<PAGE>

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

                                    FORM 10-Q



(Mark One)

[X]      QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES AND
         EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2000

[ ]      TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
         ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO _____

                         Commission File Number: 0-22474


                   AMERICAN BUSINESS FINANCIAL SERVICES, INC.
             ------------------------------------------------------
             (Exact name of registrant as specified in its charter)


              Delaware                                   87-0418807
-----------------------------------        ------------------------------------
  (State or other jurisdiction of          (I.R.S. Employer Identification No.)
   incorporation or organization)


                111 Presidential Boulevard, Bala Cynwyd, PA 19004
               ---------------------------------------------------
               (Address of principal executive offices) (Zip Code)


                                 (610) 668-2440
               ---------------------------------------------------
               (Registrant's telephone number including area code)


Indicate by check mark whether the issuer (1) filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.

                               Yes  [X]     No  [ ]


As of February 6, 2001, there were 3,070,818 shares of the registrant's Common
Stock issued and outstanding.




<PAGE>


           American Business Financial Services, Inc. and Subsidiaries

                                      INDEX
<TABLE>
<CAPTION>

                                                                                                                Page
                                                                                                                ----
<S>     <C>                                                                                                    <C>
PART I   FINANCIAL INFORMATION

Item 1.  Financial Information

   Consolidated Balance Sheets as of December 31, 2000 and June 30, 2000..........................................1
   Consolidated Statements of Income for the three and six months ended December 31, 2000 and 1999................2
   Consolidated Statement of Stockholders' Equity for the six months ended December 31, 2000 .....................3
   Consolidated Statements of Cash Flow for the six months ended December 31, 2000 and 1999.......................4
   Notes to Consolidated Financial Statements.....................................................................6

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

Item 3.  Quantitative and Qualitative Disclosure about Market Risk...............................................53


PART II. OTHER INFORMATION

Item 1.  Legal Proceedings.......................................................................................54
Item 2.  Changes in Securities...................................................................................54
Item 3.  Defaults Upon Senior Securities.........................................................................54
Item 4.  Submission of Matters to a Vote of Security Holders.....................................................54
Item 5.  Other Information.......................................................................................54
Item 6.  Exhibits and Reports on Form 8-K........................................................................54
</TABLE>



<PAGE>

PART I - FINANCIAL INFORMATION
Item 1. Financial Information

           American Business Financial Services, Inc. and Subsidiaries
                           Consolidated Balance Sheets
                             (dollars in thousands)
<TABLE>
<CAPTION>
                                                                               December 31,                  June 30,
                                                                                   2000                        2000
                                                                          ------------------------     --------------------
                                                                                (Unaudited)                   (Note)
<S>                                                                          <C>                       <C>
Assets
Cash and cash equivalents                                                     $      43,400               $      69,751
Loan and lease receivables, net
   Available for sale (net allowance for loan and lease losses of
       $1,939 at December 31, 2000 and $1,289 at June 30, 2000)                      72,672                      44,132
   Other                                                                             16,718                      13,002
Interest-only strips                                                                339,029                     277,872
Servicing rights                                                                     92,129                      74,919
Receivable for sold loans and leases                                                 14,509                      51,283
Prepaid expenses                                                                      2,790                       2,209
Property and equipment, net                                                          19,886                      17,756
Other assets                                                                         42,868                      41,744
                                                                              -------------               -------------
Total assets                                                                  $     644,001               $     592,668
                                                                              =============               =============
Liabilities and Stockholders' Equity
Liabilities
Subordinated debt                                                             $     430,617               $     390,676
Warehouse lines and other notes payable                                              49,262                      50,842
Accounts payable and accrued expenses                                                38,110                      31,496
Deferred income taxes                                                                27,709                      22,773
Other liabilities                                                                    30,287                      34,766
                                                                              -------------               -------------
Total liabilities                                                                   575,985                     530,553
                                                                              -------------               -------------
Stockholders' Equity
Preferred stock, par value $.001, Authorized, 1,000,000
    shares issued and outstanding, none                                                  --                          --
Common stock, par value $.001, Authorized, 9,000,000 shares
    Issued: 3,642,592 shares at December 31, 2000 and June 30,
    2000 (including treasury shares of 421,418 at December 31,
    2000 and 318,918 June 30, 2000)                                                       4                           4
Additional paid-in capital                                                           24,366                      24,291
Accumulated other comprehensive income                                                8,648                       5,458
Retained earnings                                                                    40,075                      36,850
Treasury stock: 421,418 shares at December 31, 2000 and
    318,918 shares at June 30, 2000.                                                 (4,477)                     (3,888)
                                                                              -------------               -------------
                                                                                     68,616                      62,715
Note receivable                                                                        (600)                       (600)
                                                                              -------------               -------------
Total stockholders' equity                                                           68,016                      62,115
                                                                              -------------               -------------
Total liabilities and stockholders' equity                                    $     644,001               $     592,668
                                                                              =============               =============
</TABLE>
Note:  The balance sheet at June 30, 2000 has been derived from the audited
       financial statements at that date.

          See accompanying notes to consolidated financial statements.

                                       1
<PAGE>


           American Business Financial Services, Inc. and Subsidiaries
                        Consolidated Statements of Income
                  (amounts in thousands except per share data)
                                   (unaudited)
<TABLE>
<CAPTION>
                                                             Three Months Ended                   Six Months Ended
                                                                December 31,                        December 31,
                                                     ------------------------------------  -------------------------------
                                                             2000              1999              2000             1999
                                                     ------------------- ----------------  ---------------    ------------
<S>                                                  <C>                 <C>              <C>               <C>
Revenues
Gain on sale of loans and leases                     $           31,009  $        20,492   $        57,099    $     39,613
Interest and fees                                                 6,017            4,737            11,255           9,497
Interest accretion on interest-only strips                        5,821            4,316            11,419           7,065
Servicing income                                                  1,666            1,050             3,161           2,239
Other income                                                          2                2                 4               3
                                                     ------------------  ---------------   ---------------    ------------
Total revenues                                                   44,515           30,597            82,938          58,417
                                                     ------------------  ---------------   ---------------    ------------
Expenses
Interest                                                         14,057            8,417            26,864          16,063
Provision for credit losses                                         540              568             1,408             709
Employee related costs                                            7,156            2,527            14,063           4,522
Sales and marketing                                               6,034            6,677            11,752          13,864
General and administrative                                       12,725            6,145            22,592          10,679
                                                     ------------------  ---------------   ---------------    ------------
Total expenses                                                   40,512           24,334            76,679          45,837
                                                     ------------------  ---------------   ---------------    ------------
Income before provision for income taxes                          4,003            6,263             6,259          12,580
Provision for income taxes                                        1,602            2,505             2,504           5,032
                                                     ------------------  ---------------   ---------------    ------------
Net Income                                           $            2,401  $         3,758   $         3,755    $      7,548
                                                     ==================  ===============   ===============    ============
Earnings per common share:
   Basic                                             $             0.72  $          1.10   $          1.13    $       2.16
                                                     ==================  ===============   ===============    ============
   Diluted                                           $             0.72  $          1.08   $          1.12    $       2.11
                                                     ==================  ===============   ===============    ============
Average common shares:
   Basic                                                          3,309            3,397             3,316           3,489
                                                     ==================  ===============   ===============    ============
   Diluted                                                        3,328            3,478             3,367           3,571
                                                     ==================  ===============   ===============    ============
</TABLE>


          See accompanying notes to consolidated financial statements.

                                       2
<PAGE>

           American Business Financial Services, Inc. and Subsidiaries
                 Consolidated Statement of Stockholders' Equity
                             (amounts in thousands)
                                   (unaudited)
<TABLE>
<CAPTION>
                                                     Common Stock
                                              --------------------------                   Accumulated
                                                Number of                   Additional        Other
                                                  Shares                      Paid-In     Comprehensive      Retained
                                               Outstanding       Amount       Capital         Income         Earnings
                                              -------------   ----------   ------------  ---------------  ------------
<S>                                            <C>           <C>          <C>            <C>              <C>
Balance June 30, 2000....................          3,324       $      4     $    24,291    $     5,458     $    36,850
Comprehensive income:
  Net income.............................             --             --              --             --           3,755
  Unrealized gain on interest-only strips             --             --              --          3,190              --
                                              ----------       --------     -----------    -----------     -----------
Total comprehensive income...............             --             --              --          3,190           3,755

Issuance of non-employee stock options...             --             --              75             --              --
Repurchase of treasury shares............           (103)            --              --             --              --
Cash dividends ($0.16 per share).........             --             --                             --            (530)
                                              ----------       --------     -----------    -----------     -----------
Balance December 31, 2000                          3,221       $      4     $    24,366    $     8,648     $    40,075
                                              ==========       ========     ===========    ===========     ===========
</TABLE>


[RESTUB]

<TABLE>
<CAPTION>


                                                                                    Total
                                                   Treasury          Note        Stockholders'
                                                     Stock        Receivable        Equity
                                                -------------   -------------   --------------
<S>                                             <C>              <C>            <C>
Balance June 30, 2000....................        $    (3,888)     $     (600)    $    62,115
Comprehensive income:
  Net income.............................                 --              --           3,755
  Unrealized gain on interest-only strips                 --              --           3,190
                                                  ----------      ----------      ----------
Total comprehensive income...............                 --              --           6,945

Issuance of non-employee stock options...                 --              --              75
Repurchase of treasury shares............               (589)             --            (589)
Cash dividends ($0.16 per share).........                                 --            (530)
                                                  ----------      ----------      ----------
Balance December 31, 2000                         $   (4,477)     $     (600)     $   68,016
                                                  ==========      ==========      ==========
</TABLE>


          See accompanying notes to consolidated financial statements.

                                       3
<PAGE>


           American Business Financial Services, Inc. and Subsidiaries
                      Consolidated Statements of Cash Flow
                             (dollars in thousands)
                                   (unaudited)
<TABLE>
<CAPTION>
                                                                                            Six Months Ended
                                                                                              December 31,
                                                                                  -----------------------------------
                                                                                       2000                  1999
                                                                                  --------------        -------------
<S>                                                                               <C>                   <C>
Cash Flow from Operating Activities:
Net income                                                                        $      3,755          $     7,548
Adjustments to reconcile net income to net cash
   used in operating activities:
         Gain on sale of loans and leases                                              (57,099)             (39,613)
         Depreciation and amortization                                                  13,038                8,733
         Interest accretion on interest-only strips                                    (11,419)              (7,065)
         Provision for credit losses                                                     1,408                  709
         Accounts written off, net                                                        (758)              (1,072)
Loans and leases originated for sale                                                  (620,391)            (536,381)
Proceeds from sale of loans and leases                                                 570,233              500,636
Principal payments on loans and leases                                                   3,649                2,383
Increase in accrued interest and fees on loan and
   lease receivables                                                                   (3,716)              (2,040)
Purchase of initial overcollateralization on securitized
   loans and leases                                                                     (2,211)              (4,375)
Required purchase of additional overcollateralization on
   securitized loans and leases                                                        (19,777)             (12,411)
Cash flow from interest-only strips                                                     35,310               19,981
Decrease (increase) in receivable for loans and leases sold                             38,350              (19,313)
Increase in prepaid expenses                                                              (581)              (1,798)
Increase in accounts payable and accrued expenses                                        6,614                5,981
Increase in deferred income taxes                                                        2,833                5,881
Decrease in loans in process                                                            (9,390)             (10,199)
Other, net                                                                              (5,908)               1,123
                                                                                  ------------          -----------
Net cash used in operating activities                                                  (56,060)             (81,292)
                                                                                  ------------          -----------
Cash Flows from Investing Activities:
   Purchase of property and equipment, net                                              (5,112)              (6,122)
   Sales, redemptions or maturities of investments                                         238                   11
                                                                                  ------------          -----------
Net cash used in investing activities                                             $     (4,874)         $    (6,111)
                                                                                  ------------          -----------
</TABLE>


                                       4

<PAGE>


           American Business Financial Services, Inc. and Subsidiaries
                Consolidated Statements of Cash Flow (continued)
                             (dollars in thousands)
                                   (unaudited)
<TABLE>
<CAPTION>
                                                                                           Six Months Ended
                                                                                              December 31,
                                                                                  -----------------------------------
                                                                                      2000                  1999
                                                                                  --------------        -------------
<S>                                                                              <C>                    <C>
Cash Flow from Financing Activities:
   Proceeds from issuance of subordinated debt                                    $     83,403          $    89,806
   Redemptions of subordinated debt                                                    (43,462)             (35,322)
   Net borrowings on revolving lines of credit                                           1,168               35,692
   Principal payments on lease financing facility                                       (1,954)                   -
   Repayments of repurchase agreement                                                     (490)                   -
   Repayments of other notes payable                                                      (303)              (1,714)
   Financing costs incurred                                                             (2,660)              (1,384)
   Cash dividends paid                                                                    (530)                (497)
   Exercise of employee stock options                                                        -                  150
   Repurchase of treasury stock                                                           (589)              (2,807)
                                                                                  ------------          -----------
Net cash provided by financing activities                                               34,583               83,924
                                                                                  ------------          -----------
   Net decrease in cash and cash equivalents                                           (26,351)              (3,479)
   Cash and cash equivalents, beginning of period                                       69,751               22,395
                                                                                  ------------          -----------
   Cash and cash equivalents, end of period                                       $     43,400          $    18,916
                                                                                  ============          ===========
Supplemental disclosure of cash flow information
   Cash paid during the period for:
      Interest                                                                    $     18,812          $    11,606
                                                                                  ============          ===========
      Income taxes                                                                $        528          $         -
                                                                                  ============          ===========
</TABLE>

           See accompanying note to consolidated financial statements.

                                       5
<PAGE>

           American Business Financial Services, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements
                                December 31, 2000

1.       Basis of Financial Statement Presentation

         American Business Financial Services, Inc., together with its
         subsidiaries (the "Company"), is a diversified financial service
         company operating throughout the United States. The Company originates
         loans through a combination of channels including a national processing
         center located in the Company's centralized operating office in Bala
         Cynwyd, Pennsylvania, and a retail branch network of offices. The
         Company, through its principal direct and indirect subsidiaries,
         originates, sells and services loans to businesses secured by real
         estate and other business assets and conventional first mortgage and
         home equity loans, typically to credit impaired borrowers secured by
         first and second mortgages. In addition, the Company offers
         subordinated debt securities to the public, the proceeds of which are
         used to fund loan originations and the Company's operations.

         Prior to December 31, 1999 the Company also originated equipment
         leases. Effective December 31, 1999 the Company de-emphasized the
         leasing origination business as a result of its strategy of focusing on
         its most profitable lines of business. The Company is continuing to
         service the remaining leases in its managed portfolio which totaled
         $91.6 million at December 31, 2000.

         The accompanying unaudited consolidated financial statements have been
         prepared in accordance with generally accepted accounting principles
         for interim financial information and pursuant to the rules and
         regulations of the Securities and Exchange Commission. Accordingly,
         they do not include all the information and footnotes required by
         generally accepted accounting principles for complete financial
         statements. In the opinion of management, all adjustments (consisting
         of normal recurring accruals and the elimination of intercompany
         balances) considered necessary for a fair presentation have been
         included. Operating results for the six month period ended December 31,
         2000 are not necessarily indicative of financial results that may be
         expected for the full year ended June 30, 2001. These unaudited
         consolidated financial statements should be read in conjunction with
         the audited consolidated financial statements and notes thereto
         included in the Company's Annual Report on Form 10-K for the fiscal
         year ended June 30, 2000.

         Certain prior period financial statement balances have been
         reclassified to conform to current period presentation.

         Recent Accounting Pronouncements

         In June 1998, the Financial Accounting Standards Board (the "FASB")
         issued Statement of Financial Accounting Standards No. 133 "Accounting
         for Derivative Instruments and Hedging Activities" ("SFAS No. 133").
         SFAS No. 133 establishes accounting and reporting standards for
         derivative instruments, including certain derivative instruments
         embedded in other contracts (collectively referred to as derivatives),
         and for hedging activities. It requires that an entity recognize all
         derivatives as either assets or liabilities in the statement of
         financial position and measure those instruments at fair value. If
         certain conditions are met, a derivative may be specifically designated
         as (a) a hedge of the exposure to changes in the fair value of a
         recognized asset or liability or an unrecognized firm commitment (fair
         value hedge), (b) a hedge of the exposure to variable cash flows of a
         forecasted transaction (cash flow hedge), or (c) a hedge of

                                       6
<PAGE>

           American Business Financial Services, Inc. and Subsidiaries
             Notes to Consolidated Financial Statements (Continued)
                                December 31, 2000

1.       Basis of Financial Statement Presentation - (Continued)

         the foreign currency exposure of a net investment in a foreign
         operation. If a derivative is a hedge, depending on the nature of the
         hedge designation, changes in the fair value of a derivative are either
         offset against the change in the fair value of assets, liabilities, or
         firm commitments through earnings or recognized in other comprehensive
         income until the hedged item is recognized in earnings. The ineffective
         portion of a derivative's change in fair value will be recognized in
         earnings immediately.

         SFAS No. 133 was effective on a prospective basis for all fiscal
         quarters of fiscal years beginning after June 15, 2000. The adoption of
         SFAS No. 133 on July 1, 2000 resulted in the cumulative effect of a
         change in accounting principal of $15 thousand pre-tax being recognized
         as expense in the Consolidated Statement of Income for the six months
         ended December 31, 2000. Due to the immateriality of the cumulative
         effect of adopting SFAS No. 133, the $15 thousand pre-tax expense is
         included in general and administrative expense in the Consolidated
         Statement of Income. The tax effects and earnings per share amounts
         related to the cumulative effect of adopting SFAS No. 133 are not
         material.

         In September 2000, the FASB issued the Statement of Financial
         Accounting Standards No. 140 "Accounting for Transfers and Servicing of
         Financial Assets and Extinguishments of Liabilities" ("SFAS No. 140").
         SFAS No. 140 replaces FASB Statement of Financial Accounting Standards
         No. 125 ("SFAS No. 125"), also titled "Accounting for Transfers and
         Servicing of Financial Assets and Extinguishments of Liabilities." SFAS
         No. 140 revises the standards for accounting for securitizations and
         other transfers of financial assets and collateral and requires certain
         disclosures, but it carries over most of SFAS No. 125's provisions
         without reconsideration.

         SFAS No. 140's standards are based on consistent application of a
         financial-components approach that focuses on control. Under that
         approach, after a transfer of financial assets, an entity recognizes
         the financial and servicing assets it controls and the liabilities it
         has incurred, derecognizes financial assets when control has been
         surrendered, and derecognizes liabilities when extinguished. This
         statement provides consistent standards for distinguishing transfers of
         financial assets that are sales from transfers that are secured
         borrowings.

         SFAS No. 140 is effective on a prospective basis for transfers and
         servicing of financial assets and extinguishments of liabilities
         occurring after March 31, 2001. This statement is effective for
         recognition and reclassification of collateral and for disclosures
         relating to securitization transactions and collateral for fiscal years
         ending after December 15, 2000. Disclosures about securitization and
         collateral accepted need not be reported for periods ending on or
         before December 15, 2000, for which financial statements are presented
         for comparative purposes. This Statement is to be applied prospectively
         with certain exceptions. Other than those exceptions, earlier or
         retroactive application of its accounting provisions is not permitted.
         The adoption of this standard is not expected to have a material effect
         on the Company's financial condition or results of operations.

