334                                     | $269,701                                                                                            |
| Note        payable                                                                                         |      $            25,000                                         |              $        — |             $        — |       $ 25,000 |               $        — |
| Total        contractual cash obligations                                                                   |      $1,637,938                                                                      |      $457,681                                                        |      $638,222                                                  |      $272,334       |       $269,701                                                        |

| ________________ |
|------------------|
| (1)              | Amounts        listed are bond payments based on anticipated receipt of        principal and interest on underlying mortgage loan        collateral using historical prepayment speeds. |

F-22

----

          Asummary of interest expense for the period July 6, 2001 toDecember 31, 2001, for the period January 1, 2001 to July 5, 2001and for the years ended December 31, 2000 and 1999 is as follows:

|                           | **Saxon Capital, Inc.**                                                                                                                 | **SCI Services, Inc.        (Predecessor)**                                                                                             |
|--------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------|
|                           | **For the Period        July 6, 2001 to****December 31, 2001**                                                                     | **For the Period        January 1, 2001****to July 5, 2001**                                                                  | **For the Year         Ended        December 31,****        2000        ** | **For the Year        Ended        December 31,****        1999        ** |
|                           | ($ in thousands)                                                                                                                        |
| **Interest        Expense**    |                                                                                                                                    |                                                                                                                                    |   |   |
| Warehouse        Borrowing     | $      162                                                                                                | $      499                                                                                                | $  1,639 | $  2,798 |
| Repurchase        Agreements   | 4,317                                                                                                                                   | 6,726                                                                                                                                   | 14,541 | 10,698 |
| Non-Recourse        Debt       | 17,000                                                                                                                                  | —                                                                                                                                  | — | — |
| Note        Payable            | 985                                                                                                                                     | —                                                                                                                                  | — | — |
| Due to        Dominion Capital | —                                                                                                                                  | 3,665                                                                                                                                   | 8,044 | 6,587 |
| Due to        Dynex            | —                                                                                                                                  | —                                                                                                                                  | 651 | 1,259 |
| Other                          |                       993 |                       634 |                   — |                    — |
| Total                          |                $23,457                                       |                $11,524                                       |           $24,875 |           $21,342 |

          TheCompany is subject to certain debt covenants and is required tomaintain or satisfy specified financial ratios and tests, as wellas other customary covenants, representations and warranties, andevents of default. In addition, the Company is prohibited frompaying dividends and making distributions under certain of ourcredit facilities without the prior approval of our lenders. TheCompany was in compliance with all the covenants under therespective borrowing agreements.

**(14)    Employee Savings Plan**

          Priorto July 6, 2001, the Company's employees were eligible toparticipate in the Dominion Resources 401(k) plan upon theemployee's sixth month of employment. Under this plan, eligibleemployees were able to defer up to 15% of their income on apre-tax basis. The Company matched 50% of the employees'contribution up to 6% of the employees' income. The total expenserelated to the Company's matching contributions during the periodJanuary 1, 2001 to July 5, 2001 and the years endedDecember 31, 2000, and 1999 were $0.2 million,$0.4 million, and $0.4 million, respectively.

          Followingthe Company's divestiture from Dominion Resources, the Company'semployees are immediately eligible to participate in the SCIServices, Inc. 401(k) plan upon reaching 18 years of age andprovided they are scheduled for 1,000 hours of service annually.Under the current plan, eligible employees may defer up to 15% oftheir income, on a pre-tax basis. The Company matches 50% of theemployees' contribution up to 6% of the employees' pre-taxincome. The total expense related to the Company's matchingcontributions during the period July 6, 2001 to December 31, 2001was $0.2 million.

F-23

----

**(15)    Income Taxes**

          Thecomponents of the provision for income taxes for the period July6, 2001 to December 31, 2001, the period January 1, 2001 to July5, 2001, and for the years ended December 31, 2000, and 1999consist of the following:

|                                         | **   Saxon Capital,        Inc.   **                                        | **                      SCI        Services, Inc.        (Predecessor)              ** |
|----------------------------------------------|-----------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                         | **For the Period July        6, 2001 to****   December 31,        2001   ** | **For the Period        January 1, 2001****   to July 5,        2001   **                                                                                                                                                                    | **Year Ended        December 31,****        2000        ** | **Year Ended         December 31,****        1999        ** |
|                                         | ($ in thousands)                                                                                          |
| Federal                                      |                                                                                                      |                                                                                                                                                                                                                                                                       |   |   |
|       Current  | $7,007                                                                                                    | $(200)                                                                                                                                                                                                                                                                     | $(172) | $10,698 |
|       Deferred | (10,452)                                                                                                  | (14,005)                                                                                                                                                                                                                                                                   | (27,801) | 8,974 |
| State                                        |                                                                                                      |                                                                                                                                                                                                                                                                       |   |   |
|       Current  | 808                                                                                                       | (1,017)                                                                                                                                                                                                                                                                    | 664 | 1,592 |
|       Deferred |            (1,320)                                 |             (6,387)                                                                                                                                                                                            |                3,225 |                (36) |
| Total        income tax (benefit) expense    |         $  (3,957)                                      |         $(21,609)                                                                                                                                                                                                                  |         $(24,084) |         $21,228 |

