AMERICAN BUSINESS FINANCIAL SERVICES INC /DE/ - 10-K Annual Report

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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-K

(Mark One)
[X] Annual Report under Section 13 or 15(d) of the Securities Exchange Act of
1934 For the fiscal year ended June 30, 2002

[ ] Transition report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the transition period from _______________ to ________________

Commission File No. 000-22474

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

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

111 Presidential Boulevard, Bala Cynwyd, PA 19004
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(Address of principal executive offices) (zip code)

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

Securities registered under Section 12(b) of the Exchange Act: None

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

Common Stock, par value
$.001 per share
---------------
(Title of Class)

Indicate by check mark whether the Registrant (1) filed all reports
required to be filed by Section 13 or 15(d) of the 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. [X] YES [ ] NO

Indicate by check mark if disclosure of delinquent filers in response
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 the Form 10-K or
amendment to this Form 10-K. [X]

The aggregate market value of the 1,739,875 shares of common stock,
$.001 par value per share, held by non-affiliates of the Registrant as of
September 6, 2002 was $22.8 million.

The number of shares outstanding of the Registrant's sole class of
common stock as of September 6, 2002 was 2,854,369 shares.

DOCUMENTS INCORPORATED BY REFERENCE:

Part III - Proxy Statement for 2002 Annual Meeting of Stockholders

1

PART I

Item 1. Business

Forward Looking Statements

Some of the information in this Annual Report on Form 10-K may contain
forward-looking statements. You can identify these statements by words or
phrases such as "will likely result," "may," "are expected to," "will continue
to," "is anticipated," "estimate," "believe," "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 described under "Risk Factors" as
well as other portions of this Annual Report on Form 10-K, which could cause our
actual results to differ materially from historical earnings and those presently
anticipated. When considering forward-looking statements, you should keep these
risk factors in mind as well as the other cautionary statements in this Form
10-K. You should not place undue reliance on any forward-looking statement.

General

American Business Financial Services, Inc. is a diversified financial
services organization operating predominantly in the eastern and central
portions of the United States. We originate loans through a combination of
channels including a national processing center located at our centralized
operating office in Bala Cynwyd, Pennsylvania, a regional processing center in
Roseland, New Jersey, and a network of retail branch offices. Through our
principal direct and indirect subsidiaries, we originate, service and sell:

o mortgage loans, which are secured by first and second
mortgages on single-family residences and may not satisfy the
eligibility requirements of Fannie Mae, Freddie Mac or similar
buyers, which we refer to in this document as home equity
loans; and
o loans to businesses, secured by real estate and other business
assets, which we refer to in this document as business purpose
loans.

We also process and purchase home equity loans through our Bank
Alliance Program. Through this program, we purchase home equity loans from other
financial institutions that meet our underwriting criteria but do not meet the
underwriting guidelines of the selling institution for loans it holds in its
portfolio. The loans are originated by the selling institution and subsequently
sold to us. 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. See "-- Home Equity Loans."

Our loan customers are primarily credit-impaired borrowers who are
generally unable to obtain financing from banks or savings and loan associations
and who are attracted to our products and services. See "-- Lending Activities."

2

The ongoing securitization of our loans is a central part of our
current business strategy. We securitize business and home equity loans
originated by our subsidiaries pursuant to our existing securitization program.
A securitization is a financing technique often used by originators of financial
assets to raise capital. A securitization involves the transfer of a pool of
financial assets, in our case, loans, to a trust in exchange for certificates,
notes or other securities issued by the trust and representing an undivided
interest in the trust assets. The transfer to the trust involves a sale and
pledge of the financial assets, as well as providing representations and
warranties regarding these transferred assets, depending on the particular
transaction. Next, the trust sells a portion of the certificates, notes or other
securities to investors for cash. Often the originator of the loans retains the
servicing rights, which is the right to service the loans for a fee. The
originator may also retain an interest in the cash flows generated by the
securitized loans which is subordinate to the interest represented by the notes
or certificates sold to investors. This interest in the cash flows generated by
the securitized loans is called an interest-only strip. See "-- Securitizations"
and "-- Loan Servicing" for further detail.

In addition to other sources, we fund our operations with subordinated
debt that we offer from our principal office located in Bala Cynwyd,
Pennsylvania and a branch office located in Arizona. We offer this debt without
the assistance of an underwriter or dealer. At June 30, 2002, we had $655.7
million in subordinated debt outstanding. This debt had a weighted-average
interest rate of 9.82% and a weighted average maturity of 17 months. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."

We were incorporated in Delaware in 1985 and began operations as a
finance company in 1988, initially offering business purpose loans to customers
whose borrowing needs we believed were not being adequately serviced by
commercial banks. Since our inception, we have significantly expanded our
product line and geographic scope and currently have licenses, or are in the
process of becoming licensed, to offer our home equity loan products in 44
states.

Our principal corporate office in Delaware is located at 103 Springer
Building, 3411 Silverside Road, Wilmington, Delaware 19810. The telephone number
at that address is (302) 478-6160. Our principal operating office is located at
BalaPointe Office Centre, 111 Presidential Boulevard, Bala Cynwyd, Pennsylvania
19004. The telephone number at our principal operating office is (610) 668-2440.
We maintain a site on the World Wide Web at www.abfsonline.com as well as web
sites for most of our primary subsidiary companies.

We file annual, quarterly and current reports, proxy statements and
other information with the SEC. You may read and copy our reports or other
filings made with the SEC at the SEC's Public Reference Room, located at 450
Fifth Street, N.W., Washington, DC 20549. You can also access these reports and
other filings electronically on the SEC's web site, www.sec.gov.

3

We also make these reports and other filings available free of charge
on our web site, www.abfsonline.com, as soon as reasonably practicable after
filing with the SEC. We will provide, at no cost, paper or electronic copies of
our reports and other filings made with the SEC. Requests should be directed to:

Stephen M. Giroux, Esquire
American Business Financial Services, Inc.
BalaPointe Office Centre
111 Presidential Boulevard
Bala Cynwyd, PA 19004
(610) 668-2440

The information on the web sites listed above, is not and should not be
considered part of this Annual Report on Form 10-K and is not incorporated by
reference in this document. These web sites are and are only intended to be
inactive textual references.

Subsidiaries

As a holding company, our activities have been limited to:

(1) holding the shares of our subsidiaries, and

(2) raising capital for use in the subsidiaries' lending and loan
servicing operations.

We are the parent holding company of American Business Credit, Inc. and
its primary subsidiaries, HomeAmerican Credit, Inc. (doing business as Upland
Mortgage), American Business Mortgage Services, Inc., Processing Service Center,
Inc., and Tiger Relocation Company.

American Business Credit, Inc., a Pennsylvania corporation incorporated
in 1988 and acquired by us in 1993, originates, services and sells business
purpose loans and services home equity loans.

HomeAmerican Credit, a Pennsylvania corporation incorporated in 1991,
originates and sells home equity loans. HomeAmerican Credit acquired Upland
Mortgage Corp. in 1996 and since that time has conducted business as "Upland
Mortgage." HomeAmerican Credit also purchases home equity loans through the Bank
Alliance Program.

In January 2001, we completed a corporate reorganization, which
included the renaming of our home equity loan subsidiary, New Jersey Mortgage
and Investment Corp. (a New Jersey corporation organized in 1938 and acquired by
us in October 1997) to American Business Mortgage Services, Inc. The new name
better reflects our subsidiary's national presence. American Business Mortgage
Services, Inc., is currently engaged in the origination and sale of home equity
loans.

Processing Service Center, Inc., a subsidiary of American Business
Credit, Inc., administers the Bank Alliance Program. American Business Mortgage
Services, Inc., through one of its divisions, is also involved in the
administration of the Bank Alliance Program. Under the Bank Alliance Program, we
enter into business arrangements with financial institutions which provide for
the purchase of home equity loans through our lending subsidiaries that meet our
underwriting criteria but do not meet the guidelines of the selling institution
for loans to be held in its portfolio. We anticipate that the current
responsibilities of Processing Service Center, Inc. under the Bank Alliance
Program will be transferred to one of our lending subsidiaries at some point in
the future.

4

Tiger Relocation Company, formerly ABC Holdings Corporation, a
Pennsylvania corporation, was incorporated in 1992 to hold, maintain and sell
properties acquired through foreclosure or deeds-in-lieu of foreclosure.

We also have numerous special purpose subsidiaries that were
incorporated solely to facilitate our securitizations and off-balance sheet
mortgage conduit facilities. Some of those companies are Delaware investment
holding companies. None of these corporations engage in any business activity
other than holding the subordinated certificate, if any, and the interest-only
strips created in connection with completed securitizations. See "--
Securitizations." We also have several additional subsidiaries that are inactive
or not significant to our operations.

5

The following chart sets forth our basic organizational structure and
our primary subsidiaries.(a)

----------------------------------------
AMERICAN BUSINESS FINANCIAL
SERVICES, INC.
----------------------------------------
Holding Company
Issues subordinated debt securities

----------------------------------------
|
----------------------------------------
AMERICAN BUSINESS CREDIT, INC.

----------------------------------------
Originates and services business purpose
loans and services home equity loans
----------------------------------------
|
- --------------------------------------------------------------------------------------------------------
| | | |
- --------------------- --------------------- --------------------- ---------------------
AMERICAN PROCESSING HOMEAMERICAN TIGER RELOCATION
BUSINESS SERVICE CENTER, CREDIT, INC. COMPANY
MORTGAGE INC. D/B/A
SERVICES, INC. UPLAND
MORTGAGE

- --------------------- --------------------- --------------------- ---------------------
Originates, purchases Processes Bank Originates, purchases Holds foreclosed real
and services home Alliance Program and services home estate
equity loans(b) home equity loans equity loans(b)

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

- ---------------------
(a) In addition to the corporations pictured in this chart, we organized at
least one special purpose corporation for each securitization and have
several other subsidiaries that are inactive or not significant to our
operations.

(b) Includes loans acquired through the Bank Alliance Program.

6

Lending Activities

General. The following table sets forth information concerning our loan
origination, purchase and sale activities for the periods indicated. Leases and
conventional first mortgages originated in the year ended June 30, 2000 have
been excluded because we no longer originate these types of loans or leases.

Year Ended June 30,
---------------------------------------
2002 2001 2000
------ ------ ------
(dollars in thousands)

Loans Originated/Purchased
Business purpose loans........................... $ 133,352 $ 120,537 $ 106,187
Home equity loans................................ $ 1,246,505 $ 1,096,440 $ 949,014

Number of Loans Originated/Purchased
Business purpose loans........................... 1,372 1,318 1,198
Home equity loans................................ 14,015 13,443 13,544

Average Loan Size
Business purpose loans........................... $ 97 $ 91 $ 89
Home equity loans................................ $ 89 $ 82 $ 70

Weighted-Average Interest Rate on Loans
Originated/Purchased
Business purpose loans........................... 15.75% 15.99% 15.99%
Home equity loans................................ 10.91% 11.46% 11.28%
Combined......................................... 11.38% 11.91% 11.64%

Weighted-Average Term (in months)
Business purpose loans........................... 161 163 171
Home equity loans................................ 260 259 259

Loans Securitized or Sold
Business purpose loans........................... $ 129,074 $ 109,892 $ 104,503
Home equity loans................................ $ 1,279,740 $ 1,068,507 $ 990,606

Number of Loans Securitized or Sold
Business purpose loans........................... 1,331 1,208 1,163
Home equity loans................................ 14,379 13,031 13,190

7

The following table sets forth information regarding the average
loan-to-value ratios for loans we originated during the periods indicated.

Year Ended June 30,
---------------------------------------------------
Loan Type 2002 2001 2000
--------------- --------------- ------------------

Business purpose loans.............. 62.6% 62.2% 60.9%
Home equity loans................... 77.8 78.4 78.9

The following table shows the geographic distribution of our loan
originations and purchases during the periods indicated.

