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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

(MARK ONE)

For the fiscal year ended December 31, 2002

Commission file number

CONSUMER DIRECT OF AMERICA, INC.

6330 S. Sandhill Rd. Suite 6
Las Vegas, Nevada 89120

(702) 547-7322

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

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

COMMON STOCK, $0.001 PAR VALUE

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (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

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

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Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes    No  x

     Aggregate market value of Common Stock held by shareholders based on the closing price of the registrant’s Common Stock on the OTC:BB on June 30, 2002: $15,814,123.

DOCUMENTS INCORPORATED BY REFERENCE

     If the following documents are incorporated by reference, briefly describe them and identify the part of the Form 10-KSB (e.g., Part I, Part II, etc.) into which the document is incorporated:

(1)  any annual report to security holders; (2) any proxy or information statement; and (3) any prospectus filed pursuant to Rule 424(b) or (c) of the Securities Act of 1933 (“Securities Act”). The listed documents should be clearly described for identification purposes (e.g., annual report to security holders for fiscal year ended December 24, 1990).

Transitional Small Business Disclosure Format (Check one):

Yes [    ] No [X]

This Annual Report contains forward-looking statements about the Company’s business, financial condition and prospects that reflect management’s assumptions and beliefs based on information currently available. There can be no assurance that the expectations indicated by such forward-looking statements will be realized. If any of management’s assumptions should prove incorrect, or if any of the risks and uncertainties underlying such expectations should materialize, Consumer Direct of America, Inc.’s actual results may differ materially from those indicated by the forward-looking statements.

The key factors that are not within the Company’s control and that may have a direct bearing on operating results include, but are not limited to, acceptance of the Company’s products and services, the Company’s ability to expand its customer base, managements’ ability to raise capital in the future, the retention of key employees and changes in the regulation of our industry.

There may be other risks and circumstances that management may be unable to predict. When used in this Report, words such as, “believes,” “expects,” “intends,” “plans,” “anticipates,” “estimates” and similar expressions are intended to identify and qualify forward-looking statements, although there may be certain forward-looking statements not accompanied by such expressions. However, the forward-looking statements contained herein are not covered by the safe harbors created by Section 21E of the Securities Exchange Act of 1934.

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CONSUMER DIRECT OF AMERICA, INC.
2002 ANNUAL REPORT ON FORM 10-K
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PART I

ITEM 1. DESCRIPTION OF BUSINESS

General Background

CONSUMER DIRECT OF AMERICA, INC. (OTC:BB:CDIT) was incorporated on July 28, 2000 as Blue Star Coffee Inc. and began marketing its services in August 2000. We are a provider of loans directly to consumers, offering borrowers a variety of purchase and refinance mortgage loans (“mortgage loans”), home equity loans and home equity lines of credit (“home equity loans”) to suit their financial needs. Our two Marketing Centers in Nevada and Colorado directly solicit potential customers utilizing CDIT’s extensive technology infrastructure which the Company believes give it a distinct advantage over other mortgage companies.

We own and operate business units in two Groups:

The Financial Services Marketing Group (FSMG) employs over 230 residential mortgage and Real Estate Brokerage professionals and had closed loan volume of $330 million for the year ending 2002. The Group closed in excess of 2,800 mortgage loans and over $50 million in residential real estate sales. This Division of the Company contains three operating units, Consumer Direct Lending, Las Vegas Mortgage and Las Vegas Real Estate. Each operating company has its own President and is individually licensed by state and federal regulatory agencies.

Consumer Direct Lending (CDL) is the direct lending arm of the Company. Telesales agents conduct outbound calls using the Company’s sophisticated technology backbone to solicit mortgage financing opportunities. The “hot leads” are then transferred electronically to the various CDL branches where trained loan officers are waiting to close the loan leads. The operating history of the platform shows that CDL closes one loan for every ten “hot leads” delivered. The Company believes it has the ability to originate 1,500 “hot leads” per day per 100 telemarketing seats active. This would translate into a closed loan production of 150 loans per day or approximately 3,000 closed loans per month at current capacity. CDL operates five branches in Nevada, Colorado, Washington and California. CDL branches are owned by the company and loan officers employed there split their commissions with the Company on a 70/30% basis on average. New loan officers are trained as lead generators on the telesales platform before being assigned to a senior “mentor” in a CDL office. New loan officers receive a 50/50 split.

Las Vegas Mortgage (LVM) operates the “Net Branch” arm of the Company. Each net branch is independently owned and is responsible for their own expenses and operations management. Loan officers in each net branch receive 100% of the origination fees on each loan. LVM receives a transaction and processing fee of $975 for each closed loan plus a fee of $1,000 for each closed loan which was generated from a “hot lead” generated by CDL. LVM operates five net branch offices in Southern Nevada. The Company does not plan to expand this business unit and has nearly completed the integration of its LVM branches into its CDL format.

Las Vegas Real Estate Company and Consumer Direct Realty

Las Vegas Real Estate is a licensed Nevada real estate broker with its main offices in Las Vegas. The company has thirty-two (32) licensed agents and specializes in the Hispanic market of Clark County, NV. LVREC plans to open three additional branches in 2003 and has a Controlled Business Arrangement with its sister company, Consumer Direct Lending, for loan referrals. Las Vegas Real Estate is changing its name to Consumer Direct Realty.