                                       7

<PAGE>


           American Business Financial Services, Inc. and Subsidiaries
             Notes to Consolidated Financial Statements (Continued)
                                December 31, 2000


2.       Loan and Lease Receivables - Available for Sale

         Loan and lease receivables available for sale which are held by the
         Company were as follows (in thousands):
<TABLE>
<CAPTION>
                                                                December 31,         June 30,
                                                                    2000               2000
                                                              ---------------      -----------
<S>                                                             <C>                 <C>
Real estate secured loans.................................      $  58,058           $  26,589
Leases, net of unearned income of $1,946 and $2,503.......         16,553              18,832
                                                                ---------           ---------
                                                                   74,611              45,421
Less: Allowance for credit losses on loans and leases
   available for sale.....................................          1,939               1,289
                                                                ---------           ---------
                                                                $  72,672           $  44,132
                                                                =========           =========
</TABLE>
         At December 31, 2000 and June 30, 2000, the accrual of interest was
         suspended on real estate secured loans of $4.2 million and $4.3
         million, respectively.

3.       Interest-Only Strips

         Activity for interest-only strips for the six-month periods ended
         December 31, 2000 and 1999 were as follows (in thousands):
<TABLE>
<CAPTION>
                                                                          December 31,
                                                                -----------------------------
                                                                   2000               1999
                                                                ---------           ---------
<S>                                                             <C>                 <C>
Balance at beginning of period............................      $ 277,872           $ 178,218
Initial recognition of interest-only strips, including
   initial overcollateralization of $2,211 and $4,375.....         59,978              53,576
Required purchases of additional overcollateralization....         19,777              12,411
Interest accretion........................................         11,419               7,065
Cash flow from interest-only strips.......................        (35,310)            (19,981)
Net adjustments to fair value.............................          5,293                 948
                                                                ---------           ---------
Balance at end of period..................................      $ 339,029           $ 232,237
                                                                =========           =========
</TABLE>

         Interest-only strips include overcollateralization balances that
         represent excess principal balances of loans and leases in
         securitization trusts over investor interests maintained to provide
         credit enhancement to investors in securitization trusts. In order to
         meet the required overcollateralization levels, the trust initially
         retains cash flows until overcollateralization requirements, which are
         specific to each securitization, are met. At December 31, 2000, the
         Company's investment in overcollateralization was $102.4 million.

                                       8

<PAGE>


           American Business Financial Services, Inc. and Subsidiaries
             Notes to Consolidated Financial Statements (Continued)
                                December 31, 2000

4.       Servicing Rights

         Activity for servicing rights for the six-month periods ended December
         31, 2000 and 1999 were as follows (in thousands):
<TABLE>
<CAPTION>
                                                                          December 31,
                                                                -----------------------------
                                                                    2000              1999
                                                                ---------           ---------
<S>                                                             <C>                 <C>
Balance at beginning of period............................      $  74,919           $  43,210
Initial recognition of servicing rights...................         25,377              19,915
Amortization..............................................         (8,167)             (5,330)
                                                                ---------           ---------
Balance at end of period..................................      $  92,129           $  57,795
                                                                =========           =========
</TABLE>
         Servicing rights are periodically valued by the Company based on the
         current estimated fair value of the mortgage servicing asset. A review
         for impairment is performed by stratifying the serviced loans and
         leases based on the predominant risk characteristic, which consists of
         loan type. Key assumptions used in the periodic valuation of the
         servicing rights are described in "Management's Discussion and Analysis
         - Securitization Accounting Considerations." Impairments, if they
         occurred, would be recognized in a valuation allowance for each
         impaired stratum in the period of adjustment. As of December 31, 2000,
         no valuation allowance for impairment was required.

5.       Other Assets

         Other assets were comprised of the following (in thousands):
<TABLE>
<CAPTION>
                                                               December 31,          June 30,
                                                                   2000                2000
                                                               ------------         ---------
<S>                                                           <C>                  <C>
Goodwill, net of accumulated amortization of $3,804
   and $3,132..............................................     $  15,793           $  16,465
Financing costs, debt offering costs, net of accumulated
   amortization of $6,970 and $5,467.......................         7,890               6,244
Due from securitization trusts for servicing related
   activities..............................................        11,444              10,075
Other .....................................................         4,784               5,605
Real estate owned..........................................         1,499               1,659
Investments held to maturity...............................           963                 983
Investments available for sale (U.S. Treasury Securities)..           495                 713
                                                                ---------           ---------
                                                                $  42,868           $  41,744
                                                                =========           =========
</TABLE>

                                       9
<PAGE>


           American Business Financial Services, Inc. and Subsidiaries
             Notes to Consolidated Financial Statements (Continued)
                                December 31, 2000

6.       Subordinated Debt and Warehouse Lines and Other Notes Payable

         Subordinated debt was comprised of the following (in thousands):
<TABLE>
<CAPTION>
                                                               December 31,         June 30,
                                                                   2000               2000
                                                               ------------        ----------
<S>                                                             <C>                 <C>
Subordinated debentures (a)...............................      $ 421,511           $ 379,836
Subordinated debentures - money market notes(b)...........          9,106              10,840
                                                                ---------           ---------
Total subordinated debentures.............................      $ 430,617           $ 390,676
                                                                =========           =========
</TABLE>
         Warehouse lines and other notes payable were comprised of the following
         (in thousands):
<TABLE>
<CAPTION>

                                                                December 31,         June 30,
                                                                    2000               2000
                                                                ------------        ---------
<S>                                                              <C>                <C>
Warehouse and operating revolving line of credit (c) .....       $  24,750          $       -
Warehouse revolving line of credit (d)....................           8,069              3,861
Warehouse revolving line of credit (e)....................           5,688                250
Warehouse revolving line of credit (f)....................               -             28,229
Revolving line of credit (g)..............................               -              5,000
Repurchase agreement (h)..................................           3,116              3,606
Lease funding facility (i)................................           7,385              9,339
Other debt................................................             254                557
                                                                ----------          ---------
Total warehouse lines and other notes payable.............      $   49,262          $  50,842
                                                                ==========          =========
</TABLE>
        (a)     Subordinated debentures due January 2001 through December 2010,
                interest rates ranging from 7.00% to 12.50%; subordinated to all
                of the Company's senior indebtedness.
        (b)     Subordinated debentures-money market notes due upon demand,
                interest rate at 6.15%; subordinated to all of the Company's
                senior indebtedness.
        (c)     $50 million warehouse and operating revolving line of credit
                expiring December 2001, interest rates ranging from LIBOR plus
                1.5% to LIBOR plus 2.0%, collateralized by certain loan
                receivables and certain interest-only strips from securitization
                trusts. At any time the amount drawn for operating purposes is
                limited to $5 million.
        (d)     $25 million warehouse revolving line of credit expiring February
                2002, interest rates at LIBOR plus 1.75%, collateralized by
                certain loan receivables.
        (e)     $250 million warehouse line of credit expiring March 2001,
                interest rate of LIBOR plus 1.0%, collateralized by certain loan
                receivables. The combination of on-balance sheet borrowings
                against the warehouse facility to fund loan originations and the
                amount of loans sold into the off-balance sheet conduit facility
                at any point in time is limited to $250 million at December 31,
                2000. The sale into the off-balance sheet conduit facility
                involves a two-step transfer that qualifies for sale accounting
                under SFAS No. 125. First, we sell the loans to a special
                purpose entity which has been established for the limited
                purpose of buying and reselling the loans. Next, the special
                purpose entity sells the loans to a qualified special purpose
                entity (the "facility") for cash proceeds generated by its sale
                of notes to a third party purchaser. We have no obligation to
                repurchase the loans and neither the third party note purchaser
                nor the facility has a right to require such repurchase. The
                facility has the option to dispose of the loans, ordinarily by
                re-securitizing them. If the loans are not re-securitized by
                the facility, the third

                                       10
<PAGE>

           American Business Financial Services, Inc. and Subsidiaries
             Notes to Consolidated Financial Statements (Continued)
                                December 31, 2000

                party note purchaser has the right to securitize or sell the
                loans. Under this arrangement, the loans have been isolated from
                us and our subsidiaries, and, as a result, the transfer to the
                conduit facility is treated as a sale for financial reporting
                purposes. As of December 31, 2000, approximately $42.5 million
                in principal amount of loans was in the conduit facility.
        (f)     $150 million warehouse revolving line of credit expired October
                2000, interest rates ranged from LIBOR plus 1.375% to 2.0%,
                collateralized by certain loan receivables.
        (g)     $5 million revolving line of credit expired December 2000,
                interest rate of LIBOR plus 2.0%, collateralized by certain
                interest-only strips in securitization trusts.
        (h)     Repurchase agreement due January 2001, interest rate of LIBOR
                plus 0.5%, collateralized by certain lease backed securities.
        (i)     Lease funding facility matures through December 2004, interest
                rate of LIBOR plus 1.775%, collateralized by certain lease
                receivables.

         Under a registration statement declared effective by the Securities and
         Exchange Commission on October 30, 2000, we registered $350 million of
         subordinated debt. As of December 31, 2000, $314.8 million of debt was
         available for future issuance. The Company's subordinated debt
         securities are subordinated in right of payment to, or subordinate to,
         the prior payment in full of all senior debt as defined in the
         indentures related to such debt, whether outstanding on the date of the
         applicable indenture or incurred following the date of the indenture.
         There is no limit on the amount of senior debt the Company may incur.
         The Company's assets, including the stock it holds in its subsidiaries,
         are available to repay the subordinated debt in the event of default
         following payment to holders of the senior debt. In the event of the
         Company's default and liquidation of its subsidiaries to repay the debt
         holders, creditors of the subsidiaries must be paid or provision made
         for their payment from the assets of the subsidiaries before the
         remaining assets of the subsidiaries can be used to repay the holders
         of the subordinated debt securities.

         In July 2000, the Company established a $200.0 million facility, which
         provides for the sale of mortgage loans into an off-balance sheet
         funding facility. The sale into the off-balance sheet conduit facility
         involves a two-step transfer that qualifies for sale accounting under
         SFAS No. 125. First, the Company sells the loans to a special purpose
         entity which has been established for the limited purpose of buying and
         reselling the loans. Next, the special purpose entity sells the loans
         to a qualified special purpose entity (the "facility") for cash
         proceeds generated by its sale of notes to a third party purchaser. The
         Company has no obligation to repurchase the loans except under certain
         conditions where loans do not conform to representations and warranties
         made at the time of sale, and neither the third party note purchaser
         nor the sponsor has a right to require such repurchase. The facility
         has the option to dispose of the loans, ordinarily by resecuritizing
         them. If the loans are not re-securitized, the third party note
         purchaser has the right to securitize or sell the loans. Under this
         arrangement, the loans have been isolated from the Company; and as a
         result, transfers to the conduit facility are treated as sales for
         financial reporting purposes. As of December 31, 2000, approximately
         $61.6 million in principal amount of loans was in the conduit facility.

         In January 2001, the Company established a $200 million warehouse line
         of credit which will be used to fund on-balance sheet financing of loan
         receivables. The facility expires January 2002. The interest rate on
         the facility is based on LIBOR plus a margin ranging from 0.95% to
         1.15%.

                                       11
<PAGE>


           American Business Financial Services, Inc. and Subsidiaries
             Notes to Consolidated Financial Statements (Continued)
                                December 31, 2000

7.       Derivative Financial Instruments

         In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
         Instruments and Hedging Activities" SFAS No. 133 establishes accounting
         and reporting standards for derivative instruments, including certain
         liabilities in derivative instruments embedded in other contracts
         (collectively referred to as derivatives), and for hedging activities.
         It requires that an entity recognize all derivatives as either assets
         or liabilities in the statement of financial position and measure those
         instruments at fair value. If certain conditions are met, a derivative
         may be specifically designated as (a) a hedge of the exposure to
         changes in the fair value of a recognized asset or liability or an
         unrecognized firm commitment (fair value hedge), (b) a hedge of the
         exposure to variable cash flows of a forecasted transaction (cash flow
         hedge), or (c) a hedge of the foreign currency exposure of a net
         investment in a foreign operation. If a derivative is a hedge,
         depending on the nature of the hedge designation, changes in the fair
         value of a derivative are either offset against the change in the fair
         value of assets, liabilities, or firm commitments through earnings or
         recognized in other comprehensive income until the hedged item is
         recognized in earnings. The ineffective portion of a derivative's
         change in fair value will be recognized in earnings immediately.

         SFAS No. 133 was effective on a prospective basis for all fiscal
         quarters of fiscal years beginning after June 15, 2000. The adoption of
         SFAS No. 133 on July 1, 2000 resulted in the cumulative effect of a
         change in accounting principal of $15 thousand pre-tax being recognized
         as expense in the Consolidated Statement of Income for the six months
         ended December 31, 2000. Due to the immateriality of the cumulative
         effect of adopting SFAS No. 133, the $15 thousand pre-tax expense is
         included in general and administrative expense in the Consolidated
         Statement of Income. The tax effects and earnings per share amounts
         related to the cumulative effect of adopting SFAS No. 133 are not
         material.

         For the six months ended December 31, 2000, the Company recorded a loss
         on the fair value of derivative financial instruments of $4.3 million
         which was offset by gains from the securitization of loans during the
         period. There were no derivative contracts or unrealized gains or
         losses from derivative contracts outstanding at December 31, 2000.

         The primary market risk exposure that the Company faces is interest
         rate risk. Interest rate risk occurs due to potential changes in
         interest rates between the date fixed rate loans are originated and the
         date of securitization. The Company may utilize hedging strategies to
         mitigate the effect of changes in interest between the date rate
         commitments on loans are made and the date the fixed rate pass-through
         certificates to be issued by a securitization trust are priced, a
         period typically less than 90 days.

         These strategies may include the utilization of derivative financial
         instruments such as futures and forward pricing on securitizations. The
         nature and quality of hedging transactions are determined by the
         Company's management based on various factors, including market
         conditions and the expected volume of mortgage loan originations and
         purchases. At the time the contract is executed, derivative contracts
         are specifically designated as hedges of mortgage loans, loan
         commitments or of residual interests in mortgage loans in the Company's
         conduit facilities which we would expect to be

                                       12
<PAGE>



           American Business Financial Services, Inc. and Subsidiaries
             Notes to Consolidated Financial Statements (Continued)
                                December 31, 2000

7.       Derivative Financial Instruments (continued)

         included in a permanent securitization at a future date. The mortgage
         loans, loan commitments and mortgage loans underlying the residual
         interests in the conduit facilities consist of essentially similar
         pools of fixed rate loans and loan commitments, collateralized by real
         estate (primarily residential real estate) with similar maturities and
         credit characteristics. Fixed rate pass-through certificates issued by
         securitization trusts are generally priced to yield a spread above a
         benchmark rate based on Eurodollars or interest rate swap yield curves
         with a three-year maturity. The Company may hedge potential rate
         changes in Eurodollars or interest rate swap yield curves with futures
         contracts or forward sales contracts on a similar underlying security.
         This has provided strong correlation between our hedge contracts and
         the ultimate pricing we have received on the subsequent
         securitizations. The unrealized gain or loss derived from these
         derivative financial instruments, which are designated as fair value
         hedges, is reported in earnings as it occurs with an offsetting
         adjustment to the fair value of the item hedged. The effectiveness of
         our hedges are continuously monitored. If correlation did not exist,
         the related gain or loss on the hedged item no longer would be
         recognized as an adjustment to income. See "Management's Discussion and
         Analysis of Financial Condition and Results of Operations -- Interest
         Rate Risk Management" for further discussion of the Company's use of
         derivative financial instruments.

8.       Earnings Per Share

         Following is a reconciliation of the Company's basic and diluted
         earnings per share calculations (in thousands except per share data):
<TABLE>
<CAPTION>
                                                                Three Months Ended                Six Months Ended
                                                                    December 31,                     December 31,
                                                          -----------------------------      --------------------------
                                                               2000             1999             2000           1999
                                                          --------------    -----------      ------------    ----------
<S>                                                      <C>               <C>              <C>             <C>
Earnings
(a) Net Income                                            $        2,401    $     3,758      $      3,755    $    7,548
Average Common Shares
(b) Average common shares outstanding                              3,309          3,397             3,316         3,489
    Average potentially dilutive shares                               19             81                51            82
                                                          --------------    -----------      ------------    ----------
(c) Average common and potentially
    dilutive shares                                                3,328          3,478             3,367         3,571
                                                          ==============    ===========      ============    ==========
Earnings Per Common Share
Basic (a/b)                                               $         0.72    $      1.10      $       1.13    $     2.16
Diluted (a/c)                                             $         0.72    $      1.08      $       1.12    $     2.11
</TABLE>


                                       13
<PAGE>



           American Business Financial Services, Inc. and Subsidiaries
             Notes to Consolidated Financial Statements (Continued)
                                December 31, 2000


9.       Segment Information

         The Company has three operating segments: Loan Origination, Servicing,
         and Treasury and Funding.

         The Loan Origination segment originates business purpose loans secured
         by real estate and other business assets and home equity loans
         including loans to credit-impaired borrowers and conventional first
         mortgage loans secured by one to four family residential real estate.

         The Servicing segment services the loans and leases the Company
         originates both while held by the Company and subsequent to
         securitization. Servicing activities include billing and collecting
         payments from borrowers, transmitting payments to investors, accounting
         for principal and interest, collections and foreclosure activities and
         disposing of real estate owned.

         The Treasury and Funding segment administers the Company's subordinated
         debt securities sales and obtains other sources of funding for the
         Company's general operating and lending activities.

         The All Other segment mainly represents segments that do not meet the
         Statement of Financial Accounting Standards No. 131 "Disclosures about
         Segments of an Enterprise and Related Information" quantitative or
         defined thresholds for determining reportable segments, financial
         assets not related to operating segments, unallocated overhead and
         other expenses of the Company unrelated to the reportable segments
         identified. Transactions between reportable segments have been reported
         at cost. The accounting policies of the reportable segments are the
         same as those described in the summary of significant accounting
         policies.

         Reconciling items represent elimination of inter-segment income and
         expense items.

                                       14
<PAGE>



           American Business Financial Services, Inc. and Subsidiaries
             Notes to Consolidated Financial Statements (Continued)
                                December 31, 2000

9.       Segment Information (continued)
<TABLE>
<CAPTION>

                                                         Treasury
Six months ended December 31, 2000           Loan           and                                    Reconciling
(in thousands)                           Origination      Funding         Servicing    All Other      Items       Consolidated
                                         -----------     ---------       ------------  ---------    ----------    ------------
<S>                                       <C>            <C>            <C>           <C>            <C>          <C>
External revenues:
   Gain on sale of loan and leases.       $ 57,099       $      -         $      -     $       -    $      -       $   57,099
   Interest income.................          3,535            617              919        11,419           -           16,490
   Non-interest income.............          6,052              -           11,308             -      (8,011)           9,349
Inter-segment revenues.............              -         28,617                -        23,652     (52,269)               -
Operating expense:
   Interest expense................         11,381         23,670              292        20,138     (28,617)          26,864
   Non-interest expense............         17,374          6,121            9,075        13,520           -           46,090
   Depreciation and amortization...          1,845             65              402         1,413           -            3,725
   Inter-segment expense...........         31,663              -                -             -     (31,663)               -
Income tax expense.................          1,770           (249)             983             -           -            2,504
                                          --------       --------         --------     ---------    --------       ----------
Net income.........................       $  2,653       $   (373)        $  1,475     $       -    $      -       $    3,755
                                          ========       ========         ========     =========    ========       ==========
Segment assets.....................       $100,934       $103,203         $ 96,101     $ 343,763    $      -       $  644,001
                                          ========       ========         ========     =========    ========       ==========
</TABLE>

<TABLE>
<CAPTION>

                                                         Treasury
Six months ended December 31, 1999           Loan           and                                    Reconciling
(in thousands)                           Origination      Funding         Servicing    All Other      Items       Consolidated
                                         -----------     ---------       ------------  ---------    ----------    ------------
<S>                                       <C>            <C>            <C>           <C>            <C>          <C>
External revenues:
   Gain on sale of loan and leases..      $  39,613      $      -         $      -     $       -    $      -       $   39,613
   Interest income..................          2,553           550              549         7,015           -           10,667
   Non-interest income..............          5,846             -            6,780             -      (4,489)           8,137
Inter-segment revenues..............              -        17,224                -         4,715     (21,939)               -
Operating expense:
   Interest expense.................         10,577        11,956              100        10,654     (17,224)          16,063
   Non-interest expense.............         18,420         4,235            3,855           676           -           27,186
   Depreciation and amortization....          2,036            19              133           400           -            2,588
   Inter-segment expense............          9,204             -                -             -      (9,204)               -
Income tax expense..................          3,110           626            1,296             -           -            5,032
                                          ---------      --------         --------     ---------    --------       ----------
Net income..........................      $   4,665      $    938         $  1,945     $       -    $      -       $    7,548
                                          =========      ========         ========     =========    ========       ==========
Segment assets......................      $ 141,036      $ 76,511         $ 58,500     $ 215,851    $      -          491,898
                                          =========      ========         ========     =========    ========       ==========
</TABLE>

                                       15
<PAGE>


           American Business Financial Services, Inc. and Subsidiaries

PART I. FINANCIAL INFORMATION (continued)

Item 2.  Management's Discussion and Analysis of Financial Condition and Results
         of Operations

         Our consolidated financial information set forth below should be read
in conjunction with the consolidated financial statements and the accompanying
notes to consolidated financial statements included in Item 1 of this Quarterly
Report, and the consolidated financial statements, notes to consolidated
financial statements and Management's Discussion and Analysis of Financial
Condition and Results of Operations and the risk factors contained in our Annual
Report on Form 10-K for the year ended June 30, 2000 incorporated by reference
in this Form 10-Q in their entirety.