Year Ended June 30,
---------------------------------------------------------------------
2002 % 2001 % 2000 %
------ --- ------ --- ------ ---
(dollars in thousands)

New York............ $ 341,205 24.73% $ 337,218 27.71% $ 298,813 27.22%
New Jersey.......... 159,117 11.53 161,087 13.24 182,969 16.67
Pennsylvania........ 103,865 7.53 102,789 8.45 129,900 11.83
Massachusetts....... 101,383 7.35 75,958 6.24 26,776 2.44
Florida............. 97,686 7.08 89,169 7.33 86,365 7.87
Michigan............ 89,224 6.47 40,477 3.33 12,939 1.18
Illinois............ 73,152 5.30 51,904 4.26 42,179 3.84
Ohio................ 65,884 4.77 66,877 5.50 41,979 3.82
Georgia............. 49,956 3.62 42,857 3.52 39,684 3.61
North Carolina...... 38,060 2.76 34,065 2.80 23,055 2.10
Virginia............ 33,169 2.40 33,739 2.77 27,147 2.47
Connecticut......... 30,461 2.21 18,741 1.54 18,479 1.68
Indiana............. 27,833 2.02 21,489 1.77 7,088 0.65
Other(a)............ 168,862 12.23 140,607 11.54 160,435 14.62
---------- ------ ---------- ------ ---------- ------
Total............ $1,379,857 100.00% $1,216,977 100.00% $1,097,808 100.00%
========== ====== ========== ====== ========== ======

(a) No individual state constitutes more than 2% of total loan originations for
fiscal 2002.

Customers. Our loan customers are primarily credit-impaired borrowers
who are generally unable to obtain financing from banks or savings and loan
associations and who are attracted to our products and services. These
institutions have historically provided loans only to individuals with the most
favorable credit characteristics. These borrowers generally have impaired or
unsubstantiated credit histories and/or unverifiable income. Our experience has
indicated that these borrowers are attracted to our loan products as a result of
our marketing efforts, the personalized service provided by our staff of highly
trained lending officers and our timely response to loan requests. Historically,
our customers have been willing to pay our origination fees and interest rates
even though they are generally higher than those charged by traditional lending
sources.

Business Purpose Loans. Through our subsidiary, American Business
Credit, we originate business purpose loans predominately in the eastern and
central portions of the United States through a network of salespeople and
through our business loan web site, which was launched in fiscal 2000. We focus
our marketing efforts on small businesses that do not meet all of the credit
criteria of commercial banks and small businesses that our research indicates
may be predisposed to using our products and services.

8

We originate business purpose loans to corporations, partnerships, sole
proprietors and other business entities, or to individuals, for various business
purposes including, but not limited to, working capital, business expansion,
equipment acquisition, tax payments and debt-consolidation. We do not target any
particular industries or trade groups and, in fact, take precautions against
concentration of loans in any one industry group. All business purpose loans
generally are collateralized by a first or second mortgage lien on a principal
residence of the borrower or a guarantor of the borrower or some other parcel of
real property, such as office and apartment buildings and mixed use buildings,
owned by the borrower, a principal of the borrower, or a guarantor of the
borrower. In most cases, these loans are further collateralized by personal
guarantees, pledges of securities, assignments of contract rights, life
insurance and lease payments and liens on business equipment and other business
assets. Business purpose loans are generally securitized subsequent to their
origination.

Our business purpose loans generally range from $15,000 to $500,000 and
had an average loan size of approximately $97,000 for the loans originated
during fiscal 2002. Generally, our business purpose loans are made at fixed
interest rates and for terms ranging from five to fifteen years. We generally
charge origination fees for these loans of 4.75% to 5.75% of the original
principal balance. The weighted-average interest rate charged on the business
purpose loans originated by us was 15.75% for fiscal 2002. Business purpose
loans we originated during fiscal 2002 have a loan-to-value-ratio, based solely
upon the real estate collateral securing the loans, of 62.6%. We originated
$133.4 million of business purpose loans during fiscal 2002.

Generally, we compute interest due on our outstanding business purpose
loans using the simple interest method. We generally impose a prepayment fee.
Although prepayment fees imposed vary based upon applicable state law, the
prepayment fees on our business purpose loans can be a significant portion of
the outstanding loan balance. Whether a prepayment fee is imposed and the amount
of such fee, if any, is negotiated between the individual borrower and American
Business Credit prior to closing of the loan. We may waive the collection of a
prepayment fee, if any, in the event the borrower refinances a business loan
with us.

Home Equity Loans. We originate home equity loans through Upland
Mortgage and American Business Mortgage Services, Inc. We also process and
purchase loans through the Bank Alliance Program. We originate home equity loans
primarily to credit-impaired borrowers through various channels of retail
marketing which include direct mail and our subsidiaries' interactive web sites,
and have included radio and television advertisements. We entered the home
equity loan market in 1991. Currently, we are licensed or otherwise qualified to
originate home equity loans in 44 states and originate home equity loans
predominantly in the eastern and central portions of the United States. Home
equity loans originated and funded by our subsidiaries are generally
securitized. In addition, we may sell home equity loans to one of several third
parties, at a premium and with servicing released.

Home equity loan applications are obtained from potential borrowers
over the phone, in writing, in person or through our Internet web site. The loan
request is then evaluated for possible loan approval. The loan processing staff
generally provides its home equity applicants who qualify for loans with a
conditional loan approval within 24 hours and closes its home equity loans
within approximately ten to fifteen days of obtaining a conditional loan
approval.

9

Home equity loans generally range from $10,000 to $250,000 and had an
average loan size of approximately $89,000 for the loans originated during
fiscal 2002. During the fiscal year ended June 30, 2002, we originated $1.2
billion of home equity loans. Home equity loans are generally made at fixed
rates of interest and for terms ranging from five to thirty years, generally,
with average origination fees of approximately 1.5% of the aggregate loan
amount. During fiscal 2002, the weighted-average interest rate received on such
loans was 10.91%. The average loan-to-value ratio was 77.8% for the loans
originated by us during fiscal 2002. We attempt to maintain our interest and
other charges on home equity loans to be competitive with the lending rates of
other non-conforming mortgage finance companies. Interest on home equity loans
originated subsequent to January 2001 is generally computed based on the
scheduled interest method. Prior to January 2001, most of the home equity loans
we originated computed interest on the simple interest method. To the extent
permitted by law, borrowers are given an option to choose between a loan without
a prepayment fee at a higher interest rate, or a loan with a prepayment fee at a
lower interest rate. We may waive the collection of a prepayment fee, if any, in
the event the borrower refinances a home equity loan with us.

We have exclusive business arrangements with several financial
institutions which provide for our purchase of home equity loans that meet our
underwriting criteria, but do not meet the guidelines of the selling institution
for loans to be held in its portfolio. This program is called the Bank Alliance
Program. The Bank Alliance Program is designed to provide an additional source
of home equity loans. This program targets traditional financial institutions,
such as banks, which because of their strict underwriting and credit guidelines
for loans held in their portfolio have generally provided mortgage financing
only to the most credit-worthy borrowers. This program allows these financial
institutions to originate loans to credit-impaired borrowers in order to achieve
community reinvestment goals and to generate fee income and subsequently sell
such loans to one of our subsidiaries. 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.

Since the introduction of this program, we have entered into agreements
with approximately 39 financial institutions to provide us with the opportunity
to process and purchase loans generated by the branch networks of such
institutions which consist of over 1,800 branches located in various states
throughout the country. During fiscal 2002, our subsidiaries purchased
approximately $145.9 million of loans pursuant to this program. We intend to
continue to expand the Bank Alliance Program with financial institutions across
the United States.

During fiscal 1999, we launched an Internet loan distribution channel
through Upland Mortgage's web site. Through this interactive web site, borrowers
can examine available loan options and calculate interest payments. The Upland
Mortgage Internet platform provides borrowers with convenient access to the
mortgage loan information 7 days a week, 24 hours a day. Throughout the loan
processing period, borrowers who submit applications are supported by our staff
of highly trained loan officers. Currently, in addition to the ability to
utilize an automated rapid credit approval process, which we believe reduces
time and manual effort required for loan approval, the site features our
proprietary software, Easy Loan Advisor, which provides personalized services
and solutions to retail customers through interactive web dialog. We have
applied to the U.S. Patent and Trademark Office to patent this product.

10

Prepayment Fees. We currently charge prepayment fees on approximately
90-95% of our business purpose loans and approximately 85-90% of home equity
loans originated. Home equity loans comprise approximately 90% of all loans we
originate and the remaining 10% are business purpose loans. On home equity loans
where the borrower has elected the prepayment fee option, the prepayment fee is
generally a certain percentage of the outstanding principal balance of the loan.
Our typical prepayment fee structure provides for a fee of 5% or less of the
outstanding principal loan balance and will not extend beyond the first three
years after a loan's origination. Prepayment fees on our existing home equity
loans range from 1% to 5% of the outstanding principal balance and remain in
effect for one to five years. The prepayment fee on business purpose loans is
generally 8% to 12% of the outstanding principal balance, provided that no
prepayment option is available until after the 24th scheduled payment is made
and no prepayment fee is due after the 60th scheduled payment is made. From time
to time, a different prepayment fee arrangement may be negotiated or we may
waive prepayment fees for borrowers who refinance their loans with us.

Our ability to offer a loan with a prepayment fee is sometimes impacted
by state law, with respect to both home equity loans and business purpose loans.
In the case of home equity loans which have a "balloon" payment feature,
whenever possible, we use the Federal Alternative Mortgage Transactions Parity
Act of 1982, referred to as the "Parity Act," to preempt state laws which limit
or restrict prepayment fees. However, the Office of Thrift Supervision has
recently proposed a rule which, if promulgated as proposed, would preclude us
and other non-bank, non-thrift creditors from using the Parity Act to preempt
state prepayment penalty and late fee laws and regulations. We cannot predict
whether or in what form this proposed rule will be adopted. We are currently
evaluating the impact of the adoption of this rule on our lending activities and
results of operations.

In states which have overridden the Parity Act and in the case of some
fully amortizing home equity loans, state laws may restrict prepayment fees
either by the amount of the prepayment fee or the time period during which it
can be imposed. Federal law restrictions in connection with certain high
interest rate and fee loans may also preclude the imposition of prepayment fees
on these loans. Similarly, in the case of business purpose loans, some states
prohibit or limit prepayment fees when the loan is below a specific dollar
threshold or is secured by residential property.

Marketing Strategy

We concentrate our marketing efforts primarily on credit-impaired
borrowers who are generally unable to obtain financing from banks or savings and
loan associations and who are attracted to our products and services. See "Risk
Factors -- Lending to credit-impaired borrowers may result in higher
delinquencies in our managed portfolio, which could result in a reduction in
profitability and impair our ability to repay our subordinated debt." The
managed portfolio includes loans on our balance sheet and loans we service for
others.

11

Our marketing efforts for business purpose loans focus on our niche
market of selected small businesses located in our market area, which generally
includes the eastern and central portion of the United States. We target
businesses, which might qualify for loans from traditional lending sources, but
would elect to use our products and services. Our experience has indicated that
these borrowers are attracted to us as a result of our marketing efforts, the
personalized service provided by our staff of highly trained lending officers
and our timely response to loan applications. Historically, such customers have
been willing to pay our origination fees and interest rates, which are generally
higher than those charged by traditional lending sources.

We market business purpose loans through various forms of advertising,
including large direct mail campaigns, our business loan web site and a direct
sales force, and have in the past used newspaper and radio advertising. Our
commissioned sales staff, which consists of full-time salespersons, is
responsible for converting advertising leads into loan applications. We use a
proprietary training program involving extensive and on-going training of our
lending officers. Our sales staff uses significant person-to-person contact to
convert advertising leads into loan applications and maintains contact with the
borrower throughout the application process. See "-- Lending Activities --
Business Purpose Loans."