Direct Marketing Group

     Our Direct Marketing Group sells a variety of products and services including:

	•		Direct product Marketing
	•		Outbound Customer Acquisition
	•		Membership Subscription
	•		Customer Care
	•		Mortgage Lead Generation

Company clients can choose which marketing campaigns best suit their objectives.

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Outbound Campaigns

Customers or CDIT provide the contact lists and are then programmed into the operations profile. Scripts are programmed into the system and personnel are assigned for each campaign. The predictive dialer employed by the company for outbound campaigns carefully monitors each session on the system and begins to queue up a prospective customer while the salesman is in the closing phase of the sale. This helps insure a minimum of downtime between calls. Calls are constantly monitored and all conversations are digitally recorded and archived. Employees who demonstrate unethical practices are dismissed on the spot at the first infraction. Campaigns are managed by a supervisor and report daily operations to the General Manager of the Center. All transaction activity is electronically monitored and various production reports are available to management.

Inbound Campaigns

Inbound campaigns function in a similar manner operationally as the Outbound campaigns except that the telemarketer is simply receiving inbound calling instead of making outbound calls. Inbound traffic is created by the customer’s own marketing activity which the Company may also be managing as an additional campaign. A predictive dialer is not needed for Inbound; however, potential prospects are pre-loaded into the database and when an inbound call originates, the system can intercept the caller ID and automatically queue up any prospect’s data.

Broadcast Campaigns

Customer prospect lists are provided from clients or specialty providers and are merged together to create a specific broadcast calling script which is recorded and left as a message on home voice mail. A similar mail piece with specific information about the prospect’s financial profile and how we benefit the customer may also be developed to support the broadcast calling. Customers begin by calling any one of our toll free national call center numbers that houses state-of-the-art phone and computer systems which provides us with the ability to capture and track consumer data and produce real-time reports for campaign analysis.

Specialized Technology

We have developed a proprietary program which can strip out certain information from the initial loan application such as disability insurance, auto payments, auto insurance, homeowners insurance, credit card and banking information and offer the customer (member) the opportunity for periodic savings by authorizing us to “shop” for better prices. The database of information gleaned allows us to better target first time customers as repeat customers by establishing their unique “buyers profile” which remains a part of their record. We can then target previous customers with future products and services based on their customer profile preferences and use the Internet as the marketing delivery mechanism.

          Product diversification. We offer diversified loan products — mortgage, home equity, and debt consolidation — in order to satisfy the various lending needs of our customers. We are able to shift resources such as marketing and operations expenses among our products to take advantage of seasonal and cyclical lending opportunities as the mix of business changes in response to interest rate and economic conditions. This product diversification strategy helps reduce the Company’s earnings volatility and provide more stability through a range of economic cycles. When interest rates are low, consumers refinance higher interest rate home loans in order to lower their overall borrowing costs. When interest rates are higher, consumers still have the need to borrow and are concerned about finding the best loan — perhaps a home equity line of credit — to meet their needs for such uses as home improvement or paying for college education.

          Broad Band Product Provider Strategy. Our business model starts with a focus on providing a broad bandwidth of mortgage products. Most mortgage bankers provide only their own loan products whereas CDIT has lending products from over 200 lenders. In this way, the Company believes it can reach more potential customers via its Direct Marketing Group’s resources and maintain them as referrals for new customers. Highly satisfied customers will help drive overall consumer adoption and thus expand our overall share of the lending market. Increased market share will drive economies of scale that should further help lower our costs to originate and close loans.

          Customer Lifetime Value CLTV. Unlike traditional web based financial companies, CDI Corp. uses the Internet primarily as a customer services channel providing electronic access to consumers for a variety of home related financial services. The Company uses its significant experience in direct marketing to first contact the consumer, establish a verbal relationship, close the financing transaction and continue to hold the relationship via the use or the Internet as a communications channel. The Company has positioned itself as an electronic “consultant” to the homeowner as well as “provider” of the products and services they need. This technique allows the Company to build a robust customer “profile” based on the information provided by “browsers” as well as “buyers”.

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The database of information gleaned from this allows the Company to better target first time customers as repeat customers by establishing their unique “buyers profile” which remains a pant of their record. The Company can then target previous customers with future products and services based on their customer profile preferences and use the Internet as the marketing delivery mechanism. This CLTV objective is the key driver behind the Company’s development of its HomeAdvantage program for customer retention.

INDUSTRY BACKGROUND

According to the Mortgage Bankers Association 67.1 million, or 65.7% of the 102 million U.S. households, own their home. Many more desire to be homeowners. The homeownership rates expected to rise above 70% within the next several years. According to be National Association of Realtors, sales of existing homes reached a record 5.31 million in 2002, while be Department of Commerce says new home sales in 2001 of over 800,000 was the third best year ever. According to Chicago Title and Trust Co., the average U.S. home is sold to a new owner every 11.9 years. Turnover rates vary across the nation, with New York having the lowest rate at 18.7 years and Arizona having the highest turnover rate at 6.4 years. With the working age population increasing about 1% per year, the percentage of horne ownership is on the rise. Barring a severe economic downturn, home transactions should steadily increase throughout the next decade.

There is an array of services connected with the sale and purchase of a home inducing inspections, warranties, furniture and fixtures, landscaping, mortgage financing, escrow, title search, title as well as flood, earthquake, wind and general homeowners insurance, moving and storage, temporary housing, and relocation assistance. These annual sales, financing and related services activities generate revenues exceeding $50 billion. The primary functional sectors are sales, financing and settlement services.