Forward Looking Statements

         Some information in this Quarterly Report on Form 10-Q may contain
forward looking statements. You can identify these statements by words or
phrases such as "will likely result," "may," "are expected to," "will continue
to," "is anticipated," "estimate," "projected," "intends to" or other similar
words. These forward-looking statements regarding our business and prospects are
based upon numerous assumptions about future conditions, which may ultimately
prove to be inaccurate. Actual events and results may materially differ from
anticipated results described in those statements. Forward-looking statements
involve risks and uncertainties which could cause our actual results to differ
materially from historical earnings and those presently anticipated. When
considering forward-looking statements, you should keep these risk factors in
mind as well as the other cautionary statements in this Form 10-Q. You should
not place undue reliance on any forward-looking statement.

General

         American Business Financial Services, Inc. is a diversified financial
services company operating throughout the United States. We originate, sell and
service business purpose loans, home equity loans and conventional first
mortgage loans through our principal direct and indirect subsidiaries. We also
underwrite, process and purchase home equity loans through the Bank Alliance
Program whereby we purchase home equity loans from financial institutions that
meet our underwriting criteria but do not meet the underwriting guidelines of
the selling institutions for loans to be held in the portfolio of the selling
institutions. Following our purchase of the loans through this program, we hold
these loans as available for sale until they are sold in connection with a
future securitization. The loans are originated by the selling institution and
immediately sold to us. Loans originated primarily consist of fixed rate loans
secured by first or second mortgages on single family residences. Our customers
include credit impaired borrowers and other borrowers who would qualify for
loans from traditional sources but who are attracted to our loan products due to
our personalized service and timely response to loan applications. We originate
loans through a combination of channels including a centralized processing
center located in Bala Cynwyd, Pennsylvania and a retail branch network of 13
offices. In addition, we offer subordinated debt securities to the public, the
proceeds of which are used to repay existing debt, to fund loan originations and
our operations and for general corporate purposes.

         During the first six months of fiscal 2001, declines in market interest
rates resulted in interest rate spreads related to our securitized loans
improving approximately 1.00% from the fourth quarter of fiscal 2000. Spread
refers to the difference between the average coupon rate on our fixed rate
loans, and the weighted average pass-through rate paid to investors for
interests issued in connection with a securitization. There can be no assurances
that interest rates will continue to decline or remain at current levels.

                                       16

<PAGE>

However, in a rising interest rate environment we would expect our ability to
originate loans at interest rates that will maintain our current level of
profitability would become more difficult than during a stable or falling
interest rate environment. We would address the challenge presented by a rising
rate environment by carefully monitoring our product pricing, the actions of our
competition, market trends, and the use of hedging strategies in order to
continue to originate loans in as profitable a manner as possible. See "Interest
Rate Risk Management - Loans and Leases Available for Sale" for a discussion of
our hedging strategies.

         A rising rate environment could also unfavorably impact our liquidity
and capital resources. Rising interest rates could impact our short-term
liquidity by widening investor spread requirements in pricing future
securitizations, increasing the levels of overcollateralization in future
securitizations, limiting our access to borrowings in the capital markets and
limiting our ability to sell our subordinated debt securities at favorable
interest rates. In a rising interest rate environment, short-term and long-term
liquidity could also be impacted by increased interest costs on all sources of
borrowed funds, including the subordinated debt, and by reducing interest rate
spreads on our securitized loans which would reduce our cash flows. See
"Liquidity and Capital Resources" for a discussion of both long and short-term
liquidity.

         Prior to December 31, 1999 we also originated equipment leases.
Effective December 31, 1999, we de-emphasized the leasing origination business
in keeping with our strategy of focusing on our most profitable lines of
business. We are continuing to service the remaining leases in our managed
portfolio, which totaled $91.6 million in gross receivables at December 31, 2000
and we may from time to time consider originating or purchasing new leases.

         A focus by state and federal banking regulatory agencies, state
attorneys general offices, the Federal Trade Commission, the U.S. Department of
Justice and the U.S. Department of Housing and Urban Development relates to
predatory lending practices by companies in our industry. Sanctions have been
imposed on selected industry competitors for practices including but not limited
to charging borrowers excess fees, imposing higher interest rates than the
borrower's credit risk warrants and failing to disclose the material terms of
loans to the borrowers. We have reviewed our lending policies in light of these
actions against other lenders and we believe we are in compliance with all
lending related guidelines. To date, no sanctions or recommendations from
governmental regulatory agencies regarding our practices related to predatory
lending have been imposed. We are unable to predict whether state or federal
regulatory authorities will require changes in our lending practices in the
future or the impact of those changes on our profitability.

Securitizations

         The ongoing securitization of loans is a central part of our current
business strategy. We sell loans, and have in the past sold leases, through
securitizations with servicing retained. This strategy generates the cash
proceeds to repay warehouse and line of credit facilities, to fund additional
loan originations and to provide additional sources of revenue through retained
mortgage and lease servicing rights.

                                       17
<PAGE>

         The following table summarizes the volume of loan and lease
securitizations and whole loan sales for the three and six month periods ended
December 31, 2000 and 1999 (in millions):
<TABLE>
<CAPTION>
                                                            Three Months Ended          Six Months Ended
                                                                December 31,               December 31,
                                                          ----------------------      ----------------------
Securitizations:                                            2000         1999           2000          1999
                                                         --------      --------       --------      --------
<S>                                                      <C>           <C>            <C>           <C>
Business loans.....................................      $  27.5       $   27.4       $  50.7       $   51.7
Home equity loans..................................        256.5          209.3         490.1          386.0
Equipment leases...................................            -              -             -            9.3
                                                         -------       --------       -------       --------
   Total...........................................      $ 284.0       $  236.7       $ 540.8       $  447.0
                                                         =======       ========       =======       ========
Gain on sale of loans and leases through
   securitization..................................      $  31.0       $   20.5       $  57.1       $   39.6
Securitization gains as a percentage of total
   revenue.........................................         69.6%          67.0%         68.9%          67.8%
Whole loan sales...................................      $  23.0       $   26.7       $  39.2       $   50.4
Premiums on whole loan sales.......................      $   0.7       $    0.4       $   1.1       $    0.8
</TABLE>
         Our quarterly revenues and net income may fluctuate in the future
principally as a result of the timing, size and profitability of our
securitizations. The strategy of selling loans through securitizations requires
building an inventory of loans over time, during which time we incur costs and
expenses. Since a gain on sale is not recognized until a securitization is
closed, which may not occur until a subsequent quarter, operating results for a
given quarter can fluctuate significantly. If securitizations do not close when
expected, we could experience a materially adverse effect on our results of
operations for a quarter. In addition, due to the timing difference between the
period when costs are incurred in connection with the origination of loans and
their subsequent sale through the securitization process, we have operated on a
negative cash flow basis in the past and anticipate that we will continue to do
so in the foreseeable future, which could adversely impact our results of
operations and financial condition. See "Liquidity and Capital Resources" for a
discussion of our liquidity and cash flows.

         Several factors affect our ability to complete securitizations on a
profitable basis, including conditions in the securities markets generally, such
as fluctuations in interest rates described below and conditions in the
asset-backed securities markets relating to the types of financial assets we
originate and credit quality of the managed portfolio of loans which include
loans we hold as available for sale and securitized loans that we service. Any
substantial reduction in the size or availability of the securitization market
for loans could have a material adverse effect on our results of operations and
financial condition.

         During the first six months of fiscal 2001, declines in market interest
rates resulted in an improvement in interest rate spreads related to our
securitized loans of approximately 1.0%. Spread refers to the difference between
the average coupon rate on our fixed rate loans, and the weighted average
pass-through rate paid to investors for interests issued in connection with a
securitization. From our September 1998 mortgage loan securitization through the
December 2000 mortgage loan securitization, the pass-through rates on the
asset-backed securities issued in our securitizations had increased by
approximately 0.7%. Because the coupon on our loans securitized has been
relatively high, we were able to absorb this increase in pass-through rates and
have continued to access the asset-backed securities markets. During the same
period of September 1998 through December 2000, the average coupon on our loans
securitized increased 0.9%, which more than offset the increase in pass-through
rates. There can be no assurances that spreads will continue to improve or
remain at current levels.

         A rising interest rate environment could negatively impact the
profitability of our future securitizations by decreasing spreads. Although the
loan coupon rate is fixed at the time the loan is originated, the pass-through
rate paid to investors in the securitization is not fixed until the pricing of
the securitization which occurs just prior to the sale of the loans. Our gain on
sale of loans in a securitization will be reduced if the spread between the
average coupon rate on our fixed rate loans and the weighted average

                                       18
<PAGE>

pass-through rate paid to investors for interests issued in connection with a
securitization declines. We estimate that each 0.1% reduction in the spread
reduces the gain on sale of loans as a percentage of loans securitized by
approximately 0.25%. See "Interest Rate Risk Management" for further detail. We
are continuously monitoring market rate fluctuations, our loan pricing and our
hedging strategy in order to attempt to manage these changes and maintain our
current level of profitability in connection with the securitization of loans.

         In addition, when the spread is reduced, we could be required to
increase the level of overcollateralization which is required to provide
additional protection to trust investors. An increase in the amount of
overcollateralization would negatively impact the timing of the cash flows from
the interest-only strips. See "Securitization Accounting Considerations" for a
discussion of overcollateralization amounts.

         Our strategy of securitizing loans could also impact our future
profitability to the extent that the carrying value of our interest-only strips
may require negative adjustments. We generally retain interest-only strips and
servicing rights in the securitization transactions we complete. We estimate the
fair value of the interest-only strips and servicing rights based upon estimated
discount rates and prepayment and default assumptions. Together, these two
assets represent 66.9% of our total assets at December 31, 2000. The value of
our interest-only strips totaled $339.0 million and the value of our servicing
rights totaled $92.1 million at December 31, 2000. Although we believe that
these amounts represent the fair value of these assets, the amounts were
estimated based on discounting the expected cash flows to be received in
connection with our securitizations using estimated discount rates, prepayment
rates and default rate assumptions. Changes in market interest rates may impact
our discount rate assumptions and our actual prepayment and default experience
may vary materially from these estimates. Even a small unfavorable change in
these assumptions utilized could have a significant adverse impact on the value
of these assets. In the event of an unfavorable change in these assumptions, the
fair value of these assets would be overstated, requiring an adjustment which
would adversely affect our income in the period of adjustment. See "Interest
Rate Risk Management - Interest-Only Strips and Servicing Rights" for further
discussion of the impact of changes in the assumptions described above.

         Our business strategy is dependent upon our ability to identify and
emphasize lending related activities that will provide us with the most economic
value. The implementation of this strategy will depend in large part on a
variety of factors outside of our control, including, but not limited to, our
ability to obtain adequate financing on favorable terms and to profitably
securitize our loans on a regular basis. Our failure with respect to any of
these factors could impair our ability to successfully implement our strategy,
which would adversely affect our results of operations and financial condition.

Whole Loan Sales

         We also sell loans with servicing released referred to as whole loan
sales. Gains on whole loan sales equal the difference between the net proceeds
from such sales and the loans' net carrying value. The net carrying value of
loans is equal to their principal balance plus unamortized origination costs and
fees. Gains from these sales are recorded as fee income.

                                       19
<PAGE>

Subordinated Debt and Other Borrowings

         We also rely upon funds generated by the sale of subordinated debt and
other borrowings to fund our operations and to repay maturing subordinated debt.
At December 31, 2000, $430.6 million of subordinated debt was outstanding and
warehouse and other revolving credit facilities totaling $525.0 million were
available, of which $142.5 million was drawn upon on that date. We expect to
continue to rely on the borrowings to fund loans prior to securitization. See
"Liquidity and Capital Resources" for a discussion of short-term and long-term
liquidity.

Securitization Accounting Considerations

         When we securitize our loans and leases by selling them to trusts we
receive cash and an interest-only strip, which represents our retained interest
in the securitized loans and leases. The trust issues multi-class securities,
which derive their cash flows from the pool of securitized loans and leases.
These securities, which are senior to our interest-only strips in the trusts,
are sold to public investors. In addition, when we securitize our loans and
leases we retain the right, for a fee paid to us, to service the loans and
leases which creates an asset that we refer to as our servicing rights.
Servicing includes billing and collecting payments from borrowers, transmitting
payments to investors, accounting for principal and interest, collections and
foreclosure activities and disposing of real estate owned.

         As the holder of the interest-only strips received in a securitization,
we are entitled to receive excess (or residual) cash flows. These cash flows are
the difference between the payments made by the borrowers on securitized loans
and leases and the sum of the scheduled and prepaid principal and pass-through
interest paid to the investors in the trust, servicing fees, trustee fees and,
if applicable, surety fees. Surety fees are paid to an unrelated insurance
entity to provide protection for the trust investors. Overcollateralization is
the excess of the aggregate principal balances of loans and leases in a
securitized pool over investor interests. Overcollateralization requirements are
established to provide additional protection for the trust investors.

         The overcollateralization requirements for a mortgage loan
securitization, which are different for each securitization, include:

         (1)      The initial requirement, which is a percentage of the original
                  balance of loans securitized and is paid in cash at the time
                  of sale;

         (2)      The final target, which is a percentage of the original
                  balance of loans securitized and is funded from the monthly
                  excess cash flow; and

         (3)      The stepdown overcollateralization requirement, which is a
                  percentage of the remaining balance of loans securitized.
                  During the stepdown period, the overcollateralization amount
                  is gradually reduced through cash payments to us. The stepdown
                  period begins at the later of 30 months or when the remaining
                  balance of loans securitized is less than 50% of the original
                  balance of securitized loans.

         At December 31, 2000, investments in interest-only strips in
securitizations totaled $339.0 million, including investments in
overcollateralization of $102.4 million.


                                       20
<PAGE>

         In March 2000, we amended our arrangements with a warehouse lender to
include an off-balance sheet mortgage loan conduit facility. The sale into the
off-balance sheet conduit facility involves a two-step transfer that qualifies
for sale accounting under SFAS No. 125. First, we sell the loans to a special
purpose entity which has been established for the limited purpose of buying and
reselling the loans. Next, the special purpose entity sells the loans to a
qualified special purpose entity (the "facility") for cash proceeds generated by
its sale of notes to a third party purchaser. We have no obligation to
repurchase the loans and neither the third party note purchaser nor the facility
has a right to require such repurchase. The facility has the option to dispose
of the loans, ordinarily by re-securitizing them. If the loans are not
re-securitized, the third party note purchaser has the right to securitize or
sell the loans. Under this arrangement, the loans have been isolated from us and
our subsidiaries; and, as a result, the transfer to the conduit facility is
treated as a sale for financial reporting purposes. As of December 31, 2000,
there were $42.5 million in principal amount of loans in the off-balance sheet
conduit facility. Approximately $5.7 million of the on-balance sheet facility
was utilized.

         In July 2000, we established a $200.0 million facility, which provides
for the sale of mortgage loans into an off-balance sheet funding facility with
UBS Warburg. The sale into the off-balance sheet conduit facility involves a
two-step transfer that qualifies for sale accounting under SFAS No. 125. First,
we sell the loans to a special purpose entity which has been established for the
limited purpose of buying and reselling the loans. Next, the special purpose
entity sells the loans to a qualified special purpose entity (the "facility")
for cash proceeds generated by its sale of notes to a third party purchaser. We
have no obligation to repurchase the loans except under certain conditions where
loans do not conform to representations and warranties made by us at the time of
sale, and neither the third party note purchaser nor the sponsor has a right to
require such repurchase. The facility has the option to dispose of the loans,
ordinarily by re-securitizing them. If the loans are not re-securitized, the
third party note purchaser has the right to securitize or sell the loans. Under
this arrangement, the loans have been isolated from us and our subsidiaries;
and, as a result, transfers to the conduit facility will be treated as sales for
financial reporting purposes. As of December 31, 2000, there were $61.6 million
in principal amount of loans in the conduit facility.



                                       21

<PAGE>


         The following tables provide information regarding the nature and
principal balances of mortgage loans securitized in each trust, the securities
issued by each trust, and the overcollateralization requirements of each trust.