          Theamounts provided for income taxes differ from the amount providedat the statutory federal rate as follows:

|                                                                                                     | **   Saxon Capital,        Inc.   **                                        | **                    SCI        Services, Inc.        (Predecessor)              ** |
|----------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                     | **For the Period        July 6, 2001 to****   December 31,        2001   ** | **For the Period        January 1, 2001****  to July 5, 2001  **                                                                                                                                                                           | **Year Ended        December 31,****        2000        ** | **Year Ended         December 31,****        1999        ** |
|                                                                                                     | ($ in thousands)                                                                                          |
| Federal        income tax (benefit) expense              at statutory rate | $(3,611)                                                                                                  | $(17,891)                                                                                                                                                                                                                                                      | $(25,411) | $20,526 |
| State        income tax (benefit) expense, net                                                           | (503)                                                                                                     | (2,300)                                                                                                                                                                                                                                                        | (2,904) | 1,736 |
| Federal        tax expense (benefit) of state              tax deduction   | 176                                                                                                       | (805)                                                                                                                                                                                                                                                          | 1,106 | (607) |
| Other        expense (benefit), net                                                                      |                (19)            |                 (613)                                                                                                                                                          |             3,125 |              (427) |
| Total        income tax (benefit) expense                                                                |         $(3,957)                                                  |          $(21,609)                                                                                                                                                                                                |      $(24,084) |          $21,228 |

          Theincome tax effects of temporary differences that give rise to thenet deferred tax asset and liability at December 31, 2001and 2000 are as follows:

|                                                          | **   Saxon Capital,        Inc.   **                                           | **SCI Services, Inc.****     (Predecessor)     ** |
|---------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------|
|                                                          | **   December 31,        2001   **                                             | **   December 31,        2000   **                                    |
|                                                          | ($ in thousands)                                                                                             |
| Deferred        tax asset (liability):                        |                                                                                                         |                                                                                                |
| Tax        gain on sale of loans, net of hedging transactions | $  9,063                                                                                           | $(70,704)                                                                                           |
| Amortization        of intangibles                            | 2,790                                                                                                        | (1,565)                                                                                             |
| Deferred        revenue                                       | 164                                                                                                          | —                                                                                              |
| Reserve        for loan losses                                | 141                                                                                                          | 1,542                                                                                               |
| Depreciation                                                  | (386)                                                                                                        | —                                                                                              |
| Original        issue discount                                | —                                                                                                       | 20,409                                                                                              |
| Gain        on sale of MSR's                                  | —                                                                                                       | (36,014)                                                                                            |
| Impairment        of residuals                                | —                                                                                                       | 57,084                                                                                              |
| Other                                                         |                  — |              (2,291)               |
| Total        deferred tax asset (liability)                   |         $11,772                                                      |         $(31,539)                                           |

F-24

----

          TheCompany recognizes all of its net deferred tax assets if itbelieves that it is more likely than not, given all availableevidence, that all of the benefits of the carryforward losses andother deferred tax assets will be realized. Management believesthat, based on the available evidence, it is more likely than notthat the Company will realize the benefit from its deferred taxassets.

**(16)    Derivatives**

> 
*Change in Accounting Principle*

          EffectiveJanuary 1, 2001, the Company adopted Statement of FinancialAccounting Standard No. 133, *Accounting for DerivativeInstruments and Hedging Activities* ("SFAS 133"), asamended. SFAS 133 requires all derivatives, whether designated inhedging relationships or not, to be recorded on the balance sheetat fair value. SFAS 133 requires that changes in a derivative'sfair value be recognized currently in earnings or othercomprehensive income, depending on the designation as a fairvalue or cash flow hedge, respectively.

          Theadoption of SFAS 133 on January 1, 2001 was accounted for as acumulative effect of a change in accounting principle. The impactof adoption was not material.

> 
*Accounting Policies*

          Allderivatives are recognized on the balance sheet at their fairvalue. On the date the derivative contract is entered into, theCompany designates the derivative as a fair value hedge, whichhedges the fair value of a recognized asset. Changes in the fairvalue of derivatives and changes in the fair value of the hedgedasset attributable to the hedged risk which are determined to beeffective, are recorded in current period earnings. Accordingly,ineffective portions of changes in the fair value of hedginginstruments are recognized in other income.

          Somederivative instruments are acquired to hedge the changes in fairvalue of another derivative (interest rate lock commitments),with changes in fair value being recorded to current periodearnings.

          TheCompany documents the relationships between hedging instrumentsand hedged items, as well as our risk-management objective andstrategy for undertaking various hedge transactions. This processincludes linking derivatives to specific assets or liabilities onthe balance sheet. The Company also assesses, both at the hedge'sinception and on an ongoing basis, whether the derivatives usedin hedging transactions are highly effective in offsettingchanges in fair values of hedged items. When it is determinedthat a derivative is not highly effective as a hedge or that ithas ceased to be a highly effective hedge, the Companydiscontinues hedge accounting prospectively, as discussed below.

