<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, 2001

/ / 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 11, 2002, there were 2,584,881 shares of the registrant's Common
Stock issued and outstanding.




<PAGE>


           American Business Financial Services, Inc. and Subsidiaries

                                      INDEX
<TABLE>
<CAPTION>


                                                                                                               Page
                                                                                                               ----
PART I FINANCIAL INFORMATION
<S>                                                                                                            <C>
Item 1. Financial Information

   Consolidated Balance Sheets as of December 31, 2001 and June 30, 2001..........................................1
   Consolidated Statements of Income for the three and six months ended December 31, 2001 and 2000................2
   Consolidated Statement of Stockholders' Equity for the six months ended December 31, 2001 .....................3
   Consolidated Statements of Cash Flow for the six months ended December 31, 2001 and 2000.......................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................................................51


PART II. OTHER INFORMATION

Item 1. Legal Proceedings........................................................................................52
Item 2. Changes in Securities....................................................................................52
Item 3. Defaults Upon Senior Securities..........................................................................52
Item 4. Submission of Matters to a Vote of Security Holders......................................................52
Item 5. Other Information........................................................................................52
Item 6. Exhibits and Reports on Form 8-K........................................................................ 53
</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,
                                                                                    2001                        2001
                                                                                 -----------                  ---------
                                                                                  (Unaudited)                   (Note)
<S>                                                                               <C>                        <C>
Assets
Cash and cash equivalents                                                         $ 111,556                  $  91,092
Loan and lease receivables, net
   Available for sale                                                                78,144                     83,241
   Interest, fees and other                                                          13,812                     16,549
Interest-only strips (includes the fair value of over-
    collateralization related cash flows of $209,254
    at December 31, 2001 and $183,087 at June 30, 2001)                             460,601                    398,519
Servicing rights                                                                    112,084                    102,437
Receivable for sold loans                                                            14,949                     14,157
Prepaid expenses                                                                      3,397                      3,457
Property and equipment, net                                                          19,575                     20,750
Other assets                                                                         32,885                     36,285
                                                                                  ---------                  ---------
Total assets                                                                      $ 847,003                  $ 766,487
                                                                                  =========                  =========
Liabilities and Stockholders' Equity
Liabilities
Subordinated debt                                                                 $ 611,939                  $ 537,950
Warehouse lines and other notes payable                                              55,172                     51,064
Accounts payable and accrued expenses                                                48,153                     41,023
Deferred income taxes                                                                32,971                     30,954
Other liabilities                                                                    33,011                     38,634
                                                                                  ---------                  ---------
Total liabilities                                                                   781,246                    699,625
                                                                                  ---------                  ---------

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:  3,645,192 shares at December 31, 2001 and
   3,645,092 shares at June 30, 2001 (including treasury shares
   of 1,060,311 at December 31, 2001 and 676,507 at
   June 30,  2001)                                                                        4                          4
Additional paid-in capital                                                           23,985                     23,984
Accumulated other comprehensive income                                               11,492                     10,337
Retained earnings                                                                    44,334                     43,922
Treasury stock, at cost                                                             (13,458)                   (10,785)
                                                                                  ---------                  ---------
                                                                                     66,357                     67,462
Note receivable                                                                        (600)                      (600)
                                                                                  ---------                  ---------
Total stockholders' equity                                                           65,757                     66,862
                                                                                  ---------                  ---------
Total liabilities and stockholders' equity                                        $ 847,003                  $ 766,487
                                                                                  =========                  =========

</TABLE>

Note: The balance sheet at June 30, 2001 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,
                                                               -------------------------         -------------------------
                                                                 2001             2000              2001            2000
                                                               --------         --------         ---------        --------
<S>                                                            <C>              <C>              <C>              <C>
Revenues
Gain on sale of loans                                          $ 44,563         $ 31,009         $  79,919        $ 57,099
Interest and fees                                                 5,526            6,017            11,467          11,255
Interest accretion on interest-only strips                        8,646            5,821            16,382          11,419
Servicing income                                                  1,298            1,666             2,934           3,161
Other income                                                          1                2                 4               4
                                                               --------         --------         ---------        --------

Total revenues                                                   60,034           44,515           110,706          82,938
                                                               --------         --------         ---------        --------

Expenses
Interest                                                         17,293           14,057            34,276          26,864
Provision for credit losses                                       1,270              540             2,706           1,408
Employee related costs                                            8,662            7,156            16,486          14,063
Sales and marketing                                               6,375            6,034            12,439          11,752
General and administrative                                       17,748           12,725            33,765          22,592
Interest-only strips valuation adjustment                         4,462              -               4,462              -
                                                               --------         --------         ---------        --------

Total expenses                                                   55,810           40,512           104,134          76,679
                                                               --------         --------         ---------        --------

Income before provision for income taxes                          4,224            4,003             6,572           6,259

Provision for income taxes                                        1,774            1,602             2,760           2,504
                                                               --------         --------         ---------        --------

Net Income                                                     $  2,450         $  2,401         $   3,812        $  3,755
                                                               ========         ========         =========        ========

Earnings per common share:
   Basic                                                       $   0.96         $   0.66         $    1.43        $   1.03
                                                               ========         ========         =========        ========
   Diluted                                                     $   0.87         $   0.65         $    1.31        $   1.01
                                                               ========         ========         =========        ========

Average common shares:
   Basic                                                          2,585            3,640             2,667           3,648
                                                               ========         ========         =========        ========
   Diluted                                                        2,835            3,661             2,899           3,704
                                                               ========         ========         =========        ========
</TABLE>

See accompanying notes to consolidated financial statements

                                       2
<PAGE>


           American Business Financial Services, Inc. and Subsidiaries
                 Consolidated Statement of Stockholders' Equity
                   For the six months ended December 31, 2001
                             (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, 2001                           2,969        $    4        $ 23,984        $ 10,337         $ 43,922
Comprehensive income:
  Net income                                       --            --              --              --            3,812
  Net unrealized gain on interest-only strips      --            --              --           1,155               --
                                                -----        ------        --------        --------         --------
Total comprehensive income                         --            --              --           1,155            3,812

Issuance of new shares                             --            --               1              --               --
Stock dividend (10% of outstanding shares)         --            --              --              --           (2,979)
Repurchase of treasury shares                    (384)           --              --              --               --
Cash dividends ($0.15 per share)                   --            --              --              --             (421)
                                                -----        ------        --------        --------         --------
Balance December 31, 2001                       2,585        $    4        $ 23,985        $ 11,492         $ 44,334
                                                =====        ======        ========        ========         ========
</TABLE>

(RESTUBBED TABLE)
<TABLE>
<CAPTION>

                                                                                    Total
                                                   Treasury          Note       Stockholders'
                                                     Stock        Receivable        Equity
                                                   ----------     ----------     ------------
<S>                                                <C>             <C>            <C>
Balance June 30, 2001                              $ (10,785)      $ (600)        $ 66,862
Comprehensive income:
  Net income                                              --           --            3,812
  Net unrealized gain on interest-only strips             --           --            1,155
                                                    ---------      ------         --------
Total comprehensive income                                --           --            4,967

Issuance of new shares                                    --           --                1
Stock dividend (10% of outstanding shares)             2,979           --               --
Repurchase of treasury shares                         (5,652)          --           (5,652)
Cash dividends ($0.15 per share)                          --           --             (421)
                                                    ---------      ------         --------
Balance December 31, 2001                           $(13,458)      $ (600)        $ 65,757
                                                    =========      ======         ========
</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,
                                                                                     ------------------------------
                                                                                       2001                  2000
                                                                                     ---------            ---------
<S>                                                                                  <C>                  <C>
Cash Flow from Operating Activities:
Net income                                                                           $   3,812            $   3,755
Adjustments to reconcile net income to net cash
   used in operating activities:
         Gain on sale of loans                                                         (79,919)             (57,099)
         Depreciation and amortization                                                  19,255               13,038
         Interest accretion on interest-only strips                                    (16,382)             (11,419)
         Interest-only strips fair value adjustment                                      4,462                   --
         Provision for credit losses                                                     2,706                1,408
         Accounts written off, net                                                      (2,308)                (758)
Loans originated for sale                                                             (696,470)            (620,391)
Proceeds from sale of loans                                                            681,706              608,583
Principal payments on loans and leases                                                   5,587                3,649
Decrease (increase) in accrued interest and fees on loan and
   lease receivables                                                                     2,737               (3,716)
Purchase of initial overcollateralization on securitized
   loans                                                                                    --               (2,211)
Required purchase of additional overcollateralization on
   securitized loans                                                                   (26,245)             (19,777)
Cash flow from interest-only strips                                                     48,894               35,310
Decrease (increase) in prepaid expenses                                                     60                 (581)
Increase in accounts payable and accrued expenses                                        7,130                6,614
Accrued interest payable reinvested in subordinated debt                                11,915                7,389
Increase in deferred income taxes                                                        2,668                2,833
Decrease in loans in process                                                            (5,780)              (9,390)
Other, net                                                                                  39               (5,908)
                                                                                     ---------            ---------

Net cash used in operating activities                                                  (36,133)             (48,671)
                                                                                     ---------            ---------

Cash Flows from Investing Activities:
   Purchase of property and equipment, net                                              (2,225)              (5,112)
   Principal receipts and maturities of investments                                         14                  238
                                                                                     ---------            ---------

Net cash used in investing activities                                                $  (2,211)           $  (4,874)
                                                                                     ---------            ---------
</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,
                                                                                     ------------------------------
                                                                                       2001                  2000
                                                                                     ---------            ---------
<S>                                                                                  <C>                  <C>
Cash Flow from Financing Activities:
   Proceeds from issuance of subordinated debt                                       $ 123,092            $  76,014
   Redemptions of subordinated debt                                                    (61,018)             (43,462)
   Net borrowings on revolving lines of credit                                           5,634                1,168
   Principal payments on lease financing facility                                       (1,370)              (1,954)
   Repayments of repurchase agreement                                                       --                 (490)
   Repayments of other notes payable                                                      (156)                (303)
   Financing costs incurred                                                             (1,301)              (2,660)
   Cash dividends paid                                                                    (421)                (530)
   Repurchase of treasury stock                                                         (5,652)                (589)
                                                                                     ---------            ---------

Net cash provided by financing activities                                               58,808               27,194
                                                                                     ---------            ---------

   Net increase (decrease) in cash and cash equivalents                                 20,464              (26,351)
   Cash and cash equivalents, beginning of period                                       91,092               69,751
                                                                                     ---------            ---------

   Cash and cash equivalents, end of period                                          $ 111,556            $  43,400
                                                                                     =========            =========

Supplemental disclosure of cash flow information Cash paid during the period
   for:
      Interest                                                                       $  13,499            $  11,423
                                                                                     =========            =========
      Income taxes                                                                   $     601            $     528
                                                                                     =========            =========
</TABLE>

See accompanying notes to consolidated financial statements.

                                       5


<PAGE>



           American Business Financial Services, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements
                                December 31, 2001

1.       Basis of Financial Statement Presentation

         American Business Financial Services, Inc., together with its
         subsidiaries (the "Company"), is a diversified financial service
         organization 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 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 repay existing debt, to fund
         loan originations and the Company's operations and for general
         corporate purposes including repurchases of our outstanding common
         stock.

         Prior to January 1, 2001, the Company originated conventional first
         mortgage loans, which were sold in the secondary mortgage market.
         Effective January 1, 2001 we de-emphasized this business however, we
         may from time to time consider originating conventional first mortgage
         loans on a limited basis in the future.

         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,
         2001 are not necessarily indicative of financial results that may be
         expected for the full year ended June 30, 2002. 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, 2001.

         On October 1, 2001, the Company's Board of Directors declared a 10%
         stock dividend which was paid on November 5, 2001 to shareholders of
         record on October 22, 2001. In conjunction with the Board's resolution,
         all outstanding stock options and the related exercise prices were
         adjusted. Accordingly, all outstanding shares, earnings per common
         share, dividends per share, average common share and stock option
         amounts for all periods presented have been retroactively adjusted to
         reflect the effect of the stock dividend.

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


                                       6
<PAGE>


           American Business Financial Services, Inc. and Subsidiaries
             Notes to Consolidated Financial Statements (Continued)
                                December 31, 2001

1.       Basis of Financial Statement Presentation (Continued)

         Recent Accounting Pronouncements

         In September 2000, the Financial Accounting Standard Board (the "FASB")
         issued Statement of Financial Accounting Standards ("SFAS") No. 140
         "Accounting for Transfers and Servicing of Financial Assets and
         Extinguishments of Liabilities." SFAS No. 140 replaces 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 was effective on a prospective basis for transfers and
         servicing of financial assets and extinguishments of liabilities
         occurring after March 31, 2001. This statement was effective for
         recognition and reclassification of collateral and for disclosures
         relating to securitization transactions and collateral for fiscal years
         ending after December 15, 2000. The adoption of this standard in the
         fourth quarter of the fiscal year ended June 30, 2001 did not have a
         material effect on the Company's financial condition or results of
         operations and is not expected to have a material effect on the
         Company's financial condition or results of operations in future
         periods. However, the new standard requires that the Company record the
         obligation to repurchase loans from securitization trusts at the time
         the Company has the contractual right to repurchase loans whether or
         not the Company actually repurchases the loan.

         In July 2000, the Emerging Issues Task Force ("EITF"), a
         standard-setting group under the FASB, reached a consensus in EITF
         99-20, "Recognition of Interest Income and Impairment of Purchased and
         Retained Beneficial Interests in Securitized Financial Assets." EITF
         99-20 provides guidance on the recognition of interest income and the
         measurement of impairment on beneficial interests retained in
         securitization transactions. If upon evaluation, the retained interest
         holder determines there is a change in the estimated cash flows from
         the retained interests, the amount of accretable yield should be
         recalculated and in certain circumstances, if that change in estimated
         cash flows is an adverse change, an other than temporary impairment
         should be considered to have occurred. This accounting guidance was
         effective for fiscal quarters beginning after March 15, 2001. The new
         standard did not and is not expected to have a material effect on the
         Company's financial condition or results of operations.