       Summary of Selected Mortgage Loan Securitization Trust Information
                    Current Balances as of December 31, 2000
                              (dollars in millions)
<TABLE>
<CAPTION>
                                               2000-4   2000-3  2000-2   2000-1   1999-4   1999-3  1999-2   1999-1   1998-4
                                               ------   ------  ------   ------   ------   ------  ------   ------   ------
<S>                                            <C>      <C>     <C>      <C>      <C>     <C>      <C>      <C>      <C>
Original balance of loans securitized:
   Business loans............................. $   27   $   16  $   28   $   25   $   25   $   28  $   30   $   16   $    9
   Home equity loans..........................    248      134     275      212      197      194     190      169       71
                                               ------   ------  ------   ------   ------   ------  ------   ------   ------
   Total...................................... $  275   $  150  $  303   $  237   $  222   $  222  $  220   $  185   $   80
                                               ======   ======  ======   ======   ======   ======  ======   ======   ======
Current balance of loans securitized:
   Business loans............................. $   27   $   16  $   27   $   24   $   24   $   24  $   26   $   12   $    6
   Home equity loans..........................    247      131     263      194      173      163     153      127       51
                                               ------   ------  ------   ------   ------   ------  ------   ------   ------
   Total...................................... $  274   $  147  $  290   $  218   $  197   $  187  $  179   $  139   $   57
                                               ======   ======  ======   ======   ======   ======  ======   ======   ======
Weighted average coupon on loans securitized:
   Business loans............................. 16.08%   16.06%  16.01%   16.10%   16.05%   15.78%  15.77%   15.99%   16.05%
   Home equity loans.......................... 11.61%   11.52%  11.42%   11.37%   11.09%   10.91%  10.47%   10.65%   10.81%
   Total...................................... 12.05%   12.01%  11.85%   11.90%   11.69%   11.54%  11.22%   11.10%   11.36%

Percentage of first mortgage loans............    85%      85%     78%      77%      80%      82%     88%      90%      90%
Weighted average loan-to-value................    70%      70%     74%      77%      76%      74%     76%      77%      77%
Weighted average remaining term (months) on
   loans securitized .........................    242      241     250      239      233      236     239      238      237

Original balance of Trust Certificates........   $275    $ 150   $ 300    $ 235    $ 220    $ 219   $ 219    $ 184     $ 79
Current balance of Trust Certificates.........   $275    $ 147   $ 268    $ 213    $ 199    $ 180   $ 171    $ 134     $ 54
Weighted average pass-through interest rate
    to Trust Certificate holders..............  7.05%    7.61%   7.88%    7.79%    7.40%    7.43%   7.12%    6.56%    6.70%
Highest Trust Certificate pass-through rate...  7.05%    7.61%   8.04%    7.93%    7.68%    7.49%   7.13%    6.58%    7.08%

Overcollateralization requirements:
Required percentages:
   Initial....................................  0.00%    0.00%   0.90%    0.75%    1.00%    1.00%   0.50%    0.50%    1.00%
   Final target...............................  4.50%    4.75%   5.95%    5.95%    5.50%    5.00%   5.00%    5.00%    5.00%
   Stepdown overcollateralization.............  9.00%    9.50%  11.90%   11.90%   11.00%   10.00%  10.00%   10.00%   10.00%
Required Amounts:
     Initial.................................. $   --   $   --  $    3   $    2   $    2   $    2  $    1   $    1   $    1
     Final target.............................     12        7      18       14       12       11      11        9        4
Current Status:
    Overcollateralization amount.............. $   --   $    1  $    7   $    7   $   10   $   10  $   11   $    9   $    4
    Final target reached or anticipated date
      to reach................................ 3/2002   3/2002  3/2002   2/2002   7/2001   3/2001     Yes      Yes      Yes
    Stepdown reached or anticipated date to
      reach...................................10/2004   8/2004  5/2004   4/2001  10/2003   6/2003 12/2002   9/2002   5/2002

Annual surety wrap fee........................  0.21%    0.21%   0.21%    0.19%    0.21%    0.21%   0.19%    0.19%    0.20%

Servicing rights:
   Original balance........................... $   14   $    7  $   14   $   10   $   10   $   10  $   10   $    8   $    3
   Current balance............................     14        6      13        9        8        8       7        5        2
</TABLE>

                                       22

<PAGE>


 Summary of Selected Mortgage Loan Securitization Trust Information (Continued)
                    Current Balances as of December 31, 2000
                              (dollars in millions)
<TABLE>
<CAPTION>

                                                             1998-3   1998-2   1998-1   1997-2  1997-1   1996-2   1996-1
                                                             ------   ------   ------   ------  ------   ------   ------
<S>                                                         <C>      <C>      <C>       <C>     <C>     <C>       <C>
Original balance of loans securitized:
   Business loans..........................................  $   17   $   15   $   16   $   23  $   22   $   16   $   13
   Home equity loans.......................................     183      105       89       77      53       24        9
                                                             ------   ------   ------   ------  ------   ------   ------
   Total...................................................  $  200   $  120   $  105   $  100  $   75   $   40   $   22
                                                             ======   ======   ======   ======  ======   ======   ======
Current balance of loans securitized:
   Business loans..........................................  $   11   $    9   $    9   $   13  $   10   $    5   $    4
   Home equity loans.......................................     126       57       43       28      18        6        3
                                                             ------   ------   ------   ------  ------   ------   ------
   Total...................................................  $  137   $   66   $   52   $   41  $   28   $   11   $    7
                                                             ======   ======   ======   ======  ======   ======   ======
Weighted average coupon on loans securitized:
   Business loans..........................................  15.95%   15.92%   15.98%   15.90%  15.90%   15.98%   15.87%
   Home equity loans.......................................  10.74%   10.69%   11.08%   11.56%  11.43%   11.29%   10.61%
   Total...................................................  11.15%   11.39%   11.91%   12.91%  13.00%   13.45%   13.34%

Percentage of first mortgage loans.........................     90%      87%      78%      71%     69%      71%      68%
Weighted average loan-to-value.............................     78%      77%      73%      71%     71%      67%      67%
Weighted average remaining term (months) on loans
   securitized.............................................     235      210      196      185     165      137      135

Original balance of Trust Certificates.....................   $ 198    $ 118    $ 103     $ 98    $ 73     $ 39     $ 22
Current balance of Trust Certificates......................   $ 130     $ 61     $ 47     $ 36    $ 24      $ 9      $ 5
Weighted average pass-through interest rate to Trust
   Certificate holders.....................................   6.33%    6.51%    6.72%    6.80%   7.43%    7.53%    7.95%
Highest Trust Certificate pass-through rate................   6.43%    6.85%    7.15%    7.13%   7.53%    7.53%    7.95%

Overcollateralization requirements:
Required percentages:
   Initial.................................................   1.00%    1.50%    1.50%    2.00%   3.00%    3.00%       --
   Final target............................................   5.00%    5.00%    5.50%    7.00%   8.00%   10.00%    7.00%
   Stepdown overcollateralization..........................  10.00%   10.00%   11.00%   14.00%  16.00%   20.00%       na
Required Amounts:
     Initial...............................................  $    2   $    2   $    2   $    2  $    2   $    1   $   --
     Final target..........................................      10        6        6        7       6        4        2
Current Status:
    Overcollateralization amount...........................  $   10   $    6   $    6   $    6  $    5   $    3   $    2
    Final target reached or anticipated date to reach......     Yes      Yes      Yes      Yes     Yes      Yes      Yes
    Stepdown reached or anticipated date to reach..........  3/2002   6/2001      Yes      Yes     Yes      Yes       na

Annual surety wrap fee.....................................   0.20%    0.22%    0.23%    0.26%   0.26%    0.28%       na

Servicing rights:
   Original balance........................................  $    7   $    4   $    4   $    4  $    3   $    2   $    2
   Current balance.........................................       4        2        2        2       2        1        1
</TABLE>

na = not applicable


                                       23
<PAGE>



         Gains on sale of loans and leases through securitizations represent the
difference between our net proceeds and the allocated cost of loans and leases
securitized. The allocated cost of the loans and leases securitized is
determined by allocating their net carrying value between the loans and leases
securitized, the interest-only strips and the servicing rights retained, based
upon their relative fair values.

         The calculation of the fair value of interest-only strips is based upon
a discounted cash flow analysis which estimates the present value of the future
expected excess cash flows utilizing assumptions made by management at the time
loans are sold. These original assumptions include the rate used to calculate
the present value of expected future cash flows, referred to as the discount
rate, the rates of prepayment and credit loss on the pool of loans. The
prepayment rate of loans may be affected by a variety of economic and other
factors, including prevailing interest rates and the availability of alternative
financing to borrowers. The effect of those factors on loan prepayment rates may
vary depending on the type of loan. Estimates of prepayment rates and credit
loss rates are made based on management's expectation of future experience,
which is based, in part, on historical experience and in the case of prepayment
rate assumptions, consideration of the impact of changes in market interest
rates. Our interest-only strips and servicing rights are periodically evaluated
based upon the present value of the expected future cash flows from our
interest-only strips and servicing rights related to the loans remaining in the
trusts. The current assumptions for prepayment and credit loss rates are
monitored against actual experience and would be adjusted if necessary.

         We use a discount rate which we believe is commensurate with the risks
involved in our securitization assets. While quoted market prices on comparable
interest-only strips are not available, we have performed comparisons of our
valuation assumptions and performance experience to others in the
non-conventional mortgage industry. We quantify the risks in our securitization
assets by comparing the asset quality and performance experience of the
underlying securitized mortgage pools to comparable industry performance. We
believe that the practice of many companies in the non-conventional mortgage
industry has been to add a spread for risk to the all-in cost of securitizations
to determine their discount rate. From these experience comparisons, we have
determined a spread, which is added to the all-in cost of our mortgage loan
securitization trusts' investor certificates. The 13% discount rate used to
discount our interest-only strips considers our higher asset quality and
performance of our securitized assets compared to industry asset quality and
performance and the other characteristics of our securitized loans described
below.


         o        Underlying loan collateral with fixed yields which are higher
                  than others in the non-conventional mortgage industry. Average
                  coupons of securitized loans exceed the industry average by
                  100 basis points or more. All of our loans have fixed interest
                  rates which are more predictable than adjustable rate loans.

         o        Most of our loans include prepayment fees. Approximately 90%
                  to 95% of our business purpose loans have prepayment fees.
                  Approximately 85% to 90% of our home equity loans have
                  prepayment fees. Our experience indicates that prepayment fees
                  increase the prepayment ramp periods and slow annual
                  prepayment speeds which have the effect of increasing the life
                  of the loans securitized.

         o        A portfolio mix of first and second mortgage loans of 80-85%
                  and 15-20%, respectively. The high proportion of first
                  mortgages results in lower delinquencies and losses.

                                       24
<PAGE>

         o        A portfolio credit grade mix comprised of 64% A credits, 22% B
                  credits, 12% C credits, and 2% D credits. In addition, our
                  loss experience is below what is experienced by others in the
                  non-conventional mortgage industry.

         The all-in cost of the trusts' investor certificates includes the
highest trust certificate pass-through interest rate in each mortgage
securitization, trustee fees, and surety fees. Trustee fees and surety fees are
deal specific and generally range from 19 to 22 basis points combined.

         The assumptions for prepayment rates and credit loss rates are compared
to actual experience and adjusted if warranted. The length of time before a pool
of mortgage loans reaches its expected constant prepayment rate is referred to
as the "prepayment ramp period." It is our policy to maintain the initial
assumptions used for the expected constant prepayment rate while a pool of
mortgage loans is less than a year old even though actual experience may be
lower. During this ramp period, actual experience both quantitatively and
qualitatively is not sufficient to conclude that final actual experience would
be materially different than the initial assumptions used. For pools of mortgage
loans greater than one year old, but still in the ramp period, historical
prepayment experience trends for other pools securitized both prior and
subsequent to the pool are considered. If these other pools are also noted to
have favorable prepayment experience, adjustments to prepayment assumptions may
be made over a one year phase in period to more closely conform the assumptions
to actual experience. If actual prepayment experience is higher than our initial
assumptions, and is expected to continue, we adjust our assumptions to actual to
avoid the potential of overstating the value of our interest-only strips.

         Due to increases in the volume of loans originated with prepayment
fees, we have reduced the initial annual prepayment rate assumption on business
loans and lengthened the prepayment ramp period for home equity loans for
mortgage loan securitizations beginning with the 1999-1 securitization. Reducing
the annual prepayment assumption and lengthening the prepayment ramp period is
supported by our experience with loans having prepayment fees, that fewer
borrowers will prepay, and those prepaying will do so more slowly. The
percentage of home equity loans containing prepayment fees increased from less
than 50% of loans originated to over 85% over the nine-month period ending
October 31, 1998. As a result of this increase in the percentage of loans
originated having prepayment fees, we had lengthened the initial assumptions
used for the prepayment ramp period on home equity loans from 12 to 18 months
beginning with the 1999-1 mortgage loan securitization through the 2000-1
mortgage loan securitization and to 24 months beginning with the 2000-2 mortgage
loan securitization. This increase in the length of the prepayment ramp period
for home equity loans was supported by actual cumulative prepayment experience
through June 30, 2000, which demonstrated that only 25% of home equity loans
having prepayment fees were actually prepaid by the borrowers, while 47% of home
equity loans without prepayment fees were prepaid. This cumulative historical
performance demonstrates that it is nearly twice as likely that a loan without a
prepayment fee will be prepaid.

                                       25

<PAGE>

         The initial credit loss assumptions beginning with the 1999-4 mortgage
loan securitization were increased as a result of an increase in the percentage
of second mortgage loans and our concerns regarding the current high levels of
real estate values. As shown on the prior table, "Summary of Selected Mortgage
Loan Securitization Trust Information," the average percentage of first mortgage
loans securitized declined approximately 10% from fiscal 1999 to fiscal 2000
securitizations. The current high real estate values affected our loss
assumptions on recent securitizations because in the event of an economic
downturn, the loan-to-value ratios of the recently originated loans could be
understated. Both of these factors increase the potential that the underlying
real estate collateral would not be sufficient to satisfy the loan if a
foreclosure was required. We believe these factors may limit our ability in
recent securitizations to maintain the credit loss experience realized in prior
securitizations. Actual credit loss experience for securitizations prior to the
1999-4 mortgage loan securitization generally continue to support the initial
credit loss assumptions for those securitizations. The credit loss assumptions
in two mortgage loan securitizations have been increased to reflect the higher
level of losses experienced.





                                       26

<PAGE>


         The following tables provide information regarding the initial and
current assumptions applied in determining the fair values of mortgage loan
related interest-only strips and servicing rights for each securitization trust.

                Summary of Material Mortgage Loan Securitization
        Valuation Assumptions and Actual Experience at December 31, 2000
<TABLE>
<CAPTION>
                                               2000-4   2000-3  2000-2   2000-1   1999-4   1999-3  1999-2   1999-1   1998-4
                                               ------   ------  ------   ------   ------   ------  ------   ------   ------
<S>                                           <C>      <C>      <C>      <C>      <C>      <C>     <C>      <C>      <C>
Interest-only strip discount rate:
   Initial valuation..........................    13%      13%     13%      11%      11%      11%     11%      11%      11%
   Current valuation..........................    13%      13%     13%      13%      13%      13%     13%      13%      13%
Servicing rights discount rate:
   Initial valuation..........................    11%      11%     11%      11%      11%      11%     11%      11%      11%
   Current valuation..........................    11%      11%     11%      11%      11%      11%     11%      11%      11%

Prepayment rates:
   Initial assumption:
   Expected Constant Prepayment Rate (CPR):
     Business loans...........................    10%      10%     10%      10%      10%      10%     10%      10%      13%
     Home equity loans........................    24%      24%     24%      24%      24%      24%     24%      24%      24%
   Ramp period (months) (a):
     Business loans...........................     24       24      24       24       24       24      24       24       24
     Home equity loans........................     24       24      24       18       18       18      18       18       12
   Current assumptions:
   Expected Constant Prepayment Rate (CPR):
     Business loans...........................    10%      10%     10%      10%      10%      10%  13.25%   11.50%   14.50%
     Home equity loans........................    24%      24%     24%      24%      24%      24%     24%   22.50%      22%
   Ramp period (months):
     Business loans...........................     24       24      24       24       24       24      12       12       12
     Home equity loans........................     24       24      24       24       24       24      24       24       24
   CPR adjusted to reflect ramp:
     Business loans...........................  3.00%    3.30%   3.91%    4.83%    5.74%    6.65%  13.25%   11.50%   14.50%
     Home equity loans........................  2.00%    2.96%   4.87%    7.74%   10.61%   13.48%  16.35%   18.04%   20.26%
   Actual CPR experience:
     Business loans...........................     --       --   2.91%    3.20%    3.83%    6.53%  13.06%   11.44%   14.42%
     Home equity loans........................     --    1.65%   6.60%    9.79%   13.18%   12.56%  12.30%   12.42%   13.50%

Credit loss rates:
   Annual credit loss rate:
     Initial assumption.......................  0.40%    0.40%   0.40%    0.40%    0.30%    0.25%   0.25%    0.25%    0.25%
     Current assumption.......................  0.40%    0.40%   0.40%    0.40%    0.30%    0.25%   0.25%    0.25%    0.25%
     Actual experience........................     --       --      --    0.14%    0.01%    0.09%   0.09%    0.18%    0.27%
   Cumulative credit loss rate:
     Initial assumption.......................  1.89%    1.85%   1.85%    1.85%    1.35%    1.20%   1.20%    1.20%    1.20%
     Current assumption.......................  1.89%    1.85%   1.85%    1.85%    1.35%    1.20%   1.20%    1.20%    1.20%
     Cumulative experience to date............     --       --      --    0.12%    0.01%    0.12%   0.13%    0.32%    0.57%

Servicing fees:
   Contractual fees...........................  0.70%    0.50%   0.50%    0.50%    0.50%    0.50%   0.50%    0.50%    0.50%
   Ancillary fees.............................  1.25%    1.25%   1.25%    1.25%    1.25%    1.25%   1.25%    1.25%    1.25%
</TABLE>

(a) The prepayment ramp is the length of time before a pool of mortgage loans
    reaches its expected Constant Prepayment Rate. The business loan prepayment
    ramp begins at 3% in month one. The home equity loan prepayment ramp begins
    at 2% in month one.

                                       27

<PAGE>


                Summary of Material Mortgage Loan Securitization
  Valuation Assumptions and Actual Experience at December 31, 2000 (Continued)
<TABLE>
<CAPTION>

                                               1998-3    1998-2    1998-1    1997-2    1997-1   1996-2    1996-1
                                               ------    ------    ------    ------    ------   ------    ------
<S>                                            <C>       <C>       <C>        <C>       <C>      <C>      <C>
Interest-only strip discount rate:
   Initial valuation..........................    11%       11%       11%       11%      11%       11%       11%
   Current valuation..........................    13%       13%       13%       13%      13%       13%       13%
Servicing rights discount rate:
   Initial valuation..........................    11%       11%       11%       11%      11%       11%       11%
   Current valuation..........................    11%       11%       11%       11%      11%       11%       11%

Prepayment rates:
   Initial assumption:
   Expected Constant Prepayment Rate (CPR):
     Business loans...........................    13%       13%       13%       13%      13%       13%       13%
     Home equity loans........................    24%       24%       24%       24%      24%       24%       24%
   Ramp period (months) (a):
     Business loans...........................     24        24        24        24       24        24        24
     Home equity loans........................     12        12        12        12       12        12        12
   Current assumptions:
   Expected Constant Prepayment Rate (CPR):
     Business loans........................... 14.25%    16.75%    16.50%    15.75%   19.00%    22.50%    22.00%
     Home equity loans........................ 21.50%    20.50%    20.50%    25.25%   24.50%    26.25%    18.75%
   Ramp period (months):
     Business loans...........................     24        24        24        24       24        24        24
     Home equity loans........................     24        12        12        12       12        12        12
   CPR adjusted to reflect ramp:
     Business loans........................... 14.25%    16.75%    16.50%    15.75%   19.00%    22.50%    22.00%
     Home equity loans........................ 21.50%    20.50%    20.50%    25.25%   24.50%    26.25%    18.75%
   Actual CPR experience:
     Business loans........................... 14.20%    16.70%    16.52%    15.79%   18.89%    22.39%    21.97%
     Home equity loans........................ 13.76%    20.39%    22.18%    25.10%   24.39%    26.08%    18.62%

Credit loss rates:
   Annual credit loss rate:
     Initial assumption.......................  0.25%     0.25%     0.25%     0.25%    0.25%     0.25%     0.25%
     Current assumption.......................  0.25%     0.45%     0.40%     0.25%    0.25%     0.25%     0.25%
     Actual experience........................  0.26%     0.45%     0.39%     0.22%    0.25%     0.19%     0.26%
   Cumulative credit loss rate:
     Initial assumption.......................  1.20%     1.20%     1.20%     1.20%    1.20%     1.20%     1.20%
     Current assumption.......................  1.20%     1.70%     1.57%     1.20%    1.20%     1.20%     1.20%
     Cumulative experience to date............  0.61%     1.17%     1.11%     0.72%    0.96%     0.83%     1.25%

Servicing fees:
   Contractual fees...........................  0.50%     0.50%     0.50%     0.50%    0.50%     0.50%     0.50%
   Ancillary fees.............................  0.75%     0.75%     0.75%     0.75%    0.75%     0.75%     0.75%
</TABLE>

(a) The prepayment ramp is the length of time before a pool of mortgage loans
    reaches its expected Constant Prepayment Rate. The business loan prepayment
    ramp begins at 3% in month one. The home equity loan prepayment ramp begins
    at 2% in month one.

                                       28

<PAGE>


         Although we believe we have made reasonable estimates of prepayment
rates and credit loss assumptions, the actual prepayment and credit loss
experience may materially vary from our estimates. To the extent that
prepayments or credit losses differ materially from the estimates made,
adjustments of our interest-only strips and servicing rights may be required in
accordance with Statement of Financial Accounting Standards No. 115. Levels of
future prepayments and credit loss assumptions higher than those initially
estimated could result in a reduction in the value of interest-only strips and
servicing rights which would adversely affect income in the period of
adjustment. Additionally, some of our securitization trusts have issued floating
rate certificates supported by fixed rate mortgages. The fair value of the
excess cash flow we will receive may be affected by any changes in the rates
paid on the floating rate certificates.