          Whenhedge accounting is discontinued because it is determined thatthe derivative no longer qualifies as an effective hedge, thederivative will continue to be recorded on the balance sheet atits fair value. For terminated hedges or hedges no longerqualifying as effective, 

F-25

----

the formerly hedged asset will no longer be adjusted forchanges in fair value and any previously recorded adjustment tothe hedged asset will be included in the carrying basis. Theseamounts will be included in income (amortized or in atransactional gain or loss) based upon the disposition of theasset or liability.

          Ifthe hedged asset is sold or extinguished, the Company typicallyterminates any applicable hedges. However, if the Companycontinues to hold the derivatives, they continue to be recordedon the balance sheet at fair value with any changes beingrecorded to current period earnings.

> 
*Objectives for Holding Derivative Instruments*

          TheCompany's risk management program addresses potential financialrisks such as interest rate and counterparty risk. The Board ofDirectors determines limits for such risks and reviews andregularly approves the policies and procedures for suchactivities.

          TheCompany generally funds our assets with liabilities that havesimilar interest rate features, which reduces any structuralinterest rate risk. Over time, customer demand for the mortgageloans shifts between fixed rate and floating rate products, basedon market conditions and preferences. These shifts result indifferent funding strategies and produce different interest rateexposures. The Company maintains an overall risk managementstrategy that uses a variety of interest rate derivativefinancial instruments to mitigate the exposure to fluctuationscaused by volatility in interest rates. The Company manages theexposure to interest rate risk primarily through the use ofinterest rate forwards, futures, options and swaps, and otherrisk management instruments. The Company does not use derivativesto speculate on interest rates and does not use leveragedderivative instruments for interest rate risk management.

          Byusing derivative instruments as part of the risk managementstrategy, the Company is exposed to additional credit risk. TheCompany mitigates counterparty credit risk in derivativeinstruments by established credit approval policies and riskcontrol limits, and by using only highly rated financialinstitutions and actively traded hedging instruments. Certainderivative agreements require payments be made to, or be receivedfrom, the counterparty when the fair value of the derivativeexceeds a prespecified contractual amount. The Company has notexperienced nonperformance by any derivative instrumentcounterparty.

          AtDecember 31, 2001, the fair value hedges totaling $(0.8) millionwere included in mortgage loans held prior to securitization.Hedge ineffectiveness associated with fair value hedges reportedin earnings during the period July 6, 2001 to December 31, 2001was $(0.2) million.

          Asof December 31, 2000, the Company had LIBOR based options with anet outstanding short (sold) position of $2,825 million. AtDecember 31, 2000, the Company had outstanding payables relatedto its hedging positions with certain counterparties of $2.7million. The Company held interest rate swap agreements with atotal notional value of $589.0 million and a total fair value of$(3.7) million at December 31, 2000. The interest rate swaps wereclassified as trading, and as such, were marked to market throughearnings prior to January 1, 2001.

F-26

----

**(17)    SCI Services, Inc. GoodwillImpairment**

          Inconnection with the divestiture of SCI Services, Inc., thehistorical goodwill recorded on SCI Services, Inc.'s balancesheet was determined to be impaired as the purchase price paidfor SCI Services, Inc. was substantially at net book value,excluding historical goodwill. As such, SCI Services, Inc.recorded a $45.0 million goodwill impairment charge to itsconsolidated statement of operations in the second quarter of2001.

**(18)    Stockholder's Equity**

          Duringthe years ended December 31, 2000 and 1999, the Companyconverted $40.0 million and $26.5 million,respectively, of borrowings from Dominion Capital into capital.

          OnJuly 6, 2001, the Company purchased all of the issued andoutstanding shares of capital stock of SCI Services, Inc. fromDominion Capital. In connection with the acquisition of SCIServices, Inc., the Company sold 28.0 million shares of $.01 parvalue common stock at a price of $9.30 per share (net ofunderwriter's discount) in a private placement offering. TheCompany incurred $2.6 million of legal, consulting and accountingcosts in connection with the issuance of common stock.Simultaneously with the sale of the 28.0 million shares, theCompany sold 50,000 shares to officers of Saxon Capital, Inc. ata price of $10.00 per share. A portion of the proceeds was usedto acquire SCI Services, Inc., as described further in Note21.

          Inconnection with the 144A Offering, the Company granted warrantsto Friedman, Billings, Ramsey & Co., Inc. to purchase anaggregate of 1,200,000 shares of our common stock at an exerciseprice of $10.00 per share. The warrants are exercisable for aperiod of five years, commencing on July 6, 2001.