         In the second quarter of fiscal 2002, due to increases in prepayment
         experience, a write down of $4.5 million was recorded on the Company's
         interest-only strips. This adjustment reflects the impact of higher
         prepayment experience on home equity loans than anticipated during the
         second quarter, as well as the impact of an increase in the prepayment
         rate assumptions used to value our interest-only strips. The impact of
         increased prepayments were considered to be other than temporary and

                                       7
<PAGE>


           American Business Financial Services, Inc. and Subsidiaries
             Notes to Consolidated Financial Statements (Continued)
                                December 31, 2001


1.       Basis of Financial Statement Presentation (Continued)

         were therefore recorded as an adjustment to earnings in the current
         period in accordance with SFAS No. 115 "Accounting for Certain
         Investments in Debt and Equity Securities," and EITF 99-20. We have
         increased our prepayment rate assumptions for home equity loans and
         certain pools of business loans due to our expectation that the
         increased trend of prepayments noted throughout the mortgage industry
         will continue, but at a declining rate, through the end of the current
         fiscal year.

         In July 2001, the FASB issued SFAS No. 142 "Goodwill and Other
         Intangible Assets." SFAS No. 142 establishes standards for how
         intangible assets that are acquired individually or with a group of
         other assets should be accounted for in financial statements upon their
         acquisition, and how goodwill and other intangible assets should be
         accounted for after they have been initially recognized in the
         financial statements. In addition, SFAS No. 142 requires
         additional disclosure for goodwill and other intangibles. Under the new
         standard, amortization of goodwill and intangible assets with an
         indefinite useful life will be discontinued. After a transitional
         impairment test, goodwill and intangible assets will be tested at least
         annually for impairment by comparing the fair value of the recorded
         assets to their carrying amount. If the carrying amount of the
         intangible asset exceeds its fair value, an impairment loss is
         recognized.

         Because the Company's goodwill will no longer be amortized after the
         adoption of the new standard, the reported amounts of goodwill will not
         decrease at the same time and in the same manner as under previous
         standards. There may be more volatility in reported income than under
         previous standards because impairment losses, if any, are likely to
         occur irregularly and in varying amounts. As of July 1, 2001, the
         Company performed a transitional impairment test which did not indicate
         impairment of goodwill under the provisions of the new standard. The
         provisions of SFAS No. 142 are required to be applied starting with
         fiscal years beginning after December 15, 2001. Early application is
         permitted for entities with fiscal years beginning after March 15,
         2001. The Company adopted the new standard July 1, 2001.

         For the six months ended December 31, 2000, the Company recorded
         amortization of goodwill in the amount of $672 thousand. Adjusted to
         exclude amortization of goodwill, net income and diluted net income per
         share for the six months ended December 31, 2000 were $4.2 million and
         $1.12, respectively.

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,
                                                                         2001             2001
                                                                     ------------      ----------
<S>                                                                    <C>               <C>
         Real estate secured loans.................................    $ 70,116          $ 71,266
         Leases, net of unearned income of $882 and $1,324.........      10,906            14,455
                                                                       --------          --------
                                                                         81,022            85,721
         Less: Allowance for credit losses on loans and leases
          available for sale.....................................         2,878             2,480
                                                                       --------          --------
                                                                       $ 78,144          $ 83,241
                                                                       ========          ========
</TABLE>
                                       8
<PAGE>


           American Business Financial Services, Inc. and Subsidiaries
             Notes to Consolidated Financial Statements (Continued)
                                December 31, 2001

2.       Loan and Lease Receivables - Available for Sale (Continued)

         At December 31, 2001 and June 30, 2001, the accrual of interest was
         suspended on real estate secured loans of $5.1 million and $4.5
         million, respectively.

3.       Interest-Only Strips

         Activity for interest-only strips for the six-month periods ended
         December 31, 2001 and 2000 were as follows (in thousands):

<TABLE>
<CAPTION>

                                                                                               December 31,
                                                                                         -----------------------
                                                                                            2001           2000
                                                                                         ---------     ---------
<S>                                                                                      <C>           <C>
          Balance at beginning of period...............................................  $ 398,519     $ 277,872
          Initial recognition of interest-only strips, including initial
                overcollateralization of  $0 and $2,211................................     72,307        59,978
          Required purchases of additional overcollateralization.......................     26,245        19,777
          Interest accretion...........................................................     16,382        11,419
          Cash flow from interest-only strips..........................................    (48,894)      (35,310)
          Net adjustments to fair value................................................        504         5,293
          Other than temporary fair value adjustment...................................     (4,462)            -
                                                                                         ---------     ---------
          Balance at end of period.....................................................  $ 460,601     $ 339,029
                                                                                         =========     =========
</TABLE>
         Interest-only strips include overcollateralization balances that
         represent undivided interests in securitization trusts 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,
         2001, the fair value of overcollateralization related cash flows was
         $209.3 million.

4.       Servicing Rights

         Activity for servicing rights for the six-month periods ended December
         31, 2001 and 2000 were as follows (in thousands):

<TABLE>
<CAPTION>

                                                                                               December 31,
                                                                                         -----------------------
                                                                                            2001           2000
                                                                                         ---------     ---------
<S>                                                                                      <C>           <C>
         Balance at beginning of period................................................  $ 102,437     $  74,919
         Initial recognition of servicing rights.......................................     23,393        25,377
         Amortization..................................................................    (13,746)       (8,167)
                                                                                         ---------     ---------
         Balance at end of period......................................................  $ 112,084     $  92,129
                                                                                         =========     =========
</TABLE>
                                       9
<PAGE>

         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 loan type, which is considered to be the predominant
         risk characteristic due to their different prepayment characteristics
         and fee structures. 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 occur, would be recognized in a valuation allowance for each
         impaired stratum in the period of adjustment. As of December 31, 2001,
         no valuation allowance for impairment was required.


                                       10
<PAGE>


          American Business Financial Services, Inc. and Subsidiaries
             Notes to Consolidated Financial Statements (Continued)
                               December 31, 2001

5.       Other Assets and Other Liabilities

         Other assets were comprised of the following (in thousands):
<TABLE>
<CAPTION>

                                                                      December 31,            June 30,
                                                                         2001                   2001
                                                                       --------               --------
<S>                                                                    <C>                    <C>
         Goodwill..................................................    $ 15,121               $ 15,121
         Financing costs, debt offering ...........................       7,103                  7,707
         Due from securitization trusts for servicing related
             activities............................................       3,569                  5,430
         Other ....................................................       3,579                  4,760
         Real estate owned.........................................       2,581                  2,322
         Investments held to maturity..............................         932                    945
                                                                       --------               --------
                                                                       $ 32,885               $ 36,285
                                                                       ========               ========
</TABLE>

         Other liabilities were comprised of the following (in thousands):
<TABLE>
<CAPTION>
                                                                      December 31,            June 30,
                                                                         2001                   2001
                                                                       --------               --------
<S>                                                                    <C>                    <C>
         Commitments to fund closed loans..........................    $ 23,350               $ 29,130
         Escrow deposits held......................................       7,263                  6,425
         Other.....................................................       2,398                  3,079
                                                                       --------               --------
                                                                       $ 33,011               $ 38,634
                                                                       ========               ========
</TABLE>

6.       Subordinated Debt, Warehouse Lines and Other Notes Payable

         Subordinated debt was comprised of the following (in thousands):
<TABLE>
<CAPTION>
                                                                      December 31,            June 30,
                                                                         2001                   2001
                                                                       --------               --------
<S>                                                                    <C>                    <C>
         Subordinated debt (a).....................................    $592,411               $524,003
         Subordinated debt - money market notes (b)................      19,528                 13,947
                                                                       --------               --------
         Total subordinated debt...................................    $611,939               $537,950
                                                                       ========               ========
</TABLE>

         Warehouse lines and other notes payable were comprised of the following
         (in thousands):

<TABLE>
<CAPTION>
                                                                      December 31,            June 30,
                                                                         2001                   2001
                                                                       --------               --------
<S>                                                                    <C>                    <C>
         Warehouse and operating revolving line of credit (c) .....    $ 38,288               $ 34,199
         Warehouse revolving line of credit (d)....................       5,461                 11,235
         Warehouse revolving line of credit (e)....................       7,320                      -
         Lease funding facility (f)................................       4,103                  5,474
         Other debt................................................           -                    156
                                                                       --------               --------
         Total warehouse lines and other notes payable.............    $ 55,172               $ 51,064
                                                                       ========               ========
</TABLE>
                                       11
<PAGE>



           American Business Financial Services, Inc. and Subsidiaries
             Notes to Consolidated Financial Statements (Continued)
                                December 31, 2001

6.       Subordinated Debt, Warehouse Lines and Other Notes Payable (Continued)

         (a) Subordinated debt due January 2002 through December 2011, interest
             rates ranging from 5.83% to 13.5%; subordinated to all of the
             Company's senior indebtedness.
         (b) Subordinated debt-money market notes due upon demand, interest rate
             at 4.88%; subordinated to all of the Company's senior indebtedness.
         (c) $50 million warehouse and operating revolving line of credit
             expiring December 2002, interest rates ranging from LIBOR plus 1.5%
             to LIBOR plus 2.0%, collateralized by certain loan receivables and
             certain interest-only strips. 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 rate of LIBOR plus 1.75%, collateralized by certain
             loan receivables. The Company is currently renegotiating this
             credit facility. No assurances can be given that this new credit
             facility will be extended, or if extended, will be on the same
             terms as described above.
         (e) $200 million revolving line of credit expiring January 2002,
             interest rate ranges from LIBOR plus 0.95% to 1.15%, fundings to be
             collateralized by certain loan receivables. The Company did not
             renew this credit facility upon its expiration in January 2002.
         (f) Lease funding facility matures through December 2004, interest rate
             of LIBOR plus 1.77%, collateralized by certain lease receivables.

         Warehouse lines and other notes payable were collateralized by $51.1
         million of loan and lease receivables and $36.4 million of
         interest-only strips at December 31, 2001.

         In addition to the above, the Company had available to it the following
         credit facilities:

         o $200 million revolving line of credit expiring March 2002, interest
           rate of commercial paper rates plus 0.99%, fundings to be
           collateralized by certain loan receivables. This line was unused at
           December 31, 2001. The Company currently intends to renegotiate
           this credit facility. No assurances can be given that this new credit
           facility will be extended, or if extended, will be on the same terms
           as described above.
         o $200 million revolving line of credit expiring November 2002,
           interest rate of LIBOR plus 1.25%, collateralized by certain loan
           receivables. This line was unused at December 31, 2001.
         o $300 million facility, expiring July 2002, which provides for the
           sale of mortgage loans into an off-balance sheet facility. See
           "Management's Discussion and Analysis-- Securitization Accounting
           Considerations" for further discussion of the off-balance sheet
           features of this facility.

         Under a registration statement declared effective by the Securities and
         Exchange Commission on October 16, 2001, we registered $325.0 million
         of subordinated debt. As of December 31, 2001, $264.4 million of this
         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.
         Under the terms of the subordinated debt agreements there are no limits
         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


                                       12
<PAGE>



           American Business Financial Services, Inc. and Subsidiaries
             Notes to Consolidated Financial Statements (Continued)
                                December 31, 2001

6.       Subordinated Debt, Warehouse Lines and Other Notes Payable (Continued)

         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.

7.       Contingencies

         There has been an increased focus by state and federal banking
         regulatory agencies, state attorneys general offices, the Federal Trade
         Commission, the U.S. Department of Justice, the U.S. Department of
         Housing and Urban Development and local governmental authorities on
         subprime lending practices by companies in our industry, sometimes
         referred to as "predatory lending" practices. 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. To date, no
         sanctions or recommendations from the governmental regulatory agencies
         regarding practices related to predatory lending have been imposed or
         recommended against us. 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. The Pennsylvania Attorney General has required us to
         provide information in connection with designated loans made to
         Pennsylvania customers by our subsidiary, Upland Mortgage. The
         Pennsylvania Attorney General has asserted certain claims against
         Upland Mortgage based on its review of specific fees charged to
         Pennsylvania customers of Upland Mortgage. Although we are unable to
         accurately predict the ultimate cost related to the resolution of this
         matter at this time, the Company has established a reserve which we
         believe is adequate to cover this matter.

8.       Derivative Financial Instruments

         A 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 utilizes 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. See "Management's Discussion and Analysis -- Interest
         Rate Risk Management" for further discussion of the Company's hedging
         strategy and use of derivative financial instruments.

         The Company recorded cash losses on the fair value of derivative
         financial instruments of $3.4 million during the six months ended
         December 31, 2001, and $4.3 million during the six months ended
         December 31, 2000. There were no open derivative contracts or
         unrealized gains or losses from derivative contracts at December 31,
         2001.

                                       13
<PAGE>


           American Business Financial Services, Inc. and Subsidiaries
             Notes to Consolidated Financial Statements (Continued)
                                December 31, 2001

9.       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,
                                                                ------------------            ----------------------
                                                                2001          2000              2001           2000
                                                              -------       -------           -------        -------
<S>                                                           <C>           <C>               <C>            <C>
         Earnings
         (a)   Net Income                                     $ 2,450       $ 2,401           $ 3,812        $ 3,755
                                                              =======       =======           =======        =======
         Average Common Shares
         (b)   Average common shares outstanding                2,585         3,640             2,667          3,648
               Average potentially dilutive shares                250            21               232             56
                                                              -------       -------           -------        -------
         (c)   Average common and potentially
               dilutive shares                                  2,835         3,661             2,899          3,704
                                                              =======       =======           =======        =======
         Earnings Per Common Share
         Basic (a/b)                                          $  0.96       $   0.66          $   1.43       $  1.03
         Diluted (a/c)                                        $  0.87       $   0.65          $   1.31       $  1.01
</TABLE>

10.      Segment Information

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

         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 previously originated
         conventional first mortgage loans secured by one to four family
         residential real estate.