         Lease Securitizations. Information related to our two lease
securitizations is presented in the table below. As of December 31, 1999, we
de-emphasized the lease origination business but continue to service the
remaining leases in our managed portfolio.

              Summary of Selected Lease Securitization Information
                    Current Balances as of December 31, 2000
                              (dollars in millions)
<TABLE>
<CAPTION>
                                                                               1999-a         1998-a
                                                                            -----------    ------------
<S>                                                                         <C>            <C>
Original balance of leases securitized..................................    $        82    $         80
Current balance of leases securitized...................................    $        45    $         22
Weighted average yield on leases securitized............................         11.17%          12.09%
Weighted average remaining term (months) on leases securitized..........             27              14
Original balance of Trust Certificates..................................    $        78    $         76
Current balance of Trust Certificates...................................    $        43    $         20
Weighted average pass-through interest rate to Trust Certificate
   Holders..............................................................          6.55%           6.15%
Overcollateralization requirements......................................             3%              3%
Annual surety wrap fee..................................................          0.29%           0.29%
Valuation Assumptions
Residual interests discount rate:
   Initial valuation....................................................            11%             11%
   Current valuation....................................................            13%             13%
Servicing rights discount rate:
   Initial valuation....................................................            11%             11%
   Current valuation....................................................            11%             11%
   Prepayment rates.....................................................            (a)             (a)
Credit loss rates:
   Annual credit loss rate:
     Initial assumption.................................................          0.50%           0.50%
     Current assumption.................................................          0.70%           0.50%
     Actual experience..................................................          0.57%           0.48%
Servicing Fees:
   Contractual fees.....................................................          0.50%           0.50%
   Ancillary fees.......................................................          0.30%           0.30%
</TABLE>

(a) The equipment leasing portfolio has experienced insignificant prepayments,
    less than 1.5% annualized. Should a lease terminate early, any impact on the
    valuation of lease securitization assets would be recorded upon termination
    of the lease.


                                       29
<PAGE>

         Servicing Rights. When loans or leases are sold through a
securitization, the servicing on the loans or leases is retained and we
capitalize the benefit associated with the rights to service securitized loans
and leases based on those servicing rights relative fair value to other
consideration received in the securitization. We receive annual contractual
servicing fees of 50 to 70 basis points which are paid out of accumulated
mortgage loan payments before payments of principal and interest are made to
trust certificate holders. Prepayment fees, late charges, nonsufficient fund
fees and other fees are retained directly by us as servicer as payments are
collected from the borrowers.

         Fair value of servicing rights is determined by computing the present
value of projected net cash flows from contractual servicing fees and ancillary
servicing fees, as described above, net of costs to service expected to be
received over the life of the loans or leases securitized. These projections
incorporate assumptions, including prepayment rates, credit loss rates and
discount rates. These assumptions are similar to those used to value the
interest-only strips retained in a securitization. Periodically, capitalized
servicing rights are evaluated for impairment, which is measured as the excess
of unamortized cost over fair value. Interest rates are not considered as a
predominant risk characteristic for purposes of evaluating impairment. We have
generally found that the non-conforming mortgage market is less sensitive to
changes in interest rates than the conventional mortgage market where borrowers
have more favorable credit history for the following reasons. First, there are
relatively few lenders willing to supply credit to non-conforming borrowers
which limits those borrowers' opportunities to refinance. Second, interest rates
available to non-conforming borrowers tend to adjust much slower than
conventional mortgage rates which reduces the non-conforming borrowers'
opportunity to capture economic value from refinancing. Also, a majority of
loans to our borrowers require prepayment fees. As a result, the prepayment
experience on our managed portfolio is more stable than the mortgage market in
general. This stability favorably impacts our ability to value the future cash
flows from our servicing rights and interest-only strips because it increases
the predictability of future cash flows. At December 31, 2000, servicing rights
totaled $92.1 million, compared to $74.9 million at June 30, 2000.

RESULTS OF OPERATIONS

Overview

         For the second quarter of fiscal 2001, net income decreased $1.4
million, or 36.1%, to $2.4 million from $3.8 million for the second quarter of
fiscal 2000. Diluted earnings per common share decreased to $0.72 on average
common shares of 3,328,000 compared to $1.08 per share on average common shares
of 3,478,000 for the second quarter of fiscal 2000.

         For the six months ended December 31, 2000, net income decreased $3.7
million, or 50.3%, to $3.8 million from $7.5 million for the same period in
fiscal 2000. Diluted earnings per share decreased to $1.12 for the six months
ended December 31, 2000, on average common shares of 3,367,000 compared to $2.11
on average common shares of 3,571,000 for the same period in fiscal 2000.
Dividends of $0.08 per share were paid for the quarter ended December 31, 2000
compared to dividends of $0.07 per share for the quarter ended December 31,
1999. The common dividend payout ratio based on diluted earnings per share was
11.1% for the second quarter of fiscal 2001 compared to 6.5% for the second
quarter of fiscal 2000.

         The decrease in net income and earnings per share primarily resulted
from an increase interest expense due to higher levels of subordinated debt,
increases in employee related costs and general and administrative expenses
which included a one-time expense related to the 1997 acquisition of New Jersey
Mortgage and Investment Corp.

                                       30
<PAGE>


         Our business strategy is dependent upon our ability to increase loan
origination volume through both geographic expansion and growth in current
markets to realize efficiencies in the infrastructure and loan production
channels we have been building. The implementation of this strategy will depend
in large part on a variety of factors outside of our control, including, but not
limited to, the ability to obtain adequate financing on favorable terms and
profitably securitize loans on a regular basis and continue to expand in the
face of increasing competition. Our failure with respect to any of these factors
could impair our ability to successfully implement our strategy, which could
adversely affect our results of operations and financial condition.

         In fiscal 1999, the Board of Directors initiated a stock repurchase
program in view of the price level of our common stock, which was at the time,
and has continued to, trade at below book value. In addition, our consistent
earnings growth over the past several years did not result in a corresponding
increase in the market value of our common stock. In November 2000, the Board of
Directors extended this program through fiscal 2001 and authorized the purchase
of up to 20% of our outstanding shares of common stock. In the second quarter of
fiscal 2001, we repurchased 103 thousand shares of common stock, representing 3%
of the outstanding shares.

                            Summary Financial Results
                  (dollars in thousands, except per share data)
<TABLE>
<CAPTION>

                                  Three Months Ended                        Six Months Ended
                                      December 31,                             December 31,
                                ---------------------      Percentage   -----------------------         Percentage
                                  2000           1999       Increase      2000             1999          Increase
                                -------        -------     ----------   --------         -------        ----------
<S>                             <C>            <C>            <C>       <C>              <C>               <C>
Total revenues..............    $44,515        $30,597        45.5%     $82,938          $58,417           42.0%
Total expenses..............     40,512         24,334        66.5%      76,679           45,837           67.3%
Net income..................      2,401          3,758       (36.1%)      3,755            7,548          (50.3%)

Return on average equity....     14.53%         23.81%                   11.62%           24.41%
Return on average assets....      1.50%          3.23%                    1.20%            3.43%

Earnings per share:
   Basic....................      $0.72          $1.10       (34.5%)      $1.13            $2.16          (47.7%)
   Diluted..................      $0.72          $1.08       (33.3%)      $1.12            $2.11          (46.9%)
Dividends declared per
   share....................      $0.08          $0.07        14.3%       $0.16            $0.14           14.3%
</TABLE>

         Total Revenues. For the second quarter of fiscal 2001, total revenues
increased $13.9 million, or 45.5%, to $44.5 million from $30.6 million for the
second quarter of fiscal 2000. For the first six months of fiscal 2001, total
revenues increased $24.5 million, or 42.0%, to $82.9 million from $58.4 million
for the first six months of fiscal 2000. Growth in total revenues was mainly the
result of increases in gains on the securitization of mortgage loans and
increases in interest accretion earned on our interest-only strips.

         Gain on Sale of Loans and Leases. Gain on sale of loans and leases
increased $10.5 million, or 51.3%, to $31.0 million on the securitization of
$284.0 million of loans for the second quarter of fiscal 2001 from $20.5 million
on the securitization of $236.7 million of loans in the second quarter of fiscal
2000. For the six months ended December 31, 2000, gains of $57.1 million were
recorded on the securitization of $540.8 million of loans. This was an increase
of $17.5 million, or 44.1%, over gains of $39.6 million recorded on
securitizations of $447.0 million of loans and leases for the six months ended
December 31, 1999.

                                       31
<PAGE>

         The increase in securitization gains for the three months and six
months ended December 31, 2000 was due to both the higher volume of loans
securitized and increases in spreads. The securitization gain as a percentage of
loans securitized increased to 10.6% for the six months ended December 31, 2000
from 8.9% on loans and leases securitized for the six months ended December 31,
1999. The increase in the gain percentage on loans securitized for the six
months ended December 31, 2000 was primarily due to an increase in the spread
between the average coupon on loans securitized and the pass-through rate paid
to investors and a lower writeoff for capitalized SFAS No. 91 loan origination
costs. These increases more than offset the negative effect of an increase from
11% to 13%, in the discount rate used to value our interest-only strips in our
fiscal 2001 securitizations.

         The increase in spread for the six months ended December 31, 2000
compared to the six months ended December 31, 1999 resulted from an increase in
the average coupon on loans securitized. For loans securitized during the six
months ended December 31, 2000, the average coupon was 12.03%, an increase from
11.62% on loans securitized during the six months ended December 31, 1999. The
average interest rate on trust certificates issued in mortgage loan
securitizations during the six months ended December 31, 2000 was 7.24%, a
decrease from 7.42% during the six months ended December 31, 1999. The resulting
net improvement in spread was approximately 0.59%.

         SFAS No. 91, "Accounting for Nonrefundable Fees and Costs Associated
with Originating or Acquiring Loans and Initial Direct Costs of Leases,"
requires that certain direct loan origination costs related to the time spent
successfully originating loans be deferred and recorded as an addition to the
cost basis of loans originated. These costs are then recognized as a reduction
of the gain on sale recorded at the time loans are securitized. Because of
efficiencies and productivity gains achieved in our loan origination businesses,
we have reviewed and revised our estimates of costs related to time spent
successfully originating loans and have lowered the amount of employee related
costs previously deferred and recorded as a reduction to securitization gains.
See "Employee Related Costs."

         Changes in prepayment ramp and credit loss assumptions from those used
in calculating securitization gains in the six months ended December 31, 2000
had an insignificant net impact on the change in securitization gain percentage
from the first six months of fiscal 2000.

         The following schedule details our loan and lease originations (in
thousands):
<TABLE>
<CAPTION>
                                           Three Months Ended                 Six Months Ended
                                              December 31,                       December 31,
                                        -----------------------            ------------------------
                                          2000           1999                2000            1999
                                        --------       --------            --------        --------
<S>                                     <C>            <C>                 <C>             <C>
Business purpose loans.......           $ 26,816       $ 28,830            $ 56,670        $ 52,241
Home equity loans............            262,626        226,066             543,686         434,328
Equipment leases..............                 -          4,100                   -          19,609
                                        --------       --------            --------        --------
                                        $289,442       $258,996            $600,356        $506,178
                                        ========       ========            ========        ========
</TABLE>
         Loan originations for our subsidiary, American Business Credit, Inc.,
which offers business purpose loans secured by real estate, increased $4.4
million, or 8.5%, for the six months ended December 31, 2000, to $56.7 million
from $52.2 million for the six months ended December 31, 1999. This increase is
attributable to the continued geographic expansion of our business lending
division.

         Home equity loans originated by our subsidiaries Upland Mortgage, New
Jersey Mortgage and Investment Corp. and Processing Service Center, Inc.,
increased $109.3 million, or 25.2% to $543.7 million from $434.3 million for the
six months ended December 31, 2000. Upland mortgage has redirected its marketing
mix to focus on targeted direct mail, which delivers more leads at a lower cost
than broadcast marketing channels and has continued to phase in advanced
Internet technology through its web site, www.UplandMortgage.com. In addition to
the ability to take online loan applications and utilize an automated rapid
credit approval process, both of which reduce time and manual effort required
for loan approval, the site features our proprietary patent-pending Easy Loan
Advisor, which provides personalized services and solutions to retail customers
through interactive web dialog.

                                       32
<PAGE>


         In January 2001, ABFS completed a corporate reorganization which
included the renaming of its home equity loan subsidiary, New Jersey Mortgage
and Investment Corporation, to better reflect its national presence. New Jersey
Mortgage will now be known as American Business Mortgage Services, Inc. In
addition, American Business Mortgage Services, Inc. will also be responsible for
marketing the proprietary loan structuring software and will utilize this
software in connection with loan products offered through its network of loan
brokers. Finally, as part of the reorganization, the Bank Alliance Program will
now be administered by American Business Mortgage Services, Inc.

         Interest and Fees. Interest and fee income for the second quarter of
fiscal 2001 increased $1.3 million, or 27.0%, to $6.0 million from $4.7 million
in the second quarter of fiscal 2000. For the six months ended December 31,
2000, interest and fee income increased $1.7 million, or 18.5%, to $11.2 million
from $9.5 million for the six months ended December 31, 1999. Interest and fee
income consists primarily of interest income earned on available for sale loans
and leases, premiums earned on whole loan sales and other ancillary fees
collected in connection with loan originations.

         Interest income for the second quarter of fiscal 2001 increased $1.2
million, or 72.2%, to $2.9 million from $1.7 million in the second quarter of
fiscal 2000. During the six months ended December 31, 2000, interest income
increased $1.5 million, or 40.8%, to $5.1 million from $3.6 million for the six
months ended December 31, 1999. The increase was attributable to an increase in
our balance of loans and leases available for sale due to a decrease in the
percentage of loan originations which were securitized and retained on the
balance sheet during the second quarter of fiscal 2001.

         Fee income was level at $3.1 for the second quarter of fiscal 2001 and
2000. For the six months ended December 31, 2001, fee income increased $0.2
million, or 4.9%, to $6.2 million from $5.9 million for the six months ended
December 31, 1999. The increase for the six-month period was the result of
increases in premiums earned on whole loan sales.

         Premiums on whole loan sales were $1.1 million and $0.8 million for the
six-month periods ended December 31, 2000 and 1999, respectively. The volume of
whole loan sales decreased 22.2%, to $39.2 million for the six months ended
December 31, 2000 from $50.4 million for the six months ended December 31, 1999
which was offset by an increase in the average premium earned on whole loan
sales in the period.

         Interest Accretion on Interest-Only Strips. Interest accretion
represents the yield component of cash flows received on interest-only strips.
Interest accretion of $5.8 million and $11.4 million was earned in the
three-month and six-month periods ended December 31, 2000, respectively,
compared to $4.3 million and $7.1 million in the three months and six months
ended December 31, 1999, respectively. The increase reflects the growth in the
balance of our interest-only strips of $106.9 million, or 46.0%, to $339.0
million at December 31, 2000 from $232.2 million at December 31, 1999. In
addition, cash flows for the six months ended December 31, 2000 from
interest-only strips increased $15.3 million, or 76.7%, from the same period of
fiscal 2000 due to the larger size of our more recent securitizations and
additional securitizations reaching final target overcollateralization levels.

                                       33
<PAGE>

         We use a prospective approach to estimate interest accretion.
Periodically, we update estimates of residual cash flow from our
securitizations. When it is probable that there is a favorable change in
estimated residual cash flow from the cash flow previously projected, we
recognize a greater percentage of estimated interest accretion earned by the
securitization. Any change in value of the underlying interest-only strip could
impact our current estimate of residual cash flow earned from the
securitizations. For example, a significant change in market interest rates
could increase or decrease the level of prepayments, thereby changing the size
of the total managed loan portfolio and related projected cash flows. See
"Securitization Accounting Considerations" for additional discussion.

         Servicing Income. Servicing income is comprised of contractual and
ancillary fees collected on securitized loans and leases less amortization of
the servicing rights assets that are recorded at the time loans and leases are
securitized. Ancillary fees include prepayment fees, late fees and other
servicing fee compensation. For the second quarter of fiscal 2001, servicing
income increased $0.6 million , or 58.7%, to $1.7 million from $1.1 million for
the second quarter of fiscal 2000. For the six months ended December 31, 2000,
servicing income increased $1.0 million, or 41.2%, to $3.2 million from $2.2
million for the six months ended December 31, 1999. The increases were due to an
increase in the size of the managed portfolio from $1.5 billion at December 31,
1999 to $2.3 billion at December 31, 2000.

         The following table summarizes the components of servicing income for
the three and six month periods ended December 31, 2000 and 1999 (in thousands):
<TABLE>
<CAPTION>
                                                         Three Months Ended            Six Months Ended
                                                            December 31,                  December 31,
                                                     ---------------------------   --------------------------
                                                         2000           1999           2000          1999
                                                     ------------ --------------   ------------ -------------
<S>                                                  <C>          <C>              <C>          <C>
        Contractual and ancillary fees.........      $     6,080  $        3,925   $    11,328   $      7,569
        Amortization of servicing rights.......           (4,414)         (2,875)       (8,167)        (5,330)
                                                     -----------  --------------   -----------   ------------
                                                     $     1,666  $        1,050   $     3,161   $      2,239
                                                     ===========  ==============   ===========   ============
</TABLE>

         As an annualized percentage of the average managed portfolio, servicing
income for the quarter decreased to 0.30%, from 0.32% in the second quarter of
the prior year. For the first six months of fiscal 2001 annualized servicing
income as a percentage of the average managed portfolio was 0.30% compared to
0.35% in the first six months of fiscal 2000. The decrease was due to lower
prepayment and other ancillary fees collected as a percentage of the portfolio
in the first six months of fiscal 2001 compared to the same period of the prior
year.

         The origination of loans with prepayment fees impacts our servicing
income in two ways. Prepayment fees reduce the likelihood of a borrower
prepaying their loan. This results in prolonging the length of time a loan is
outstanding which increases the contractual servicing fees to be collected over
the life of the loan. Additionally, the terms of our servicing agreements with
the securitization trusts allow us to retain prepayment fees collected from
borrowers as part of our compensation for servicing loans.

         Amortization of the servicing rights asset for securitized loans and
leases is calculated individually for each securitized pool and is recognized in
proportion to, and over the period of estimated future servicing income on that
particular pool of loans and leases. We perform a valuation analysis of
servicing rights on a quarterly basis to determine the fair value of our
servicing rights. If our valuation analysis indicates the carrying value of
servicing rights are not recoverable through future cash flows from contractual
servicing and other ancillary fees, a valuation allowance would be required. To
date, our valuation analysis has not indicated any impairment, other than a $0.7
million writedown recorded in the fourth quarter of fiscal 2000, and no
valuation allowance has been required. Impairment is measured as the excess of
carrying value over fair value.

                                       34
<PAGE>


         Total Expenses. For the second quarter of fiscal 2001, total expenses
increased $16.2 million, or 66.5%, to $40.5 million from $24.3 million for the
second quarter of fiscal 2000. Total expenses increased $30.8 million, or 67.3%,
to $76.7 million for the six months ended December 31, 2000 compared to $45.8
million for the six months ended December 31, 1999. As described in more detail
below, this increase was a result of increased interest expense attributable to
the sale of subordinated debt, increases in employee related costs, and an
increase in general and administrative expense which includes a one-time expense
related to the 1997 acquisition of New Jersey Mortgage and Investment Corp.