**(19)    Stock Compensation Plans**

          *StockIncentive Plan* – The Board of Directors approved andratified the Company's 2001 Stock Incentive Plan on November 15,2001. The stock incentive plan provides for the issuance toeligible employees, non-employee directors, and consultants ofstock options, restricted common stock, stock appreciationrights, or unit awards based on the value of the Company's commonstock. The maximum number of shares of common stock issuable overthe term of the plan is the greatest of 2,998,556, 10.69% of thetotal number of issued and outstanding shares of common stock, orthe maximum number that has been previously awarded under theStock Incentive Plan. The total number of shares available maynot exceed 6,000,000 over the terms of the Stock Incentive Plansubject to adjustment for certain changes in the number of ouroutstanding shares.

          Thecompensation committee administers the Stock Incentive Plan, andhas full authority to select the recipients of awards, to decidewhen awards are to be made, to determine the number of shares ofcommon stock included in each award, and to establish the vestingrequirements and other features and conditions of the award.

          Alloptions granted during 2001 vest over a 4 year period and have a10 year life. The following table summarizes the transactions ofthe Company's Stock Incentive Plan for the year ended December31, 2001:

F-27

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|                                          | ******Number of Options**                                                                                                                          | **Weighted Average****Exercise Price**                                                                         |
|-----------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------|
|                                          | **            2001           ** | **           2001      ** |
| Options        outstanding, beginning of year | —                                                                                                                                             | —                                                                                                         |
| Options        granted                        | 3,274,000                                                                                                                                          | $10.02                                                                                                         |
| Options        canceled                       |                     68,500                     |                 $10.04         |
| Options        outstanding, end of year       |                3,205,500                                                |                $10.02               |

          Nooptions were exercisable at December 31, 2001. The followingtable summarizes information concerning outstanding andexercisable options at December 31, 2001.

|                                                                                                  | **                              Options        Outstanding                             ** | **              Options        Exercisable           ** |
|-------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Range of        Exercisable****     Prices     ** | **Number****   Outstanding   **                                                                                                                                                                                                                                                                                                                                    | **Remaining         Contractual in****        Years        **                                        | **Weighted        Average****   Exercise        Price   ** | **Number****   Exercisable   ** | **Weighted        Average****   Exercise        Price   ** |
| $10.00                                                                                                | 2,585,000                                                                                                                                                                                                                                                                                                                                                                                        | 9.5                                                                                                                                                                                  | $10.00 | — | — |
| $10.10                                                                                                | 620,500                                                                                                                                                                                                                                                                                                                                                                                          | 9.8                                                                                                                                                                                  | $10.10 | — | — |

          Asallowed by SFAS 123, *Accounting for Stock-Based Compensation*,the Company has elected to continue to follow APB 25, *Accountingfor Stock Issued to Employees*, in accounting for its stockoption plans for stock options issued to employees andnon-employee directors. Any options issued to consultants will beaccounted for as prescribed by SFAS 123. As of December 31, 2001,no options have been granted to consultants. Under APB 25, theCompany does not recognize compensation expense upon the issuanceof its stock options because the option terms are fixed and theexercise price equals the market price of the underlying stock onthe grant date. The Company has determined the pro-formainformation as if the Company had accounted for stock optionsgranted since May 31, 2001, under the fair value method of SFAS123. The Black-Scholes option pricing model was used with thefollowing weighted average assumptions for options issued duringthe year:

|                                  | **       2001       ** |
|---------------------------------------|----------------------------------------------------------------------------------------------|
|                                  |                                                                                         |
| Risk-free        interest rate        | 4.60% - 5.41%                                                                                |
| Dividend        yield                 | —                                                                                       |
| Volatility        factor              | 23.56%                                                                                       |
| Weighted        average expected life | 10 years                                                                                     |

          Theweighted average fair values of options granted in 2001 were$4.83 per share. If the Company had recognized compensationexpense based on this value, the Company's pro-forma net earningsand both basic and diluted earnings per share would have beenreduced by approximately $1.8 million or $0.06 per share for2001.

          *EmployeeStock Purchase Plan* – The Company's Employee StockPurchase Plan was adopted by the Board of Directors and receivedstockholder approval in October 2001. The purchase planauthorizes the issuance of up to a total of 1,000,000 shares ofcommon stock to participating employees. The 1,000,000 shareaggregate limitation shall be adjusted proportionately for anyincrease or decrease in the number of outstanding shares of thestock. Under the terms of the Stock Purchase Plan, eligibleemployees may have up to 15% of eligible 

F-28

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compensation deducted from their pay to purchase common stock.The per share purchase price is 85% of the last transaction priceper share of our common stock on the last trading day of theoffering period. Employees did not begin participating in theStock Purchase Plan until fiscal year 2002.