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

         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 All Other segment mainly represents activities that do not meet the
         thresholds for determining reportable segments as defined by SFAS No.
         131 "Disclosures about Segments of an Enterprise and Related
         Information." This segment includes 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 are 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, 2001


10.      Segment Information (Continued)
<TABLE>
<CAPTION>

                                                       Treasury
Six months ended December 31, 2001         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 loans...........     $ 79,919     $      -    $      -       $      -      $      -          $ 79,919
   Interest income.................        3,731          517         807         16,382             -            21,437
   Non-interest income.............        6,390            -      16,617              -       (13,657)            9,350
Inter-segment revenues.............            -       36,353           -         34,484       (70,837)                -
Operating expenses:
   Interest expense................       10,389       33,472         147         26,621       (36,353)           34,276
   Non-interest expense............       18,855        5,545      14,495         23,029             -            61,924
   Depreciation and amortization...        1,677           69         510          1,216             -             3,472
   Interest-only strips valuation
      adjustment...................            -            -           -          4,462             -             4,462
   Inter-segment expense...........       48,141            -           -              -       (48,141)                -
Income tax expense.................        4,611         (932)        954         (1,873)            -             2,760
                                        --------     --------    --------       --------      --------          --------
Net income (loss)..................     $  6,367     $ (1,284)   $  1,318       $ (2,589)     $      -          $  3,812
                                        ========     ========    ========       ========      ========          ========
Segment assets.....................     $104,836     $185,703    $114,122       $442,342      $      -          $847,003
                                        ========     ========    ========       ========      ========          ========
</TABLE>
<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 loans...........     $ 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 expenses:
   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 (loss)..................     $  2,653     $   (373)    $ 1,475       $      -      $      -          $  3,755
                                        ========     ========     =======       ========      ========          ========
Segment assets.....................     $100,934     $103,203     $96,101       $343,763      $      -          $644,001
                                        ========     ========     =======       ========      ========          ========

</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, 2001, 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," "believes," "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 document. You should
not place undue reliance on any forward-looking statement.


General

         We are a diversified financial services organization operating
throughout the United States. We originate, sell and service loans to businesses
secured by real estate and other business assets and home equity loans,
typically to credit impaired borrowers secured by first and second mortgages,
through our principal direct and indirect subsidiaries. We also underwrite,
process and purchase home equity loans through the Bank Alliance Program.
Through this program we purchase home equity loans from other financial
institutions which may have more stringent underwriting guidelines than ours.
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 we originate 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
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 including, but not limited to,
repurchases of our outstanding common stock.

         Prior to January 1, 2001, the Company originated conventional first
mortgage loans, which were sold in the secondary mortgage market. Effective
January 1, 2001 we de-emphasized this business as a result of our strategy of
focusing on our most profitable lines of business. We may from time to time
consider originating conventional first mortgage loans on a limited basis in the
future.

                                       16
<PAGE>

         In January 2001, our subsidiary formerly named New Jersey Mortgage and
Investment Corporation, was renamed American Business Mortgage Services, Inc. to
better reflect its national presence.

         During fiscal 2001 and the first six months of fiscal 2002, declines in
market interest rates resulted in average interest rate spreads related to our
loans securitized during this period improving approximately 190 basis points at
December 31, 2001 from the fourth quarter of fiscal 2000. Spread refers to the
difference between the average coupon rate we charge on our fixed rate loans,
and the weighted average pass-through rate we pay to investors for interests
issued in connection with a securitization. Increased spreads result in
increases in the residual cash flow we will receive on securitized loans and
corresponding increases in the gains we recognized on the sale on loans in
securitization. See "-- Securitization Accounting Considerations" for further
details. There can be no assurances that interest rates will continue to decline
or remain at current levels. 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 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 as described above, increasing the levels of
overcollateralization required 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. See "--Liquidity and
Capital Resources" for a discussion of both long and short-term liquidity.

         There has been an increased focus by state and federal banking
regulatory agencies, state attorneys general offices, the Federal Trade
Commission, the U.S. Department of Justice, the U.S. Department of Housing and
Urban Development and local governmental authorities on subprime lending
practices by companies in our industry, sometimes referred to as "predatory
lending" practices. 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. To date, no
sanctions or recommendations from the governmental regulatory agencies regarding
practices related to predatory lending have been imposed or recommended against
us. 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. The Pennsylvania Attorney General has
required us to provide information in connection with designated loans made to
Pennsylvania customers by our subsidiary, Upland Mortgage. The Pennsylvania
Attorney General has asserted certain claims against Upland Mortgage based on
its review of specific fees charged to Pennsylvania customers of Upland
Mortgage. Although we are unable to accurately predict the ultimate cost related
to the resolution of this matter at this time, the Company has established a
reserve which we believe is adequate to cover this matter. 17
<PAGE>

Securitizations

         In the second quarter of fiscal 2002, due to increases in prepayment
experience, a write down of $4.5 million was recorded on our interest-only
strips. This adjustment reflects the impact of higher prepayment experience on
home equity loans than anticipated during the second quarter, as well as the
impact of an increase in the prepayment rate assumptions used to value our
interest-only strips. The impact of increased prepayments were considered to be
other than temporary and were therefore recorded as an adjustment to earnings in
the current period in accordance with SFAS No. 115 "Accounting for Certain
Investmetns in Debt and Equity Securities," and EITF 99-20. We have increased
our prepayment rate assumptions for home equity loans and certain pools of
business loans due to our expectation that the increased trend of prepayments
noted throughout the mortgage industry will continue, but at a declining rate,
through the end of the current fiscal year.

         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.

         The following table summarizes the volume of loan securitizations and
whole loan sales for the three and six-month periods ended December 31, 2001 and
2000 (in millions):
<TABLE>
<CAPTION>

                                                           Three Months Ended            Six Months Ended
                                                               December 31,                 December 31,
                                                         ---------------------       -----------------------
Securitizations:                                           2001          2000          2001           2000
                                                         -------       -------       -------         -------
<S>                                                      <C>           <C>           <C>             <C>
Business loans.......................................... $  29.3       $  27.5       $  59.3         $  50.7
Home equity loans.......................................   312.9         256.5         572.7           490.1
                                                         -------       -------       -------         -------
   Total................................................ $ 342.2       $ 284.0       $ 632.0         $ 540.8
                                                         =======       =======       =======         =======

Gain on sale of  loans through securitization........... $  44.6       $  31.0       $  79.9         $  57.1
Securitization gains as a percentage of total revenue...    74.2%         69.6%         72.2%           68.9%
Whole loan sales........................................ $  14.8       $  23.0       $  43.7         $  39.2
Premiums on whole loan sales............................ $   0.6       $   0.7       $   1.8         $   1.1

</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. These include conditions in the securities markets generally,
such as fluctuations in interest rates described below, 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 includes
loans on our balance sheet and securitized loans we service for others. 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.

                                       18
<PAGE>


         From our September 1998 mortgage loan securitization through the June
2000 mortgage loan securitization, the pass-through rates on the asset-backed
securities issued in our securitizations had increased by approximately 155
basis points. During the same period of September 1998 through June 2000, the
average coupon on our loans securitized increased only 71 basis points. As noted
previously, during fiscal 2001 through the second quarter of fiscal 2002,
declines in market interest rates resulted in interest rate spreads related to
our securitized loans improving by an average of 190 basis points from the
fourth quarter of fiscal 2000. There can be no assurances that spreads will
continue to improve or remain at current levels.

         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. The value of our interest-only strips totaled
$460.6 million and the value of our servicing rights totaled $112.1 million at
December 31, 2001. Together, these two assets represent 67.6% of our total
assets at December 31, 2001. Although we believe our carrying value represents
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 our
estimates. Even a small unfavorable change in our assumptions, made as a result
of unfavorable actual experience or other considerations 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. See "--Securitizations"
for information on the volume of whole loan sales and premiums recorded for the
three and six-month periods ended December 31, 2001 and 2000.

Subordinated Debt and Other Borrowings

         We 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, 2001, $611.9 million of subordinated debt was outstanding and
warehouse and other revolving credit facilities totaling $975.0 million were
available, of which $91.0 million was drawn upon on that date. Of the amount
available at December 31, 2001, $200.0 million expired after the period end and
was not renewed. 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.


                                       19
<PAGE>

Securitization Accounting Considerations

         Our securitizations involve a two-step transfer that qualified for sale
accounting under Statement of Financial Accounting Standards ("SFAS") No. 125
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities" and also qualifies under SFAS No. 140, also titled "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities." First, we sell the loans to a special purpose entity, which has
been established for the limited purpose of buying and reselling the loans and
establishing a true sale under law. Next, the special purpose entity then sells
the loans to a qualified special purpose entity ("the Trust"), transferring
title of the loans and isolating those assets from our Company's assets.
Finally, the Trust issues certificates to investors to raise the cash purchase
price, collects proceeds on behalf of the certificate holders, distributes
proceeds and has a distinct legal standing from the Company. The Trusts do not
qualify for consolidation in our financial statements and hold both the loan
collateral as assets and the certificates issued to investors as liabilities.
See "Summary of Selected Mortgage Loan Securitization Trust Information" for
detail of the assets and liabilities held by each securitization trust.

         When we securitize our loans by selling them to trusts we receive cash
and an interest-only strip, which represents our retained interest in the
securitized loans. The trust issues multi-class securities, which derive their
cash flows from the pool of securitized loans. 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 we retain the right, for a fee paid to
us, to service the loans 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 and cash flows from
overcollateralization. These cash flows are the difference between the payments
made by the borrowers on securitized loans 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.

         Generally, all residual cash flows are initially retained by the trust
to establish overcollateralization levels in the trust. Overcollateralization is
the excess of the aggregate principal balances of loans in a securitized pool
over investor interests. Overcollateralization requirements are established to
provide credit enhancement for the trust investors.

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

         (1) The initial requirement, if any, is a percentage of the original
             balance of loans securitized and is paid in cash at the time of
             sale;
         (2) The final target 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 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 until the overcollateralization balance
             declines to a specific floor. The stepdown period generally 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.

                                       20
<PAGE>


         The fair value of our interest-only strips is a combination of the fair
values of our residual cash flows and our overcollateralization cash flows. At
December 31, 2001, investments in interest-only strips totaled $460.6 million,
including the fair value of overcollateralization related cash flows of $209.3
million.

         We established a $300.0 million facility, which provides for the sale
of mortgage loans into an off-balance sheet facility with UBS Warburg. Sales
into the off-balance sheet facility involve a two-step transfer that qualified
for sale accounting under SFAS No. 125 and with the June 2001 amendment,
qualifies under SFAS No. 140. 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 can be directed by the sponsor to dispose of the loans,
typically this has been accomplished by re-securitizing them in a term
securitization. The third party note purchaser also has the right to sell the
loans. Under this arrangement, the loans have been isolated from us and our
subsidiaries; and, as a result, transfers to the facility are treated as sales
for financial reporting purposes. As of December 31, 2001, there was $41.0
million in principal amount of loans in the Warburg 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, 2001
                              (dollars in millions)
<TABLE>
<CAPTION>


                                                2001-4   2001-3    2001-2   2001-1    2000-4    2000-3   2000-2    2000-1    1999-4
                                               -------   -------   -------  -------   -------   -------  -------   -------   ------
<S>                                            <C>       <C>       <C>      <C>       <C>       <C>      <C>       <C>       <C>
Original balance of loans securitized:
--------------------------------------
   Business loans............................. $    29   $    31   $    35  $    29   $    27   $    16  $    28   $    25   $   25
   Home equity loans..........................     287       269       320      246       248       134      275       212      197
                                               -------   -------   -------  -------   -------   -------  -------   -------   ------
   Total...................................... $   316   $   300   $   355  $   275   $   275   $   150  $   303   $   237   $  222
                                               =======   =======   =======  =======   =======   =======  =======   =======   ======
Current balance of loans securitized:
-------------------------------------
   Business loans............................. $    29   $    30   $    34  $    27   $    24   $    12  $    23   $    21   $   20
   Home equity loans..........................     286       261       295      207       188        92      192       137      126
                                               -------   -------   -------  -------   -------   -------  -------   -------   ------
   Total...................................... $   315   $   291   $   329  $   234   $   212   $   104  $   215   $   158   $  146
                                               =======   =======   =======  =======   =======   =======  =======   =======   ======

Weighted average coupon on loans securitized:
---------------------------------------------
   Business loans.............................   15.77%    15.94%    15.95%    16.05%   16.07%    16.10%   15.99%    16.09%   16.11%
   Home equity loans..........................   10.76%    11.15%    11.20%    11.47%   11.57%    11.48%   11.40%    11.34%   11.09%
   Total......................................   11.23%    11.64%    11.69%    12.00%   12.08%    12.02%   11.90%    11.97%   11.79%

Percentage of first mortgage loans............      88%       86%       88%       87%      85%       86%      79%       79%      80%
Weighted average loan-to-value................      77%       76%       76%       76%      76%       77%      77%       77%      76%
Weighted average remaining term (months) on
    loans securitized.........................      255      247       247       241      231       228      237       225      218

Original balance of Trust Certificates........ $   322   $   306   $   355  $    275  $   275   $   150  $   300   $   235   $  220
Current balance of Trust Certificates......... $   321   $   294   $   322  $    226  $   201   $    98  $   197   $   144   $  134
Weighted average pass-through interest rate
    to Trust Certificate holders..............    5.35%     5.72%     6.81%     6.97%    7.05%     7.61%    7.19%     7.15%    6.84%
Highest Trust Certificate pass-through rate...    5.35%     6.14%     6.99%     6.28%    7.05%     7.61%    8.04%     7.93%    7.68%

Overcollateralization requirements:
-----------------------------------
Required percentages:
   Initial....................................      --        --        --        --       --        --     0.90%     0.75%    1.00%
   Final target...............................    4.25%     4.00%     4.40%     4.10%    4.50%     4.75%    5.95%     5.95%    5.50%
   Stepdown overcollateralization.............    8.50%     8.00%     8.80%     8.20%    9.00%     9.50%   11.90%    11.90%   11.00%
Required dollar amounts:
   Initial....................................      --        --        --        --       --        --  $     3   $     2   $    2
   Final target............................... $    13   $    12   $    16  $     11  $    12   $     7  $    18   $    14   $   12
Current status:
   Overcollateralization amount............... $    --   $   --    $     7  $      8  $    11   $     6  $    18   $    14   $   12
   Final target reached or anticipated date
     to reach.................................  6/2003    3/2003   11/2002    6/2002   3/2002    5/2002   2/2002       Yes      Yes
   Stepdown reached or anticipated date to
     reach....................................  7/2005    5/2005   11/2004    6/2004   1/2004    8/2003   8/2003    4/2003   3/2003