Sales

When addressing significant, complex financial decisions, such as personal financial, investment, tax and estate planning issues, most consumers turn to a trained and trusted expert for advice and guidance. The Company believes that this is and will remain no less true for homeownership decisions and that personal service and a human interface will remain important to real estate consumers. No matter how paperless and swift the process of homeownership becomes, there will remain a need for qualified professionals to explain and facilitate the transaction.

Financing.

The combination of new home sales, turnover of existing housing and the refinancing of existing residential loans require a large annual flow of funds. According to the Mortgage Bankers Association, in the last ten years, new mortgage loans in the United States have ranged from $700 billion to $1.1 trillion annually, with loans for home purchases averaging in the $4-500 billion range annually. During the same period, the average annual volume of refinancing loans has been similar, but with significantly greater volatility, as refinancing varied from a low of $90 billion in 1994 to a high of $870 billion in 2002, as interest rates rose and fell, respectively. The deductibility of home mortgage interest from taxable income encourages owners to leverage home purchases with high loan-to value financing. According to Fannie Mae, residential loan origination’s topped $875 billion in 1999, of which $550 billion was purchase money loans.

Some mortgage financing is provided directly to buyers by retail lenders, many of which also function as wholesale lenders funding loans originated by independent mortgage brokers, who typically represent a number of wholesale lenders. According to the National Association of Mortgage Brokers, mortgage brokers and retail lender agents each originate approximately half the annual volume of new mortgage loans. Historically, in addition to the costs of other transaction related services, loan origination fees average one to two percent of the loan amount.

Mortgage lenders generally fall into two categories: depository institutions, such as banks and savings and loans, and independent mortgage bankers. Mortgage bankers provide a large share of residential mortgage funds, primarily through mortgage warehouse lines of credit, provided by financial institutions and investment banks. Mortgage bankers use these funds to provide loans to borrowers through their own retail loan officers and/or by wholesaling through independent mortgage brokers. After funding a loan, the mortgage banks typically sell the loan in the secondary market and reduce their line of credit balance. Depending on their objectives, they may retain the servicing rights and service those loans or sell the servicing rights to others.

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Over the past several decades, the supply of mortgage funds has moved from deposit based local sources to investment-based national sources. Many local and regional banks and savings and loans have transitioned from “portfolio lenders” to “securities lenders,” selling a high percentage of their residential loans in the secondary market to Fannie Mae, Freddie Mac Ginnie Mae and others, who then securitize and sell loan portfolios to pension plans, insurance companies and Investors in national fund markets.

Settlement Services.

In addition to sales and financing services, completion of a real estate transaction typically requires a number of additional services prior to the closing of the sale known as “settlement services.” Historically these services, which include credit appraisal, title, escrow, inspection, engineering, warranty and insurance services are provided by independent specialists, most of whom are small local businesses. Until recently, there has been limited ability for settlement service firms to communicate and document their services other than through traditional, costly paper-intensive processes. Because each real estate transaction involves many service providers, the flies of each include the cost of duplicate marketing to the same customer. These inefficiencies create an opportunity for an organization that can bundle and deliver these services electronically at lower cost from a central point-of-sate.

Market opportunity

The consumer debt market is substantial and highly fragmented among many lenders. The evolution of Internet mortgage companies has done little to migrate the mortgage borrower to an electronic “do-it-yourself” environment. The overwhelming number of borrowers still pick up a phone to begin their loan process. We believe with our technological infrastructure which allows us to reach between 50,000 to 75,000 potential borrowers per hour, that the Company has a distinct advantage to win the opportunity for that first phone call from the borrower.

          Consumer Debt Market. According to industry sources, the 2002 U.S. consumer debt market for our focus products totaled approximately $3.9 trillion in originations, which is comprised of approximately $2.5 trillion in mortgage loans (approximately $1.5 trillion of which were refinance transactions), approximately $654.0 billion in home equity and non-prime mortgage loans. The average mortgage market totaled a significant $1.8 trillion in annual loan originations over the past four years (1999-2002), and 2002 was a record year for mortgage refinance loan activity.

Loan products are ideally suited to fulfillment via a direct marketing telephony delivery. These products are often complex, requiring extensive consumer research to find the right product and provider, and they do not require the consumer, provider and product to be in physical proximity. Loans — as opposed to other products marketed online, such as computers — have the potential to evolve into a completely electronic product. As loan products become more complex, consumers can not possibly understand the full effect of the variables involved in selecting a loan. As most lenders disguise their fee structure with terms such as “points” and “rebate”, it is difficult for the lay consumer to determine what they are paying for a loan. The opportunity to put a human voice in relationship with the borrower at a low cost is a perfect application for a direct marketing contact center technology.

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PRODUCTS AND SERVICES

The CONSUMER DIRECT OF AMERICA INC. Solution

     Despite increasing acceptance of electronic commerce in the real estate industry, we believe that personal service and a human interface will remain important to financial services products for consumers. When facing large, complex personal financial decisions such as home purchases, most consumers prefer to turn to a trusted expert for advice and guidance. No matter how paperless and swift the process of homeownership becomes, there will remain a need for qualified professionals to explain and facilitate the transaction.

     We believe that consumers need the assurance of another professionally trained human being in order to have comfort in making commitments to enter into complex home financing transactions. Throughout the “dot com” blitz of the past, consumers still preferred to pick up the phone rather than boot up their PC when it came to securing mortgage debt at a ratio of more than 10 to 1. The process of Internet mortgage research did not provide enough comfort to consumers to make them change their habits of “talking” verses “browsing” for answers.