**(20)    Disclosure about FinancialInstruments**

          Fairvalue of a financial instrument is defined as the amount at whichthe instrument could be exchanged in a current transactionbetween willing parties other than in a forced or liquidationsale. In cases where market prices are not available, fair valuesare based on estimates using present value or other valuationtechniques. Those techniques are significantly affected by theassumptions used, including the discount rate and estimates offuture cash flows. In that regard, the derived fair valueestimates cannot be substantiated by comparison to independentmarkets and, in many cases, could not be realized in immediatesettlement of the instrument. Certain financial instruments dueto their nature and all non-financial instruments are excludedfrom this disclosure. At December 31, 2001 and 2000, theCompany's financial assets and liabilities were recorded at fairvalue with the exception of mortgage loans held prior tosecuritization and securitized loans. At December 31, 2001and 2000, the carrying values of the mortgage loans held prior tosecuritization, net, are $367.0 million and $105.2 million,respectively. The carrying value of securitized loans, net, atDecember 31, 2001 is $1,035 million. Due to the change insecuritization structures subsequent to July 5, 2001, whichresulted in a change from gain on sale accounting to portfolioaccounting, no data for securitized loans is available for 2000.

          Thefollowing methods and assumptions were used to estimate the fairvalue of the Company's financial instruments:

          **Mortgageloan portfolio –**The mortgage loan portfolio's fairvalue is determined by the projected carrying cost or a marketprice based upon investor demand. The fair value of the principalbalance of the mortgage loan portfolio at December 31, 2001 and2000 is $1,741.9 million and $105.2 million, respectively.

          **Residuals–**At December 31, 2001 the Company did not own anymortgage loan residual assets. All mortgage loan residuals weretransferred to Dominion Capital at the time of sale as part ofthe sale agreement. At December 31, 2000 the fair value of theCompany's investment in mortgage loan residuals was based onestimates of market assumptions based on the type of collateral,estimates of prepayment, credit loss assumptions, and discountedcash flows.

          **Subordinatebonds –**At December 31, 2001 Saxon Capital Inc. did notown any mortgage subordinate bonds. All mortgage loan subordinatebonds were transferred to Dominion Capital at the time of sale aspart of the sale agreement. At December 31, 2000 the fair valueof the Company's investment in mortgage loan subordinate bondswas based on the price of similar bonds trading in the secondarymarket at year-end.

          **Derivativeinstruments –**At December 31, 2001 derivativeinstruments are held on the balance sheet as an asset. Theseitems are marked-to-market using broker pricing with any gains orlosses being recognized in earnings. At December 31, 2000derivatives were off-balance 

F-29

----

sheet items marked-to-market with any unrealized gains orlosses deferred until the related loans were securitized or sold.

          **Limitedrecourse debt** – Limited recourse debt is the debtassociated with the ABS securitizations. Limited recourse debt issecured by mortgage loans securitized and the fair value isdetermined based on the net present value of future cash flows.The fair value at December 31, 2001 is $1,346.2 million.

          **Notepayable –**The fair value of the note payable with afixed interest rate is determined by the present value of futurepayments based on interest rate conditions at December 31, 2001.The fair value of the note payable at December 31, 2001 is $25.5million.

          **Warehousefinancing –** Warehouse financing is secured by mortgageloans held prior to securitization and is tied to one month LIBORand accordingly carrying value is considered a reasonableestimate of fair value.

          **Dueto Dominion Capital –**At December 31, 2000 the carryingamount of due to Dominion Capital with variable interest rates isa reasonable estimate of fair value.

**(21)    Acquisition of SCIServices, Inc. and Issuance of Common Stock**

          OnJuly 6, 2001, Saxon Capital, Inc. issued 28,000,000shares of $.01 par value common stock at a price of $9.30 pershare (net of underwriter's discount) and 50,000 shares at aprice of $10.00 per share. A portion of the proceeds was used toacquire SCI Services, Inc., as described below.

          OnJuly 6, 2001, the Company, acquired 100 percent of theissued and outstanding common shares of SCI Services, Inc. fromDominion Capital at a price equal to its adjusted book value(excluding certain assets, liabilities and goodwill ("oldgoodwill")) at closing plus a $5 million premium. Inaddition, SCI Services, Inc. paid a $6.7 millionpremium for mortgage loans held for sale, which represented theaccretion in value of mortgage loans after February 28,2001. Dominion Capital retained interest-only residual assets,and subordinated bonds that Saxon retained in securitizationsbefore July 6, 2001. In addition, the due to DominionCapital liability and all tax liabilities were paid at closing.The aggregate purchase price was $170.3 million, including$145.3 million of cash and a $25 million note payable toDominion Capital. The note to Dominion Capital pays interest at8% per annum and is due in full on July 6, 2006.

          Inconnection with the acquisition of Saxon Capital, Inc., the oldgoodwill recorded on SCI Services, Inc. was determined to beimpaired as the purchase price paid for SCI Services, Inc. wassubstantially at net book value, excluding old goodwill. As such,SCI Services, Inc. recorded a $45.0 million permanentimpairment charge to its consolidated statement of operations inthe second quarter of 2001.

          Thefollowing table summarizes the estimated fair values of theassets acquired and liabilities assumed at the date ofacquisition.