We market home equity loans through direct mail campaigns and our
interactive web sites, and have in the past used telemarketing, radio and
television advertising. We believe that our targeted direct mail strategy
delivers more leads at a lower cost than broadcast marketing channels. Our
integrated approach to media advertising that utilizes a combination of direct
mail and Internet advertising is intended to maximize the effect of our
advertising campaigns. We also use a network of loan brokers along with the Bank
Alliance Program as additional sources of loans.

Our marketing efforts for home equity loans are focused on the eastern
and central portions of the United States. In addition we utilize branch offices
in various states to market our loans. Loan processing, underwriting, servicing
and collection procedures are performed at our centralized operating office
located in Bala Cynwyd, Pennsylvania and a regional processing center in
Roseland, New Jersey. See "-- Lending Activities -- Home Equity Loans."

Loan Servicing

We service the loans we hold as available for sale or that we
securitize, in accordance with our established servicing procedures. Our
servicing procedures include practices regarding processing of mortgage
payments, processing of disbursements for tax and insurance payments,
maintenance of mortgage loan records, performance of collection efforts,
including disposition of delinquent loans, foreclosure activities and
disposition of real estate owned and performance of investor accounting and
reporting processes, which in general conform to the mortgage servicing
practices of prudent mortgage lending institutions. At June 30, 2002, our total
managed portfolio included approximately 38,000 loans with an aggregate
outstanding balance of $3.0 billion. We generally receive contractual servicing
fees for our servicing responsibilities for securitized loans. In addition, we
receive other ancillary fees related to the loans serviced. Our servicing and
collections activities are principally located at our operating office in Bala
Cynwyd, Pennsylvania.

12

In servicing loans, we send an invoice to borrowers on a monthly basis
advising them of the required payment and its scheduled due date. We begin the
collection process promptly after a borrower fails to make a scheduled monthly
payment. When a loan becomes 45 to 60 days delinquent for a home equity loan or
90 days delinquent for a business purpose loan, it is transferred to a
specialist in the collections department. The specialist tries to reinstate a
delinquent loan, seek a payoff, or enter into a forbearance or other agreement
with the borrower to avoid foreclosure. All proposed arrangements are evaluated
on a case-by-case basis, based on, among other things, the borrower's past
credit history, current financial status, cooperativeness, future prospects and
the reasons for the delinquency. If a loan becomes 61 or more days delinquent
for a home equity loan or 91 or more days delinquent for a business purpose loan
and a satisfactory arrangement with the borrower is not achieved or the borrower
declares bankruptcy, our in-house attorneys and paralegals promptly address the
matter. Legal action may be initiated earlier if we determine that the
circumstances warrant such action.

Real estate acquired as a result of foreclosure or by deed-in-lieu of
foreclosure is classified as real estate owned until it is sold. When property
is acquired by foreclosure or deed-in-lieu of foreclosure, we record it at the
lower of cost or estimated fair value, less estimated cost of disposition. After
acquisition, all costs incurred in maintaining the property are accounted for as
expenses.

Our ability to foreclose on some properties may be affected by state
and federal environmental laws. The costs of investigation, remediation or
removal of hazardous substances may be substantial and can easily exceed the
value of the property. The presence of hazardous substances, or the failure to
properly eliminate the substances from the property, can hurt the owner's
ability to sell or rent the property and prevent the owner from using the
property as collateral for another loan. Even parties who arrange for the
disposal or treatment of hazardous or toxic substances may be liable for the
costs of removal and remediation, whether or not the facility is owned or
operated by the party who arranged for the disposal or treatment. See "Risk
Factors -- Environmental laws and regulations may restrict our ability to
foreclose on loans secured by real estate or increase costs associated with
those loans which could reduce our profitability and the funds available to
repay our subordinated debt." The technical nature of some laws and regulations,
such as the Truth in Lending Act, can also contribute to difficulties in
foreclosing on real estate and other assets, as even immaterial errors can
trigger foreclosure delays or other difficulties.

As the servicer of securitized loans, we are obligated to advance funds
for scheduled interest payments that have not been received from the borrower
unless we determine that our advances will not be recoverable from subsequent
collections of the related loan payments. See "-- Securitizations."

Underwriting Procedures and Practices

Summarized below are some of the policies and practices which are
followed in connection with the origination of business purpose loans and home
equity loans. These policies and practices may be altered, amended and
supplemented, from time to time, as conditions warrant. We reserve the right to
make changes in our day-to-day practices and policies at any time.

13

Our loan underwriting standards are applied to evaluate prospective
borrowers' credit standing and repayment ability as well as the value and
adequacy of the mortgaged property as collateral. Initially, the prospective
borrower is required to provide pertinent credit information in order to
complete a detailed loan application. As part of the description of the
prospective borrower's financial condition, the borrower is required to provide
information concerning assets, liabilities, income, credit, employment history
and other demographic and personal information. If the application demonstrates
the prospective borrower's ability to repay the debt as well as sufficient
income and equity, loan processing personnel generally obtain and review an
independent credit bureau report on the credit history of the borrower and
verification of the borrower's income. Once all applicable employment, credit
and property information is obtained, a determination is made as to whether
sufficient unencumbered equity in the property exists and whether the
prospective borrower has sufficient monthly income available to meet the
prospective borrower's monthly obligations.

14

The following table outlines the key parameters of the major credit
grades of our current home equity loan underwriting guidelines. Home equity
loans represent approximately 90% of the loans we originate.

- --------------------------------------------------------------------------------------------------------
"A" Credit Grade "B" Credit Grade
- ---------------------------------- ---------------------------------- ----------------------------------

General Repayment Has good credit but might have Pays the majority of accounts on
some minor delinquency. time but has some 30 and/or 60
day delinquency.

- ---------------------------------- ---------------------------------- ----------------------------------
Existing Mortgage Loans Current at application time and Current at application time and
a maximum of two 30 day a maximum of four 30 day
delinquencies in the past 12 delinquencies in the past 12
months. months.
- ---------------------------------- ---------------------------------- ----------------------------------
Non-Mortgage Credit Major credit and installment Major credit and installment
debt should be current but may debt can exhibit some minor 30
exhibit some minor 30 day and/or 60 day delinquency.
delinquency. Minor credit may Minor credit may exhibit up to
exhibit some minor delinquency. 90 day delinquency.
- ---------------------------------- ---------------------------------- ----------------------------------
Bankruptcy Filings Discharged more than 2 years Discharged more than 2 years
with reestablished credit. with reestablished credit.

- ---------------------------------- ---------------------------------- ----------------------------------
Debt Service-to-Income Generally not to exceed 50%. Generally not to exceed 50%.
- ---------------------------------- ---------------------------------- ----------------------------------
Owner Occupied: Generally 80% to 90% for a 1-4 Generally 80% to 85% for a 1-4
Loan-to-value ratio family dwelling residence; 80% family dwelling residence; 80%
for a condominium. for a condominium.
- ---------------------------------- ---------------------------------- ----------------------------------
Non-Owner Occupied: Generally 80% for a 1-4 family Generally 70% for a 1-4 family
Loan-to-value ratio dwelling or condominium. dwelling or condominium.
- --------------------------------------------------------------------------------------------------------

- --------------------------------------------------------------------------------------------------------
"C" Credit Grade "D" Credit Grade
- ---------------------------------- ---------------------------------- ----------------------------------
General Repayment Marginal credit history which is Designed to provide a
offset by other positive borrower with poor credit
attributes. history an opportunity to
correct past credit problems
through lower monthly
payments.
- ---------------------------------- ---------------------------------- ----------------------------------
Existing Mortgage Loans Cannot exceed four 30 day Must be paid in full from
delinquencies and/or two 60 day loan proceeds and no more
delinquencies in the past 12 than 120 days delinquent.
months.
- ---------------------------------- ---------------------------------- ----------------------------------
Non-Mortgage Credit Major credit and installment Major and minor credit
debt can exhibit some minor 30 delinquency is acceptable,
and/or 90 day delinquency. but must demonstrate some
Minor credit may exhibit more payment regularity.
serious delinquency.
- ---------------------------------- ---------------------------------- ----------------------------------
Bankruptcy Filings Discharged more than 1 year with Discharged prior to closing
reestablished credit. or payoff of bankruptcy debts
with proceeds.
- ---------------------------------- ---------------------------------- ----------------------------------
Debt Service-to-Income Generally not to exceed 55%. Generally not to exceed 55%.
- ---------------------------------- ---------------------------------- ----------------------------------
Owner Occupied: Generally 70% to 80% for a 1-4 Generally 60% to 65% for a
Loan-to-value ratio family dwelling residence; 70% 1-4 family dwelling residence.
for a condominium.
- ---------------------------------- ---------------------------------- ----------------------------------
Non-Owner Occupied: Generally 60% for a 1-4 family N/A
Loan-to-value ratio dwelling or condominium.
- --------------------------------------------------------------------------------------------------------

15

Generally, business purpose loans are secured by residential real
estate and at times commercial real estate. Loan amounts generally range from
$15,000 to $500,000. The loan-to-value ratio (based solely on the appraised fair
market value of the real estate collateral securing the loan) on the properties
collateralizing the loans generally, have a maximum range of 50% to 75%. The
actual maximum loan to value varies depending on a variety of factors including,
the credit grade of the borrower, whether the collateral is a one to four family
residence, a condominium or a commercial property and whether the property is
owner occupied or non-owner occupied. The credit grade of a business purpose
loan borrower will vary depending on the payment history of their existing
mortgages, major lines of credit and minor lines of credit, allowing for
delinquency but generally requiring major credit to be current at closing. The
underwriting of the business purpose loan includes confirmation of income or
cash flow through tax returns, bank statements and other forms of proof of
income and business cash flow. Generally, we make loans to businesses whose
bankruptcy was discharged at least two years prior to closing, but we make
exceptions to allow for the bankruptcy to be discharged just prior to or at
closing. In addition, we generally receive additional collateral in the form of,
among other things, personal guarantees, pledges of securities, assignments of
contract rights, assignments of life insurance and lease payments and liens on
business equipment and other business assets, as available. The business purpose
loans we originated during fiscal 2002 had an average loan-to-value ratio of
62.6% based solely on the real estate collateral securing the loan.

Generally, the maximum acceptable loan-to-value ratio for home equity
loans to be securitized is 100%. The home equity loans we originated during
fiscal 2002 had an average loan-to-value ratio of 77.8%. From time to time, we
may originate loans under our guidelines with loan-to-value ratios in excess of
100%, which may be sold with servicing released. It is our policy to obtain
title insurance in connection with all loans.

In determining whether the mortgaged property is adequate as
collateral, we have an appraisal performed for each property considered for
financing. The appraisal is completed by a licensed qualified appraiser on a
Fannie Mae form and generally includes pictures of comparable properties and
pictures of the property securing the loan.

Any material decline in real estate values reduces the ability of
borrowers to use home equity to support borrowings and increases the
loan-to-value ratios of loans previously made by us, thereby weakening
collateral coverage and increasing the possibility of a loss in the event of
borrower default. Further, delinquencies, foreclosures and losses generally
increase during economic slowdowns or recessions. As a result, we cannot assure
that the market value of the real estate underlying the loans will at any time
be equal to or in excess of the outstanding principal amount of those loans.
Although we have expanded the geographic area in which we originate loans, a
downturn in the economy generally or in a specific region of the country may
have an effect on our originations. See "Risk Factors -- A decline in value of
the collateral securing our loans could result in an increase in losses on
foreclosure, which could reduce our profitability and limit our ability to repay
our subordinated debt."

Loan Administration Procedures

We employ a staff of experienced collectors and supervisors working in
shifts to manage non-performing loans. In addition, a staff of in-house
attorneys and paralegals work closely with the collections staff to optimize
collection efforts. The primary goal of our labor-intensive collections program
is to emphasize delinquency and loss prevention.