We assert that our educated tele-salesman on our call center platform is necessary to commit a borrower to the transaction; and then we can direct the new customer to our field loan officers or our platform sales teams to follow-up and close. A combination of “high tech — high touch” brings the borrower into our financial services engine.

Our websites function differently than most “dot com” mortgage sites. They are designed to offer prospective borrowers easy access to rate quotes, information about loan fulfillment and a variety of interactive tools and services to help them understand their options and make the best choices for their personal situations. Once comfortable, the customer can activate a phone call directly into one of our Consumer Direct Lending Loan Centers and our expert counselors can begin the loan process. Upon authorization by the customer, his/her loan profile is transferred to seasoned loan officer while the customer is on the phone.

CONSUMER DIRECT OF AMERICA INC. Innovations

We continuously look for ways to break down barriers and eliminate redundant steps to make the loan process significantly faster, easier and far less expensive for both consumers and ourselves. Where technology and automation make sense, we use it.

Some of the important innovations that we have introduced to date are:

     Increased Technical Enhancements to the Mortgage Process. We intend to further streamline and automate our processes in order to eliminate the inefficiencies and unnecessary steps that separate the origination and underwriting processes from the capital markets. By continually incorporating and upgrading automated underwriting techniques and technologies, we believe we will efficiently match borrowers with the loan best tailored to their needs, resulting in faster approval, lower pricing and reduced documentation. We currently employ a sophisticated proprietary lead generation system which integrates into our loan origination product matrix. The system is unique in that it eliminates the need for a product rate sheet. Each day our underwriting department loads in the product information from our 200 lenders and this information is stored in our system. When Loan Officers are reviewing the financial profile with a borrower, the system will automatically select the appropriate loan product for that borrower based on his/her unique financial profile. This greatly reduces the training aspect needed for loan officers to become effective with CDIT and frees up time for more marketing and sales activity.

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MORTGAGE LOAN OPERATIONS

Marketing Platform

CDIT has developed its own proprietary Lead Transfer System (LTS). Although other companies boast of having similar systems, CDIT’s system stands out as among the most unique and highly effective.

The LTS assists the telemarketer in screening leads, in effect becoming the telemarketer’s partner. The telemarketer simply fills out a short but concise mini profile of the client. Information established from this profile along with the LTS then determines whether this call is a potential client. The client is immediately transferred to a seasoned loan officer who establishes the client relationship and places the client in an appropriate loan program. The advantage of the LTS system is that it saves time and therefore increases productivity. The beauty of this system is that it can be utilized from abroad via the Internet.

Loan Originations utilizing CDIT’s
proprietary Lead Transfer System (LTS)

Fig. 1

CDIT’s Lead Transfer System has proven to increase loan originations established by telemarketing leads by 250%. The Graph compares the number of leads that actually turn into loan originations based on 1,000 calls.

At the appropriate time, approved customers are invited to request an interest rate lock for their selected loan. An interest rate lock is an agreement between the borrower and the lender, specifying a number of days for which a loan’s interest rate and points will be guaranteed by the lender. Lock requests can be made by phone or online.

As loan documentation is received, data provided by the customer at the time of initial origination is validated. Where needed, appraisals and title documents are ordered and reviewed by the loan consultant, who is supported by a loan processing team.

Final loan approval is secured once all critical data elements have been validated and have been confirmed to satisfy the guidelines of the lending program sought by the borrower. If a borrower’s loan does not satisfy loan program guidelines, the designated loan consultant will research additional loan programs for the customer. If a product cannot be secured for the customer, the customer will receive a letter stating the reasons that a loan could not be obtained.

After loans have been approved and all relevant conditions have been met, we prepare loan documents to be signed by the borrower. The assigned loan consultant will work with the borrower to schedule the closing of the loan and obtain the necessary signatures for funding. Often a mobile notary service is used to provide an added level of convenience for the borrower. Once the borrower has signed all documentation, the loan file is reviewed to identify any missing requirements. If complete, the loan is then funded and recorded as closed.

A quality control review of funded loans is performed prior to forwarding the loan documentation to the final mortgage loan purchaser or its designated custodian. An accounting audit is also performed to reconcile settlement information provided by escrow/attorney

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settlement agents with our internal information. Loan documentation relating to closed loans is then shipped to the mortgage loan purchaser or its designated custodian, and documentation is maintained to satisfy regulatory and company record retention requirements.

We also solicit customer feedback regarding the loan process to measure overall customer loyalty and to utilize in developing future product and service enhancements.

Expanded Product Offering

Consumer Direct of America, operating under its primary mortgage subsidiary, Consumer Direct Lending, offers an extensive assortment of mortgage products. Ordinarily, mortgage loans are only given to borrowers who can meet the basic requirements necessary to qualify for a mortgage, such as: excellent credit, job stability and sufficient down payment.

However, our society is filled with individuals who desire to be homeowners but cannot fulfill even these basic requirements for a mortgage. The mortgage industry has responded to this burgeoning market by developing a vast array of specialized mortgage products that address the individual borrower’s particular needs. These products are referred to as non-conforming loans.

Non-conforming loans have established guidelines for all types of borrowers... those who may have bad credit, no down payment, limited job history or other issues that would prevent them from getting a loan at a traditional bank.