F-30

----

**At July 6, 2001**

**($ in thousands)**

| Cash                                                                  | $2,999                                                                              |
|-----------------------------------------------------------------------|-------------------------------------------------------------------------------------|
| Mortgage        loans held for sale                                   | 669,680                                                                             |
| Mortgage        servicing rights                                      | 41,616                                                                              |
| Servicing        related assets                                       | 81,526                                                                              |
| Furniture,        fixtures and equipment                              | 4,755                                                                               |
| Other assets                                                          |              6,925 |
|       Total        assets acquired      | 807,501                                                                             |
| Warehouse        financing                                            | 631,036                                                                             |
| Other current        liabilities                                      |             10,973      |
|       Total        liabilities acquired |           642,009                 |
|       Net        assets acquired        | 165,492                                                                             |
| Purchase        price paid                                            |           170,325                 |
| Goodwill                                                              |         $    4,833      |

          Theacquisition of Saxon Capital, Inc. resulted in goodwill("new goodwill") of $4.8 million. In accordance withSFAS No. 142, *Goodwill and Other Intangible Assets*,which was issued in June 2001, new goodwill, which isincluded in other assets, will not be amortized but will beevaluated periodically for impairment.

**(22)    Commitments and Contingencies**

> 
*Leases*

          TheCompany is obligated under non-cancelable operating leases forproperty and both operating and capital leases for equipment.Minimum annual rental payments are as follows:

|                                               |                                                                                      | **               Equipment               ** |
|----------------------------------------------------|-------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                               | **Property****   Operating   **                             | ******   Operating   **                                                                                                                                             | ******   Capital   ** |
|                                               | **($ in thousands)**                                                                      |
| 2002                                               | $ 3,149                                                                                   | $1,545                                                                                                                                                                                            | $41 |
| 2003                                               | 3,171                                                                                     | 664                                                                                                                                                                                               | 40 |
| 2004                                               | 2,854                                                                                     | 291                                                                                                                                                                                               | — |
| 2005                                               | 2,385                                                                                     | 2                                                                                                                                                                                                 | — |
| 2006                                               | 1,605                                                                                     | —                                                                                                                                                                                            | — |
| Thereafter                                         |               2,417 |                  —                                                                                      |             — |
| Total                                              |           $15,581                       |           $2,502                                                                                                                                |           $81 |
| Imputed        interest rate                       |                                                                                      |                                                                                                                                                                                              | 6.4% |
| Present        value of net minimum lease payments |                                                                                      |                                                                                                                                                                                              | $79 |

          SaxonCapital, Inc. entered into two operating lease agreements forproperty in January 2002. These leases have been included in theabove schedule, as they will affect minimum annual rentalpayments in the future. Rent and lease expense amounted to $3.0million, $2.7 

F-31

----

million, $4.9 million, and $3.6 million for the periods July6, 2001 to December 31, 2001 and January 1, 2001 to July 5, 2001and the years ended December 31, 2000 and 1999, respectively.

> 
*Mortgage Loans*

          AtDecember 31, 2001 and 2000, the Company had commitments to fundmortgage loans of approximately $197.8 and $161.8 million,respectively. This does not necessarily represent future cashrequirements, as some portion of the commitments will expirewithout being drawn upon or will be subsequently declined forcredit or other reasons.

          Aspart of its representations and warranties made at the time ofsecuritization, the Company guarantees that it will repurchaseany loan, which is found to have violated standardrepresentations and warranties. As of December 31, 2001 and 2000,the Company was not obligated to repurchase any loans that hadbeen securitized.

> 
*Legal Matters*

          Becausethe nature of the Company's business involves the collection ofnumerous accounts, the validity of liens and compliance withvarious state and federal lending laws, the Company is subject,in the normal course of business, to various legal proceedings.The resolution of these lawsuits, in management's opinion, willnot have a material adverse effect on the financial position orthe results of operations of the Company.

> 
*Insurance Policies*

          Asof December 31, 2001, the Company carried a mortgageimpairment (errors and omissions) policy of $10 million, abanker's professional/lenders liability policy of $10 million, afinancial institutions bond for $15 million, a fiduciaryliability policy for $10 million, an employment practicesliability policy for $10 million, and directors and officersliability insurance totaling $50 million.

**(23)    Related Party Transactions**

          AtDecember 31, 2001 and 2000, the Company had $10.9 million and$7.3 million, respectively, of unpaid principal balances, relatedto first mortgage loans originated for employees of the Companyand certain officers of Dominion Resources. These mortgage loanswere underwritten to the Company's underwriting guidelines. Whenmaking loans to our employees, the Company waives loanorigination fees that otherwise would be paid to us by theborrower, and reduces the interest rate by 25 basis points fromthe market rate.

          During2001, the Company paid $0.4 million to OIC Design, Inc.("OIC") for marketing and printing materials. Of thisamount, $0.1 million represented design fees and $0.3 millionwere primarily for printing and postage fees incurred by OIC onbehalf of the Company. No amounts were paid during 2000. Theowner and principal officer of OIC is the spouse of the Company'sVice President of Capital Markets. Payments made to OIC forservices rendered are not in excess of fair market prices forsimilar services.

F-32

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**(24)    Segments**

          Theoperating segments reported below are the segments of the Companyfor which separate financial information is available and forwhich revenues and operating income amounts are evaluatedregularly by management in deciding how to allocate resources andin assessing performance. The accounting policies of the businesssegments are the same as those described in the summary ofsignificant accounting policies (Note 1).