         Interest Expense. For the second quarter of fiscal 2001, interest
expense increased $5.6 million, or 67.0%, to $14.1 million from $8.4 million for
the second quarter of fiscal 2000. The increase was attributable to an increase
in the amount of subordinated debt outstanding during the second quarter of
fiscal 2001, the proceeds of which were used to fund loan originations,
operating activities, repayments of maturing subordinated debt and investments
in systems technology and Internet capabilities required to position us for
future growth. Average subordinated debt outstanding during the three months
ended December 31, 2000 was $423.0 million compared to $254.1 million during the
three months ended December 31, 1999. Average interest rates paid on
subordinated debt outstanding increased to 10.99% during the three months ended
December 31, 2000 from 9.55% during the three months ended December 31, 1999.
Rates offered on subordinated debt increased during fiscal 2000 in response to
general increases in market rates during that period and to attract funds with a
longer average maturity.

         During the first six months of fiscal 2001 interest expense increased
$10.9 million, or 67.2%, to $26.9 million from $16.0 million for the six months
ended December 31, 1999. Average subordinated debt outstanding during the six
months ended December 31, 2000 was $414.2 compared to $239.9 during the six
months ended December 31, 1999. Average interest rates paid on subordinated debt
outstanding increased to 10.90% during the six months ended December 31, 2000
from 9.49% during the six months ended December 31, 1999.

         The increase in interest expense related to increases in the average
balance of subordinated debt was partially offset by a decrease in the average
outstanding balances under warehouse lines of credit. The average outstanding
balances under warehouse lines of credit were $67.5 million during the three
months ended December 31, 2000, compared to $100.1 million during the three
months ended December 31, 1999. The average outstanding balances under warehouse
lines of credit were $56.7 million during the six months ended December 31,
2000, compared to $109.9 million during the six months ended December 31, 1999.
This decrease was due to the increased utilization of proceeds from the sale of
subordinated debt to fund loan originations and greater utilization of
off-balance sheet facilities. Borrowings under warehouse lines of credit are
secured by mortgage loans and represent advances of cash to us, usually at 98%
of the principal amount of the mortgage loan used as collateral. These
borrowings are for a limited duration, generally no more than 270 days, pending
the ultimate sale of the mortgage loans through securitization or whole loan
sale, either of which will generate the proceeds necessary to retire the
borrowing.

         Provision for Credit Losses. The provision for credit losses remained
level at $0.5 million for the quarters ended December 31, 2000 and 1999. The
provision for credit losses on portfolio loans and leases for the six months
ended December 31, 2000 increased $0.7 million, or 98.6%, to $1.4 million as
compared to $0.7 million for the six months ended December 31, 1999. The
increase in the provision for credit losses was primarily due to an increase in
loans and leases available for sale.

                                       35
<PAGE>

         The following tables summarize the changes in the allowance for credit
losses by loan and lease type for the three-month and six-month periods ended
December 31, 2000 and 1999 (in thousands):

<TABLE>
<CAPTION>
                                                  Business
                                                  Purpose         Home Equity        Equipment
Three Months Ended December 31, 2000               Loans             Loans            Leases        Total
----------------------------------------          --------        -----------        ---------     --------
<S>                                               <C>               <C>              <C>           <C>
Balance at beginning of period...........         $   505           $    733         $    358      $  1,596
Provision for credit losses..............              78                309              153           540
(Charge-offs) recoveries, net............             (63)               (90)             (44)         (197)
                                                  -------           --------         --------      --------
Balance at end of period.................         $   520           $    952         $    467      $  1,939
                                                  =======           ========         ========      ========
</TABLE>

<TABLE>
<CAPTION>
                                                  Business
                                                  Purpose         Home Equity        Equipment
Six Months Ended December 31, 2000                 Loans             Loans            Leases        Total
----------------------------------------          --------        -----------        ---------     --------
<S>                                               <C>               <C>              <C>           <C>
Balance at beginning of period...........         $   462           $    507         $    320      $  1,289
Provision for credit losses..............             122                679              607         1,408
(Charge-offs) recoveries, net............             (64)              (234)            (460)         (758)
                                                  -------           --------         --------      --------
Balance at end of period.................         $   520           $    952         $    467      $  1,939
                                                  =======           ========         ========      ========
</TABLE>


<TABLE>
<CAPTION>
                                                  Business
                                                  Purpose         Home Equity        Equipment
Three Months Ended December 31, 1999               Loans             Loans            Leases        Total
----------------------------------------          --------        -----------        ---------     --------
<S>                                               <C>               <C>              <C>           <C>
Balance at beginning of period...........         $    24           $    336         $    473      $    833
Provision for credit losses..............              65                (80)             583           568
(Charge-offs) recoveries, net............             (66)               (96)            (900)       (1,062)
                                                  -------           --------         --------      --------
Balance at end of period.................         $    23           $    160         $    156      $    339
                                                  =======           ========         ========      ========
</TABLE>

<TABLE>
<CAPTION>
                                                  Business
                                                  Purpose         Home Equity        Equipment
Six Months Ended December 31, 1999                 Loans             Loans            Leases        Total
----------------------------------------          --------        -----------        ---------     --------
<S>                                               <C>               <C>              <C>           <C>
Balance at beginning of period...........         $    26           $    243         $    433      $    702
Provision for credit losses..............              84                 11              614           709
(Charge-offs) recoveries, net............             (87)               (94)            (891)       (1,072)
                                                  -------           --------         --------      --------
Balance at end of period.................         $    23           $    160         $    156      $    339
                                                  =======           ========         ========      ========
</TABLE>

                                       36

<PAGE>

         The decline in charge-offs for the six months ended December 31, 2000
was primarily attributable to lower losses recorded on leases, partially offset
by an increase in losses recorded on loans. While we are under no obligation to
do so, at times we elect to repurchase some foreclosed and delinquent loans from
the securitization trusts. Under the terms of the securitization agreements,
repurchases are permitted only for foreclosed and delinquent loans and the
purchase prices are at the loans' outstanding contractual balance. Under the
terms of the trust agreements, a foreclosed loan is one where we as servicer
have initiated formal foreclosure proceedings against the borrower and a
delinquent loan is one that is 30 days or more past due. The foreclosed and
delinquent loans we typically elect to repurchase must be 90 days or more
delinquent and the subject of completed foreclosure proceedings, or where a
completed foreclosure is imminent. We elect to repurchase loans in situations
requiring more flexibility for the administration and collection of these loans
in order to maximize their economic recovery and to avoid temporary
discontinuations of residual or stepdown overcollateralization cash flow from
securitization trusts. The related charge-offs on these repurchased loans are
included in our provision for credit losses in the period of charge-off. Our
ability to repurchase these loans does not disqualify us for sale accounting
under SFAS No. 125 and other relevant accounting literature because we are not
required to repurchase any loan and our ability to repurchase a loan is limited.






                                       37

<PAGE>

         The following table summarizes the principal balances of loans we have
repurchased from the mortgage loan securitization trusts for the six months
ended December 31, 2000 and the three years ended June 30, 2000, 1999 and 1998.
All loans were repurchased at the contractual outstanding balances at the time
of repurchase. Mortgage loan securitization trusts are listed only if loan
repurchases occurred.

      Summary of Loans Repurchased from Mortgage Loan Securitization Trusts
                             (dollars in thousands)
<TABLE>
<CAPTION>

                                         2000-3     2000-2   2000-1   1999-3   1999-1   1998-4   1998-3   1998-2  1998-1
                                         ------     ------   ------   ------   ------   ------   ------   ------  ------
<S>                                      <C>        <C>      <C>      <C>      <C>      <C>      <C>      <C>     <C>
Six months ended December 31, 2000:
   Business loans....................    $   --     $   --   $   --   $   --   $   --   $   --   $  359   $  215  $  168
   Home equity loans.................        88        330       --       --       --       --      661       95   1,174
                                         ------     ------   ------   ------   ------   ------   ------   ------  ------
      Total..........................    $   88     $  330   $   --   $   --   $   --   $   --   $1,020   $  310  $1,342
                                         ======     ======   ======   ======   ======   ======   ======   ======  ======
   Number of loans repurchased.......         1          2       --       --       --       --        9        2      19

Year ended June 30, 2000:
   Business loans....................    $   --     $   --   $   --   $  101   $   --   $   --   $   --   $  827  $   --
   Home equity loans.................        --         --      167       --       --      363      106    2,588     165
                                         ------     ------   ------   ------   ------   ------   ------   ------  ------
     Total...........................    $   --     $   --   $  167   $  101   $   --   $  363   $  106   $3,415  $  165
                                         ======     ======   ======   ======   ======   ======   ======   ======  ======
   Number of loans repurchased.......        --         --        3        1       --        3        1       24       1

Year ended June 30, 1999:
   Business loans....................    $   --     $   --   $   --   $   --   $   --   $   --   $   --   $   --  $   23
   Home equity loans.................        --         --       --       --       35       15      311       --     277
                                         ------     ------   ------   ------   ------   ------   ------   ------  ------
     Total...........................    $   --     $   --   $   --   $   --   $   35   $   15   $  311   $   --  $  300
                                         ======     ======   ======   ======   ======   ======   ======   ======  ======
   Number of loans repurchased.......        --         --       --       --        1        1        2       --       4

Year ended June 30, 1998:
   Business loans....................    $   --     $   --   $   --   $   --   $   --   $   --   $   --   $   --  $   --
   Home equity loans.................        --         --       --       --       --       --       --       --      --
                                         ------     ------   ------   ------   ------   ------   ------   ------  ------
     Total...........................    $   --     $   --   $   --   $   --   $   --   $   --   $   --   $   --  $   --
                                         ======     ======   ======   ======   ======   ======   ======   ======  ======
   Number of loans repurchased.......        --         --       --       --       --       --       --       --      --
</TABLE>


<PAGE>

                                    [RESTUB]



      Summary of Loans Repurchased from Mortgage Loan Securitization Trusts
                             (dollars in thousands)
<TABLE>
<CAPTION>

                                           1997-2   1997-1   1996-2  1996-1   Total
                                           ------   ------   ------  ------  -------
<S>                                        <C>      <C>      <C>     <C>     <C>
Six months ended December 31, 2000:
   Business loans....................      $  275   $   --   $  100  $  250  $ 1,367
   Home equity loans.................         995       --       --      --    3,343
                                           ------   ------   ------  ------  -------
      Total..........................      $1,270   $   --   $  100  $  250  $ 4,710
                                           ======   ======   ======  ======  =======
   Number of loans repurchased.......          13       --        2       3       51

Year ended June 30, 2000:
   Business loans....................      $  153   $2,441   $  337  $  259  $ 4,118
   Home equity loans.................          84    1,123      114      --    4,710
                                           ------   ------   ------  ------  -------
     Total...........................      $  237   $3,564   $  451  $  259  $ 8,828
                                           ======   ======   ======  ======  =======
   Number of loans repurchased.......           6       35        6       1       81

Year ended June 30, 1999:
   Business loans....................      $   --   $   51   $   --  $   --  $    74
   Home equity loans.................         265      344       --      25    1,272
                                           ------   ------   ------  ------  -------
     Total...........................      $  265   $  395   $   --  $   25  $ 1,346
                                           ======   ======   ======  ======  =======
   Number of loans repurchased.......           4        6       --       1       19

Year ended June 30, 1998:
   Business loans....................      $   --   $   33   $  264  $   --  $   297
   Home equity loans.................          --       57      144      --      201
                                           ------   ------   ------  ------  -------
     Total...........................      $   --   $   90   $  408  $   --  $   498
                                           ======   ======   ======  ======  =======
   Number of loans repurchased.......          --        2        2      --        4
</TABLE>



                                       38


<PAGE>


         An allowance for credit losses for available for sale loans and leases
is maintained primarily to account for loans and leases that are delinquent and
are expected to be ineligible for sale into a future securitization. The
allowance is calculated based upon management's estimate of the expected
collectibility of loans and leases outstanding based upon a variety of factors,
including but not limited to, periodic analysis of the available for sale loans
and leases, economic conditions and trends, historical credit loss experience,
borrowers ability to repay, and collateral considerations. Although we maintain
an allowance for credit losses at the level we consider adequate to provide for
potential losses, there can be no assurances that actual losses will not exceed
the estimated amounts or that an additional provision will not be required. The
allowance for credit losses was $1.9 million, or 2.6% of gross receivables, at
December 31, 2000 compared to $1.3 million, or 2.8% of gross receivables, at
June 30, 2000.

         Employee Related Costs. For the second quarter of fiscal 2001, employee
related costs increased $4.6 million, to $7.2 million, from $2.5 million in the
second quarter of fiscal 2000. The increase was primarily attributable to growth
in personnel to support our increased volume of loan originations and loan
servicing support personnel related to the growth in our total managed portfolio
and a reduction on the amount of employee related costs which were deferred and
capitalized in accordance with the Statement of Financial Accounting Standards
No. 91 ("SFAS No. 91").

         SFAS No. 91, "Accounting for Nonrefundable Fees and Costs Associated
with Originating or Acquiring Loans and Initial Direct Costs of Leases,"
requires that certain direct loan origination costs related to the time spent
successfully originating loans be deferred and recorded as an addition to the
cost basis of loans originated. These costs are then recognized as a reduction
of the gain on sale recorded at the time loans are securitized. Because of
efficiencies and productivity gains achieved in certain aspects of our loan
origination business, we have reviewed and revised our estimates of the direct
costs related to time spent successfully originating loans and have lowered the
amount of employee related costs we defer and capitalized. See "Gains on Sale of
Loans and Leases." The number of employees engaged in the loan origination
process has declined by approximately 160 employees from last year. Overall
throughout the Company, the number of employees has declined by almost 140
employees from last year to the current level of 861 employees.

         Sales and Marketing Expenses. For the second quarter of fiscal 2001,
sales and marketing expenses decreased $0.7 million, or 9.6%, to $6.0 million
from $6.7 million for the second quarter of fiscal 2000. For the six months
ended December 31, 2000, sales and marketing expenses decreased $2.1 million, or
15.2%, to $11.8 million from $13.9 million for the six months ended December 31,
2000. Expenses for direct mail advertising increased $2.9 million for the six
months ended December 31, 2000 compared to the prior year six-month period due
to increased use of targeted direct mail programs for our loan products. These
targeted programs are considered to be more cost effective than the television
and radio advertising campaigns utilized into the second quarter of fiscal 2000.
Television and radio advertising costs decreased by $3.3 million in the first
six months of fiscal 2001 compared to the prior year six-month period. Subject
to market conditions, we plan to selectively increase the funding for
advertising in markets where we believe we can generate significant additional
increases in loan originations.

         General and Administrative Expenses. For the second quarter of fiscal
2001, general and administrative expenses increased $6.6 million, to $12.7
million from $6.1 million for the second quarter of fiscal 2000. For the six
months ended December 31, 2000, general and administrative expenses increased
$11.9 million, to $22.6 million from $10.7 million for the six months ended
December 31, 1999. The increases were primarily attributable to increases in
rent, telephone, office supplies and equipment, expenses associated with real
estate owned and collection of delinquent loans, professional fees, investments
in systems and technology, a one-time expense related to the 1997 acquisition of
New Jersey Mortgage and Investment Corp. and other expenses incurred as a result
of the growth in loan originations and the volume of total managed loans and
leases, and the continued building of support area infrastructure and Internet
capabilities.

                                       39

<PAGE>


BALANCE SHEET INFORMATION

Balance Sheet Data:
(in thousands, except per share data)
<TABLE>
<CAPTION>

                                                                                  December 31,      June 30,
                                                                                      2000            2000
                                                                                 -------------    -----------
<S>                                                                              <C>              <C>
Cash and cash equivalents....................................................    $    43,400      $    69,751
Loan and lease receivables, net:
   Available for sale........................................................         72,672           44,132
   Other.....................................................................         16,718           13,002
Interest-only strips.........................................................        339,029          277,872
Servicing rights.............................................................         92,129           74,919
Receivables for sold loans and leases........................................         14,509           51,283
Total assets.................................................................        644,001          592,668

Subordinated debt............................................................        430,617          390,676
Warehouse lines and other notes payable......................................         49,262           50,842
Total liabilities............................................................        575,985          530,553
Total stockholders' equity...................................................         68,016           62,115

Book value per common share..................................................    $     20.48       $    18.69
Debt to tangible equity (a)(d)...............................................          11.0x            11.6x
Adjusted debt to tangible equity (b)(d)......................................          10.7x             8.3x
Subordinated debt to tangible equity (d).....................................           8.2x             8.6x
Interest-only strips to adjusted  tangible equity (c)(d).....................           3.0x             2.6x
</TABLE>

  (a) Total liabilities to tangible equity.
  (b) Total liabilities less cash and secured borrowings to tangible equity.
  (c) Interest-only strips less overcollateralization to tangible equity plus
      subordinated debt with a remaining maturity greater than 5 years.
  (d) Tangible equity is calculated as total stockholders' equity less goodwill.

         Total assets increased $51.3 million, or 8.7%, to $644.0 million at
December 31, 2000 from $592.7 million at June 30, 2000 primarily due to
increases in loans and leases available for sale, interest-only strips and
servicing rights.

         Loans and leases available for sale increased $28.6 million, or 64.7%,
to $72.7 million from $44.1 million due to a higher level of originations and a
lower level of securitizations during the first quarter of fiscal 2001.

                                       40
<PAGE>



         Activity of our interest-only strips for the six months ended December
31, 2000 and 1999 were as follows (in thousands):
<TABLE>
<CAPTION>

                                                                                  December 31,
                                                                        ------------------------------
                                                                            2000               1999
                                                                        ----------          ----------
<S>                                                                     <C>                 <C>
Balance at beginning of period...................................       $  277,872          $  178,218
Initial recognition of interest-only strips, including initial
      overcollateralization of $2,211 and $4,375.................           59,978              53,576
Required purchases of additional overcollateralization...........           19,777              12,411
Interest accretion...............................................           11,419               7,065
Cash flow from interest-only strips..............................          (35,310)            (19,981)
Net adjustments to fair value....................................            5,293                 948
                                                                        ----------          ----------
Balance at end of period.........................................       $  339,029          $  232,237
                                                                        ==========          ==========
</TABLE>




                                       41

<PAGE>


         The following table summarizes the purchases of overcollateralization
by trust for the six months ended December 31, 2000 and years ended June 30,
2000, 1999 and 1998. See "Securitization Accounting Considerations" for a
discussion of overcollateralization requirements.