Add to this the fact that Consumer Direct Lending is approved with over 200 wholesale lenders, and it’s easy to see how this gives CDL the power, ability and edge over other mortgage brokers to match up a loan product with the individual borrower’s unique needs through CDIT’s Expanded Product Offering.

Average Product Offering
                    Vs
CDL’s Expanded Product Offering

Fig. 2

Our Expanded Product Offering combined with the increase of loan originations resulting from our Lead Transfer System allows CDL to effectively close 70% of all loans originated compared to the industry standard of 35%.

Operating Margin

Due to the value to individual loan officers of the CDIT system, the Company is able to impose a commission split favorable to the Company of at least 70/30% for seasoned loan officers and for new hires – 50/50%. With CDIT’s expanded Product Offering, Lead Generation Technology, and Active Product Matrix to select loan product, CDIT can retain margins even in the most competitive

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markets. We believe the Company is unique among mortgage brokers in that CDIT possesses greater technology, a stronger marketing engine via its telesales platforms and more efficient processing via its integrated product selection system. For these reasons, the Company believes it will be successful at acquiring independent mortgage companies across the U.S. and can convert them to the CDIT profitable margin format.

Loan Products. Our broad and competitive product offerings include conforming and jumbo fixed rate mortgages, adjustable rate mortgages, alternate “A” and non-prime mortgage loans, concurrent second mortgages, and home equity loans and lines of credit.

The following table summarizes the mix of our mortgage and home equity closed loan volume by product type along with their median credit score and loan to value (“LTV”) ratios for the year ended December 31, 2002:

Conforming Fixed Rate Loans. These mortgage loans conform to the underwriting standards established by Federal National Mortgage Association (“Fannie Mae”) or the Federal Home Loan Mortgage Corporation (“Freddie Mac”). This product is limited to high-quality borrowers with good credit records and involves adequate down payments or mortgage insurance.

Jumbo Fixed Rate Loans. Jumbo loans are considered non-conforming mortgage loans because they have a principal loan amount in excess of the loan limits set by Fannie Mae and Freddie Mac (currently $322,700 for single-family, one-to-four-unit mortgage loans in the continental United States).

Adjustable Rate Mortgages (ARM). The ARM’s defining feature is a variable interest rate that fluctuates over the life of the loan, usually 30 years. Interest rate fluctuations are based on an index that is related to Treasury bill rates, regional or national average cost of funds, or another widely published rate, such as the London InterBank Offered Rate (“LIBOR”). The period between the rate changes is called an adjustment period and may change every six months or one year. The majority the ARMs we originate include an initial fixed rate period of three to ten years, otherwise known as hybrid ARMs. The ARMs we originate include rate and payment caps, which limit the interest rate increase and payment amount for each adjustment period.

Alternate “A” and Non-Prime Mortgage Loans. From a credit risk standpoint, alternate “A” loan borrowers present a risk profile comparable to that of conforming loan borrowers, but entail special underwriting considerations, such as a higher loan to value ratio or limited income verification. The non-prime mortgage loan focuses on customers whose borrowing needs are not served by traditional financial institutions. Borrowers of non- prime mortgage loans may have impaired or limited credit profiles, high levels of debt service to income, or other factors that disqualify them for conforming loans. The risk of originating mortgage loans to borrowers with higher credit risk is generally offset with higher interest rates than would be charged for a conventional loan. Offering this category of mortgage loans on a limited basis allows us to provide loan products to borrowers with a variety of differing credit profiles.

Concurrent Second Mortgage Loans. These loans take place concurrent to a first mortgage loan origination and are secured by a second lien on the related property.

Home Equity Loans and Lines of Credit. These loans are usually secured by second liens on the related property. Our home equity line of credit products bear an adjustable interest rate and generally provide for a 5, 10 or 15-year draw period where the borrower withdraws needed cash and pays interest only, followed by a balloon payment of the outstanding balance of principal and interest. Our closed-end home equity loans are fixed rate loans that typically amortize over 15 to 30 years with a balloon payment due after 10 or 15 years.

Approved Lenders

Below is a list of the primary lenders which CDI’s mortgage companies were approved with as of 12/31/02. Approval indicates that CDIT’s mortgage companies may sell the lender’s loan products as an agent for the lender and receive a commission for that service.

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Loan Underwriting. Our guidelines for underwriting conventional conforming loans comply with the underwriting criteria employed by Fannie Mae and/or Freddie Mac. Our underwriting guidelines and property standards for all other non-conforming loans are based on either general or investor specific guidelines that we establish to satisfy the criteria of the ultimate purchasers of the loans. We consider the following general underwriting criteria in determining whether to approve a loan application:

	•		Employment and income
	•		Credit history
	•		Property value and characteristics
	•		Available assets

Automated Underwriting. Automated underwriting (AU) contributes significantly to our goal of increasing the efficiency of multi-source lending by providing customers with faster, more cost-efficient credit reviews and decisions. In addition, we believe customers also value the less onerous and time-consuming nature of AU relative to more traditional underwriting processes. We are also approved as an originator under Fannie Mae’s Desktop Originator and Desktop Underwriter system (DU), and Freddie Mac’s Loan Prospector system (LP). These systems help automate the lending process for all conforming loans.

TECHNOLOGY

Our technology systems use a combination of our own proprietary technologies and commercially available licensed technologies from industry leading providers, including Compaq, Cisco Systems and Dynatek. These systems provide availability 24 hours a day, seven days a week, and have capacity for peak activity levels without requiring additional hardware or support.