16

In servicing loans we send an invoice to borrowers on a monthly basis
advising them of the required payment and its scheduled due date. We begin the
collection process promptly after a borrower fails to make a scheduled monthly
payment. We believe we begin the collection process earlier than lenders who
provide financing to conforming mortgage borrowers. When a loan becomes 45 to 60
days delinquent for a home equity loan or 90 days delinquent for a business
purpose loan, it is transferred to a specialist in the collections department.
The specialist tries to reinstate a delinquent loan, seek a payoff, or enter
into a forbearance or other agreement with the borrower to avoid foreclosure.
All proposed arrangements are evaluated on a case-by-case basis, based on, among
other things, the borrower's past credit history, current financial status,
cooperativeness, future prospects and the reasons for the delinquency. If a loan
becomes 61 or more days delinquent for a home equity loan or 91 or more days
delinquent for a business purpose loan and a satisfactory arrangement with the
borrower is not achieved or the borrower declares bankruptcy, our in-house
attorneys and paralegals promptly address the matter. Due to this timing, the
foreclosure process on most delinquent loans is commenced before the loan is 100
days past due.

We believe we are among a small number of non-conforming mortgage
lenders that have an in-house legal staff dedicated to the collection of
delinquent loans and the handling of bankruptcy cases. As a result, we believe
our delinquent loans are reviewed from a legal perspective earlier in the
collection process than is the case with loans made by traditional lenders so
that troublesome legal issues can be noted and, if possible, resolved earlier.
Our in-house legal staff also attempts to find solutions for delinquent loans,
other than foreclosure. Every loan is analyzed to compare the property value
against the loan balance and solutions are presented to the borrower based on
the results of that analysis, when appropriate.

Most foreclosures are handled by outside counsel who are managed by our
in-house legal staff to ensure that the time period for handling foreclosures
meets or exceeds established industry standards. Frequent contact between
in-house and outside counsel ensures that the process moves quickly and
efficiently in an attempt to achieve a timely and economical resolution to
contested matters.

Securitizations

During fiscal 2002, we securitized $129.1 million of business purpose
loans and $1.2 billion of home equity loans. During fiscal 2001, we securitized
$109.9 million of business purpose loans and $992.2 million of home equity
loans. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Securitizations" for additional information regarding
our securitizations.

Securitization is a financing technique often used by originators of
financial assets to raise capital. A securitization involves the sale of a pool
of financial assets, in our case loans, to a trust in exchange for cash and a
retained interest in the securitized loans which is called an interest-only
strip. The trust issues multi-class securities which derive their cash flows
from a pool of securitized loans. These securities, which are senior to our
retained interest-only strips in the trust, are sold to public or private
investors. We also retain servicing on securitized loans. See "-- Loan
Servicing."

As the holder of the interest-only strips received in a securitization,
we are entitled to receive excess (or residual) cash flows. These cash flows are
the difference between the payments made by the borrowers on securitized loans
and the sum of the scheduled and prepaid principal and pass-through interest
paid to trust investors, 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. These cash flows also include cash flows
from overcollateralization. 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.

17

We may be required either to repurchase or to replace loans which do
not conform to the representations and warranties we made in the agreements
entered into when the loans are sold through a securitization. As of June 30,
2002, we have been required to repurchase or replace only one such loan from the
securitization trusts.

When borrowers are delinquent in making scheduled payments on loans
included in a securitization trust, we are obligated to advance interest
payments with respect to such delinquent loans if we deem that advances will
ultimately be recoverable. These advances can first be made out of funds
available in the respective trust's collection account, then from our operating
cash if there are insufficient funds in the trust's collection account. These
advances, including those made from the trust's collection account, which if not
recovered from the borrowers or proceeds from the liquidation of the loan,
require reimbursement from us. These advances may require funding from our
capital resources and may create greater demands on our cash flow than either
selling loans with servicing released or maintaining a portfolio of loans on
balance sheet. However, these advances have priority of repayment from the
succeeding month's mortgage loan payments.

At times we elect to repurchase some delinquent loans from the
securitization trusts, some of which may be in foreclosure. The purchase price
of a delinquent loan is at the loan's outstanding contractual balance plus
accrued and unpaid interest and unreimbursed servicing advances. 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 flows from securitization trusts. See "Risk Factors
- -- Our securitization agreements require us to retain some risk on loans that do
not meet the requirements in these agreements or require us, as servicer, to
advance interest payments for delinquent loans and allow us to repurchase a
limited amount of delinquent loans, which could result in a reduction in
profitability and reduce the funds we have available to repay our subordinated
debt."

Our securitizations can include a prefunding option where a portion of
the cash received from investors is withheld until additional loans are
transferred to the trust. The loans to be transferred to the trust to satisfy
the prefund option must be substantially similar in terms of collateral, size,
term, interest rate, geographic distribution and loan-to-value ratio as the
loans initially transferred to the trust. To the extent we fail to originate a
sufficient number of qualifying loans for the prefund account within the
specified time period, our earnings during the quarter in which the funding was
to occur would be reduced. We had no prefund obligations at June 30, 2002.

The securitization of loans generated gains on sale of loans during
fiscal 2002 of $185.6 million. Subject to market conditions, we anticipate that
we will continue to securitize business purpose loans and home equity loans. We
believe that a securitization program provides a number of benefits by allowing
us to diversify our funding base, provide liquidity and lower our cost of funds.

18

Competition

We compete for business purpose loans against many other finance
companies and financial institutions. Although many other entities originate
business purpose loans, we have focused our lending efforts on our niche market
of businesses which may qualify for loans from traditional lending sources but
who we believe are attracted to our products as a result of our marketing
efforts, responsive customer service and rapid processing and closing periods.

We have significant competition for home equity loans. Through Upland
Mortgage and American Business Mortgage Services, Inc., we compete with banks,
thrift institutions, mortgage bankers and other finance companies, which may
have greater resources and name recognition. We attempt to mitigate these
factors through a highly trained staff of professionals, rapid response to
prospective borrowers' requests and by maintaining a relatively short average
loan processing time. In addition, we implemented our Bank Alliance Program in
order to generate additional loan volume. See "Risk Factors -- Competition from
other lenders could adversely affect our profitability and our ability to repay
our subordinated debt."

Regulation

General. Our business is regulated by federal, state and, in certain
cases, local laws. All home equity loans must meet the requirements of, among
other statutes and regulations, the Truth in Lending Act, the Real Estate
Settlement Procedures Act, the Equal Credit Opportunity Act of 1974, and their
associated Regulations Z, X and B, respectively.

Truth in Lending. The Truth in Lending Act and Regulation Z contain
disclosure requirements designed to provide consumers with uniform,
understandable information about the terms and conditions of loans and credit
transactions so that consumers may compare credit terms. The Truth in Lending
Act also guarantees consumers a three-day right to cancel certain transactions
described in the act and imposes specific loan feature restrictions on some
loans, including some of the same types of loans originated by us. If we were
found not to be in compliance with the Truth in Lending Act, some aggrieved
borrowers could, depending on the nature of the non-compliance, have the right
to recover actual damages, statutory damages, penalties, rescind their loans
and/or to demand, among other things, the return of finance charges and fees
paid to us and third parties. Other fines and penalties can also be imposed
under the Truth in Lending Act and Regulation Z.

Equal Credit Opportunity and Other Laws. We are also required to comply
with the Equal Credit Opportunity Act and Regulation B, which prohibit creditors
from discriminating against applicants on the basis of race, color, religion,
national origin, sex, age or marital status. Regulation B also restricts
creditors from obtaining certain types of information from loan applicants.
Among other things, it also requires lenders to advise applicants of the reasons
for any credit denial. Equal Credit Opportunity Act violations can also result
in fines, penalties and other remedies.

In instances where the applicant is denied credit or the rate of
interest for a loan increases as a result of information obtained from a
consumer credit reporting agency, the Fair Credit Reporting Act of 1970, as
amended, requires lenders to supply the applicant with the name and address of
the reporting agency whose credit report was used in making such determinations.
It also requires that lenders provide other information and disclosures about
the loan application rejection. In addition, we are subject to the Fair Housing
Act and regulations under the Fair Housing Act, which broadly prohibit
discriminatory practices in connection with our home equity and other lending
businesses.

19

Pursuant to the Home Mortgage Disclosure Act and Regulation C, we are
also required to report information on loan applicants and certain other
borrowers to the Department of Housing and Urban Development, which is among
several federal and state agencies which monitor compliance with fair lending
laws.

We are also subject to the Real Estate Settlement Procedures Act and
Regulation X. This law and regulation, which is administered by the Department
of Housing and Urban Development, imposes limits on the amount of funds a
borrower can be required to deposit with us in any escrow account for the
payment of taxes, insurance premiums or other charges; limits the fees which may
be paid to third parties; and imposes various disclosure and other requirements.

The Office of Thrift Supervision has recently proposed a rule which, if
promulgated as proposed, would preclude us and other non-bank, non-thrift
creditors from using the Parity Act to preempt state prepayment penalty and late
fee laws and regulations. We cannot predict whether or in what form this
proposed rule will be adopted. We are currently evaluating the impact of the
adoption of this rule on our lending activities and results of operations.

We are subject to various other federal, state and local laws, rules
and regulations governing the licensing of mortgage lenders and servicers,
procedures that must be followed by mortgage lenders and servicers, and
disclosures that must be made to consumer applicants and borrowers. Failure to
comply with these laws, as well as with the laws described above, may result in
civil and criminal liability.

Several of our subsidiaries are licensed and regulated by the
departments of banking or similar entities in the various states in which they
are conducting business. The rules and regulations of the various states impose
licensing and other restrictions on lending activities, such as prohibiting
discrimination and regulating collection, foreclosure procedures and claims
handling, disclosure obligations, payment feature restrictions and, in some
cases, these laws fix maximum interest rates and fees. Failure to comply with
these requirements can lead to termination or suspension of licenses, rights of
rescission for mortgage loans, individual and class action lawsuits and/or
administrative enforcement actions. Our in house compliance staff, which
includes attorneys, and our outside counsel review and monitor the lending
policies of our subsidiaries for compliance with the various federal and state
laws.

The previously described laws and regulations are subject to
legislative, administrative and judicial interpretation. Some of these laws and
regulations have recently been enacted or amended. Some of these laws and
regulations are rarely challenged in, or interpreted by the courts. Infrequent
interpretations, an insignificant number of interpretations and / or conflicting
interpretations of these enacted or amended laws and regulations can make it
difficult for us to always know what is permitted conduct under these laws and
regulations. Any ambiguity or vagueness under the laws and regulations to which
we are subject may lead to regulatory investigations or enforcement actions and
private causes of action, such as class action lawsuits, with respect to our
compliance with the applicable laws and regulations. See "Risk Factors -- Our
residential lending business is subject to government regulation and licensing
requirements, as well as private litigation, which may hinder our ability to
operate profitably and repay our subordinated debt."

20

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 state and local governmental
authorities have increased their focus on lending practices by some companies in
the subprime lending industry, more commonly referred to as "predatory lending"
practices. State, local and federal governmental agencies have imposed sanctions
for practices including, but not limited to, charging borrowers excessive fees,
imposing higher interest rates than the borrower's credit risk warrants and
failing to adequately disclose the material terms of loans to the borrowers. As
a result of these initiatives, we are unable to predict whether state, local or
federal authorities will require changes in our lending practices in the future,
including the reimbursement to borrowers as a result of fees charged or the
imposition of fines, or the impact of those changes on our profitability. The
Pennsylvania Attorney General reviewed certain fees charged to Pennsylvania
customers by our subsidiary, HomeAmerican Credit, Inc., which does business as
Upland Mortgage. Although we believe that these fees were fair and in compliance
with applicable federal and state laws, we agreed to reimburse borrowers
approximately $221,000 with respect to a particular fee and to reimburse the
Commonwealth of Pennsylvania $50,000 for its costs of investigation and for
future public protection purposes. We have satisfied the monetary commitments
and obligations to the Pennsylvania Attorney General. The reserve, which we
previously established, was adequate to cover the resolution of this matter. See
"Risk Factors -- Our residential lending business is subject to government
regulation and licensing requirements, as well as private litigation, which may
hinder our ability to operate profitably and repay our subordinated debt."