          Segmentrevenues and operating income amounts are evaluated and includethe economic value of mortgage loans originated, servicingincome, other income and expense, and general and administrativeexpenses. Economic value of mortgage loans originated representsthe amount in excess of the segment's basis in its loanoriginations that generate a required after tax return ofcapital.

          Certainamounts are not evaluated at the segment level and are includedin the segment net operating income (loss) reconciliation below.The unallocated gain (loss) on securitizations represents thedifference between the segment's economic value of mortgage loansoriginated and the actual gain on securitization. For the periodJuly 6, 2001 to December 31, 2001, the segment's economic valueof mortgage loans originated was required to be eliminated sincethe Company now structures our securitizations as financingtransactions.

          Managementdoes not identify assets to the segments and evaluates assetsonly at the consolidated level. As such, only operating resultsfor the segments are included herein.

|                                                                                                                        |                                                                                                                          | **                              Predecessor                    ** |
|-----------------------------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                        | **July 6 to        December 31,****       2001       ** | **January 1 to        July 5,****     2001     **                                                                                                                                                                                                                         | **     2000     ** | **     1999     ** |
|                                                                                                                        | ($ in thousands)                                                                                                              |
| **Segment        Revenues:**                                                                                                |                                                                                                                          |                                                                                                                                                                                                                                                                                                                        |   |   |
|       Wholesale                                                                               | $27,760                                                                                                                       | $24,069                                                                                                                                                                                                                                                                                                                     | $24,309 | $29,587 |
|       Correspondent                                                                           | 9,229                                                                                                                         | 8,884                                                                                                                                                                                                                                                                                                                       | 12,047 | 30,878 |
|       Retail                                                                                  | 13,845                                                                                                                        | 10,872                                                                                                                                                                                                                                                                                                                      | 14,551 | 12,554 |
|       Servicing                                                                               |             11,681                                                |             16,550                                                                                                                                                                                                                                              |         25,208 |           15,984 |
|             Total        Segment Revenues                       |           $62,515                                                           |           $60,375                                                                                                                                                                                                                                                         |        $76,115 |         $89,003 |
|                                                                                                                        |                                                                                                                          |                                                                                                                                                                                                                                                                                                                        |   |   |
| **Segment        Operating Income (Loss):**                                                                                 |                                                                                                                          |                                                                                                                                                                                                                                                                                                                        |   |   |
|       Wholesale                                                                               | $21,128                                                                                                                       | $15,857                                                                                                                                                                                                                                                                                                                     | $8,918 | $4,540 |
|       Correspondent                                                                           | 6,504                                                                                                                         | 5,606                                                                                                                                                                                                                                                                                                                       | 5,558 | 24,861 |
|       Retail                                                                                  | 4,292                                                                                                                         | 2,124                                                                                                                                                                                                                                                                                                                       | (1,225) | 751 |
|       Servicing                                                                               |               1,171                                     |               7,112                                                                                                                                                                                                                                   |          10,836 |            2,588 |
|             Total        Segment Net Operating Income           |           $33,095                                                           |           $30,699                                                                                                                                                                                                                                                         |        $24,087 |        $32,740 |
|                                                                                                                        |                                                                                                                          |                                                                                                                                                                                                                                                                                                                        |   |   |
| **Segment        Net Operating Income Reconciliation**                                                                      |                                                                                                                          |                                                                                                                                                                                                                                                                                                                        |   |   |
| Total        segment operating income                                                                                       | $33,095                                                                                                                       | $30,699                                                                                                                                                                                                                                                                                                                     | $24,087 | $32,740 |
| Net        interest income                                                                                                  | 26,871                                                                                                                        | 3,807                                                                                                                                                                                                                                                                                                                       | 9,569 | 24,476 |
| Provision        for loan losses                                                                                            | (11,861)                                                                                                                      | (8,423)                                                                                                                                                                                                                                                                                                                     | (6,403) | (9,107) |
| Unallocated        gain (loss) on securitizations                                                                           | —                                                                                                                        | (8,518)                                                                                                                                                                                                                                                                                                                     | 23,994 | 26,202 |
| Elimination        of segment economic value of              mortgage loans        originated | (50,604)                                                                                                                      | —                                                                                                                                                                                                                                                                                                                      | — | — |

F-33

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| Unallocated        shared general and administrative              expenses | (7,745)                                                                                                                                    | (16,417)                                                       | (15,406)                                                                                               | (8,127)                                                                                    |
|----------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------|--------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------|
| Residual        losses                                                                                   | —                                                                                                                                     | (7,301)                                                        | (108,445)                                                                                              | (8,308)                                                                                    |
| Impairment        of SCI Services, Inc. goodwill                                                         |                       — |          (44,963) |                 — |               — |
| Total        consolidated (loss) income before taxes                                                     |            $(10,244)                                                                |        $(51,116)            |      $(72,604)                                                                |      $57,876                                                      |