     Telecommunications Switch  The Company utilizes a state of the art telecommunications phone switch and predictive dialer configuration provided by Interactive Intelligence (I3) and Cisco Systems. The network has the current capacity to make up to 75,000 outbound phone calls per hour. Additional capacity can be added by increasing the phone line capacity and by adding additional call switching equipment. He network employs a telephony over IP fully digital system such that all voice, data and applications are capable of being switched to any other node in the network without any degradation in content or quality of information. In this way, the system has the capacity to make any digital phone a terminal which can receive full access to the Company’s products and services such as hot leads and loan data.

     Network Architecture  The Company employs a network configuration for an on-line environment based on a series of Compaq Proliant servers with a current capacity on-line of 10 terabytes. The system has redundant backup on all critical components and has an offsite disaster recovery plan with a third party provider.

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Business Development

     The following are key areas of focus to further develop our business:

          Acquisition of Regional Mortgage Brokerage Companies As our lead generation system has much more capacity than is currently in use, the Company can increase its volume of funded loans by increasing the number if Loan Officers employed by the company who are available to receive “hot leads”. In this way, the Company believes that it has a distinct marketing advantage to independent Loan Officers such that an individual’s monthly production can increase with very little incremental work. The Company has tested this value equation on several mortgage companies who close $30 to $50 million per year and has been successful in convincing them to be acquired by CDIT. The Company plans to continue this process until it has twenty (20) regional hubs acquired across the U.S. by year end 2003 with newly acquired loan volume of $500 million to $1 billion.

GEOGRAPHIC INFORMATION

All of our revenue is generated from transactions originating in the United States. All of our fixed assets are located in the United States, principally at our headquarters in Las Vegas, Nevada and at our mortgage origination center Denver, Colorado.

MARKETING

     We have structured our marketing program around conventional customer reach programs such as direct mail, media and telesales campaigns and use the Internet as a communications pipeline to the customer once the initial contact is made. By providing the customer with access to their own “file folder” which from time to time gets filled with bonus points, we will induce a “stickiness factor” to our direct marketing programs thus creating more opportunity for follow-on sales.

Build Strong Brand Recognition.

     Our marketing strategy is to promote, advertise and increase its brand equity and visibility through comprehensive service and a variety of marketing and promotional techniques, including advertising and developing business alliances and strategic partnerships. The Company also intends to build brand recognition by fully exploiting its direct-to-market advantage.

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Maintain Technology Leadership.

The Company has played leading role in creating and defining the market for electronic call center management and intends to continue to develop technology that electronically links consumers to our marketing center. Our internal development group has expanded and we will continue to invest in and enhance its technology in order to further simplify and automate the process of direct marketing.

Promote Strategic Relationships.

We intend to continue to leverage strategic relationships to enhance brand recognition of our marketing center and increase revenue resulting from connectivity with electronic commerce solutions. We will also selectively pursue strategic alliances and business partnerships in order to leverage the Company’s current market position, increase its online visibility and accelerate distribution of its products. We believe that opportunities also exist for it to further broaden its product and services offerings through strategic alliances.

Expand Product and Service Offerings.

     We intend to broaden the product offerings into related consumer product areas including insurance and other complementary services. We believe that our network of call centers will further enhance the level of service we are able to provide to our clients as ours skilled customer service representatives cultivate ongoing relationships with client customers.

COMPETITION

     The mortgage market is intensely competitive and rapidly evolving, and competition is expected to intensify even more in the future. Consumer Direct competes mainly on the selection of mortgage products it offers and on customer service. Barriers to entry are minimal, and current and new competitors can launch new sites on the Internet at relatively low cost. In addition, the residential mortgage loan business is intensely competitive. Consumer Direct currently competes with traditional mortgage companies and Internet companies offering mortgage and real estate related services, including, but not limited to:

	•		Various online mortgage brokers, including E-LOAN, Inc. and Lendingtree.com;
	•		mortgage banking companies, commercial banks, savings associations, credit unions and other financial institutions which originate mortgage loans;
	•		Real estate agents; and
	•		Mortgage brokers.

Many of Consumer Direct’s mortgage banking and mortgage brokerage competitors have competitive advantages including the following:

	•		Longer operating histories;
	•		Greater name recognition and more extensive customer bases; and
	•		Substantially greater financial, marketing, technical and other resources.

As previously stated, Consumer Direct’s business depends primarily on providing direct person to person mortgage services to a diversified client base consisting of consumers. To remain competitive, Consumer Direct must increase the volume of mortgage loan transactions that it effects through Consumer Direct and maintain sustainable margins on such mortgage transactions.

     Also, Consumer Direct will need to maintain strategic relationships with a critical mass of lenders and mortgage brokers to fulfill consumer demand. This will take significant time and resources, and will require that Consumer Direct provide it’s lending and brokerage partners with compelling reasons to partner with Consumer Direct, as many of these partners are also current or potential competitors of Consumer Direct.

     Finally, Consumer Direct will need to continue developing its technology to facilitate transactions for both consumers and lenders, as well as to permit lenders and other strategic partners to integrate their services easily and seamlessly with those of Consumer Direct.