Additionally, the U.S. Congress is currently considering a number of
proposed bills or proposed amendments to existing laws which could affect our
lending activities and make our business less profitable. These bills and
amendments, if adopted as proposed, could reduce our profitability by limiting
the fees we are allowed to charge, including prepayment fees, restricting the
terms we are allowed to include in our loan agreements and increasing the amount
of disclosure we are required to give to potential borrowers. While we can not
predict whether or in what form Congress may adopt these bills or amendments, we
are currently evaluating the potential impact of these bills and amendments, if
adopted, on our lending practices and results of operations. See "Risk Factors
- -- Our residential lending business is subject to government regulation and
licensing requirements, as well as private litigation, which may hinder our
ability to operate profitably and repay our subordinated debt." and "Business --
Lending Activities."

The Gramm-Leach-Bliley Act, which was signed into law at the end of
1999, contains comprehensive consumer financial privacy restrictions. The
various federal enforcement agencies, including the Federal Trade Commission,
have issued final regulations to implement this act; however, compliance with
the new regulations was voluntary until July 1, 2001. These restrictions fall
into two basic categories. First, a financial institution must provide various
notices to consumers about such institution's privacy policies and practices.
Second, this act imposes restrictions on a financial institution and gives
consumers the right to prevent a financial institution from disclosing
non-public personal information about the consumer to non-affiliated third
parties, with exceptions. We have prepared the appropriate consumer disclosures
and internal procedures to address these requirements.

We have procedures and controls to monitor compliance with numerous
federal, state and local laws and regulations. However, because these laws and
regulations are complex and often subject to interpretation, or as a result of
inadvertent errors, we may, from time to time, unknowingly violate these laws
and regulations.

If more restrictive laws, rules and regulations are enacted or more
restrictive judicial and administrative interpretations of those laws are
issued, compliance with the laws could become more expensive or difficult.

21

Risk Factors

Investors in our common stock or subordinated debt should carefully consider
these risk factors together with all of the information contained in this Form
10-K, and incorporated by reference in this Form 10-K including the risk factors
described below which could impact the value of our common stock.

Since we have historically experienced negative cash flows from our operations
and expect to do so in the foreseeable future, our ability to repay our
subordinated debt could be impaired.

We have historically experienced negative cash flow from operations
since 1996 primarily because our strategy of selling loans through
securitization requires us to build an inventory of loans over time. During the
period we are building this inventory of loans, we incur costs and expenses. We
do not recognize a gain on the sale of loans until we complete a securitization,
which may not occur until a subsequent period. In addition, our gain on a
securitization results from our retained interests in the securitized loans,
consisting primarily of interest-only strips, which do not generate cash flow
immediately. We expect this negative cash flow from operations to continue in
the foreseeable future. Should we continue to experience negative cash flows
from operations, it could impair our ability to make principal and interest
payments due under the terms of our subordinated debt. At June 30, 2002, there
was $367.1 million of subordinated debt, which will mature through June 30,
2003.

We obtain the funds to repay our subordinated debt at their maturities
by securitizing our loans, selling whole loans and selling additional notes. We
may in the future generate cash flows by securitizing or selling interest-only
strips and selling servicing rights generated in past securitizations. If we are
unable in the future to securitize our loans, to sell whole loans, or to realize
cash flows from interest-only strips and servicing rights generated in past
securitizations, our ability to repay our subordinated debt could be impaired.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."

Our estimates of the value of interest-only strips and servicing rights we
retain when we securitize loans could be inaccurate and could result in reduced
profitability and impair our ability to repay our subordinated debt.

We generally retain interest-only strips and servicing rights in the
securitization transactions we complete. We estimate the fair value of the
interest-only strips and servicing rights based upon discount rates, prepayment
and default assumptions established by the management of our company. The value
of our interest-only strips totaled $512.6 million and the value of our
servicing rights totaled $125.3 million at June 30, 2002. Together, these two
assets represent 72.8% of our total assets at June 30, 2002. Although we believe
that these amounts represent the fair value of these assets, the amounts were
estimated based on discounting the expected cash flows to be received in
connection with our securitizations using discount rate, prepayment rate and
credit loss rate assumptions established by us. Changes in market interest rates
may impact our discount rate assumptions and our actual prepayment and default
experience may vary materially from these estimates. Even a small unfavorable
change in these assumptions 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 accounting
adjustment, which would adversely affect our income in the period of adjustment
and impair our ability to repay our subordinated debt. During fiscal 2002, a
write down of $22.1 million was recorded, as a reduction to our pre-tax income,
on our interest-only strips due to prepayment experience that was higher than
anticipated in our assumptions. During fiscal 2000, a write down of $12.6
million was recorded, as a reduction to our pre-tax income, on our interest-only
strips due to changes in the discount rate assumption. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Application of Critical Accounting Policies -- Impact of Changes in Critical
Accounting Estimates in Prior Years." and "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Securitizations" for
information on the sensitivities of interest-only strips and servicing rights to
changes in assumptions.

22

Since we depend upon the availability of financing to fund our continuing
operations, any failure to obtain adequate funding could hurt our profitability
and restrict our ability to repay our subordinated debt on maturity.

For our ongoing operations, we depend upon frequent financings,
including the sale of our unsecured subordinated debt and warehouse credit
facilities or lines of credit. If we are unable to renew or obtain adequate
funding under a warehouse credit facility, or other borrowings, including the
sale of our subordinated debt, the lack of adequate funds would reduce our
profitability and restrict our ability to repay our subordinated debt upon
maturity. To the extent that we are not successful in maintaining or replacing
existing subordinated debt upon maturity, we may have to limit our loan
originations or sell loans earlier than intended and restructure our operations.
Limiting our originations or earlier sales of loans could reduce our
profitability or restrict our ability to repay our subordinated debt upon
maturity. Our ability to repay our subordinated debt at maturity may depend, in
part, on our ability to raise new funds through the sale of additional
subordinated debt. In addition, as the servicer of securitized loans, we may
incur certain cash requirements to the securitization trusts. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."

Terrorist attacks in the United States may cause disruption in our business and
operations and other attacks or acts of war may adversely affect the markets in
which our common stock trades, the markets in which we operate and our
profitability and our ability to repay our subordinated debt.

Terrorists' attacks in the United States in September 2001 have caused
major instability in the U.S. financial markets. These attacks and the response
on behalf of the U.S. government may lead to armed hostilities or to further
acts of terrorism in the U.S. which may cause a further decline in the financial
market and may contribute to a further decline in economic conditions. These
events may cause disruption in our business and operations including reductions
in demand for our loan products and our subordinated debt, increases in
delinquencies and credit losses in our managed loan portfolio, changes in
historical 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.

23

Lending to credit-impaired borrowers may result in higher delinquencies in our
managed portfolio, which could result in a reduction in profitability and impair
our ability to repay our subordinated debt.

We market a significant portion of our loans to borrowers who are
either unable or unwilling to obtain financing from traditional sources, such as
commercial banks. Loans made to these borrowers may entail a higher risk of
delinquency and loss than loans made to borrowers who use traditional financing
sources. Historically, we have experienced higher rates of delinquency on loans
made to these credit-impaired borrowers as compared to delinquency rates
experienced by banks on loans to borrowers who are not credit-impaired. While we
use underwriting standards and collection procedures designed to mitigate the
higher credit risk associated with lending to these borrowers, our standards and
procedures may not offer adequate protection against risks of default. Higher
than anticipated delinquencies, foreclosures or losses in our sold and serviced
loans, would reduce our profitability, which could restrict our ability to repay
our subordinated debt upon maturity. See "Business -- Lending Activities" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Managed Portfolio Quality."

Our reliance upon the sale of our loans through securitization may result in
fluctuating operating results which could restrict our ability to repay our
subordinated debt when due.

A significant portion of our revenue and net income represents gain on
the sale of loans in securitization transactions. Operating results for a given
period can fluctuate significantly as a result of the timing and size of
securitizations. If we do not close securitizations when expected, we could
experience a loss for a period. In addition, we rely primarily on
securitizations to generate cash proceeds for the repayment of our warehouse
credit facilities and origination of additional loans.

Our ability to complete securitizations depends on several factors,
including:

o conditions in the securities markets generally, including market
interest rates;
o conditions in the asset-backed securities markets specifically;
and
o the credit quality of our managed portfolio.

Any substantial impairment in the size or availability of the market
for our loans could result in our inability to continue to originate loans and
repay our subordinated debt upon maturity. See "Business -- Securitizations" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."

Because our business operations are generally not subject to regulation and
examination by federal banking regulators, these protections are not available
to protect investors.

Currently, our operations are not regulated or subject to examination
in the same manner as commercial banks, savings banks and thrift institutions.
Our operations are not subject to the stringent regulatory requirements imposed
upon the operations of those entities and are not subject to periodic compliance
examinations by federal banking regulators designed to protect investors. See
"Business -- Regulation."

24

Our residential lending business is subject to government regulation and
licensing requirements, as well as private litigation, which may hinder our
ability to operate profitably and repay our subordinated debt.

Our residential lending business is subject to extensive regulation,
supervision and licensing by various state departments of banking and other
state and federal agencies. Our lending business is also subject to various laws
and judicial and administrative decisions imposing requirements and restrictions
on all or part of our home equity lending activities, such as the recently
proposed Office of Thrift Supervision rule which would preclude our lending
subsidiaries from utilizing a federal statute to preempt state law restriction
on certain fees we may charge borrowers. We are currently evaluating the impact
of the adoption of this rule on our lending activities and results of
operations. See "Business -- Lending Activities -- Prepayment Fees."

We are also subject to examinations by state departments of banking or
similar agencies in the 44 states where we are licensed or otherwise qualified
with respect to originating, processing, underwriting, selling and servicing
home equity loans. We are also subject to certain Federal Reserve Board,
Department of Housing and Urban Development and other federal agency regulations
related to residential mortgage lending, servicing and reporting. Failure to
comply with these requirements can lead to, among other remedies, termination or
suspension of licenses, rights of rescission for mortgage loans, class action
lawsuits and administrative enforcement actions.

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 state and local governmental
authorities have increased their focus on lending practices by some companies in
the subprime lending industry, more commonly referred to as "predatory lending"
practices. State, local and federal governmental agencies have imposed sanctions
for practices, including, but not limited to, charging borrowers excessive fees,
imposing higher interest rates than the borrower's credit risk warrants and
failing to adequately disclose the material terms of loans to the borrowers. As
a result of these initiatives, we are unable to predict whether state, local or
federal authorities will require changes in our lending practices in the future,
including the reimbursement to borrowers as a result of fees charged or the
imposition of fines, or the impact of those changes on our profitability. The
Pennsylvania Attorney General reviewed certain fees charged to Pennsylvania
customers by our subsidiary, HomeAmerican Credit, Inc., which does business as
Upland Mortgage. Although we believe that these fees were fair and in compliance
with applicable federal and state laws, we agreed to reimburse borrowers
approximately $221,000 with respect to a particular fee and to reimburse the
Commonwealth of Pennsylvania $50,000 for its costs of investigation and for
future public protection purposes. We have satisfied the monetary commitments
and obligations to the Pennsylvania Attorney General. The reserve, which we
previously established, was adequate to cover the resolution of this matter.