     Summary of Mortgage Loan Securitization Overcollateralization Purchases
                             (dollars in thousands)
<TABLE>
<CAPTION>
                                       Off-
                                     Balance
                                      Sheet
                                   Facilities  2000-3  2000-2   2000-1   1999-4   1999-3  1999-2  1996-2   1996-1   Total
                                   ----------  ------  ------   ------   ------   ------  ------  ------   ------  -------
<S>                                 <C>        <C>     <C>      <C>      <C>      <C>     <C>     <C>      <C>     <C>
Six Months Ended December 31, 2000
Initial overcollateralization.....  $1,600     $   --  $  611   $   --   $   --   $   --  $   --  $   --   $   --  $ 2,211
Required purchases of additional
   overcollateralization..........      --      1,448   5,036    3,536    3,877    3,416   2,316     140        8   19,777
                                    ------     ------  ------   ------   ------   ------  ------  ------   ------  -------
   Total..........................  $1,600     $1,448  $5,647   $3,536   $3,877   $3,416  $2,316  $  140   $    8  $21,988
                                    ======     ======  ======   ======   ======   ======  ======  ======   ======  =======
</TABLE>

<TABLE>
<CAPTION>
                                       Off-
                                     Balance
                                      Sheet
                                   Facilities  2000-2  2000-1   1999-4   1999-3   1999-2  1999-1  1998-4   1998-3   Total
                                   ----------  ------  ------   ------   ------   ------  ------  ------   ------  -------
<S>                                 <C>        <C>     <C>      <C>      <C>      <C>     <C>     <C>      <C>     <C>
Year Ended June 30, 2000
Initial overcollateralization.....  $2,909     $2,114  $1,776   $2,222   $2,211   $   --  $   --  $   --   $   --  $11,232
Required purchases of additional
   overcollateralization..........      --         --   2,303    4,040    5,125    7,585   6,601   1,348    2,923   29,925
                                    ------     ------  ------   ------   ------   ------  ------  ------   ------  -------
   Total..........................  $2,909     $2,114  $4,079   $6,262   $7,336   $7,585  $6,601  $1,348   $2,923  $41,157
                                    ======     ======  ======   ======   ======   ======  ======  ======   ======  =======
</TABLE>

<TABLE>
<CAPTION>
                                       1999-2    1999-1    1998-4    1998-3    1998-2     1998-1    1997-2    Total
                                      -------  --------   -------   --------   ------    -------    ------   --------
<S>                                   <C>      <C>        <C>       <C>        <C>       <C>        <C>      <C>
Year Ended June 30, 1999
Initial overcollateralization.....    $1,100   $    925   $   800   $  2,000   $   --    $    --    $   --   $  4,825
Required purchases of additional
   overcollateralization..........        --      1,724     1,852      5,076    4,307      2,267     1,456     16,682
                                      ------   --------   -------   --------   ------    -------    ------   --------
   Total..........................    $1,100   $  2,649   $ 2,652   $  7,076   $4,307    $ 2,267    $1,456   $ 21,507
                                      ======   ========   =======   ========   ======    =======    ======   ========
</TABLE>

<TABLE>
<CAPTION>
                                       1998-2   1998-1     1997-2   1997-1   1996-2    1996-1     Total
                                      -------  -------    -------   ------   ------    ------    --------
<S>                                   <C>      <C>        <C>       <C>      <C>       <C>      <C>
Year Ended June 30, 1998
Initial overcollateralization.....    $1,801   $ 1,575    $ 2,000   $   --   $   --    $   --    $  5,376
Required purchases of additional
   overcollateralization..........         3     1,938      3,544    2,972    1,334       170       9,961
                                      ------   -------    -------   ------   ------    ------    --------
   Total..........................    $1,804   $ 3,513    $ 5,544   $2,972   $1,334    $  170    $ 15,337
                                      ======   =======    =======   ======   ======    ======    ========
</TABLE>


<PAGE>



         Servicing rights increased $17.2 million, or 23.0%, to $92.1 million
from $74.9 million at June 30, 2000, due to the recording of $25.3 million of
mortgage servicing rights obtained in connection with loan securitizations,
partially offset by amortization of servicing rights of $8.2 million for the six
months ended December 31, 2000.

         Total liabilities increased $45.4 million, or 8.6%, to $576.0 million
from $530.6 million at June 30, 2000 due primarily to an increase in
subordinated debt outstanding. For the first six months of fiscal 2001
subordinated debt increased $39.9 million, or 10.2%, to $430.6 million due to
sales of subordinated debt used to fund loan originations, operating activities,
repayments of maturing subordinated debt and investments in systems and
technology. Subordinated debt was 8.2 times tangible equity at December 31,
2000, compared to 8.6 times as of June 30, 2000. See "Liquidity and Capital
Resources" for further information regarding outstanding debt.


                                       42

<PAGE>



Managed Portfolio Quality

         The following table provides data concerning delinquency experience,
real estate owned and loss experience for the loan and lease portfolio serviced
(dollars in thousands):
<TABLE>
<CAPTION>
                                        December 31, 2000          September 30, 2000          June 30, 2000
                                    --------------------------  ------------------------  ----------------------
Delinquency by Type                     Amount          %          Amount          %          Amount        %
-------------------                 --------------   ---------  ------------- ----------  -------------  -------
<S>                                 <C>              <C>         <C>           <C>         <C>           <C>
Business Purpose Loans
Total managed portfolio...........   $    262,172                $   240,054               $   221,546
                                     ============                ===========               ===========
Period of delinquency:
    31-60 days....................   $      1,603         .61%   $     1,550       .65%    $       908      .41%
    61-90 days....................          2,534         .97          1,227       .51           1,757      .79
    Over 90 days..................         16,388        6.25         13,851      5.77          11,362     5.13
                                     ------------     -------    -----------      ----     -----------     ----
    Total delinquencies...........   $     20,525        7.83%   $    16,628      6.93%    $    14,027     6.33%
                                     ============     =======    ===========      ====     ===========     ====
REO...............................   $      2,929                $     1,319               $     1,299
                                     ============                ===========               ===========
Home Equity Loans
Total managed portfolio...........   $  1,936,394                $ 1,786,801               $ 1,578,038
                                     ============                ===========               ===========
Period of delinquency:
    31-60 days....................   $     11,929         .62%   $     5,942      .33%     $     6,596      .42%
    61-90 days....................          7,611         .39          7,116      .40            5,659      .36
    Over 90 days..................         35,045        1.81         30,117     1.69           27,600     1.75
                                     ------------      ------    -----------     ----      -----------     ----
    Total delinquencies...........   $     54,585        2.82%   $    43,175     2.42%     $    39,855     2.53%
                                     ============      ======    ===========     ====      ===========     ====
REO...............................   $     16,650                $    13,428               $    11,823
                                     ============                ===========               ===========
Equipment Leases
Total managed portfolio...........   $     91,615                $   105,458               $   118,956
                                     ============                ===========               ===========
Period of delinquency:
    31-60 days....................   $        533         .58%   $       705      .67%     $       475      .40%
    61-90 days....................            251         .27            347      .33              478      .40
    Over 90 days..................            374         .41            696      .66              992      .83
                                     ------------      ------    -----------     ----      -----------     ----
    Total delinquencies...........   $      1,158        1.26%   $     1,748     1.66%     $     1,945     1.63%
                                     ============      ======    ===========     ====      ===========     ====
Combined
--------
Total managed portfolio...........   $  2,290,181                $ 2,132,313               $ 1,918,540
                                     ============                ===========               ===========
Period of delinquency:
    31-60 days....................   $     14,065         .61%   $     8,197      .38%     $     7,979      .42%
    61-90 days....................         10,396         .45          8,690      .41            7,894      .41
    Over 90 days..................         51,807        2.27         44,664     2.09           39,954     2.08
                                     ------------      ------    -----------     ----      -----------     ----
    Total delinquencies...........   $     76,268        3.33%   $    61,551     2.88%     $    55,827     2.91%
                                     ============      ======    ===========     ====      ===========     ====
REO...............................   $     19,579         .85%   $    14,747      .69%     $    13,122      .68%
                                     ============      ======    ===========     ====      ===========     ====
Losses experienced during the
    three month period(a)(b):
    Loans.........................   $      2,005         .38%   $     2,265      .48%     $     1,116      .27%
                                                       ======                    ====                      ====
    Leases........................             44         .20%           453     1.79%             239      .84%
                                     ------------      ======    -----------     ====      -----------     ====
    Total managed portfolio.......   $      2,049         .37%   $     2,718      .54%     $     1,355      .31%
                                     ============      ======    ===========     ====      ===========     ====
</TABLE>

(a) Percentage based on annualized losses and average managed portfolio.
(b) Losses recorded on our books for loans owned by us including loans
    repurchased from securitization trusts were $0.7 million ($0.2 million from
    charge-offs through the provision for loan losses and $0.5 million for write
    downs of real estate owned) and losses absorbed by loan securitization
    trusts were $1.3 million for the three months ended December 31, 2000.
    Losses recorded on our books for loans owned by us including loans
    repurchased from securitization trusts were $1.3 million ($0.6 million from
    charge-offs through the provision for loan losses and $0.7 million for write
    downs of real estate owned) and losses absorbed by loan securitization
    trusts were $1.4 million for the three months ended September 30, 2000.
    Losses recorded on our books for loans owned by us including loans
    repurchased from securitization trusts were $515,000 and losses absorbed by
    loan securitization trusts were $840,000 for the three months ended June 30,
    2000.

                                       43
<PAGE>

         Delinquent loans and leases. Total delinquencies (loans and leases with
payments past due greater than 30 days) in the total managed portfolio were
$76.3 million at December 31, 2000 compared to $61.6 million at September 30,
2000 and $55.8 million at June 30, 2000. Total delinquencies as a percentage of
the total managed portfolio (the "delinquency rate") were 3.33% at December 31,
2000 compared to 2.88% at September 30, 2000 and 2.91% at June 30, 2000 on a
total managed portfolio of $2.3 billion at December 31, 2000, $2.1 billion at
September 30, 2000 and $1.9 billion at June 30, 2000. The 45 basis point
increase in the December 31, 2000 delinquency rate is a seasonal trend for us
during the December holiday season. At December 31, 1999, the delinquency rate
was 3.58%.

         Delinquent loans and leases held as available for sale (which are
included in total delinquencies) at December 31, 2000 were $2.7 million, or
3.7%. In addition, at December 31, 2000, $4.2 million, or 5.7% of available for
sale loans were on non-accrual status.

         Real estate owned. Total real estate owned ("REO"), comprising
foreclosed properties and deeds acquired in lieu of foreclosure, increased to
$19.6 million, or 0.85% of the total managed portfolio at December 31, 2000
compared to $14.7 million or 0.69% and $13.1 million or 0.68%, respectively, at
September 30, 2000 and June 30, 2000. The increase in the volume of REO of $4.8
million from the prior quarter is mainly due to our accelerating foreclosures
and taking deeds in lieu of foreclosure during traditionally slow months for
liquidating these assets of October, November, and December. In the same period
of fiscal 2000, REO as a percentage of the total managed portfolio was 0.90%.

         Included in total REO at December 31, 2000 was $1.5 million recorded in
our financial statements, and $ 18.1 million in loan securitization trusts.
Property acquired by foreclosure or in settlement of loan and lease receivables
is recorded in our financial statements at the lower of the cost basis in the
loan or fair value of the property less estimated costs to sell.

         Loss experience. During the second quarter of fiscal 2001, we
experienced net loan and lease charge-offs in our total managed portfolio of
$2.0 million. On an annualized basis, net loan charge-offs for the second
quarter of fiscal 2001 represent 0.37% of the total managed portfolio. Loss
severity experience on delinquent loans generally has ranged from 5% to 15% of
principal and loss severity experience on REO generally has ranged from 25% to
35% of principal. Of the $2.0 million of losses experienced on our total managed
portfolio in the second quarter of fiscal 2001, $1.2 million was from the loan
pools of four of our mortgage loan securitization trusts. The credit loss
assumptions in two mortgage loan securitizations have been increased to reflect
the higher level of losses experienced in those trusts. We believe the estimates
of credit loss assumptions for our other mortgage loan securitizations remain
reasonable. See "Securitization Accounting Considerations" for more detail on
credit loss assumptions compared to actual loss experience.

         The business purpose loans we originate have average loan-to-value
ratios of 61.0%. The home equity loans we originate have average loan to value
ratios of 78.0% and the predominant share of our home mortgage products are
first liens as opposed to junior lien loans. We believe these factors may
mitigate some potential losses on our managed portfolio.


                                       44
<PAGE>



INTEREST RATE RISK MANAGEMENT

         A primary market risk exposure that we face is interest rate risk.
Profitability and financial performance is sensitive to changes in U.S. Treasury
yields, LIBOR yields and the spread between the effective rate of interest
received on loans and leases available for sale or securitized (all fixed
interest rates) and the interest rates paid pursuant to credit facilities or the
pass-through rate to investors for interests issued in connection with
securitizations. A substantial and sustained increase in market interest rates
could adversely affect our ability to originate and purchase loans. The overall
objective of our interest rate risk management strategy is to mitigate the
effects of changing interest rates on profitability and the fair value of
interest rate sensitive balances (primarily loans and leases available for sale,
interest-only strips, servicing rights and subordinated debt).

         During periods of increasing market rates, we would expect our ability
to originate loans at rates that will maintain our current level of
profitability will become more difficult than during a stable or falling
interest rate environment. We would address this challenge by carefully
monitoring our product pricing, the actions of our competition and market trends
in order to continue to originate loans in as profitable a manner as possible.

         A rising rate environment could also unfavorably impact our liquidity
and capital resources. Rising interest rates could impact our short-term
liquidity by widening investor spread requirements in pricing future
securitizations, increasing the levels of overcollateralization in future
securitizations, limiting our access to borrowings in the capital markets and
limiting our ability to sell our subordinated debt securities at favorable
interest rates. In a rising interest rate environment, short-term and long-term
liquidity could also be impacted by increased interest costs on all sources of
borrowed funds, including the subordinated debt, and by reducing interest rate
spreads on our securitized loans, which would reduce our cash flows. See
"Liquidity and Capital Resources" for a discussion of both long and short-term
liquidity.


                                       45
<PAGE>

         Interest Rate Sensitivity. The following table provides information
about financial instruments that are sensitive to changes in interest rates. For
interest-only strips and servicing rights, the table presents projected
principal cash flows utilizing assumptions including prepayment and default
rates. See "Securitization Accounting Considerations" for more information on
these assumptions. For debt obligations, the table presents principal cash flows
and related average interest rates by expected maturity dates (dollars in
thousands):
<TABLE>
<CAPTION>
                                                           Amount Maturing After December 31, 2000
                                        -----------------------------------------------------------------------------
                                          Months    Months    Months     Months    Months   There-              Fair
                                         1 to 12   13 to 24  25 to 36   37 to 48  49 to 60   after    Total     Value
                                         -------   --------  --------   --------  --------  ------    -----     -----
<S>                                      <C>      <C>        <C>       <C>        <C>       <C>       <C>       <C>
Rate Sensitive Assets:
Loans and leases available for
  sale (a)............................  $ 69,518  $     41   $    47    $    53  $     60  $  2,355  $ 72,074  $ 73,954
Interest-only strips..................    44,819    68,829    66,597     63,407    54,567   194,342   492,561   339,029
Servicing rights......................    30,943    25,490    20,053     15,661    12,226    39,754   144,127    92,129
Investments held to maturity..........        59        66        82        108       197       436       948       880
Investments available for sale........       495         -         -          -         -         -       495       495

Rate Sensitive Liabilities:
Fixed interest rate borrowings........  $201,346  $118,369   $48,292    $ 18,872 $ 18,011  $ 25,980  $430,870  $430,084
Average interest rate.................    10.42%    11.60%    11.82%      11.51%   12.45%    12.16%    11.14%
Variable interest rate borrowings.....  $ 41,713  $  1,122   $ 1,508    $  2,375 $  1,861  $    429  $ 49,008  $ 49,008
Average interest rate.................     8.12%     8.34%     8.34%       8.34%    8.34%     8.34%     8.15%
</TABLE>

(a) For purposes of this table, all loans and leases which qualify for
    securitization are reflected as maturing within twelve months, since loans
    and leases available for sale are generally held for less than six months
    prior to securitization.

         Loans and Leases Available for Sale. Gain on sale of loans may be
unfavorably impacted to the extent fixed rate available for sale mortgage loans
are held prior to securitization. A significant variable affecting the gain on
sale of loans in a securitization is the spread between the average coupon rate
on fixed rate loans, and the weighted average pass-through rate to investors for
interests issued in connection with the securitization. Although the average
loan coupon rate is fixed at the time the loan is originated, the pass-through
rate to investors is not fixed until the pricing of the securitization which
occurs just prior to the sale of the loans. If market rates required by
investors increase prior to securitization of the loans, the spread between the
average coupon rate on the loans and the pass-through rate to investors may be
reduced or eliminated, which could have a material adverse effect on our results
of operations and financial condition. We estimate that each 0.1% reduction in
the spread reduces the gain on sale of loans as a percentage of loans
securitized by approximately 0.25%.

         Hedging strategies may be utilized in an attempt to mitigate the effect
of changes in interest between the date rate commitments on loans are made and
the date the fixed rate pass-through certificates to be issued by a
securitization trust are priced, a period typically less than 90 days. These
strategies include the utilization of derivative financial instruments such as
futures and forward pricing on securitizations. The nature and quality of
hedging transactions are determined based on various factors, including market
conditions and the expected volume of mortgage loan originations and purchases.
At the time the contract is executed, derivative contracts are specifically
designated as hedges of mortgage loans, loan commitments or of our residual
interests in mortgage loans in our conduit facility which we would expect to be
included in a permanent securitization at a future date. The mortgage loans,
loan commitments and mortgage loans underlying residual interests in mortgage
conduit pools consist of essentially similar pools of fixed rate loans and loan
commitments, collateralized by real estate (primarily residential real estate)
with similar maturities and similar credit characteristics. Fixed rate
pass-through certificates issued by securitization trusts are generally priced
to yield a spread above Eurodollars or the interest rate swap yield curves with
a three-year maturity. We may hedge potential rate changes in Eurodollars and
interest rate swap yield curves with futures contracts on similar underlying
securities. This has provided strong correlation between our hedge contracts and
the ultimate pricing we will receive on the subsequent securitization. The
unrealized gain or loss derived from these derivative financial instruments,
which are designated as fair value hedges, is reported in earnings as it occurs
with an offsetting adjustment to the fair value of the item hedged. Cash flow
related to hedging activities is reported as it occurs. The effectiveness of our
hedges are continuously monitored. If correlation did not exist, the related
gain or loss on the hedged item no longer would be recognized as an adjustment
to income.

                                       46
<PAGE>

         In June 1998, the Financial Accounting Standards Board (the "FASB")
issued SFAS No. 133 "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS No. 133"). SFAS No. 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as derivatives), and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. If certain conditions are met, a derivative may
be specifically designated as (a) a hedge of the exposure to changes in the fair
value of a recognized asset or liability or an unrecognized firm commitment
(fair value hedge), (b) a hedge of the exposure to variable cash flows of a
forecasted transaction (cash flow hedge), or (c) a hedge of the foreign currency
exposure of a net investment in a foreign operation. If a derivative is a hedge,
depending on the nature of the hedge designation, changes in the fair value of a
derivative are either offset against the change in the fair value of assets,
liabilities, or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value will be recognized in
earnings immediately.

         SFAS No. 133 was effective on a prospective basis for all fiscal
quarters of fiscal years beginning after June 15, 2000. The adoption of SFAS No.
133 on July 1, 2000 resulted in the cumulative effect of a change in accounting
principal of $15 thousand pre-tax being recognized as expense in the
Consolidated Statement of Income for the six months ended December 31, 2000. Due
to the immateriality of the cumulative effect of adopting SFAS No. 133, the $15
thousand pre-tax expense is included in general and administrative expense in
the Consolidated Statement of Income. The tax effects and earnings per share
amounts related to the cumulative effect of adopting SFAS No. 133 are not
material.

         For the six months ended December 31, 2000, the Company recorded a loss
on the fair value of derivative financial instruments of $4.3 million which was
offset by gains from the securitization of loans during the period. There were
no derivative contracts or unrealized gains or losses from derivative contracts
outstanding at December 31, 2000.

         While Eurodollar rates, interest rate swap yield curves and the
pass-through rate of securitizations are generally strongly correlated, this
correlation has not held in periods of financial market disruptions (e.g. the
so-called Russian Crisis in the later part of 1998).

         In the future, we may expand the types of derivative financial
instruments we use to hedge interest rate risk to include other types of futures
contracts.

         We may use hedging in an attempt to mitigate the effect of changes in
market value of fixed rate mortgage loans held for sale. However, an effective
interest rate risk management strategy is complex and no such strategy can
completely insulate us from interest rate changes. Poorly designed strategies or
improperly executed transactions may increase rather than mitigate risk. In
addition, hedging involves transaction and other costs. Such costs could
increase as the period covered by the hedging protection increases. It is
expected that such loss would be offset by income realized from securitizations
in that period or in future periods. As a result, we may be prevented from
effectively hedging fixed rate loans held for sale, without reducing income in
current or future periods due to the costs associated with hedging activities.