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

Servicing rights:
-----------------
   Original balance........................... $    13   $    12   $    15  $     11  $    14   $     7  $    14   $    10   $   10
   Current balance............................ $    13   $    12   $    13  $      9  $    10   $     5  $    10   $     7   $    6

</TABLE>


                                       22
<PAGE>





 Summary of Selected Mortgage Loan Securitization Trust Information (Continued)
                    Current Balances as of December 31, 2001
                              (dollars in millions)
<TABLE>
<CAPTION>
                                                1999-3    1999-2    1999-1   1998-4   1998-3    1998-2   1998-1    1997(a)   1996(a)
                                               -------   -------   -------  -------   -------   -------  -------   -------   ------
<S>                                            <C>       <C>       <C>      <C>       <C>       <C>      <C>       <C>       <C>

Original balance of loans securitized:
--------------------------------------
   Business loans............................. $    28   $    30   $    16  $      9  $    17   $    15  $    16   $    45   $   29
   Home equity loans..........................     194       190       169        71      183       105       89       130       33
                                               -------   -------   -------  --------  -------   -------  -------   -------   ------
   Total...................................... $   222   $   220   $   185  $     80  $   200   $   120  $   105   $   175   $   62
                                               =======   =======   =======  ========  =======   =======  =======   =======   ======
Current balance of loans securitized:
-------------------------------------
   Business loans............................. $    19   $    19   $     9  $      5  $     9   $     6  $     6   $    17   $    8
   Home equity loans..........................     119       121        96        35       91        43       32        34        7
                                               -------   -------   -------  --------  -------   -------  -------   -------   ------
   Total...................................... $   138   $   140   $   105  $     40  $   100   $    49  $    38   $    51   $   15
                                               =======   =======   =======  ========  =======   =======  =======   =======   ======

Weighted average coupon on loans securitized:
---------------------------------------------
   Business loans.............................   15.90%    15.75%    15.96%    16.06%   15.95%    15.84%   16.02%    15.91%   15.93%
   Home equity loans..........................   10.89%    10.44%    10.67%    10.79%   10.69%    10.72%   11.04%    11.53%   10.98%
   Total......................................   11.57%    11.18%    11.13%    11.40%   11.16%    11.31%   11.79%    12.90%   13.50%

Percentage of first mortgage loans............      83%       88%       90%       90%      91%       88%      81%       75%      74%
Weighted average loan-to-value................      77%       76%       77%       76%      78%       77%      74%       73%      66%
Weighted average remaining term (months) on
   loans securitized..........................     224       230       226       219      221       198      186       166      126

Original balance of Trust Certificates........ $   219   $   219   $   184  $     79  $   198   $   118  $   103   $   171   $   61
Current balance of Trust Certificates......... $   127   $   129   $    96  $     36  $    90   $    44  $    34   $    43   $   12
Weighted average pass-through interest rate to
   Trust Certificate holders..................    6.80%     6.64%     6.56%     6.95%    5.93%     6.57%    6.79%     7.13%    7.67%
Highest Trust Certificate pass-through rate...    7.49%     7.13%     6.58%     6.51%    6.30%     6.85%    7.15%     7.29%    7.67%

Overcollateralization requirements:
-----------------------------------
Required percentages:
   Initial....................................    1.00%     0.50%     0.50%     1.00%    1.00%     1.50%    1.50%     2.43%    1.94%
   Final target...............................    5.00%     5.00%     5.00%     5.00%    5.00%     5.00%    5.50%     7.43%    8.94%
   Stepdown overcollateralization.............   10.00%    10.00%    10.00%    10.00%   10.00%    10.00%   11.00%    14.86%   12.90%
Required dollar amounts:
   Initial.................................... $     2   $     1   $     1  $      1  $     2   $     2  $     2   $     4   $    1
   Final target............................... $    11   $    11   $     9  $      4  $    10   $     6  $     6   $    13   $    6
Current status:
   Overcollateralization amount............... $    11   $    11   $     9  $      4  $    10   $     5  $     4   $     8   $    3
   Final target reached or anticipated date
      to reach................................     Yes       Yes       Yes       Yes      Yes       Yes      Yes       Yes      Yes
   Stepdown reached or anticipated date to
      reach................................... 12/2002    1/2003    7/2002    2/2002   2/2002       Yes      Yes       Yes      Yes

Annual surety wrap fee........................    0.21%     0.19%     0.19%     0.20%    0.20%     0.22%    0.23%     0.26%    0.18%

Servicing rights:
-----------------
   Original balance........................... $    10   $    10   $     8  $      3  $     7   $     4  $     4   $     7   $    4
   Current balance............................ $     6   $     5   $     4  $      2  $     3   $     2  $     2   $     3   $    2
</TABLE>
(a) Amounts represent combined balances and weighted average percentages for two
    1997 securitization pools and two 1996 securitization pools.

                                       23

<PAGE>



         Gains on sale of loans through securitizations represent the difference
between our net proceeds and the allocated cost of loans securitized. The
allocated cost of the loans securitized is determined by allocating their net
carrying value between the loans 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 residual cash flows and overcollateralization cash flows utilizing
assumptions made by management at the time loans are sold. These assumptions
include the rates used to calculate the present value of expected future
residual cash flows and overcollateralization cash flows, referred to as the
discount rates, and prepayment and credit loss rates on the pool of loans.
Estimates of prepayment 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. The loan prepayment rate may be
affected by a variety of economic and other factors, including prevailing
interest rates and the availability of alternative financing to borrowers and
the type of loan. Our interest-only strips and servicing rights are periodically
re-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 other economic and market conditions and
would be adjusted if necessary.

         We use discount rates, which we believe are 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.

         In determining the discount rate applied to residual cash flows, 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 rates. 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 which generally
range from 19 to 22 basis points combined. From industry 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 that we
apply to our residual cash flow portion of our interest-only strips compared to
rates used by others in the industry reflects 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 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 62% A credits, 23% B
           credits, 13% C credits, and 2% D credits. In addition, our loss
           experience is below what is experienced by others in the
           non-conventional mortgage industry.



         Although market rates have declined in fiscal 2001 and 2002, no
reduction to the discount rate used to value the residual portion of our
interest-only strips has been made. We do not believe a decrease in the discount
rate is warranted as the current market interest rate decline was mainly due to
actions taken by the Federal Reserve Board in an attempt to prevent the
potential adverse effect of unstable economic conditions and to stimulate
economic growth. Additionally, the mortgage lending industry generally has taken
no actions to reduce discount rates.

         We apply a second discount rate to projected cash flows from the
overcollateralization portion of our interest-only strips. The discount rate
applied to projected overcollateralization cash flows in each mortgage
securitization is based on the highest trust certificate rate in the mortgage
securitization. At December 31, 2001, the average discount rate applied to
projected overcollateralization cash flows was 7%. The risk characteristics of
the projected overcollateralization cash flows to us do not include prepayment
risk and have minimal credit risk. For example, if the entire collateral balance
in a securitized pool of loans would prepay, we would fully recover our
investment in overcollateralization. In addition, historically, these
overcollateralization balances have not been impacted by credit losses as the
residual cash flow portion of our interest-only strips has always been
sufficient to absorb credit losses. Stepdowns of overcollateralization have
occurred as scheduled. Overcollateralization represents our investment in the
excess collateral in a securitized pool of mortgage loans. Overcollateralization
serves as a form of credit enhancement for trust investors.

         The blended discount rate used to value the interest-only strips,
including the overcollateralization cash flows, at December 31, 2001 was 10%.

         The assumptions for prepayment rates are compared to actual prepayment
experience of the individual securitization pool of mortgage loans and an
average of the actual experience of other similar pools of mortgage loans at the
same number of months after their inception. It is our practice to use an
average historical prepayment rate of similar pools for the expected constant
prepayment rate assumption while a pool of mortgage loans is less than a year
old even though actual experience may be different. During this ramp period,
before a pool of mortgage loans reaches its expected constant prepayment rate,
actual experience both quantitatively and qualitatively is generally not
sufficient to conclude that final actual experience for an individual pool of
mortgage loans would be materially different than the average. For pools of
mortgage loans greater than one year old, prepayment experience trends for the
individual pool is considered to be more significant and adjustments to
prepayment assumptions may be made to more closely conform the assumptions to
actual experience if the variance from average experience is significant and is
expected to continue.

         As was previously discussed, during the six months ended December 31,
2001 our actual prepayment experience was generally higher, most significantly
on home equity loans, than our historical averages for prepayments as was noted
throughout the mortgage industry. We have increased our prepayment assumptions
for the near term, then ramped down to the average historical levels, depending
on the seasoning of the trust and the amount of variance of recent experience to
average prepayment levels. Our recent increase in prepayment experience has been
mainly due to loan refinancings. We do not believe that the current growth in
the rate of refinancings is indicative of a long-term trend in the
non-conforming mortgage market. We believe this recent activity is due to
significant decreases in market interest rates which have occurred over a short
period of time which have generated a larger than normal volume of refinancing
activity during this period. We believe our assumptions based on average
prepayment levels remain reasonable indicators of future prepayment
expectations.

                                       25
<PAGE>


         Credit losses are analyzed in a similar manner to prepayments. Credit
loss assumptions are compared to actual experience averages for similar pools
and for individual pools. If our analysis indicates that loss experience may be
different than our assumptions an adjustment to our assumptions may be made to
more closely conform the assumptions to actual experience.

         See "Interest Rate Risk Management -- Interest-Only Strips and
Servicing Rights" for further discussion of the impact of changes in the key
assumptions used to value our interest-only strips.







                                       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, 2001
<TABLE>
<CAPTION>


                                                  2001-4   2001-3   2001-2   2001-1  2000-4   2000-3   2000-2   2000-1  1999-4
                                                  ------   ------   ------   ------  ------   ------   ------   ------  ------
<S>                                                <C>      <C>      <C>      <C>     <C>      <C>      <C>      <C>     <C>
Interest-only strip residual discount rate (a):
-----------------------------------------------
   Initial valuation...........................    13%      13%      13%      13%     13%      13%      13%      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 (c)........................    11%      11%      11%      11%     10%      10%      10%      10%     10%
     Home equity loans.........................    22%      22%      22%      22%     24%      24%      24%      24%     24%
   Ramp period (months) (b):
     Business loans.............................   27       24       24       24      24       24       24       24      24
     Home equity loans..........................   30       30       30       30      24       24       24       18      18
   Current assumptions:
   Expected Constant Prepayment Rate (CPR):
     Business loans (c) .......................    11%      11%      11%      11%     11%      11%      12%      12%     11%
     Home equity loans ........................    22%      22%      22%      22%     22%      22%      22%      22%     22%
   Ramp period (months) (b):
     Business loans.............................   27       27       27       27      27       27       27       27      27
     Home equity loans..........................   30       30       30       30      30       30       30       30      30
   CPR adjusted to reflect ramp:
     Business loans.............................    3%       5%       8%      10%     12%      15%      17%      20%     22%
     Home equity loans(e).......................    2%      10%      14%      19%     17%      21%      21%      21%     22%
   Current prepayment experience (d):
     Business loans..............................  --       --       --        5%      5%      24%      15%      10%     15%
     Home equity loans...........................  --       --       --       18%     22%      33%      33%      31%     31%

Annual credit loss rates:
-------------------------
   Initial assumption............................0.40%    0.40%    0.40%    0.40%   0.40%    0.40%    0.40%    0.40%   0.30%
   Current assumption............................0.40%    0.40%    0.40%    0.40%   0.40%    0.40%    0.40%    0.40%   0.30%
   Actual experience.............................  --       --       --     0.01%     --     0.14%    0.07%    0.24%   0.21%

Servicing fees:
--------------
   Contractual fees..............................0.50%    0.50%    0.50%    0.50%   0.70%    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) Projected cash flows from overcollateralization are discounted at the
    highest trust certificate pass through rate for each securitization
    averaging 7% at December 31, 2001. See Summary of Selected Mortgage Loan
    Securitization Trust Information table for rates specific to each
    securitization.
(b) 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.
(c) Rate is the estimated expected weighted average prepayment rate over the
    securitization's estimated remaining life. Business CPR ramps to an expected
    peak rate over 27 months then declines to the final expected CPR by month
    40.
(d) Rate is a six-month historical average.
(e) The home equity loan prepayment rates have been increased for the next six
    months to provide for the expected near term continuation of higher than
    average prepayment experience


                                       27
<PAGE>


                Summary of Material Mortgage Loan Securitization
  Valuation Assumptions and Actual Experience at December 31, 2001 (Continued)
<TABLE>
<CAPTION>

                                                 1999-3   1999-2   1999-1   1998-4   1998-3    1998-2   1998-1  1997(f)   1996(f)
                                                 ------   ------   ------   ------   ------    ------   ------  -------   -------
<S>                                                <C>      <C>      <C>      <C>       <C>      <C>      <C>      <C>       <C>
Interest-only strip residual discount rate (a):
-----------------------------------------------
   Initial valuation...........................    11%      11%      11%      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 (c)........................    10%      10%      10%      13%       13%      13%      13%      13%       13%
     Home equity loans.........................    24%      24%      24%      24%       24%      24%      24%      24%       24%
   Ramp period (months) (b):
     Business loans............................    24       24       24       24        24       24       24       24        24
     Home equity loans.........................    18       18       18       12        12       12       12       12        12
   Current assumptions:
   Expected Constant Prepayment Rate (CPR):
     Business loans (c) (e)....................    11%      11%      10%      10%       10%      15%      15%      15%       13%
     Home equity loans (e).....................    22%      22%      22%      22%       22%      22%      22%      26%       15%
   Ramp period (months) (b):
     Business loans.............................   Na       Na       Na       Na        Na       Na       Na       Na        Na
     Home equity loans..........................   30       30       30       Na        Na       Na       Na       Na        Na
   CPR adjusted to reflect ramp:
     Business loans............................    23%      20%      16%      13%       10%      23%      24%      20%       13%
     Home equity loans(g)......................    24%      25%      26%      24%       23%      22%      22%      26%       15%
   Current prepayment experience (d):
     Business loans............................    23%      21%      18%      23%        5%      39%      31%      18%        9%
     Home equity loans.........................    28%      22%      26%      29%       28%      24%      29%      28%       14%

Annual credit loss rates:
-------------------------
   Initial assumption..........................  0.25%    0.25%    0.25%    0.25%     0.25%    0.25%    0.25%    0.25%     0.25%
   Current assumption..........................  0.25%    0.25%    0.35%    0.50%     0.45%    0.55%    0.45%    0.30%     0.30%
   Actual experience...........................  0.25%    0.23%    0.36%    0.48%     0.43%    0.53%    0.45%    0.29%     0.29%

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

(a) Projected cash flows from overcollateralization are discounted at the
    highest trust certificate pass through rate for each securitization
    averaging 7% at December 31, 2001. See Summary of Selected Mortgage Loan
    Securitization Trust Information table for rates specific to each
    securitization.
(b) 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.
(c) Rate is the estimated expected weighted average prepayment rate over the
    securitization's estimated remaining life. Business CPR ramps to an expected
    peak rate over 27 months then declines to the final expected CPR by month
    40.
(d) Rate is a six-month historical average.
(e) Business loan assumption ramps down from current rate to 15% remaining
    constant at 15% for Trusts 1997-1, 1997-2, 1998-1 and 1998-2. Home equity
    loan assumption ramps down from current rate to 22% remaining constant at
    22% for Trusts 1998-3 and 1998-4.
(f) Amounts represent weighted average percentages for two 1997 securitization
    pools and two 1996 securitization pools.
(g) The home equity loan prepayment rates have been increased for the next six
    months to provide for the expected near term continuation of higher average
    prepayment experience.
Na = not applicable


                                       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 to our
interest-only strips and servicing rights may be required in accordance with
SFAS No. 115 and EITF 99-20. 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. See
"--Interest Rate Risk Management" for further description of the impact of
changes in our assumptions.