LICENSING AND REGULATION OF MORTGAGE AND AUTO LOAN BUSINESS

We are licensed as a mortgage broker, or are otherwise authorized to originate mortgage loans in Nevada etc.... The Company’s mortgage broker/barker operations are subject to extensive regulation by federal and state authorities. The United States Department of

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Housing and Urban Development Q’HUD”) regulates certain aspects of the mortgage lending business. The Real Estate Settlement Procedures Act of 1974 ’RESPA, a Federal statute, requires that certain disclosures, such as a Truth-in-Lending Statement, be made to borrowers and that certain information, such as the HUD Settlement Costs booklet, be provided to borrowers. The Fair Housing Act prohibits among other practices, discrimination, unfair and deceptive, trade practices, and requires disclosure of certain basic information to mortgagors concerning illicit terms. If the Company fails to comply with such regulations, possible consequences could include loss of approved status, demands for indemnification, class action lawsuits, and administrative enforcement actions.

RESPA contains certain prohibitions regarding the giving or taking of a fee, anything of value for the referral of business to any S-IC person or however, there is no prohibition regarding the payment of reasonable for the provision of goods, services and facilities. From time to time in its debate over tax reform, Congress has discussed eliminating deductibility of mortgage interest. Should this occur, it would reduce the number of than who can afford homeownership, which would reduce potential demand for the Company’s products and services. Additionally several large law firms have promoted class action claims alleging that certain industry fee practices violate RESPA. while the Industry has responded vigorously to these activities, no assurances can be given as to their outcome and the impact on the industry.

In California, regulation and licensing of mortgage brokers falls under the California Department of Real Estate DRE. Other than banking industry employees, who are exempt from DRE licensing requirements, individuals engaged directly in the origination of loans or the dissemination of certain information are required to be licensed by the ORE. Accordingly, the Company and some of its affiliates will be required to be licensed in accordance with the differing requirements of the various states in which offices and operations are established. Failure by the Company to comply with the multitude of government regulations and licensing requirements to which it Is subject could have material adverse effect on the Company’s business, financial condition and results of operations.

EMPLOYEES

As of December 31, 2002, we employed 347 full-time employees, of whom 260 were in mortgage loan operations, 35 were in direct marketing, 26 were in real estate operations, 20 were in administration, 2 were in marketing and business development, and 4 were in engineering. As we continue to grow and introduce more products, we expect to hire more personnel, particularly in the area of loan operations. None of our employees are represented by a labor union or are the subject of a collective bargaining agreement. We believe that relations with our employees are good.

ITEM 2. PROPERTIES

The Company leases the premises in Irvine, California. The lease provides for monthly payments of $7,048 with the company responsible for insurance, property taxes and utility costs associated with the property. The term of the lease is sixty (60) months ending in March 2004.

The Company leases the premises at Sandhill Road in Las Vegas, Nevada. The lease provides for monthly payments of $14,838 with the company responsible for insurance, property taxes and utility costs associated with the property. The term of the lease is thirty six (36) months ending in July 2005. The Company also leases the premises at Meadows Lane in Las Vegas, Nevada. The lease provides for monthly payments of $8,910 on a month to month basis with the company responsible for insurance, property taxes and utility costs associated with the property.

The Company leases the premises in Lakewood, Colorado. The lease provides for monthly payments of $3,444 for 2003 and thereafter, and $3,336 for 2002, with the company responsible for insurance, property taxes and utility costs associated with the property. The term of the lease is thirty six and one-half (36.5) months ending in February 2004.

The rent expense for all facilities for the year ended December 31, 2002 and 2001 is $277,406.

ITEM 3. LEGAL PROCEEDINGS

On May 8, 2002, a lawsuit was filed in the Superior Court of the State of California, Santa Ana, California, Case Number 02CC06670 against the Company, its chief executive officer and others. Plaintiffs allege breach of fiduciary duty; fraudulent diversion of corporate funds; accounting, equitable execution on defendants’ property; conspiracy to convert corporate assets, cause dissolution of plaintiff and defraud creditors; and use of corporate funds to benefit officers’ own business. The Company, its chief executive officer and others have subsequently responded and brought forth a cross-complaint for wrongful termination, breach of agreement and conversion of interests. The Company believes it has meritorious defenses against these actions and intends to vigorously defend them.

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PART II

ITEM 4. MARKET FOR REGISTRANT’S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

CONSUMER DIRECT OF AMERICA INC.’s (the “Company”) common stock has been quoted on the OTC:BB under the symbol “CDIT” since its merger with Blue Star Coffee on February 20, 2002. Prior to this time, there was no public market for the Company’s common stock. The following table shows the high and low sale prices per share of the Company’s common stock as reported on the OTC:BB for the periods indicated:

On March 31, 2003, the last reported sale price of the Company’s common stock on the OTC:BB was $0.41 per share. The Company had approximately 485 holders of record of our common stock on that date.

The Company has never declared or paid any cash dividends on its capital stock. The Company currently expects to retain future earnings, if any, for use in the operation and expansion of its business and does not anticipate paying any cash dividends in the foreseeable future.

ITEM 5. SELECTED FINANCIAL RESULTS

Below are the operating results for the Company by quarter. The Company returned to profitability in the fourth quarter after it had

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completed its substantial investment in expanding its plant and technical operations. Loan origination revenue is for the seven month period beginning June 6, 2002 and does not reflect a full twelve months of operating revenue. Licensing agreements were discontinued and all license holders were converted into common stock.