F-34

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**Exhibit Index**

| **Exhibit        Number** |   | **Description**                                                                                                                                                                                                                                                            |
|---------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                      |   |                                                                                                                                                                                                                                                                       |
| 3.1                       |   | Amended and        Restated Certificate of Incorporation of Saxon        Capital, Inc.(1)                                                                                                                                                                             |
| 3.2                       |   | Amended and        Restated Bylaws of Saxon Capital, Inc. (1)                                                                                                                                                                                                         |
| 4                         |   | Form of        Common Stock Certificate(1)                                                                                                                                                                                                                                 |
| 9                         |   | Voting        Agreement by and between Saxon Capital Acquisition        Corporation and Friedman, Billings, Ramsey & Co.,        Inc. dated July 6, 2001(1)                                                                                                            |
| 10.1                      |   | Form of Saxon        Capital, Inc. 2001 Stock Incentive Plan(1)                                                                                                                                                                                                       |
| 10.2                      |   | Form of        Employment Agreement of Michael L. Sawyer, dated        June 7, 2001(1)                                                                                                                                                                                |
| 10.3                      |   | Form of        Employment Agreement of Dennis G. Stowe, dated        June 7, 2001(1)                                                                                                                                                                                  |
| 10.4                      |   | Form of        Employment Agreement of Robert G. Partlow, dated        June 7, 2001(1)                                                                                                                                                                                |
| 10.5                      |   | Purchase        Agreement by and between Saxon Capital Acquisition Corp.        and Friedman, Billings,        Ramsey & Co., Inc. dated June 29,        2001(1)                                                                                    |
| 10.6                      |   | Stock        Purchase Agreement by and among Dominion        Capital, Inc., Saxon Acquisition Corp., and SCI        Services, Inc. dated June 7, 2001(1)                                                                                                    |
| 10.7                      |   | First        Amendment to the Stock Purchase Agreement dated        June 7, 2001 by and among Dominion        Capital, Inc., Saxon Acquisition Corp., and SCI        Services, Inc. dated June 29, 2001(1)                                             |
| 10.8                      |   | Residual        Assignment and Services Agreement, by and among Saxon        Acquisition Corp., SCI Services, Inc., Saxon        Mortgage, Inc., Meritech Mortgage        Services, Inc., and Dominion Capital, Inc.        dated June 7, 2001(1) |
| 10.9                      |   | Registration        Rights Agreement by and between Saxon Capital Acquisition        Corp. and Friedman, Billings,        Ramsey & Co., Inc. dated July 6,        2001(1)                                                                          |
| 10.10                     |   | FBR Warrant        Agreement by and between Saxon Capital Acquisition Corp.        and Friedman, Billings,        Ramsey & Co., Inc. dated July 6,        2001(1)                                                                                  |
| 10.11                     |   | Promissory        Note dated July 6, 2001 in the principal amount of        $25,000,000 payable to Dominion Capital, Inc.        (1)                                                                                                                             |
| 10.12                     |   | Form of        Option Grant to Edward G. Harshfield dated July 6,        2001(1)                                                                                                                                                                                      |
| 10.13                     |   | Form of        Option Grant to Richard A. Kraemer dated July 6,        2001(1)                                                                                                                                                                                        |
| 10.14                     |   | Form of        Option Grant to David Wesselink dated July 12, 2001(1)                                                                                                                                                                                                 |
| 10.15                     |   | Deed of Lease        between Innslake, L.P. and Resource Mortgage        Capital, Inc., dated September 15, 1994, as        amended(1)                                                                                                                      |
| 10.16                     |   | Lease        Agreement by and between Mercantile Partners, L.P. and        Meritech Mortgage Services, Inc. dated April 1,        1999, as amended(1)                                                                                                                 |
| 10.17                     |   | Form of Saxon        Capital, Inc. 2001 Employee Stock Purchase Plan, as        amended January 7, 2002(1)                                                                                                                                                            |
| 10.18                     |   | Form of        Option Grant to Thomas J. Wageman dated October 9,        2001(1)                                                                                                                                                                                      |
| 21                        |   | List of        subsidiaries of Saxon Capital, Inc. (1)                                                                                                                                                                                                                |
| 23                        |   | Consent of        Deloitte & Touche LLP                                                                                                                                                                                                                      |
| 24                        |   | Power of        Attorney (included on signature page)                                                                                                                                                                                                                      |

| __________________ |
|--------------------|
| (1)                | Incorporated by reference        from our Registration Statement on Form S-1, Registration        Statement 333-71052, declared effective by the Securities        and Exchange Commission on January 14, 2002. |

F-35

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Exhibit 23.1

**INDEPENDENT AUDITORS' CONSENT**

          Weconsent to the incorporation by reference in RegistrationStatement No. 333-76776 of Saxon Capital, Inc. on Form S-8 of ourreport dated January 28, 2002, appearing in the Annual Report onForm 10-K of Saxon Capital, Inc. for the year ended December 31,2001.

Deloitte & Touche, LLPRichmond, VirginiaMarch 28, 2002