25

In addition to the regulatory initiatives with respect to so-called
"predatory lending" practices, we are also subject, from time to time, to
private litigation, including actual and purported class action suits, resulting
from alleged "predatory lending" practices. Our lending subsidiaries, including
HomeAmerican Credit, Inc., which does business as Upland Mortgage, are involved
in class action lawsuits, other litigation, claims, investigations by
governmental authorities, and legal proceedings arising out of their lending
activities, including the purported class action entitled, Calvin Hale v.
HomeAmerican Credit, Inc., d/b/a Upland Mortgage, filed on behalf of borrowers
in several states alleging that the charging of, and failure to properly
disclose the nature of, a document preparation fee were improper under
applicable state law. Due to our current expectation regarding the ultimate
resolution of these actions, management believes that the liabilities resulting
from these actions will not have a material adverse effect on the consolidated
financial position or results of our operations. However, due to the inherent
uncertainty in litigation and since the ultimate resolutions of these
proceedings are influenced by factors outside of our control, it is possible
that our estimated liability under these proceedings may change or that actual
results will differ from our estimates. We expect, that as a result of the
publicity surrounding predatory lending practices, we may be subject to other
class action suits in the future. See "Business -- Legal Proceedings."

Additionally, the U.S. Congress is currently considering a number of
proposed bills or proposed amendments to existing laws which could affect our
lending activities and make our business less profitable. These bills and
amendments, if adopted as proposed, could reduce our profitability by limiting
the fees we are allowed to charge, including prepayment fees, restricting the
terms we are allowed to include in our loan agreements and increasing the amount
of disclosure we are required to give to potential borrowers. While we can not
predict whether or in what form Congress may adopt these bills or amendments, we
are currently evaluating the potential impact of these bills and amendments, if
adopted, on our lending practices and results of operations. See "Business --
Lending Activities" and "Business -- Regulation."

We have procedures and controls to monitor compliance with numerous
federal, state and local laws and regulations. However, because these laws and
regulations are complex and often subject to interpretation, or as a result of
inadvertent errors, we may, from time to time, unknowingly violate these laws
and regulations.

More restrictive laws, rules and regulations may be adopted in the
future that could make compliance more difficult or expensive or we may be
subject to additional litigation or governmental reviews of our lending
practices which could hinder our ability to operate profitably and repay our
subordinated debt. See "Business -- Regulation."

A change in market interest rates may result in a reduction in our profitability
and impair our ability to repay our subordinated debt.

Rapid changes, either upward or downward, in interest rates may
adversely affect our profitability. Any future rise in interest rates could
unfavorably impact our liquidity and profitability by:

o reducing customer demand for our products;
o widening investor interest rate spread requirements and increasing
overcollateralization requirements in future securitizations;
o reducing the interest rate spread between the rate of interest we
receive on loans and interest rates we must pay under our
outstanding credit facilities and subordinated debt securities;
o reducing the profit we will realize in securitizations or other
sales of loans;
o limiting our access to borrowings in the capital markets; and
o impacting our ability to sell our subordinated debt at favorable
interest rates.

26

Gain on sale of loans may be unfavorably impacted to the extent that we
hold fixed interest rate mortgages prior to securitization. An increase in
interest rates reduces the interest rate spread between the average interest
rate on fixed interest rate loans and the weighted-average pass-through interest
rate to investors for interests issued in connection with the securitization.
Although the average loan interest rate is fixed at the time the loan is
originated, the pass-through interest rate to investors is not fixed until the
pricing of the securitization which occurs just prior to the sale of the loans.
Therefore, if market interest rates required by investors increase prior to
securitization of the loans, the interest rate spread between the average
interest rate on the loans and the pass-through interest rate to investors may
be reduced or eliminated. This factor would reduce or eliminate our profit on
the sale of the loans. Any reduction in our profitability could impair our
ability to repay our subordinated debt upon maturity. In addition, an increase
in interest rates could increase interest costs on all sources of borrowed funds
and reduce interest rate spreads on securitized loans which could negatively
impact our liquidity and capital resources by reducing cash flows which would
decrease our profitability.

A portion of the certificates issued to investors by some of the
securitization trusts are floating interest rate certificates based on an
established index plus an interest rate spread. The fair value of the excess
cash flow we will receive from these trusts would be reduced as a result of any
increases in interest rates paid on the floating interest rate certificates. At
June 30, 2002, $188.2 million of debt issued by securitization trusts was
floating interest rate certificates representing 6.6% of total debt issued by
securitization trusts. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Securitizations" for further discussion
of the impact on our interest-only strips of interest rate changes in floating
interest rate certificates issued by securitization trusts.

We are subject to risks associated with decreases in interest rates to
the extent that we have issued fixed interest rate subordinated debt securities
with scheduled maturities of one to ten years. At June 30, 2002, we had $288.6
million of our subordinated debt with scheduled maturities greater than one
year. Of this amount, $107.7 million is not subject to early redemption at our
option. If market interest rates decrease in the future, the interest rates paid
on our long term subordinated debt could exceed the current market interest rate
paid for similar instruments which could result in a reduction in our
profitability and impair our ability to repay our subordinated debt. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Interest Rate Risk Management."

If we are not able to sustain the levels of loan originations that we
experienced in the past, our future profitability may be reduced and our ability
to repay our subordinated debt may be impaired.

During fiscal years 2002 and 2001, we experienced record levels of loan
originations. Our ability to sustain the levels of loan originations experienced
in prior periods depends upon a variety of factors outside our control,
including:

o interest rates;

o conditions in the asset-backed securities markets;

o economic conditions in our primary market area;

o competition; and

o regulatory restrictions.

27

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 will become more difficult compared to a falling or stable
interest rate environment. If we are unable to sustain our levels of loan
originations, our profitability may be reduced and our ability to repay the
subordinated debt securities upon maturity may be impaired. See " -- A change in
market interest rates may result in a reduction in our profitability and impair
our ability to repay our subordinated debt." and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."

If we are unable to continue to successfully implement our business strategy,
our profitability may decrease, which could impair our ability to repay our
subordinated debt.

Our business strategy seeks to increase our loan volume through further
development of existing markets while maintaining our customary origination
fees, underwriting criteria, and the interest rate spread between loan interest
rates and the interest rates we pay for capital. Implementation of this strategy
will depend in large part on our ability to:

o expand in markets with a sufficient concentration of borrowers who
meet our underwriting criteria;
o obtain adequate financing on favorable terms;
o profitably securitize our loans in the secondary market on a
regular basis;
o hire, train and retain skilled employees; and
o successfully implement our marketing campaigns.

Our inability to achieve any or all of these factors could impair our ability to
implement our business strategy and successfully leverage our fixed costs which
could result in a reduction in our profitability and impair our ability to repay
our subordinated debt. See "Business -- Lending Activities."

If loan prepayment rates are higher than anticipated, our profitability could be
reduced and impair our ability to repay our subordinated debt.

A significant decline in market interest rates could increase the level
of loan prepayments, which would decrease the size of the total managed loan
portfolio and the related projected cash flows. Higher than anticipated rates of
loan prepayments could require a write down of the fair value of the related
interest-only strips and servicing rights, adversely impacting earnings during
the period of adjustment which would result in a reduction in our profitability
and impair our ability to repay our subordinated debt. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Securitizations" for information on the impact of prepayments in fiscal 2002.

A decline in real estate values could result in a reduction in originations,
which could reduce our profitability and impair our ability to repay our
subordinated debt.

Our business may be adversely affected by declining real estate values. Any
significant decline in real estate values reduces the ability of borrowers to
use home equity as collateral for borrowings. This reduction in real estate
values may reduce the number of loans we are able to make, which will reduce the
gain on sale of loans and servicing and origination fees we will collect, which
could reduce our profitability and limit our ability to repay our subordinated
debt upon maturity. See "Business -- Lending Activities."

28

A decline in value of the collateral securing our loans could result in an
increase in losses on foreclosure, which could reduce our profitability and
limit our ability to repay our subordinated debt.

Declining real estate values will also increase the loan-to-value
ratios of loans we previously made, which in turn, increases the probability of
a loss in the event the borrower defaults and we have to sell the mortgaged
property. In addition, delinquencies and foreclosures generally increase during
economic slowdowns or recessions. As a result, the market value of the real
estate or other collateral underlying our loans may not, at any given time, be
sufficient to satisfy the outstanding principal amount of the loans which could
reduce our profitability and limit our ability to repay our subordinated debt.
See "Business -- Lending Activities."

If we are unable to implement an effective hedging strategy, our profitability
may be reduced, which would reduce the funds we have available to repay our
subordinated debt. In a declining interest rate environment, even an effective
hedging strategy could result in cash losses in the current period.

From time to time, derivative financial instruments strategies are used
in an attempt to mitigate the effect of changes in interest rates on our fixed
interest rate mortgage loans prior to securitization that may involve the use
of, among other things, futures, interest rate swaps and forward pricing of
securitizations. An effective hedging strategy is complex and no strategy can
completely insulate us from interest rate risk. In fact, poorly designed
strategies or improperly executed transactions may increase rather than mitigate
interest rate risk. Hedging involves transaction and other costs, and these
costs could increase as the period covered by the hedging protection increases
or in periods of rising and fluctuating interest rates. In addition, an interest
rate hedging strategy may not be effective against the risk that the interest
rate spread needed to attract potential buyers of asset-backed securities may
widen. We recorded cash losses on the fair value of derivative financial
instruments of $9.4 million, $4.3 million and $2.1 million during fiscal years
ended 2002, 2001 and 2000 respectively on effective hedging transactions.

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

Competition from other lenders could adversely affect our profitability and our
ability to repay our subordinated debt.

The lending markets in which we compete are evolving. Some competitors
have been acquired by companies with substantially greater resources, lower cost
of funds, and a more established market presence than we have. If these
companies increase their marketing efforts to include our market niche of
borrowers, we may be forced to reduce the interest rates and fees we currently
charge in order to maintain and expand our market share. Any reduction in our
interest rates or fees could have an adverse impact on our profitability and our
ability to repay our subordinated debt. Our profitability and the profitability
of other similar lenders may attract additional competitors into this market.
See "Business -- Competition."

29

An economic downturn or recession in the eastern half of the United States could
result in reduced profitability, which would reduce the funds available to repay
our subordinated debt.

We currently originate loans primarily in the eastern half of the
United States. The concentration of loans in a specific geographic region
subjects us to the risk that a downturn in the economy or recession in the
eastern half of the country would more greatly affect us than if our lending
business were more geographically diversified. As a result, an economic downturn
or recession in this region could result in decreases in loan originations and
increases in delinquencies in our managed portfolio, which could reduce
profitability and the funds available to repay our subordinated debt. See "--
Our securitization agreements require us to retain some risk on loans that do
not meet the requirements in these agreements or require us, as servicer, to
advance interest payments for delinquent loans and allow us to repurchase a
limited amount of delinquent loans, which could result in a reduction in
profitability and reduce the funds we have available to repay our subordinated
debt" and "Business -- Lending Activities."

Our securitization agreements require us to retain some risk on loans that do
not meet the requirements in these agreements or require us, as servicer, to
advance interest payments for delinquent loans and allow us to repurchase a
limited amount of delinquent loans, which could result in a reduction in
profitability and reduce the funds we have available to repay our subordinated
debt.

Although we sell substantially all of the loans we originate through
securitizations, all of the securitization agreements require that we replace or
repurchase loans which do not conform to the representations and warranties made
by us at the time of sale. Additionally, when borrowers are delinquent in making
monthly payments on loans included in a securitization trust, we are required to
advance interest payments for the delinquent loans if we deem that the advances
will ultimately be recoverable. These advances can first be made out of funds
available in the trusts' collection account, then from our operating cash if
there are insufficient funds in the trusts' collection account. These advances,
including those made from the trusts' collection account, which if not recovered
from the borrower or proceeds from the liquidation of the loan, require
reimbursement from us. These advances may require funding from our capital
resources and may create greater demands on our cash flow than either selling
loans with servicing released or maintaining a portfolio of loans on balance
sheet. In addition, the securitization agreements allow us to purchase a limited
amount of delinquent loans, some of which may be in foreclosure, from the
securitization trusts, which we do in our discretion, from time to time in order
to avoid temporary discontinuations of residual and stepdown
overcollateralization cash flows from securitization trusts. To the extent
delinquent loans exceed certain requirements set forth in the securitization
agreements and we do not have sufficient cash to repurchase these loans, the
cash flows from the residual portion and overcollateralization portion of the
interest-only strips could be negatively impacted. See "Business --
Securitizations."