         Lease Securitizations. We have in the past securitized two pools of
leases. As of December 31, 1999, we de-emphasized the lease origination business
but continue to service the remaining leases in our managed portfolio. The
interest-only strips and servicing rights we retain on these securitized pools
represent only 1% of our securitization residual assets at December 31, 2001.

         Servicing Rights. When loans are sold through a securitization, the
servicing on the loans is retained and we capitalize the benefit associated with
the rights to service securitized loans, net of estimated compensation that
would be required by a substitute servicer, based on those servicing rights
allocated cost based upon their 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. In addition, we are allowed to retain the interest paid on funds held
in trust collection accounts until these funds are distributed to trust
investors.

         Fair value of servicing rights is determined by computing the benefits
of servicing in excess of adequate compensation which would be required by a
substitute servicer for servicing. The benefits of servicing are the present
value of projected net cash flows from contractual servicing fees and ancillary
servicing fees. 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.

         The origination of a high percentage of loans with prepayment fees
impacts our servicing rights and 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.

         In addition, although prepayments increased during the quarter ended
December 31, 2001 compared to our historical averages, we have generally found
that the non-conforming mortgage market is less sensitive to prepayments due 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.

         As a result of the use of prepayment fees and the reduced sensitivity
to interest rate changes in the non-conforming mortgage market, 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, 2001, servicing rights
totaled $112.1 million, compared to $102.4 million at June 30, 2001.


                                       29
<PAGE>

RESULTS OF OPERATIONS

Overview

         For the second quarter of fiscal 2002, net income increased $0.1
million, or 2.0%, to $2.5 million compared to $2.4 million in the second quarter
of fiscal 2001. Diluted earnings per common share increased to $0.87 on average
common shares of 2,835,000 compared to $0.65 per share on average common shares
of 3,661,000 for the second quarter of fiscal 2001. Dividends of $0.08 and $0.07
per share were paid for the quarters ended December 31, 2001 and 2000,
respectively. The common dividend payout ratio based on diluted earnings per
share was 9.2% for the second quarter of fiscal 2002 compared to 10.8% for the
second quarter of fiscal 2001.

         For the six months ended December 31, 2001, net income remained level
at $3.8 million compared to the same period in fiscal 2001. Diluted earnings per
share increased to $1.31 for the six months ended December 31, 2001, on average
common shares of 2,899,000 compared to $1.01 on average common shares of
3,704,000 for the same period in fiscal 2001.

         Increases in the gain on sale recorded during the periods were offset
by increases in general and administrative expenses and other expenses and a
$4.5 million interest-only strips valuation adjustment recorded during the
period. See below for further discussion of gain on sale, general and
administrating expenses, other expenses and the interest-only strips valuation
adjustment recorded during the periods.


         The increase in earnings per share for both the three and six-month
periods was due to the lower number of shares outstanding due to our repurchases
of our common stock.

         In fiscal 1999, the Board of Directors initiated a stock repurchase
program in view of the market price level of our common stock, which was at the
time, and has continued to, trade at below book value. In addition, our earnings
growth over the past several years did not result in a corresponding increase in
the market value of our common stock. The repurchase program was extended in
fiscal 2002 to authorize the purchase of up to 10% of the then outstanding
shares which totaled approximately 2,661,000 shares at that date. The repurchase
program was completed in November 2001. In addition, in November 2001, the Board
of Directors authorized the repurchase of an additional 10% of the then
outstanding shares. To date, we have repurchased 43,000 shares.

         On October 1, 2001, the Company's Board of Directors declared a 10%
stock dividend paid on November 5, 2001 to shareholders of record on October 22,
2001. In conjunction with the Board's resolution, all outstanding stock options
and the related exercise prices were adjusted. Accordingly, all outstanding
shares, earnings per common share, dividend per share, average common share and
stock option amounts have been retroactively adjusted to reflect the effect of
the stock dividend.

Loan Originations

         The following schedule details our loan originations (in thousands):
<TABLE>
<CAPTION>


                                           Three Months Ended                     Six Months Ended
                                              December 31,                          December 31,
                                        ------------------------            --------------------------
                                          2001             2000                2001              2000
                                        -------          -------             -------           -------
<S>                                    <C>              <C>                 <C>               <C>
Business purpose loans.......          $ 32,268         $ 26,816            $ 61,892          $ 56,670
Home equity loans............           326,538          262,626             615,963           543,686
                                        -------          -------             -------           -------
                                       $358,806         $289,442            $677,855          $600,356
                                       ========         ========            ========          ========

</TABLE>


                                       30
<PAGE>


         Loan originations for our subsidiary, American Business Credit, Inc.,
which offers business purpose loans secured by real estate, increased $5.2
million, or 9.2%, for the six months ended December 31, 2001, to $61.9 million
from $56.7 million for the six months ended December 31, 2000.

         Home equity loans originated by our subsidiaries Upland Mortgage and
American Business Mortgage Services and through the Bank Alliance Program,
increased $72.3 million, or 13.3%, for the six months ended December 31, 2001,
to $616.0 million from $543.7 million for the six months ended December 31,
2000. The consumer mortgage group continues to focus on increasing efficiencies
and productivity gains made in fiscal 2001 by refining marketing techniques and
integrating technological improvements into the loan origination process. In
addition, they are continuing to realize the benefits of changes made in fiscal
2001 to management structures and consolidation of branch offices.

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

                                    Three Months Ended                            Six Months Ended
                                       December 31,                                 December 31,
                              ----------------------------   Percentage   ------------------------------   Percentage
                                  2001           2000         Increase        2001             2000          Increase
                                  ----           ----         --------        ----             ----          --------

<S>                             <C>            <C>              <C>         <C>               <C>              <C>
Total revenues...............   $60,034        $44,515          34.9%       $110,706          $82,938          33.5%
Total expenses...............    55,810         40,512          37.8%        104,134           76,679          35.8%
Net income...................     2,450          2,401           2.0%          3,812            3,755           1.5%

Return on average equity.....     14.82%         14.53%                        11.48%           11.62%
Return on average assets.....      1.17%          1.50%                         0.93%            1.20%

Earnings per share:
Basic........................     $0.96          $0.66          45.5%          $1.43            $1.03          38.8%
  Diluted....................     $0.87          $0.65          33.8%          $1.31            $1.01          29.7%
Dividends declared per share.     $0.08          $0.07          14.3%          $0.15            $0.14           7.1%
</TABLE>


         Total Revenues. For the second quarter of fiscal 2002, total revenues
increased $15.5 million, or 34.9%, to $60.0 million from $44.5 million for the
second quarter of fiscal 2001. For the first six months of fiscal 2002, total
revenues increased $27.8 million, or 33.5%, to $110.7 million from $82.9 million
for the first six months of fiscal 2001. Growth in total revenues for both
periods 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. Gain on sale of loans increased $13.6 million,
or 43.7%, to $44.6 million on the securitization of $342.2 million of loans for
the second quarter of fiscal 2002 from $31.0 million on the securitization of
$284.0 million of loans in the second quarter of fiscal 2001. For the six months
ended December 31, 2001, gains of $79.9 were recorded on the securitization of
$632.0 million of loans. This was an increase of $22.8, or 40.0% over gains of
$57.1 million recorded on securitizations of $540.8 million of loans for the six
months ended December 31, 2000.

         The increase in securitization gains for the three months and six
months ended December 31, 2001 was due to both an increase in interest rate
spreads and an increase in the volume of loans securitized. The securitization
gain as a percentage of loans securitized increased to 12.6% for the six months
ended December 31, 2001 from 10.6% on loans securitized for the six months ended
December 31, 2000. Increases in interest rate spreads increase expected residual
cash flows to us and result in increases in the gains we recognize on the sale
of loans into Securitizations. See "-- Securitization Accounting Considerations"
for further detail.

                                       31
<PAGE>

         The increase in spread for the six months ended December 31, 2001
compared to the six months ended December 31, 2000 resulted from decreases in
pass-through rates on investor certificates issued by securitization trusts. For
loans securitized during the six months ended December 31, 2001, the average
loan coupon was 11.40%, a decrease from 12.03% on loans securitized during the
six months ended December 31, 2000. However, the average interest rate on trust
certificates issued in mortgage loan securitizations during the six months ended
December 31, 2001 was 5.53%, a decrease from 7.24% during the six months ended
December 31, 2000. The resulting net improvement in spread was approximately 108
basis points.

         Interest and Fees. Interest and fee income for the second quarter of
fiscal 2002 decreased $0.5 million, or 8.2%, to $5.5 million from $6.0 million
in the second quarter of fiscal 2001. For the six months ended December 31,
2001, interest and fee income increased $0.2 million, or 1.9%, to $11.5 million
compared to $11.3 million for the six months ended December 31, 2000. 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 loans and leases.

         Interest income for the second quarter of fiscal 2002 decreased $0.4
million, or 13.8%, to $2.5 million from $2.9 million in the second quarter of
fiscal 2001. During the six months ended December 31, 2001, interest income
remained level at $5.1 million compared to the six months ended December 31,
2000. The decrease in the second quarter was due to a lower weighted average
coupon on loans available for sale from prior year and lower rates earned on
invested cash balances due to general decreases in market interest rates, which
was partially offset by a modification of the terms of our securitization, which
allowed us to retain interest income we had accrued up until the point of the
sale. Previously all accrued interest income was retained by the securitization
trust when collected.

         For the second quarter of fiscal 2002, premiums on whole loan sales
decreased $0.1 million to $0.6 million from $0.7 million in the second quarter
of fiscal 2001. The decrease was due to a 35.7% decrease in the volume of whole
loan sales partially offset by increases in the average premiums earned on whole
loan sales. Premiums on whole loan sales increased $0.7 million, to $1.8 million
for the six-months ended December 31, 2001 from $1.1 million for the six months
ended December 31, 2000. The volume of whole loan sales increased 11.5%, to
$43.7 million for the six months ended December 31, 2001 from $39.2 million for
the six months ended December 31, 2000. In addition to increases in the volume
of whole loan sales, the average premium earned on whole loan sales increased
during the period.

         Other fees were level for the quarter ended December 31, 2001 compared
to the prior year, and decreased $0.5 million for the six months ended December
31, 2001 from the prior year mainly due to the decrease in fees collected in
connection with our leasing portfolio. Our leasing portfolio has decreased due
to our decision in fiscal 1999 to discontinue the origination of new leases.

         Interest Accretion on Interest-Only Strips. Interest accretion
represents the yield component of cash flows received on interest-only strips.
Interest accretion of $8.6 million and $16.4 million was earned in the
three-month and six-month periods ended December 31, 2001, respectively,
compared to $5.8 million and $11.4 million in the three-month and six-month
periods ended December 31, 2000, respectively. The increase reflects the growth
in the balance of our interest-only strips of $121.6 million, or 35.9%, to
$460.6 million at December 31, 2001 from $339.0 million at December 31, 2000. In
addition, cash flows from interest-only strips for the six months ended December
31, 2001, increased $13.6 million, or 38.5%, from the same period of fiscal 2001
due to the larger size of our more recent securitizations and additional
securitizations reaching final target overcollateralization levels.

                                       32
<PAGE>

         We use a prospective approach to estimate interest accretion. As
previously discussed, we periodically 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 less amortization of the servicing
rights assets that are recorded at the time loans are securitized. Ancillary
fees include prepayment fees, late fees and other servicing fee compensation.
For the three months ended December 31, 2001, servicing income decreased $0.4
million, or 22.1%, to $1.3 million from $1.7 million for the three months ended
December 31, 2000. For the six months ended December 31, 2001, servicing income
decreased $0.2 million, or 7.2%, to $2.9 million from $3.2 million for the six
months ended December 31, 2000.

         The following table summarizes the components of servicing income for
the three-month and six-month periods ended December 31, 2001 and 2000 (in
thousands):
<TABLE>
<CAPTION>

                                                         Three Months Ended            Six Months Ended
                                                            December 31,                 December 31,
                                                     ------------------------      -----------------------
                                                        2001           2000           2001          2000
                                                     --------        --------      --------       --------
<S>                                                  <C>             <C>           <C>            <C>
        Contractual and ancillary fees........       $  8,448        $  6,080      $ 16,680       $ 11,328
        Amortization of servicing rights......         (7,150)         (4,414)      (13,746)        (8,167)
                                                     --------        --------      --------       --------
                                                     $  1,298        $  1,666      $  2,934       $  3,161
                                                     ========        ========      ========       ========
</TABLE>

         Amortization of the servicing rights asset for securitized loans 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. We periodically perform a valuation analysis of
servicing rights to determine their fair value. 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. As of December 31, 2001, our valuation
analysis has not indicated any impairment. Impairment is measured as the excess
of carrying value over fair value.