Consumer Direct of America
2002 Financial Results by Quarter

The following discussion of the financial condition and results of operations of the Company should be read in conjunction with the financial statements and the related notes thereto included elsewhere in this document. This discussion contains, in addition to historical information, forward-looking statements that involve risks and uncertainties. The Company’s actual results could differ materially from the results discussed in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below, as well as those discussed below under Factors Affecting Future Operating Results. The Company disclaims any obligation to update information contained in any forward-looking statement.

OVERVIEW

The Company is a direct-to-consumer mortgage broker whose revenues are derived primarily from the origination commissions earned on the closing of mortgage and home equity loans that it sells. The Company also earns income from third parties who hire our Direct Marketing Group to sell products for them. During 2002, the Company embarked on an internally funded expansion program in order to

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increase the capacity of its direct to consumer marketing capacity. The Company doubled the size of its call center facility to 13,000 sq. ft. from 6,800 sq. ft. and upgraded its I3 telephony software to provide for extended capacity. The costs to do this were in excess of $1 million dollars which the Company invested during the second and third quarters of 2002. Completion of the expansion was 80% completed by year end and operations returned to normal by the first quarter of 2003.

Management decided to perform this upgrade while production was relatively low such that it would not have to re tool at a later date during high productivity periods. This infrastructure expansion accounts for most of the operating losses during 2002 as management has chosen not to capitalize these expenses but rather expense them in order to reduce any drag on future earnings.

MORTGAGE REVENUES — QUARTERLY RESULTS

The Company’s mortgage revenues are primarily derived from the origination of brokering of loans. Brokered loans are funded through lending partners and the Company never takes title to the mortgage. The following table sets forth the unaudited results of operations for the Company’s Mortgage Division on a quarterly basis for the seven month period ending 12/31/02.

Revenues increased from the first quarter to the fourth quarter of 2002 from $710,635 to $2,274,506. A significant portion of these increases resulted from growth in the dollar volume of mortgage and home equity loans funded, as well as a steady increase in mortgage revenue earned per loan. Mortgage revenues increased from $774,080 in the second quarter to total $4,741,455 for the year. The Division generated an operating profit of $406,716 for the year. Income steadily rose due to the increased number of closed loans from our Colorado loan center and from conversions Las Vegas Mortgage 100% commission based loan officers to CDL commission split loan officers. As the operating results for the Mortgage Division are truncated and only represent a seven month period, Net Income results would be significantly higher for the full twelve month period. In addition, the Company believes the profitability of the Division should continue to grow as more and more of our loan officers are converted to the CDL split commission format.

The chart below illustrates the Pro-Forma analysis of FY 2002 comparison between actual results and a Pro-Forma twelve months operating profit under the CDL commission format.

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     The Company expects refinance activity to decline in the second half of 2003 and that growth in purchase and non-prime mortgages will help offset the decline in refinance volume, resulting in an overall similar mortgage revenue (excluding interest income) amount in 2003 as compared to 2002. The Company expects revenues to continue to grow as it acquires additional mortgage companies and converts them to the CDL operating format.

OPERATING EXPENSES

Total Operating Expenses. Total operating expenses decreased from $2.27 million in the third quarter to $ 2.13 million in the fourth quarter. Operating expenses are relatively stable at the current range based on existing production.

Gross Margin. Gross margin is defined as revenue minus operations expense, which includes variable and fixed expenses.

Gross margin increased from the second quarter to the fourth quarter of 2002 from $50.5 thousand to $227 thousand, an increase of over 400%. The growth in gross margin is due largely to the contribution from the CDL hot lead marketing system, as well as increased revenue per loan, coupled with technology and process improvements. The Company expects the margins on closed loans to grow during 2003 as it enters the sub prime market and expands its hot lead marketing system to other branches.

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DIRECT MARKETING REVENUES — QUARTERLY RESULTS

We operate a national marketing center in Las Vegas, Nevada housing state-of-the-art phone and computer systems, which provide us with the ability to operate numerous marketing campaigns for our customers. We capture and track consumer data, producing real-time reports for effective analysis, modifications and redirecting towards other products and services in which the client may have an interest or need. We are paid on a success rate per product sold and are usually paid for our services within one week.

Operating Revenues The Direct Marketing Division held its quarterly revenue stream relatively constant until the fourth quarter when revenue dropped sharply due to writing off uncollectible receivables from two call center customers totaling over $200 thousand dollars. The center did not post the internal charges between inter-company fees for its hot lead program to the Mortgage Division.

Expenses Operating expenses rose during the first and second quarter to $661,330 as the company doubled the size of its call center facility. In addition, the Company upgraded its Interactive Intelligence (I3) telephony software system and installed its high bandwidth communications platform in its newly acquired mortgage branches. The full expenses of the technology team is 100% allocated to the Direct Marketing Division and has not been allocated to other operating groups. Allocation of this cost unit pro-rata to the other operating groups should reduce operating expenses to this unit.

Non-Cash Expenses This business unit carries 100% 0f the allocation for the network and hardware infrastructure of the company, less small items such as personal computers. As a result of this accounting policy, Direct Marketing is allocated $562,056 in depreciation expense which represents 50% of the operating loss of the Division.

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ITEM 7. COMPARISON OF FINANCIAL RESULTS FY 2001 and FY 2002

The selected financial data below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and is qualified by reference to the Financial Statements and Notes thereto appearing elsewhere in this document. The balance sheet data as of December 31, 2001 and 2002 and the income statement data for each of the two years in the period ended December 31, 2002 are derived from, and are qualified by reference to, the audited financial statements of the Company included elsewhere in this document.

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