                                       47
<PAGE>

         Interest-Only Strips and Servicing Rights. A portion of the
certificates issued to investors by securitization trusts are floating interest
rate certificates based on one-month LIBOR plus a spread. The fair value of the
excess cash flow we will receive from these trusts would be affected by any
changes in rates paid on the floating rate certificates. At December 31, 2000,
$120.4 million of debt issued by loan securitization trusts was floating rate
debt based on LIBOR, representing 6.76% of total debt issued by mortgage loan
securitization trusts. In accordance with generally accepted accounting
principles, the changes in fair value are recognized as part of net adjustments
to other comprehensive income, which is a component of retained earnings. It is
estimated that a 1.0% increase in one-month LIBOR would decrease the fair value
of interest-only strips by approximately $4.0 million.

         A significant change in market interest rates could increase or
decrease the level of loan prepayments, thereby changing the size of the total
managed loan portfolio and the related projected cash flows. Higher than
anticipated rates of loan prepayments could require a write down of the fair
value of related interest-only strips and servicing rights, adversely impacting
earnings during the period of adjustment. Revaluation of our interest-only
strips and servicing rights are periodically performed. As part of the
revaluation process, assumptions used for prepayment rates are monitored against
actual experience and adjusted if warranted. It is estimated that a 100 basis
point increase in prepayment rates (for example, from 24% to 25% on home equity
loans and from 10% to 11% on business loans) would decrease the fair value of
interest-only strips by approximately $7.3 million and the fair value of
servicing rights by approximately $1.8 million. See "Securitization Accounting
Considerations" for further information regarding these assumptions.

         We attempt to minimize prepayment risk on interest-only strips and
servicing rights by requiring prepayment fees on business purpose loans and home
equity loans, where permitted by law. Currently, approximately 90-95% of
business purpose loans and 85% of home equity loans in the total managed
portfolio are subject to prepayment fees.

         Subordinated Debt. We also experience interest rate risk to the extent
that as of December 31, 2000 approximately $229.5 million of our liabilities
were comprised of fixed rate subordinated debt with scheduled maturities of
greater than one year. To the extent that market interest rates demanded for
subordinated debt increase in the future, the rates paid on replacement debt
could exceed rates currently paid thereby increasing interest expense and
reducing net income.

Liquidity and Capital Resources

         Because we have historically experienced negative cash flows from
operations, our business requires continual access to short and long-term
sources of debt to generate the cash required to fund our operations. Our cash
requirements include funding loan originations and capital expenditures,
repaying existing subordinated debt, paying interest expense and operating
expenses, and in connection with our securitizations, funding
overcollateralization requirements and servicer obligations. At times, we have
used cash to repurchase our common stock and could in the future use cash for
unspecified acquisitions of related businesses or assets.

         Borrowings against warehouse and credit facilities and sales into
off-balance sheet facilities provide the primary funding source for loan
originations. Borrowings against warehouse and other credit facilities represent
cash advanced to us for a limited duration, generally no more than 270 days, and
are secured by the loans. The ultimate sale of the loans through securitization
or whole loan sale generates the cash proceeds necessary to repay the borrowings
under these facilities. See "Credit Facilities" below for a more detailed
description on these facilities.

                                       48
<PAGE>


         Cash flow from operations and the issuance of subordinated debt fund
our remaining cash requirements discussed above. We rely significantly on our
ability to issue subordinated debt since our cash flow from operations is not
sufficient to meet these requirements. Our cash requirements include the
obligation to repay maturing subordinated debt. In the process of growing our
businesses over the last three years, we have issued subordinated debt to
partially fund that growth and to partially fund maturities of subordinated
debt. We expect that our historical levels of negative cash flow from operations
will decline in the future and then become positive as the rate of increase in
our operating cash expenditures begins to level, then decline due to an expected
decrease in the rate of growth in loan production and as we realize efficiencies
in the infrastructure and loan production channels we have been building and as
the cash flows from our interest-only strips increase. Negative cash flow from
operations was reduced by $25.3 million, or 31.1%, for the six-months ended
December 31, 2000 from the prior year six-month period. Our cash balances are
sufficient to cover approximately 21.6% of the $201.1 million of subordinated
debt maturities due within one year. Cash balances were $43.4 million at
December 31, 2000.

         We continue to significantly rely on access to the asset-backed
securities market through securitizations to generate cash proceeds for the
repayment of borrowings under warehouse and credit facilities and to create our
interest-only strips and servicing rights which will provide future cash flows.
It is our expectation that future cash flows from our interest-only strips and
servicing rights will generate more of the cash flows required to meet
maturities of our subordinated debt.

         A significant portion of our loan originations are non-conforming
mortgages to subprime borrowers. Some participants in the non-conforming
mortgage industry have experienced greater than anticipated losses on their
securitization interest-only strips and servicing rights due to the effects of
increased delinquencies, increased credit losses and increased prepayment rates,
resulting in some competitors exiting the business or recording valuation
allowances or write-downs for these conditions. As a result, some participants
experienced restricted access to capital required to fund loan originations, and
have been precluded from participation in the asset-backed securitization
market. However, we have maintained our ability to obtain funding and to
securitize loans. Factors that have minimized the effect of adverse market
conditions on our business include our ability to originate loans through
established retail channels, focus on credit underwriting, assessment of
prepayment fees on loans, diversification of lending in the home equity and
business loan markets and the ability to raise capital through sales of
subordinated debt securities pursuant to a registered public offering. Subject
to economic, market and interest rate conditions, we intend to continue to
transact additional securitizations for future loan originations. Any delay or
impairment in our ability to securitize loans, as a result of market conditions
or otherwise, could adversely affect our liquidity and results of operations.

         Additionally, we act as the servicer of the loans and leases
securitized and in that capacity will be obligated to advance funds in some
circumstances which may create greater demands on our cash flow than either
selling loans with servicing released or maintaining a portfolio of loans and
leases. When borrowers are delinquent in making monthly payments on mortgage
loans included in a securitization trust, we are required to advance interest
for the delinquent loans if we deem that the advances will be ultimately
recoverable. These advances require funding from our capital resources, but have
priority of repayment from the succeeding month's mortgage loan payments.

         To a limited extent, we intend to continue to augment the interest and
fee income earned on loans and leases by selling loans in whole loan sales to
unrelated third parties. These transactions also create additional liquid funds
available for lending activities.

                                       49
<PAGE>


         Subordinated Debt Securities. During the first six months of fiscal
2001, we sold $39.9 million in principal amount of subordinated debt securities,
net of redemptions, with maturities ranging between one day and ten years. As of
December 31, 2000, $430.6 million of subordinated debt was outstanding. Under a
registration statement declared effective by the Securities and Exchange
Commission on October 30, 2000, we registered $350.0 million of subordinated
debt. As of December 31, 2000, $314.8 million of that debt was available for
future issuance. The proceeds from sales of subordinated debt securities will be
used to fund general operating and lending activities and maturities of
subordinated debt. We intend to meet our obligation to repay such debt as it
matures with cash flow from operations, cash flows from interest-only strips,
and cash generated from additional debt financing. The utilization of funds for
the repayment of such obligations should not adversely affect operations.

         Credit Facilities. The following is a description of the warehouse and
line of credit facilities that are utilized to fund origination of loans and our
operations. All of our on balance sheet facilities are senior in right of
payment to the subordinated debt. The warehouse revolving lines of credit are
secured by loan and lease receivables. The other credit facilities are secured
with interest-only strips or other assets. The warehouse credit agreements
require that we maintain specific covenants regarding net worth, leverage and
other standards. At December 31, 2000, we were in compliance with the terms of
all loan covenants.
<TABLE>
<CAPTION>

(in thousands)                                                                     Amount          Amount
                                                                   Amount        Utilized-on    Utilized-off
                                                                  Committed     Balance Sheet  Balance Sheet
                                                               -------------   --------------  -------------
<S>                                                            <C>             <C>             <C>
Revolving credit facilities:
Warehouse revolving line of credit, expiring March 2001.....   $     250,000   $       5,688   $      42,451
Mortgage funding facility, expiring July 2001...............         200,000              na          61,574
Warehouse and operating revolving line of credit,
  expiring December 2001....................................          50,000          24,750              na
Warehouse revolving line of credit, expiring February 2002..          25,000           8,069              na
                                                               -------------   -------------   -------------
Total revolving credit facilities...........................         525,000          38,507         104,025
Other credit facilities and notes payable:
Repurchase agreement........................................           3,116           3,116              na
Commercial paper conduit for lease production, maturity
  matches underlying leases.................................           8,613           7,385           1,218
Other debt..................................................             254             254              na
                                                               -------------   -------------   -------------
Total credit facilities.....................................   $     536,983   $      49,262   $     105,243
                                                               =============   =============   =============
</TABLE>

na - not applicable for facility

         Our subsidiaries have an aggregate $250.0 million Interim Warehouse and
Security Agreements with Prudential Securities Credit Corporation expiring March
2001 to fund loan originations. The obligations described in these agreements
are guaranteed by us. Under these agreements, the subsidiaries may fund loan
originations by obtaining advances subject to specific conditions, which bear
interest at a specified margin over LIBOR rate. The obligations described in
these agreements are collateralized by pledged loans. In March of 2000, these
agreements were amended to provide for the sale of loans into an off-balance
sheet conduit facility. The combination of on-balance sheet borrowings against
the warehouse facility to fund loan originations and the amount of loans sold
into the off-balance sheet conduit facility at any point in time is limited to
$250 million.

         The sale into the off-balance sheet conduit facility involves a
two-step transfer that qualifies for sale accounting under SFAS No. 125. First,
we sell the loans to a special purpose entity which has been established for the
limited purpose of buying and reselling the loans. Next, the special purpose
entity sells the loans to a qualified special purpose entity (the "facility")
for cash proceeds generated by its sale of notes to a third party purchaser. We
have no obligation to repurchase the loans and neither the third party note
purchaser nor the facility has a right to require such repurchase. The facility
has the option to dispose of the loans, ordinarily by re-securitizing them. If
the loans are not resecuritized, the third party note purchaser has the right to
securitize or sell the loans. Under this arrangement, the loans have been
isolated from us and our subsidiaries, and, as a result, the transfer to the
conduit facility is treated as a sale for financial reporting purposes.

                                       50
<PAGE>

         We and our subsidiaries, American Business Credit, HomeAmerican Credit,
and New Jersey Mortgage established a $200.0 million mortgage funding facility,
which provides for the sale of loans into an off-balance sheet funding facility
with UBS Principal Finance, LLC, an affiliate of UBS Warburg. The sale into the
off-balance sheet conduit facility involves a two-step transfer that qualifies
for sale accounting under SFAS No. 125. First, we sell the loans to a special
purpose entity which has been established for the limited purpose of buying and
reselling the loans. Next, the special purpose entity sells the loans to a
qualified special purpose entity (the "facility") for cash proceeds generated by
its sale of notes to a third party purchaser. We have no obligation to
repurchase the loans except under certain conditions where loans do not conform
to representations and warranties made by us at the time of sale, and neither
the third party note purchaser nor the sponsor has a right to require such
repurchase. The facility has the option to dispose of the loans, ordinarily by
re-securitizing them. If the loans are not re-securitized, the third party note
purchaser has the right to securitize or sell the loans. Under this arrangement,
the loans have been isolated from us and our subsidiaries; and, as a result,
transfers to the conduit facility will be treated as sales for financial
reporting purposes.

         In December 2000 we, along with some of our subsidiaries, obtained a
$50.0 million warehouse and operating credit facility from Chase Manhattan Bank
which expires December 2001. Interest rates on the advances under this facility
are based upon LIBOR plus a margin. Obligations under the facility are
collateralized by specified pledged loans and other collateral related thereto.
Advances on this line for operating purposes are limited to $5.0 million and are
collateralized by our Class R Certificate of the ABFS Mortgage Loan Trust
1998-2. The facility requires us to meet specific financial ratios described in
the agreement and contains other restrictive covenants.

         Our subsidiaries, American Business Credit, HomeAmerican Credit and New
Jersey Mortgage obtained a $25 million warehouse line of credit facility from
Residential Funding Corporation which expires February 2002. Under this
warehouse facility, advances may be obtained, subject to specific conditions
described in the agreements. Interest rates on the advances are based on LIBOR
plus a margin. The obligations under this agreement are collateralized by
pledged loans. The facility requires us to meet specific financial ratios
described in the agreement and contains other restrictive covenants.

         The commercial paper conduit for lease production provided for sale of
equipment leases using a pooled securitization. After January 2000, the facility
was no longer available for sales of equipment leases. The facility permitted us
to sell leases in a two-step transfer that qualified for sale accounting under
SFAS No. 125. First, we sold the leases to a special purpose entity which has
been established for the limited purpose of buying and reselling the leases.
Next the special purpose entity sold the leases to a qualified special purpose
entity (the "facility") for cash. The facility is sponsored by a major financial
institution which has the option to re-securitize the leases, ordinarily using
longer-term certificates. Should a longer-term securitization not occur, the
leases would remain in the commercial paper conduit until their contractual
termination. We have no obligation to repurchase the leases and neither the
facility nor the sponsor has a right to require such repurchase. The final two
transfers into this facility in the amount of $10.6 million were accounted for
as a financing transaction. The leases transferred in those final transfers were
retained on our balance sheet and the financing raised by the commercial paper
conduit was recorded as debt on the balance sheet.


                                       51

<PAGE>

         In January 2001, we and certain of our subsidiaries established a $200
million warehouse line of credit with Morgan Stanley Dean Witter Mortgage
Capital Inc., which will be used to fund on-balance sheet financing of loan
receivables. The facility expires January 2002. The interest rate on the
facility is based on LIBOR plus a margin. The facility requires us to meet
specific financial ratios described in the agreement and contains other
restrictive covenants.

         As of December 31, 2000, $250.4 million of debt was scheduled to mature
during the next twelve months which was mainly comprised of maturing
subordinated debt and warehouse lines of credit. We currently expect to
refinance the maturing debt through extensions of maturing debt or new debt
financing and, if necessary, may retire the debt through cash flow from
operations and loan sales or securitizations. Despite the current use of
securitizations to fund loan growth, we are also dependent upon other borrowings
to fund a portion of our operations. We intend to continue to utilize debt
financing to fund operations in the future.

         A failure to renew or obtain adequate funding under a warehouse credit
facility, or other borrowings, or any substantial reduction in the size or
pricing in the markets for loans, could have a material adverse effect on our
results of operations and financial condition. To the extent we are not
successful in maintaining or replacing existing financing, we may have to
curtail loan production activities or sell loans rather than securitize them,
thereby having a material adverse effect on our results of operations and
financial condition.

         We lease our corporate headquarters facilities under a five-year
operating lease expiring in July 2003 at a minimum annual rental of
approximately $2.2 million. We also lease a facility in Roseland, New Jersey
under an operating lease expiring July 2003 at an annual rental of $0.8 million.
The corporate headquarters and Roseland leases have a renewal provision at an
increased annual rental. In addition, branch offices are leased on a short-term
basis in various cities throughout the United States. The leases for the branch
offices are not material to operations.

Recent Accounting Pronouncements

         In June 1998, the Financial Accounting Standards Board (the "FASB")
issued SFAS No. 133 "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS No. 133"). SFAS No. 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as derivatives), and for
hedging activities. See "Interest Rate Risk Management" for a discussion of the
impact of adopting SFAS 133.

         In September 2000, the FASB issued the Statement of Financial
Accounting Standards No. 140 "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" ("SFAS No. 140"). SFAS No.
140 replaces FASB Statement No. 125, also titled "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." SFAS No. 140
revises the standards for accounting for securitizations and other transfers of
financial assets and collateral and requires certain disclosures, but it carries
over most of FASB No. 125's provisions without reconsideration.

         SFAS No. 140's Standards are based on consistent application of a
financial-components approach that focuses on control. Under that approach,
after a transfer of financial assets, an entity recognizes the financial and
servicing assets it controls and the liabilities it has incurred, derecognizes
financial assets when control has been surrendered, and derecognizes liabilities
when extinguished. This statement provides consistent standards for
distinguishing transfers of financial assets that are sales from transfers that
are secured borrowings.

                                       52
<PAGE>

         SFAS No. 140 is effective on a prospective basis for transfers and
servicing of financial assets and extinguishments of liabilities occurring after
March 31, 2001. This statement is effective for recognition and reclassification
of collateral and for disclosures relating to securitization transactions and
collateral for fiscal years ending after December 15, 2000. Disclosures about
securitization and collateral accepted need not be reported for periods ending
on or before December 15, 2000, for which financial statements are presented for
comparative purposes. This Statement is to be applied prospectively with certain
exceptions. Other than those exceptions, earlier or retroactive application of
its accounting provisions is not permitted. The adoption of this standard is not
expected to have a material effect on the Company's financial condition or
results of operations.

Item 3.  Quantitative and Qualitative Disclosure about Market Risk

         See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Interest Rate Risk Management."



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<PAGE>


PART II. OTHER INFORMATION

Item 1.  Legal Proceedings - None

Item 2.  Changes in Securities - None

Item 3.  Defaults Upon Senior Securities - None

Item 4.  Submission of Matters to a Vote of Security Holders -

         The Company's Annual Meeting of Stockholders was held on December 19,
         2000. The following is a description of the matters submitted to
         stockholders for their approval at the meeting and the votes cast with
         respect thereto:

         Proposal                                      Votes Cast
         Election of Directors:               For      Withheld    Non-Votes
         Michael DeLuca                    2,606,957    18,902        0
         Harold Sussman                    2,606,957    18,902        0


         Directors continuing in office include Anthony J. Santilli, Leonard
Becker and Richard Kaufman.

Item 5.  Other Information - None

Item 6.  Exhibits and Reports on Form 8-K

(a)      Exhibits

Exhibit
Number            Description of Agreement
------            ------------------------

10.1              MASTER LOAN AND SECURITY AGREEMENT, Dated as of January 22,
                  2001, between AMERICAN BUSINESS CREDIT, INC., HOMEAMERICAN
                  CREDIT, INC., d/b/a UPLAND MORTGAGE, and AMERICAN BUSINESS
                  MORTGAGE SERVICES, INC., f/k/a NEW JERSEY MORTGAGE AND
                  INVESTMENT CORP., as Borrowers, AMERICAN BUSINESS FINANCIAL
                  SERVICES, INC., as Guarantor, and MORGAN STANLEY DEAN WITTER
                  MORTGAGE CAPITAL INC. as Lender


10.2              12/00 SENIOR SECURED CREDIT AGREEMENT, among: AMERICAN
                  BUSINESS CREDIT, INC. ("ABC"), a Pennsylvania corporation,
                  HOMEAMERICAN CREDIT, INC. ("HAC"), a Pennsylvania corporation
                  doing business under the assumed or fictitious name Upland
                  Mortage, and NEW JERSEY MORTGAGE AND INVESTMENT CORP., a New
                  Jersey corporation whose name will be changed in January 2001
                  to AMERICAN BUSINESS MORTGAGE, AMERICAN BUSINESS FINANCIAL
                  SERVICES, INC. (the "Parent"), and THE CHASE MANHATTAN BANK.

(b)      Reports on Form 8-K:

                  During the quarter ended December 31, 2000 the Company filed a
                  current report on Form 8K/A on October 10, 2000 reporting
                  financial information under Item 5 with respect to a delay in
                  filing the Company's Annual Report on Form 10-K. In addition,
                  On December 7, 2000 the Company filed a current report on Form
                  8-K reporting financial information under item 5 with respect
                  to an announcement of the Companies intention to repurchase up
                  to 20% of its outstanding capital stock over the next year.

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<PAGE>



                                   SIGNATURE

         Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.

                                   AMERICAN BUSINESS FINANCIAL SERVICES, INC.



DATE: February 13, 2001            BY: /s/ Albert W. Mandia
      -----------------                -----------------------------------
                                       Albert W. Mandia
                                       Executive Vice President and
                                       Chief Financial Officer


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