         Total Expenses. Total expenses increased $15.3 million, or 37.8%, to
$55.8 million for the three months ended December 31, 2001 compared to $40.5
million for the three months ended December 31, 2000. Total expenses increased
$27.5 million, or 35.8%, to $104.1 million for the six months ended December 31,
2001 compared to $76.7 million for the six months ended December 31, 2000. As
described in more detail below, these increases were mainly a result of
increased interest expense attributable to the issuance of additional
subordinated debt, increases in employee related costs, increases in general and
administrative expense, and a $4.5 million interest-only strips valuation
adjustment recorded in the quarter ended December 31, 2001.

         Interest Expense. For the second quarter of fiscal 2002, interest
expense increased $3.2 million, or 23.0%, to $17.3 million from $14.1 million
for the second quarter of fiscal 2001. The increase was attributable to an
increase in the amount of subordinated debt outstanding which was partially
offset by a reduction in the average rate paid on both subordinated debt and
warehouse lines of credit during the second quarter of fiscal 2002. The proceeds
from the subordinated debt were used to repay existing debt, to fund loan
originations and our operatings and for general corporate purposes including
repurchases of our common stock. Average subordinated debt outstanding during
the three months ended December 31, 2001 was $594.4 million compared to $423.0
million during the three months ended December 31, 2000. Average interest rates
paid on subordinated debt outstanding were 10.9% during the three months ended
December 31, 2001 compared to 11.0% during the three months ended December 31,
2000.

                                       33
<PAGE>

         During the first six months of fiscal 2002 interest expense increased
$7.4 million, or 27.6%, to $34.3 million from $26.9 million for the six months
ended December 31, 2000. Average subordinated debt outstanding during the six
months ended December 31, 2001 was $580.7 million compared to $414.2 during the
six months ended December 31, 2000. Average interest rates paid on subordinated
debt outstanding increased to 11.0% during the six months ended December 31,
2001 from 10.9% during the six months ended December 31, 2000.

         Rates offered on subordinated debt decreased in the fourth quarter of
fiscal 2001 and have continued to decrease in fiscal 2002 in response to
decreases in market rates as well as our lower cash needs. The average rate of
subordinated debt offered in February 2001 was 11.85% compared to the average
rate of subordinated debt offered in December 2001 of 8.54%. As the higher rate
notes mature we expect the average rate paid on subordinated debt to decline
provided that market rates do not significantly increase.

         The increase in interest expense for the three and six-month periods
ended December 31, 2001 related to subordinated debt was partially offset by the
impact of a decrease in the average outstanding balances under warehouse lines
of credit and decreased rates paid on warehouse lines. The average outstanding
balances under warehouse lines of credit were $29.9 million during the three
months ended December 31, 2001, compared to $67.5 million during the three
months ended December 31, 2000. The average outstanding balances under warehouse
lines of credit were $29.0 million during the six months ended December 31,
2001, compared to $56.7 million during the six months ended December 31, 2000.
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. Interest rates paid on warehouse lines are
generally based on LIBOR (London Inter Bank Offered Rate) plus a spread. LIBOR
has decreased from approximately 6.6% at December 31, 2000 to 1.9% at December
31, 2001. 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 for the
quarter ended December 31, 2001 increased to $1.3 million as compared to $0.5
million for the quarter ended December 31, 2000. The provision for credit losses
on available for sale loans and leases for the six months ended December 31,
2001 increased $1.3 million, or 92.2%, to $2.7 million, compared to $1.4 million
for the six months ended December 31, 2000. The increase in the provision for
credit losses was primarily due to increases in loans in non-accrual status and
increases in delinquent loans and leases held as available for sale. Non-accrual
loans were $5.1 million and $4.2 million at December 31, 2001 and 2000,
respectively. Delinquent loans and leases held as available for sale were 5.0%
and 3.7% of available for sale loans and leases at December 31, 2001 and 2000,
respectively. See "--Managed Portfolio Quality" for further detail.


                                       34
<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, 2001 and 2000 (in thousands):
<TABLE>
<CAPTION>

                                                  Business
                                                  Purpose        Home Equity    Equipment
Three Months Ended December 31, 2001:              Loans            Loans        Leases          Total
-------------------------------------             -------        -----------    ---------        -----
<S>                                             <C>                <C>          <C>              <C>
Balance at beginning of period...........       $ 1,114            $ 1,883      $   359          $ 3,356
Provision for credit losses..............           275                787          208            1,270
(Charge-offs) recoveries, net............          (588)              (931)        (229)          (1,748)
                                                -------            -------      -------          -------
Balance at end of period.................       $   801            $ 1,739      $   338          $ 2,878
                                                =======            =======      =======          =======

</TABLE>


<TABLE>
<CAPTION>

                                                  Business
                                                  Purpose        Home Equity    Equipment
Six Months Ended December 31, 2001:                Loans            Loans        Leases          Total
-----------------------------------               -------        -----------    ---------        -----
<S>                                             <C>                <C>          <C>              <C>
Balance at beginning of period...........       $   591            $ 1,473      $   416          $ 2,480
Provision for credit losses..............           892              1,545          269            2,706
(Charge-offs) recoveries, net............          (682)            (1,279)        (347)          (2,308)
                                                -------            -------      -------          -------
Balance at end of period.................       $   801            $ 1,739      $   338          $ 2,878
                                                =======            =======      =======          =======
</TABLE>
<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>

                                       35
<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 and for
delinquent loans that have been repurchased from securitization trusts. 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 $2.9 million, or 3.6% of gross receivables, at
December 31, 2001 compared to $2.5 million, or 2.9% of gross receivables, at
June 30, 2001.

         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 loan's
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 are usually 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-off 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 or SFAS No. 140, which
was adopted on a prospective basis in the fourth quarter of fiscal 2001, or
other relevant accounting literature because we are not required to repurchase
any loan and our ability to repurchase a loan is limited.

         SFAS No. 140 was effective on a prospective basis for transfers and
servicing of financial assets and extinguishments of liabilities occurring after
March 31, 2001. The new standard requires that we record the obligation to
repurchase loans from securitization trusts at the time we have the contractual
right to repurchase the loans whether or not we actually repurchase the loans.
For securitization trusts 2001-2 and forward, to which this rule applies, we
have the contractual right to repurchase a limited amount of loans greater than
180 days past due.

                                       36
<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, 2001 and the years ended June 30, 2001 and 2000. All loans
were repurchased at the contractual outstanding balances at the time of
repurchase. Mortgage loan securitization trusts are listed only if loan
repurchases have occurred.

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

                                           2000-3    2000-2    2000-1    1999-3   1999-2   1999-1    1998-4   1998-3
                                           ------    ------    ------    ------   ------   ------   -------   ------
<S>                                        <C>       <C>       <C>       <C>      <C>     <C>       <C>       <C>
Six months ended  December 31, 2001:
    Business loans......................   $   --    $   --    $   --    $   --   $  290   $  259   $   325   $   27
    Home equity loans...................                                             364    1,364     2,488    1,480
                                           ------    ------    ------    ------   ------   ------   -------   ------
        Total...........................   $   --    $   --    $   --    $   --   $  654   $1,623   $ 2,813   $1,507
                                           ======    ======    ======    ======   ======   ======   =======   ======
    Number of loans repurchased.........       --        --        --        --        6       19        32       15

Year ended June 30, 2001:
   Business loans.......................   $   --    $   --    $   --    $   --   $   --   $   --   $   173   $  803
   Home equity loans....................       88       330        --        --       --       --     1,310    3,886
                                           ------    ------    ------    ------   ------   ------   -------   ------
      Total.............................   $   88    $  330    $   --    $   --   $   --   $   --   $ 1,483   $4,689
                                           ======    ======    ======    ======   ======   ======   =======   ======
   Number of loans repurchased..........        1         2        --        --       --       --        10       48

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


(Continued)                                1998-2    1998-1    1997-2    1997-1   1996-2   1996-1    Total
                                           ------    ------    ------    ------   ------   ------   -------
Six months ended December 31, 2001:
   Business loans.......................   $  175    $1,266    $   --    $   --   $   --   $  103   $ 2,445
   Home equity loans....................      469     1,690        --       112       60       --     8,027
                                           ------    ------    ------    ------   ------   ------   -------
     Total..............................   $  644    $2,956    $   --    $  112   $   60   $  103   $10,472
                                           ======    ======    ======    ======   ======   ======   =======
   Number of loans repurchased..........        6        36        --         1        1        1       117

Year ended June 30, 2001:
   Business loans.......................   $  215    $  428    $2,252    $   --   $  380   $  250   $ 4,501
   Home equity loans....................    1,284     1,686     1,764        --       92      109    10,549
                                           ------    ------    ------    ------   ------   ------   -------
      Total.............................   $1,499    $2,114    $4,016    $   --   $  472   $  359   $15,050
                                           ======    ======    ======    ======   ======   ======   =======
   Number of loans repurchased..........       13        31        37        --        8        4       154

Year ended June 30, 2000:
   Business loans.......................   $  827    $   --    $  153    $2,441   $  337   $  259   $ 4,118
   Home equity loans....................    2,588       165        84     1,123      114       --     4,710
                                           ------    ------    ------    ------   ------   ------   -------
     Total..............................   $3,415    $  165    $  237    $3,564   $  451   $  259   $ 8,828
                                           ======    ======    ======    ======   ======   ======   =======
   Number of loans repurchased..........       24         1         6        35        6        1       81
</TABLE>

                                       37
<PAGE>

         Employee Related Costs. For the second quarter of fiscal 2002, employee
related costs increased $1.5 million, or 21.0%, to $8.7 million, from $7.2
million in the second quarter of fiscal 2001. For the six months ended December
31, 2001, employee related costs increased $2.4 million, or 17.2%, to $16.5
million from $14.1 million in the prior year. The increase in both periods was
primarily attributable to additions of personnel in the loan servicing and
collections area to service the larger managed portfolio. Total employees at
December 31, 2001 were 963 compared to 861 at December 31, 2000. The remaining
increase was attributable to annual salary increases as well as increases in the
costs of providing insurance benefits to employees.

         Sales and Marketing Expenses. For the second quarter of fiscal 2002,
sales and marketing expenses increased $0.3 million, or 5.7%, to $6.4 million
from $6.0 million for the second quarter of fiscal 2001. For the six months
ended December 31, 2001, sales and marketing expenses increased $0.7 million, or
5.8%, to $12.4 million from $11.8 million for the six months ended December 31,
2000. Expenses for direct mail advertising increased $6.1 million for the six
months ended December 31, 2001 compared to the prior year six-month period. This
increase was partially offset by a decrease of $3.6 million for television
advertising used in the prior year and a decrease of $1.8 million in
telemarketing costs from the prior year. 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
2002, general and administrative expenses increased $5.0 million, or 39.5%, to
$17.7 million from $12.7 million for the second quarter of fiscal 2001. For the
six months ended December 31, 2001, general and administrative expenses
increased $11.2 million, or 49.5%, to $33.8 million from $22.6 million for the
six months ended December 31, 2000. The increase was primarily attributable to
increases of approximately $8.9 million in costs associated with servicing and
collection of our larger total managed portfolio including expenses associated
with REO and delinquent loans, in addition to increases of $0.9 million in costs
related to the issuance of our subordinated debt and a $0.4 million increase
related to investments in technology.

         Interest-Only Strips Valuation Adjustment. In the second quarter of
fiscal 2002, due to increases in prepayment experience, a write down of $4.5
million was recorded on our interest-only strips. This adjustment reflects the
impact of higher prepayment experience on home equity loans than anticipated
during the second quarter, as well as the impact of an increase in the
prepayment rate assumptions used to value our interest-only strips. The impact
of increased prepayments were considered to be other than temporary and were
therefore recorded as an adjustment to earnings in the current period in
accordance with SFAS No. 115 and EITF 99-20. We have increased our prepayment
rate assumptions for home equity loans and certain pools of business loans due
to our expectation that the increased trend of prepayments noted throughout the
mortgage industry will continue, but at a declining rate, through the end of the
current fiscal year.


         Provision for income taxes. In fiscal 2002, our effective tax rate
increased to 42% from 40% in fiscal 2001 due to increase state tax liabilities.
As a result of our geographic expansion, we have increased the number of states
we were doing significant business in and have increased our tax provision for
additional tax liabilities in certain states.


                                       38
<PAGE>


BALANCE SHEET INFORMATION

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


                                                                                December 31,         June 30,
                                                                                    2001               2001
                                                                                ------------        ---------
<S>                                                                              <C>                <C>
Cash and cash equivalents....................................................    $ 111,556          $  91,092

Loan and lease receivables, net:
   Available for sale........................................................       78,144             83,241
   Interest, fees and other..................................................       13,812             16,549
Interest-only strips.........................................................      460,601            398,519
Servicing rights.............................................................      112,084            102,437
Receivables for sold loans ..................................................       14,949             14,157
Total assets.................................................................      847,003            766,487

Subordinated debt............................................................      611,939            537,950
Warehouse lines and other notes payable......................................       55,172             51,064
Total liabilities............................................................      781,246            699,625
Total stockholders' equity...................................................       65,757             66,862

Book value per common share..................................................    $   25.44          $   22.52
Total liabilities to tangible equity (c).....................................        15.4x              13.5x
Adjusted debt to tangible equity (a)(c)......................................        11.7x              10.2x
Subordinated debt to tangible equity (c).....................................        12.1x              10.4x
Interest-only strips to adjusted  tangible equity (b)(c).....................         4.1x               3.5x
</TABLE>

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

         Total assets increased $80.5 million, or 10.5%, to $847.0 million at
December 31, 2001 from $766.5 million at June 30, 2001 primarily due to
increases in cash and cash equivalents, interest-only strips and serving rights.

         Cash and cash equivalents increased $20.5 million, or 22.5%, due to
receipts from sales of subordinated debt and cash receipts from our
interest-only strips.