Claims by borrowers or purchasers of loans could result in reduced
profitability, which would reduce the funds we have available to repay our
subordinated debt.

In the ordinary course of our business, we are subject to claims made
against us by borrowers and purchasers of loans arising from, among other
things:

o losses that are claimed to have been incurred as a result of
alleged breaches of fiduciary obligations, misrepresentation,
error and omission by our employees, officers and agents
(including our appraisers);
o incomplete documentation; and
o failure to comply with various laws and regulations applicable to
our business.

30

To the extent that claims asserted, pending legal actions or judgments
against us, result in legal expenses or liability, such expense could result in
reduced profitability which would reduce funds available to repay our
subordinated debt. See "Business -- Legal Proceedings."

Environmental laws and regulations may restrict our ability to foreclose on
loans secured by real estate or increase costs associated with those loans which
could reduce our profitability and the funds available to repay our subordinated
debt.

Our ability to foreclose on the real estate collateralizing our loans
may be limited by environmental laws which pertain primarily to commercial
properties that require a current or previous owner or operator of real property
to investigate and clean up hazardous or toxic substances or chemical releases
on the property. In addition, the owner or operator may be held liable to a
governmental entity or to third parties for property damage, personal injury,
investigation and cleanup costs relating to the contaminated property. While we
would not knowingly make a loan collateralized by real property that was
contaminated, it is possible that the environmental contamination would not be
discovered until after we had made the loan.

To date there have been two instances where we have determined not to
foreclose on the real estate collateralizing a delinquent loan because of
environmental considerations. Any losses we may sustain on these two loans will
not have a material adverse effect on our profitability.

In addition to federal or state regulations, the owner or former owners
of a contaminated site may be subject to common law claims by third parties
based on damages and costs resulting from environmental contamination emanating
from the property. See "Business -- Loan Servicing."

31

Employees

At June 30, 2002, we employed 1,007 people on a full-time basis and 12
employees on a part-time basis. None of our employees are covered by a
collective bargaining agreement. We consider our employee relations to be good.

Executive Officers Who Are Not Also Directors

The following is a description of the business experience of each
executive officer who is not also a director.

Beverly Santilli, age 43, is First Executive Vice President, a position
she has held since September 1998 and Secretary, a position she has held since
our inception. Mrs. Santilli has held a variety of positions including Executive
Vice President and Vice President. Mrs. Santilli is also the President of
American Business Credit. Mrs. Santilli is responsible for all sales, marketing
and the day-to-day operation of American Business Credit. Mrs. Santilli is also
responsible for human resources of American Business Financial Services, Inc.
and its subsidiaries. Prior to joining American Business Credit and from
September 1984 to November 1987, Mrs. Santilli was affiliated with PSFS
initially as an Account Executive and later as a Commercial Lending Officer with
that bank's Private Banking Group. Mrs. Santilli is the wife of Anthony J.
Santilli.

Jeffrey M. Ruben, age 39, is Executive Vice President, a position he
has held since September 1998. Mr. Ruben was general counsel from April 1992 to
April 2001. He is also Executive Vice President of some of our subsidiaries,
positions he has held since April 1992. Mr. Ruben is responsible for the loan
servicing and collections departments, the asset allocation unit and the legal
department. Mr. Ruben served as Vice President from April 1992 to 1995 and
Senior Vice President from 1995 to 1998. From June 1990 until he joined us in
April 1992, Mr. Ruben was an attorney with the law firm of Klehr, Harrison,
Harvey, Branzburg & Ellers in Philadelphia, Pennsylvania. From December 1987
until June 1990, Mr. Ruben was employed as a credit analyst with the CIT Group
Equipment Financing, Inc. Mr. Ruben is a member of the Pennsylvania and New
Jersey Bar Associations. Mr. Ruben holds a New Jersey Mortgage Banker License
and a New Jersey Secondary Mortgage Banker License.

Albert W. Mandia, age 55, is Executive Vice President and Chief
Financial Officer of American Business Financial Services, Inc., positions he
has held since June 1998 and October 1998, respectively. Mr. Mandia is
responsible for all financial, treasury, information systems, facilities and
investor relations functions. Mr. Mandia also has responsibility for American
Business Mortgage Services Broker Division. From 1974 to 1998, Mr. Mandia was
associated with CoreStates Financial Corp. where he last held the position of
Chief Financial Officer from February 1997 to April 1998.

Milton Riseman, age 65, is Chairman of our Consumer Mortgage Group, a
position he has held since June 1999. Mr. Riseman is responsible for the sales,
marketing and day-to-day operation of Upland Mortgage, including the Upland
Mortgage retail operation at the Bala Cynwyd, Pennsylvania headquarters, and the
Upland Mortgage branch operations, which includes our offices in the eastern
half of the United States. In addition, Mr. Riseman is responsible for the Bank
Alliance Program. Mr. Riseman was President of Advanta Mortgage from February
1994 until 1999. He joined Advanta in 1992 as Senior Vice President,
Administration. From 1986 until 1992, Mr. Riseman was President of Citicorp
Acceptance Corp. He joined Citicorp in 1965, and in 1978, he moved into general
management positions in the bank's New York region.

32

Item 2. Properties

Except for real estate acquired in foreclosure in the normal course of
our business, we do not presently hold title to any real estate for operating
purposes. The interests which we presently hold in real estate are in the form
of mortgages against parcels of real estate owned by our borrowers or their
affiliates and real estate acquired through foreclosure.

We presently lease office space at 111 Presidential Boulevard, Bala
Cynwyd, Pennsylvania, just outside the city limits of Philadelphia. We are
currently leasing this office space with an annual rental cost of approximately
$2.9 million. The current lease term expires July 31, 2003. In addition, we
lease office space at 1 Presidential Boulevard, Bala Cynwyd, Pennsylvania. We
are currently leasing the 1 Presidential office space with an annual rental cost
of approximately $675,000. The current lease term expires November 30, 2004. We
also lease the Roseland, New Jersey office, which functions as the headquarters
for American Business Mortgage Services, Inc. and a regional processing center.
The principal Roseland office lease term expires July 31, 2003 and contains a
renewal option for an additional term of five years. The Roseland office
facility has a current annual rental cost of approximately $754,000. In
addition, we lease branch offices on a short-term basis in various cities
throughout the United States. We do not believe that the leases for the branch
offices are material to our operations.

Item 3. Legal Proceedings

On February 26, 2002, a purported class action titled Calvin Hale v.
HomeAmerican Credit, Inc., No. 02 C 1606, United States District Court for the
Northern District of Illinois, was filed in the Circuit Court of Cook County,
Illinois (subsequently removed by Upland Mortgage to the captioned federal
court) against our subsidiary, HomeAmerican Credit, Inc., which does business as
Upland Mortgage, on behalf of borrowers in Illinois, Indiana, Michigan and
Wisconsin who paid a document preparation fee on loans originated since February
4, 1997. The plaintiff alleges that the charging of, and the failure to properly
disclose the nature of, a document preparation fee were improper under
applicable state law. The plaintiff seeks restitution, compensatory and punitive
damages and attorney's fees and costs, in unspecified amounts. We believe that
our imposition of this fee is permissible under applicable law and we intend to
vigorously defend the case.

Our lending subsidiaries, including HomeAmerican Credit, Inc. which
does business as Upland Mortgage, are involved, from time to time, in class
action lawsuits, other litigation, claims, investigations by governmental
authorities, and legal proceedings arising out of their lending activities,
including the purported class action entitled, Calvin Hale v. HomeAmerican
Credit, Inc., d/b/a Upland Mortgage, described above. Due to our current
expectation regarding the ultimate resolution of these actions, management
believes that the liabilities resulting from these actions will not have a
material adverse effect on our consolidated financial position or results of
operations. However, due to the inherent uncertainty in litigation and since the
ultimate resolutions of these proceedings are influenced by factors outside of
our control, it is possible that our estimated liability under these proceedings
may change or that actual results will differ from our estimates. We expect,
that as a result of the publicity surrounding predatory lending practices, we
may be subject to other class action suits in the future.

33

In addition, from time to time, we are involved as plaintiff or
defendant in various other legal proceedings arising in the normal course of our
business. While we cannot predict the ultimate outcome of these various legal
proceedings, it is management's opinion that the resolution of these legal
actions should not have a material effect on our financial position, results of
operations or liquidity.

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

No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended June 30, 2002.

34

PART II

Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters

Our common stock is currently traded on the NASDAQ National Market
System under the symbol "ABFI." Our common stock began trading on the NASDAQ
National Market System on February 14, 1997.

The following table sets forth the high and low sales prices of our
common stock for the periods indicated. The stock price information appearing in
the table below as well as dividend information described below the table have
been retroactively adjusted to reflect the effects of a 10% stock dividend
declared on October 1, 2001 and the 10% stock dividend declared on August 21,
2002.

Quarter Ended High Low
- ----------------------------------------------------- -------- -------
June 30, 2000........................................ $ 15.19 $ 8.16
September 30, 2000................................... 12.65 4.04
December 31, 2000.................................... 6.51 4.14
March 31, 2001....................................... 10.95 4.95
June 30, 2001........................................ 13.09 7.85
September 30, 2001................................... 15.76 10.68
December 31, 2001.................................... 21.98 14.65
March 31, 2002....................................... 17.49 8.16
June 30, 2002........................................ 14.36 8.74
September 30, 2002 (through September 12, 2002)...... 15.84 6.36

As of August 15, 2002, there were 150 record holders and approximately
1,600 beneficial holders of our common stock.

During the year ended June 30, 2002, we paid dividends of $0.28 per
share on our common stock for an aggregate dividend payment of $0.8 million.
During the year ended June 30, 2001, we paid dividends of $0.26 per share on our
common stock for an aggregate dividend payment of $1.0 million. During the year
ended June 30, 2000, we paid $0.25 per share in dividends on our common stock,
for an aggregate dividend payment of $1.0 million.

On August 21, 2002, the Board of Directors declared a 10% stock
dividend payable September 13, 2002 to shareholders of record on September 3,
2002. Dividends for all periods have been retroactively adjusted to reflect the
effect of the stock dividend as if the additional shares had been outstanding
for each period presented. In addition, on October 1, 2001, the Board of
Directors declared a 10% stock dividend, which was paid on November 5, 2001 to
shareholders of record on October 22, 2001. Dividends for the first quarter of
fiscal 2002, the years ended June 30, 2001 and 2000 have been similarly adjusted
to reflect the effect of the dividend.

The payment of dividends in the future is in the sole discretion of our
Board of Directors and will depend upon, among other things, earnings, capital
requirements and financial condition, as well as other relevant factors.

As a Delaware corporation, we may not declare and pay dividends on
capital stock if the amount paid exceeds an amount equal to the excess of our
net assets over paid-in-capital or, if there is no excess, our net profits for
the current and/or immediately preceding fiscal year.

35

On April 2, 2001, we issued 3,025 shares to our director, Richard
Kaufman as a result of services rendered in connection with the stock buyback
program. This transaction was exempt from registration under the Securities Act
of 1933 pursuant to Section 4(2) of the Securities Act of 1933.