                                       39
<PAGE>


         Activity of our interest-only strips for the six months ended December
31, 2001 and 2000 was as follows (in thousands):
<TABLE>
<CAPTION>

                                                                               December 31,
                                                                        ---------------------------
                                                                          2001               2000
                                                                        --------           --------
<S>                                                                     <C>                <C>
 Balance at beginning of period..................................       $398,519           $277,872
 Initial recognition of interest-only strips, including initial
       overcollateralization of $0 and $2,211 ...................         72,307             59,978
 Required purchases of additional overcollateralization..........         26,245             19,777
 Interest accretion..............................................         16,382             11,419
 Cash flow from interest-only strips.............................        (48,894)           (35,310)
 Net adjustments to fair value...................................            504              5,293
 Other than temporary fair value adjustment......................         (4,462)                --
                                                                        --------           --------
 Balance at end of period........................................       $460,601           $339,029
                                                                        ========           ========
</TABLE>
         The following table summarizes the purchases of overcollateralization
by trust for the six months ended December 31, 2001 and the years ended June 30,
2001 and 2000. See "-- Securitization Accounting Considerations" for a
discussion of overcollateralization requirements.


     Summary of Mortgage Loan Securitization Overcollateralization Purchases
                             (dollars in thousands)

<TABLE>
<CAPTION>

                                        2001-2   2001-1  2000-4   2000-3    2000-2   2000-1    Other    Total
                                        ------   ------  ------   ------    ------   ------    -----    -----
<S>                                  <C>      <C>      <C>      <C>       <C>       <C>       <C>      <C>
Six Months Ended December 31, 2001:
Required purchases of additional
   overcollateralization............ $ 5,613  $ 5,638  $ 5,266  $ 2,046   $ 4,643   $ 2,490   $   549   $26,245
</TABLE>
<TABLE>
<CAPTION>


                                     2001-2   2001-1  2000-4   2000-3    2000-2   2000-1   1999-4  1999-3  1999-2   Other   Total
                                     ------   ------  ------   ------    ------   ------   ------  ------  ------   -----   -----
<S>                                  <C>    <C>      <C>      <C>      <C>       <C>      <C>      <C>     <C>      <C>    <C>
Year Ended June 30, 2001:
Initial overcollateralization.....   $ --   $   --   $   --   $   --   $   611   $   --   $   --   $  --   $   --   $  --  $  611
Required purchases of additional
   overcollateralization...........   959    2,574    6,049    4,051    10,160     7,519    5,960   3,719    2,316     638   43,945
                                      ---   ------   ------   ------   -------   -------   ------  ------   ------  ------  -------
   Total...........................   959   $2,574   $6,049   $4,051   $10,771   $ 7,519   $5,960  $3,719   $2,316  $  638  $44,556
                                      ===   ======   ======   ======   =======   =======   ======  ======   ======  ======  =======
</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>

         Servicing rights increased $9.6 million or 9.4% to $112.1 million at
December 31, 2001 from $102.4 at June 30, 2001 due to the securitization of
$632.0 million of loans during the period offset by amortization of the
servicing asset for fees collected during the period.

                                       40
<PAGE>


         Total liabilities increased $81.6 million, or 11.7%, to $781.2 million
from $699.6 million at June 30, 2001 due primarily to an increase in
subordinated debt outstanding and accounts payable and accrued expenses. For the
first six months of fiscal 2001 subordinated debt increased $74.0 million, or
13.8%, to $611.9 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 12.1 times tangible
equity at December 31, 2001, compared to 10.4 times as of June 30, 2001. See "--
Liquidity and Capital Resources" for further information regarding outstanding
debt.

         Accounts payable and accrued expenses increased $7.1 million, or 17.4%,
to $48.2 million from $41.0 million at June 30, 2001 primarily due to an
increase in accrued interest payable on subordinated debt due to the higher
level of subordinated debt.




                                       41
<PAGE>


Managed Portfolio Quality

     The following table provides data concerning delinquency experience, real
estate owned and loss experience for the managed loan and lease portfolio
(dollars in thousands):
<TABLE>
<CAPTION>

                                         December 31, 2001       September 30, 2001           June 30, 2001
                                      ---------------------     --------------------      ---------------------
Delinquency by Type                      Amount        %            Amount       %            Amount       %
-------------------                   -------------- ------     ------------- ------      ------------- -------
<S>                                   <C>          <C>          <C>          <C>          <C>           <C>
Business Purpose Loans
Total managed portfolio.............  $  329,594                $  314,076                 $  300,192
                                      ==========                ==========                 ==========
Period of delinquency:
    31-60 days......................  $    3,693     1.12%      $    2,626     0.84%       $    3,460    1.15%
    61-90 days......................       3,031     0.92            3,100     0.99             1,837     .61
    Over 90 days....................      27,605     8.38           26,958     8.58            22,687    7.56
                                      ----------    -----       ----------    -----        ----------    ----
    Total delinquencies.............  $   34,329    10.42%      $   32,684    10.41%       $   27,984    9.32%
                                      ==========    =====       ==========    =====        ==========    ====
REO.................................  $    7,207                $    5,408                 $    4,530
                                      ==========                ==========                 ==========
Home Equity Loans
Total managed portfolio.............  $2,472,365                $2,336,007                 $2,223,429
                                      ==========                ==========                 ==========
Period of delinquency:
    31-60 days......................  $   38,538     1.56%      $   29,477     1.26%       $   16,227     .73%
    61-90 days......................      24,054     0.97           23,519     1.01            14,329     .64
    Over 90 days....................      73,725     2.98           58,681     2.51            47,325    2.13
                                      ----------    -----       ----------    -----        ----------    ----
    Total delinquencies.............  $  136,317     5.51%      $  111,677     4.78%       $   77,881    3.50%
                                      ==========     ====       ==========     ====        ==========    ====
REO.................................  $   28,596                $   24,662                 $   23,902
                                      ==========                ==========                 ==========
Equipment Leases
Total managed portfolio.............  $   45,619                $   55,299                 $   65,774
                                      ==========                ==========                 ==========
Period of delinquency:
    31-60 days......................  $    1,383     3.03%      $    1,179     2.13%       $      595     .90%
    61-90 days......................         524     1.15              530     0.96               206     .31
    Over 90 days....................         602     1.32              700     1.27               347     .53
                                      ----------    -----       ----------    -----        ----------    ----
    Total delinquencies.............  $    2,509     5.50%      $    2,409     4.36%       $    1,148    1.74%
                                      ==========     ====       ==========     ====        ==========    ====
Combined
--------
Total managed portfolio.............  $2,847,578                $2,705,382                 $2,589,395
                                      ==========                ==========                 ==========
Period of delinquency:
    31-60 days......................  $   43,614     1.53%      $   33,282     1.23%       $   20,282     .78%
    61-90 days......................      27,609     0.97           27,149     1.00            16,372     .63
    Over 90 days....................     101,932     3.58           86,339     3.19            70,359    2.72
                                      ----------    -----       ----------    -----        ----------    ----
    Total delinquencies.............  $  173,155     6.08%      $  146,770     5.42%       $  107,013    4.13%
                                      ==========     ====       ==========     ====        ==========    ====
REO.................................  $   35,803     1.26%      $   30,070     1.11%       $   28,432    1.10%
                                      ==========     ====       ==========     ====        ==========    ====
Losses experienced during the
    three month period(a)(b) :
    Loans...........................  $    3,772     0.56%      $    2,644     0.41%       $    4,168     .68%
                                                     ====                      ====                      ====
    Leases..........................         229     1.91%             118     0.83%               61     .37%
                                      ----------     ====       ----------     ====        ----------    ====
    Total managed portfolio.........  $    4,001     0.58%      $    2,762     0.42%       $    4,229     .68%
                                      ==========     ====       ==========     ====        ==========     ===
 </TABLE>


(a) Percentage based on annualized losses and average managed portfolio.
(b) Losses recorded on our books were $2.2 million ($1.0 million from
    charge-offs through the provision for loan losses and $1.2 million for write
    downs of real estate owned) and losses absorbed by loan securitization
    trusts were $1.8 million for the three months ended December 31, 2001.
    Losses recorded on our books were $0.9 million ($0.6 million from
    charge-offs through the provision for loan losses and $0.3 million for write
    downs of real estate owned) and losses absorbed by loan securitization
    trusts were $1.9 million for the three months ended September 30, 2001.
    Losses recorded on our books were $2.7 million ($1.8 million from
    charge-offs through the provision for loan losses and $0.9 million for write
    downs of real estate owned) and losses absorbed by loan securitization
    trusts were $1.5 million for the three months ended June 30, 2001. Losses
    recorded on our books include losses for loans we hold as available for sale
    or real estate owned and loans repurchased from securitization trusts.

                                       42
<PAGE>


         The following table summarizes key delinquency statistics related to
loans, leases and real estate owned recorded on our balance sheet and their
related percentage of our available for sale portfolio (dollars in millions):

<TABLE>
<CAPTION>

                                                               December 31,     September 30,   June 30,
                                                                   2001             2001          2001
                                                               ------------     -------------   --------
<S>                                                             <C>               <C>            <C>
Delinquencies held as available for sale (a)................    $ 4.0             $ 4.7          $ 3.4
                                                                  5.0%              6.2%           4.0%

Available for sale loans and leases in non-accrual status (b)   $ 5.1             $ 6.7          $ 4.5
                                                                  7.6%              8.8%           5.4%

Real estate owned on balance sheet..........................    $ 2.6             $ 3.2          $ 2.3
</TABLE>

(a) Delinquent loans and leases held as available for sale are included in total
    delinquencies in the previously presented "Managed Portfolio Quality" table.

(b) It is our policy to suspend the accrual of interest income when a loan is
    contractually delinquent for 90 days or more. Non-accrual loans and leases
    are included in total delinquencies in the previously presented "Managed
    Portfolio Quality" table.

         Delinquent loans and leases. Total delinquencies (loans and leases with
payments past due greater than 30 days, excluding real estate owned) in the
total managed portfolio were $173.2 million at December 31, 2001 compared to
$146.8 million at September 30, 2001 and $107.0 million at June 30, 2001. Total
delinquencies as a percentage of the total managed portfolio were 6.08% at
December 31, 2001 compared to 5.42% at September 30, 2001 and 4.13% at June 30,
2001 on a total managed portfolio of $2.8 billion at December 31, 2001, $2.7
billion at September 30, 2001 and $2.6 billion at June 30, 2001. The increase in
delinquencies and delinquency percentages was mainly due to the continued
decline in economic conditions and the seasoning of the managed portfolio. As
the managed portfolio continues to season we expect the delinquency rate to
continue to increase.

         Real estate owned. Total real estate owned ("REO"), comprising
foreclosed properties and deeds acquired in lieu of foreclosure, increased to
$35.8 million, or 1.26% of the total managed portfolio at December 31, 2001
compared to $30.1 million, or 1.11%, and $28.4 million, or 1.10%, respectively,
at September 30, 2001 and June 30, 2001. The $5.7 million increase in the volume
of REO from the prior quarter was mainly due to the seasoning of the managed
portfolio together with a concerted effort by management to reduce the time a
loan remains in seriously delinquent status until the sale of an REO property.
We continue to add additional company personnel to this process. The
acceleration of the foreclosure process has caused a substantial increase in the
balance of properties classified as REO. We are now implementing processes to
decrease the cycle time in the disposition of REO properties, however, as our
portfolio seasons we expect the REO balance to continue to increase.

         Loss experience. During the second quarter of fiscal 2002, we
experienced net loan and lease charge-offs in our total managed portfolio of
$4.0 million. On an annualized basis, net loan and lease charge-offs for the
second quarter of fiscal 2002 represent 0.58% of the total managed portfolio, an
increase from 0.42% for the quarter ended September 30, 2001 and a decrease from
0.68% for the quarter ended June 30, 2001. Loss severity experienced on
delinquent loans generally has ranged from 10% to 15% of principal and loss
severity experience on REO generally has ranged from 25% to 35% of principal.
The credit loss assumptions in our mortgage loan securitizations are monitored
against actual loss experience and adjusted for future loss expectations if
warranted. See "-- Securitization Accounting Considerations" for more detail on
credit loss assumptions compared to actual loss experience.


                                       43
<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 interest rate
swap yields, 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 and maintain our profitability. 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 available for sale, interest-only strips, servicing rights and
subordinated debt). We would address this challenge by carefully monitoring our
product pricing, the actions of our competition and market trends and the use of
hedging strategies 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.


                                       44
<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, 2001
                                         ------------------------------------------------------------------------------------------
                                          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) $ 74,433   $     49     $     56    $     64    $     72    $  3,470    $ 78,144   $ 81,070
Interest-only strips..................    70,630    100,787       93,537      78,462      64,460     230,188     638,064    460,601
Servicing rights......................    38,040     30,629       24,103      18,857      14,770      48,005     174,404    112,084
Investments held to maturity..........        80         88          100         123         156         385         932        945

Rate Sensitive Liabilities:
Fixed interest rate borrowings........  $340,946   $160,486     $ 50,154    $ 21,111    $ 11,408    $ 27,834    $611,939   $610,856
Average interest rate.................    10.53%     11.52%       10.93%      12.34%      12.57%      12.39%      11.09%
Variable interest rate borrowings.....  $ 51,068   $    536     $    581    $  2,537    $     96    $    354    $ 55,172   $ 55,172
Average interest rate.................     4.06%      3.90%        3.90%       3.90%       3.90%       3.90%       4.05%
</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 three 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%.

         From time to time derivative financial instruments are 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. Derivative financial instruments include 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 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
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 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 practice has provided strong correlation between our hedge
contracts and the ultimate pricing we will receive on the subsequent


                                       45
<PAGE>

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. Fair value of derivative financial instruments is based on quoted
market prices. Fair value of the items hedged is based on current pricing of
these assets in a securitization. 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.

         We recorded cash losses on the fair value of derivative financial
instruments of $3.4 million during the six months ended December 31, 2001, and
$4.3 million during the six months ended December 31, 2000. There were no open
derivative contracts or unrealized gains or losses from derivative contracts at
December 31, 2001.

         In the future, we may expand the types of derivative financial
instruments we use to hedge interest rate risk to include other types of
derivative contracts. 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. Hedging involves
transaction and other costs, which could increase as the period covered by the
hedging protection increases. Although it is expected that such costs would be
offset by income realized from securitizations in that period or in future
periods, we may be prevented from effectively hedging fixed rate loans held for
sale without reducing income in current or future periods. In addition, 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).

         Interest-Only Strips and Servicing Rights. A portion of the
certificates issued to investors by certain 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, 2001, $134.0 million of debt issued by loan securitization trusts
was floating rate debt based on LIBOR, representing 5.2% 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.

         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 result in 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 is periodically performed. As part of the
revaluation process, assumptions used for prepayment rates are monitored against
actual experience and adjusted if warranted. See "--Securitization Accounting
Considerations" for further information regarding these assumptions and the
impact of prepayments during this period.

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

                                       46
<PAGE>

         The table below outlines the sensitivity of the current fair value of
our interest-only strips and servicing rights to 10% and 20% adverse changes in
the key assumptions used in determining the fair value of those assets. Our base
prepayment, loss and discount rates are described in the table "Summary of
Material Mortgage Loan Securitization Valuation Assumptions and Actual
Experience." (dollars in millions):

Securitized collateral balance                                       $2,753.6
Balance sheet carrying value of retained interests                     $572.7
Weighted-average collateral life (in years)                               4.2

Sensitivity of assumptions used to value retained interests:

Prepayment speed:
Impact on fair value for 10% adverse change                             $23.6
Impact on fair value for 20% adverse change                             $44.8

Credit Loss rate:
Impact on fair value for 10% adverse change                              $3.4
Impact on fair value for 20% adverse change                              $6.7

Floating Rate Debt (a):
Impact on fair value for 10% adverse change                              $1.2
Impact on fair value for 20% adverse change                              $2.3

Discount Rate:
Impact on fair value for 10% adverse change                             $19.2
Impact on fair value for 20% adverse change                             $37.5

(a) The floating rate bonds are indexed to one-month LIBOR plus a trust specific
    spread. The base one-month LIBOR rate assumption used in this sensitivity
    analysis was derived from a forward yield curve.

         The sensitivity analysis in the table above is hypothetical and should
be used with caution. As the figures indicate, changes in fair value based on a
10% or 20% variation in assumptions generally cannot easily be extrapolated
because the relationship of the change in the assumptions to the change in fair
value may not be linear. Also, in this table, the effect that a change in a
particular assumption may have on the fair value is calculated without changing
any other assumption. Changes in one assumption may result in changes in others,
which might magnify or counteract the impact of the intended change.

         The residual assets of lease securitizations represent an immaterial
portion of the total residual assets and are therefore aggregated with mortgage
loans in the above sensitivity analysis.

         Subordinated Debt. We also experience interest rate risk to the extent
that as of December 31, 2001 approximately $271.0 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

         A further decline in economic conditions, continued instability in
financial markets or further acts of terrorism in the United States may cause
disruption in our business and operations including reductions in demand for our
loan products and our subordinated debt securities, increases in delinquencies
and credit losses in our managed loan portfolio, changes in historical


                                       47
<PAGE>

prepayment patterns and declines in real estate collateral values. To the extent
we experience an economic downturn, unusual economic patterns and unprecedented
behaviors in financial markets, these developments may affect our ability to
originate loans at profitable interest rates, to price future loan
securitizations profitably and to effectively hedge our loan portfolio against
market interest rate changes which could cause our stock price to decline.
Should these disruptions and unusual activities occur, our profitability and
cash flow could be reduced and our ability to make principal and interest
payments on our subordinated debt could be impaired.

         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.

         As the servicer of securitized loans we are 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. 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.

         Borrowings against warehouse and credit facilities and sales into
off-balance sheet facilities provide a 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 the warehouse facilities. See "--Credit Facilities" below for a more
detailed description of these facilities.

         Cash flow from operations and the issuance of subordinated debt fund
our remaining cash requirements. We rely significantly on our ability to issue
subordinated debt since our cash flow from operations is not sufficient to meet
these requirements. In addition, at times we may elect to utilize proceeds from
the issuance of subordinated debt to fund loans instead of using our warehouse
credit facilities, depending on our determination of liquidity needs. In order
to expand our businesses we have issued subordinated debt to partially fund the
growth and to partially fund maturities of subordinated debt. Although we expect
negative cash flow from operations to continue in the foreseeable future, we
expect that our historical levels of negative cash flow from operations will
decline in the future and then become positive. As we expect the rates of growth
in our loan production and future securitization levels to decline from prior
growth rates, and if we manage expenses and realize expected efficiencies in our
infrastructure and loan production channels, and if the cash flows from our
interest-only strips increase as expected when securitization pools mature and
reach targeted overcollateralization levels, we would expect our current level
of negative cash flows to decline and then become positive. There can be no
assurances that our projections regarding declining negative cash flow or
positive cash flow from operations will ultimately be achieved.

         As was previously discussed, during the six months ended December 31,
2001, our actual prepayment experience on our managed portfolio was generally
higher than our average historical levels for prepayments. Prepayments result
in decreases in the size of our managed porfolio and decreases in the expected
future cash flows to us from our interest-only strips and servicing rights.
However, due to the favorable interest rate spreads and favorable
overcollateralizaiton requirements received on our more recent securitizations,
resulting in an increase in cash flows from interest-only strips and servicing
rights we do not believe our recent increase in prepayment experience will have
a significant impact on our expected cash flows from retained interests in
securitizations.

         The current low interest rate environment has provided an opportunity
to reduce the interest rates and extend the maturities offered on our
subordinated debt. The weighted average rate of our subordinated debt issued in
December 2001 was 8.54% and 64.7% of that debt was for terms of 18 months or
longer, compared to debt issued in June 2001 which had a weighted average rate
of 9.52% and 49.6% with terms of 18 months or longer and debt issued in March
2001 which had a weighted average rate of 11.24% and only 40.0% was for terms of
18 months or longer.

                                       48
<PAGE>


         Even though our operations have expanded during fiscal 2002, negative
cash flow from operations decreased $5.4 million in the first quarter and $7.1
million in the second quarter from the same periods of the prior year totaling a
decrease of $12.5 million, or 25.8%, for the six months ended December 31, 2001
from the prior year period. Our cash balances are sufficient to cover
approximately 32.7% of the $340.9 million of subordinated debt maturities due
within one year. Cash balances were $111.6 million at December 31, 2001, up from
$91.1 million at June 30, 2001.

         As of December 31, 2001, $396.1 million of subordinated debt and other
debt was scheduled to mature during the next twelve months. 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. 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 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.
As a result, some competitors have exited the business or have recorded
valuation allowances or write-downs for these conditions. Due to these
circumstances, 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.

         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 fiscal 2002, we sold $74.0 million
in principal amount of subordinated debt securities, net of redemptions, with
maturities of up to ten years with an average maturity of 21 months. As of
December 31, 2001, $611.9 million of subordinated debt was outstanding. We
registered $325.0 million of subordinated debt under a registration statement,
which was declared effective by the Securities and Exchange Commission on
October 16, 2001. As of December 31, 2001, $264.4 of this debt was available for
future issuance. The proceeds from sales of subordinated debt securities will be
used to repay existing debt, to fund loan originations and our operations and
for general corporate purposes including repurchases of our common stock. 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. The warehouse credit agreements require that we maintain specific
covenants regarding net worth, leverage and other standards. At December 31,
2001, we were in compliance with the terms of all loan covenants.
<TABLE>
<CAPTION>


                                                                                    Amount           Amount
                                                                      Amount      Utilized On-    Utilized Off-
                                                                    Committed     Balance Sheet   Balance Sheet
                                                                    ---------     -------------   -------------
                                                                                 (in thousands)
<S>                                                                 <C>              <C>              <C>
Revolving credit facilities:
   Mortgage facility, expiring July 2002 (a)..............          $300,000         $    Na          $39,882
   Warehouse revolving line of credit, expiring March 2002 (b)       200,000              --               Na
   Warehouse revolving line of credit, expiring January 2002 (c)     200,000           7,320               Na
   Warehouse revolving line of credit, expiring November 2002 (D)    200,000              --               Na
   Warehouse and operating revolving line of credit, expiring
     December 2002 (e)....................................            50,000          38,288               Na
   Warehouse revolving line of credit, expiring February 2002 (f)     25,000           5,461               Na
                                                                    --------         -------          -------

Total revolving credit facilities.........................           975,000          51,069           39,882
Other credit facilities and notes payable:
   Commercial paper conduit for lease production, maturity
     matches underlying leases (g)........................             4,834           4,103              731
                                                                    --------         -------          -------
Total credit facilities...................................          $979,834         $55,172          $40,613
                                                                    ========         =======          =======
</TABLE>

Na - not applicable for facility

         (a) We and our subsidiaries, American Business Credit, HomeAmerican
Credit, and American Business Mortgage Services established a $300.0 million
mortgage facility which expires July 2002. The facility provides for the sale of
loans into an off-balance sheet facility with UBS Principal Finance, LLC, an
affiliate of UBS Warburg. See "--Securitization Accounting Considerations" for
further discussion of the off-balance sheet features of this facility.

         (b) We and our subsidiaries, American Business Credit, HomeAmerican
Credit, and American Business Mortgage Services, established a $200.0 million
warehouse line of credit with Triple-A One Funding Corp., an affiliate of MBIA
Insurance Corporation. The facility expires in March 2002. Interest rates on
this facility are based on commercial paper rates plus a margin. Advances under
this facility are collateralized by pledged loans. We intend to negotiate a new
credit facility with MBIA. No assurances can be given that this credit facility
will be extended or, if extended will be on the same terms as described above.

                                       50
<PAGE>


         (c) We and our subsidiaries, American Business Credit, HomeAmerican
Credit, and American Business Mortgage Services, established a $200.0 million
warehouse line of credit with Morgan Stanley Dean Witter Mortgage Capital Inc.
The interest rate on the facility is based on LIBOR plus a margin. Advances
under this facility are collateralized by pledged loans. The facility expired
January 2002 and we did not renew this facility.

         (d) We and our subsidiaries, American Business Credit, HomeAmerican
Credit, and American Business Mortgage Services, established a $200.0 million
warehouse line of credit with Credit Suisse First Boston Mortgage Capital, LLC.
The facility expires November 2002. The interest rate on the facility is based
on LIBOR plus a margin. Advances under this facility are collateralized by
pledged loans.

         (e) We and our subsidiaries, American Business Credit, HomeAmerican
Credit, and American Business Mortgage Services, established a $50.0 million
warehouse and operating credit facility with Chase Manhattan Bank which expires
December 2002. Interest rates on the advances under this facility are based upon
LIBOR plus a margin. Obligations under the facility are collateralized by
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 2001-1.

         (f) Our subsidiaries, American Business Credit, HomeAmerican Credit and
American Business Mortgage Services established a $25.0 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. We are currently negotiating a new credit
facility with Residential Funding Corporation. No assurances can be given that
this new credit facility will be extended, or if extended, will be on the same
terms as described above.

         (g) 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.

         We lease our corporate headquarters facilities in Bala Cynwyd,
Pennsylvania under a five-year operating lease expiring in July 2003 at a
minimum annual rental of approximately $2.6 million. We lease additional space
in Bala Cynwyd under a five-year lease expiring October 2004 at an annual rental
of approximately $0.6 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.

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."



                                       51
<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 7,
2001. The following is a description of matters submitted to stockholders for
their approval at the Meeting and votes cast with respect thereto:

Proposal:                                             Votes Cast
                                         For          Against          Abstain
Election of Directors:
  Anthony J. Santilli               2,397,946           26,771            0
  Richard Kaufman                   2,397,946           26,771            0

(Directors continuing in office include Michael DeLuca, Harold Sussman and
Leonard Becker.)


To approve the proposal to amend and restate the 1999 Stock Option Plan to
increase the number of shares of Common Stock that may be issued pursuant to
such plan by 200,000 shares from 550,000 shares to 750,000 shares:

                         For              Against                    Abstain

                      1,886,906           149,341                      2,390

To approve the proposal to adopt the Company's 2001 Stock Incentive Plan:

                         For              Against                    Abstain

                      1,928,049           109,119                      2,470


Item 5. Other Information - None



                                       52
<PAGE>

Item 6. Exhibits and Reports on Form 8-K

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


10.1     12/01 AMENDMENT TO SENIOR SECURED CREDIT AGREEMENT dated December 22,
         2000, among: AMERICAN BUSINESS CREDIT, INC., a Pennsylvania
         corporation, HOMEAMERICAN CREDIT, INC, a Pennsylvania corporation doing
         business under the assumed or fictitious name Upland Mortgage, and
         AMERICAN BUSINESS MORTGAGE SERVICES and JPMorgan Chase Bank.

10.2     MASTER REPURCHASE AGREEMENT between Credit Suisse First Boston Mortgage
         Capital LLC, as buyer, or as agent pursuant hereto, and ABFS REPO 2001,
         Inc., as seller.

10.3     MASTER CONTRIBUTION AGREEMENT, dated as of November 16, 2001, by and
         between American Business Financial Services, Inc., as owner and
         contributor and ABFS REPO 2001, Inc., as Company.

10.4     CUSTODIAL AGREEMENT dated as of November 16, 2001, made by and among
         ABFS REPO 2001, INC., a Delaware corporation; (ii) AMERICAN BUSINESS
         CREDIT, INC., a Pennsylvania corporation; (iii) JPMORGAN CHASE BANK, a
         New York banking corporation, and (iv)CREDIT SUISSE FIRST BOSTON
         MORTGAGE CAPITAL LLC.

10.5     GUARANTY, dated as of November 16, 2001, is made by and among American
         Business Financial Services, Inc. ("ABFS"), American Business Credit,
         Inc., HomeAmerican Credit, Inc. d/b/a Upland Mortgage , American
         Business Mortgage Services, Inc. and Credit Suisse First Boston
         Mortgage Capital LLC.

Reports on Form 8-K:

On October 1, 2001 the Company filed a current report on Form 8-K, reporting
financial information under Item 5 with respect to the completion of a $306
million securitization on September 26, 2001.

On October 4, 2001, the Company filed a current report on Form 8-K reporting
financial information under Item 5 with respect to an October 1, 2001
announcement by its Board of Directors of a 10% stock dividend. The stock
dividend was paid on November 5, 2001 to shareholders on record on October 22,
2001.





                                       53
<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 14, 2002                         BY: /s/ Albert W. Mandia
     ------------------                             ----------------------------
                                                Albert W. Mandia
                                                Executive Vice President and
                                                Chief Financial Officer



                                       54