The following table details information regarding our existing equity
compensation plans as of June 30, 2002:

Number of securities
remaining available for
Number of securities future issuance under
to be issued upon equity compensation
exercise of Weighted-average plans (excluding
outstanding exercise price of securities reflected in
options (a) outstanding options column (a))
------------------------ ------------------------- -------------------------

Equity compensation plans approved by
security holders
Stock Option Plans................... 872,188(1) $10.93 236,024(2)
Restricted Stock Plan................ -- -- 165,000

Equity compensation plans not
approved by security holders(3)........ -- -- --
------- -------
Total.................................... 872,188 401,024
======= =======

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

1. Includes options granted pursuant to the 1995 Stock Option Plan for
Non-Employee Directors, the Amended and Restated 1993 Stock Option Plan,
and the Amended and Restated 1999 Stock Option Plan. Does not include
options granted pursuant to the 1997 Stock Option Plan for Non-Employee
Directors because all options granted pursuant to this plan expired
unexercised.

2. Includes shares of common stock issuable pursuant to the Amended and
Restated 1999 Stock Option Plan and does not include shares of common stock
authorized pursuant to our other stock option plans because we only intend
to issue future option grants under the Amended and Restated 1999 Stock
Option Plan.

3. Does not include shares of our common stock held by the ABFS 401(k) Plan
for the benefit of the participants. As of the latest statement dated June
30, 2002, the ABFS 401(k) Plan held approximately 31,600 shares of our
common stock.

36

Item 6. Selected Consolidated Financial Data

You should consider our selected consolidated financial information set
forth below together with the more detailed consolidated financial statements,
including the related notes, and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
document.

Year Ended June 30,
-------------------------------------------------------
Statement of Income Data: 2002 2001 2000 1999 1998
------ ------ ------ ------ ------
Revenues: (In thousands, except per share data)

Gain on sale of loans and leases............. $ 185,580 $ 128,978 $ 90,380 $ 64,490 $ 40,778
Interest and fees............................ 21,338 22,582 19,400 16,553 17,386
Interest accretion on interest-only strips... 35,386 26,069 16,616 2,021 538
Other........................................ 5,597 5,707 4,250 3,360 633
--------- --------- -------- -------- --------
Total revenues................................. 247,901 183,336 130,646 86,424 59,335
Total expenses(a).............................. 234,351 170,151 120,284 64,573 41,445
--------- --------- -------- -------- --------
Operating income before income taxes........... 13,550 13,185 10,362 21,851 17,890
Income taxes................................... 5,691 5,274 3,938 7,763 6,435
--------- --------- -------- -------- --------
Income before cumulative effect of a change
in accounting principle...................... 7,859 7,911 6,424 14,088 11,455
Cumulative effect of a change in accounting
principle.................................... -- 174 -- -- --
--------- --------- -------- -------- --------
Net income..................................... $ 7,859 $ 8,085 $ 6,424 $ 14,088 $ 11,455
========= ========= ======== ======== ========
Per Common Share Data:
Income before cumulative effect of a change
in accounting principle:
Basic earnings per common share(b) ....... $ 2.68 $ 2.08 $ 1.55 $ 3.16 $ 2.56
Diluted earnings per common share(b)...... 2.49 2.04 1.51 3.07 2.46
Net income:
Basic earnings per common share(b)........ $ 2.68 $ 2.13 $ 1.55 $ 3.16 $ 2.56
Diluted earnings per common share(b)...... 2.49 2.08 1.51 3.07 2.46
Cash dividends declared per common share....... 0.28 0.26 0.25 0.14 0.05

(a) Includes an interest-only strip fair value adjustment of $22.1 million in
the year ended June 30, 2002 and $12.6 million in the year ended June 30,
2000.

(b) Amounts for all periods have been retroactively adjusted to reflect the
effect of a 10% stock dividend declared August 21, 2002 as if the
additional shares had been outstanding for each period presented. Amounts
for the years ended June 30, 2001, and prior have been similarly adjusted
to reflect the effect of a 10% stock dividend declared October 1, 2001.

37

June 30,
--------------------------------------------------------
2002 2001 2000 1999 1998
------ ------ ------ ------ ------
Balance Sheet Data: (In thousands)

Cash and cash equivalents................... $ 108,599 $ 91,092 $ 69,751 $ 22,395 $ 4,486
Loan and lease receivables, net
Available for sale........................ 61,650 83,241 45,746 33,776 62,382
Interest and fees......................... 12,292 16,549 13,002 6,863 4,096
Interest-only strips........................ 512,611 398,519 277,872 178,218 95,913
Servicing rights............................ 125,288 102,437 74,919 43,210 18,472
Receivables for sold loans and leases....... 5,055 14,157 51,283 66,086 2,377
Total assets................................ 876,375 766,487 594,282 396,301 226,551
Subordinated debt........................... 655,720 537,950 390,676 211,652 115,182
Total liabilities........................... 806,997 699,625 532,167 338,055 183,809
Stockholders' equity........................ 69,378 66,862 62,115 58,246 42,742

Year Ended June 30,
---------------------------------------------------------------
2002 2001 2000 1999 1998
------ ------ ------ ------ ------
Other Data: (Dollars in thousands)
Total managed loan and lease portfolio...... $ 3,066,189 $2,589,395 $1,918,540 $1,176,918 $ 559,398
Originations:
Business purpose loans.................... 133,352 120,537 106,187 64,818 52,335
Home equity loans......................... 1,246,505 1,096,440 949,014 634,820 328,089
Average loan size of loans originated:
Business purpose loans.................... 97 91 89 80 83
Home equity loans......................... 89 82 70 74 62
Weighted-average interest rate on
loans originated:
Business purpose loans.................... 15.75% 15.99% 15.99% 15.91% 15.96%
Home equity loans......................... 10.91 11.46 11.28 11.05 11.95
Combined.................................. 11.38 11.91 11.64 11.17 12.15
Loans securitized / sold:
Securitizations........................... $ 1,351,135 $1,102,066 $1,001,702 $777,598 $384,700
Whole loan sales.......................... 57,679 76,333 102,670 105,751 51,594

Year Ended June 30,
-----------------------------------------------------
Financial Ratios: 2002 2001 2000 1999 1998
------ ------ ------ ------ ------
Return on average assets.................... 0.94% 1.22% 1.31% 4.56% 6.93%
Return on average equity.................... 11.75 12.22 10.29 28.10 31.10
Total delinquencies as a percentage of total
managed portfolio at end of period ....... 5.57 4.13 2.91 3.19 3.01
Real estate owned as a percentage of
total managed portfolio at end of period.. 1.11 1.10 0.68 0.85 0.16
Loan and lease losses as a percentage of the
average total managed portfolio during the
period (a)................................ 0.60 0.53 0.31 0.12 0.12
Pre-tax income as a percentage of total
revenues.................................. 5.47 7.19 7.93 25.28 30.15
Ratio of earnings to fixed charges.......... 1.19x 1.23x 1.26x 1.92x 2.23x

(a) Percentage based on average managed portfolio.

38

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

The following financial review and analysis of the financial condition
and results of operations for the fiscal years ended June 30, 2002, 2001 and
2000 should be read in conjunction with the consolidated financial statements
and the accompanying notes to the consolidated financial statements, and other
detailed information appearing in this document.

General

We are a diversified financial services organization operating
predominantly in the eastern and central portions of the United States. We
originate, sell and service business purpose loans and home equity loans,
through our principal direct and indirect subsidiaries. We also 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 different 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 or on a whole loan
basis.

Our loans primarily consist of fixed interest rate loans secured by
first or second mortgages on single family residences. Our customers are
primarily credit-impaired borrowers who are generally unable to obtain financing
from banks or savings and loan associations and who are attracted to our
products and services. We originate loans through a combination of channels
including a national processing center located at our centralized operating
office in Bala Cynwyd, Pennsylvania, a regional processing center in Roseland,
New Jersey and a network of retail branch offices. In addition, we offer
subordinated debt securities to the public, the proceeds of which are used for
repayment of existing debt, loan originations, our operations, investments in
systems and technology and for general corporate purposes including, but not
limited to, repurchases of our outstanding common stock.

Initially, we finance our loans under several secured and committed
credit facilities. These credit facilities are generally revolving lines of
credit, which we have with several financial institutions that enable us to
borrow on a short-term basis against our loans. We then securitize or sell our
loans to unrelated third parties on a whole loan basis to generate the cash to
pay off these revolving credit facilities. We also have a committed mortgage
conduit facility with a financial institution that enables us to sell our loans
into an off-balance sheet facility. Additionally, we rely upon funds generated
by the sale of subordinated debt and other borrowings to fund our operations and
to repay our debt as it matures. At June 30, 2002, $655.7 million of
subordinated debt was outstanding and revolving credit and conduit facilities
totaling $676.2 million were available, of which $61.3 million was drawn upon on
that date. We expect to continue to rely on the borrowings to fund our
operations and to repay maturing subordinated debt. For a description of our
credit facilities, subordinated debt and off-balance sheet facilities, see "--
Liquidity and Capital Resources."

39

In our mortgage loan securitizations, pools of mortgage loans are sold
to a trust. The trust then issues certificates or notes, which we refer to as
certificates in this document, to third-party investors, representing the right
to receive a pass-through interest rate and principal collected on the mortgage
loans each month. The difference between the average interest rate that is
charged to borrowers on the fixed interest rate pools of mortgage loans and the
weighted-average pass-through interest rate paid to investors are referred to as
the interest rate spread.

Our business strategy is dependent on our ability to emphasize lending
related activities that 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 could adversely
affect our results of operations and financial condition. See "Risk Factors --
If we are unable to continue to successfully implement our business strategy,
our profitability may decrease, which could impair our ability to repay our
subordinated debt."

During fiscal years 2002 and 2001, declines in securitization
pass-through interest rates resulted in interest rate spreads improving by
approximately 196 basis points at June 30, 2002 compared to the fourth quarter
of fiscal 2000. Increased interest rate 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 of loans in a securitization.
See "-- Securitizations" for further details. No assurances can be made that
market 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 to become more difficult than during a stable or falling interest
rate environment. This situation occurred from our September 1998 mortgage loan
securitization through the June 2000 mortgage loan securitization when the
pass-through interest rates on the asset-backed securities issued in our
securitizations had increased by approximately 155 basis points. During the same
period, the average interest rate on our loans securitized increased only 71
basis points. We would address the challenge presented by a rising interest 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 -- Strategies for use of Derivative Financial
Instruments" for a discussion of our hedging strategies.

A rising interest rate environment could unfavorably impact our
liquidity and capital resources. Rising interest rates could impact our
short-term liquidity by widening investor interest rate 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.

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 state and local governmental
authorities have increased their focus on lending practices by some companies in
the subprime lending industry, more commonly referred to as "predatory lending"
practices. State, local and federal governmental agencies have imposed sanctions
for practices including, but not limited to, charging borrowers excessive fees,
imposing higher interest rates than the borrower's credit risk warrants and
failing to adequately disclose the material terms of loans to the borrowers. As
a result of these initiatives, we are unable to predict whether state, local or
federal authorities will require changes in our lending practices in the future,
including the reimbursement of borrowers as a result of fees charged or the
imposition of fines, or the impact of those changes on our profitability. The
Pennsylvania Attorney General reviewed certain fees charged to Pennsylvania
customers by our subsidiary, HomeAmerican Credit, Inc., which does business as
Upland Mortgage. Although we believe that these fees were fair and in compliance
with applicable federal and state laws, we agreed to reimburse borrowers
approximately $221,000 with respect to a particular fee and to reimburse the
Commonwealth of Pennsylvania $50,000 for its costs of investigation and for
future public protection purposes. We have satisfied the monetary commitments
and obligations to the Pennsylvania Attorney General. The reserve, which we
previously established, was adequate to cover the resolution of this matter.

40

In addition to the regulatory initiatives with respect to so-called
"predatory lending" practices, we are also subject, from time to time, to
private litigation, including actual and purported class action suits. See
"Business -- Legal Proceedings" for a description of one purported class action
suit currently pending. We expect, that as a result of the publicity surrounding
predatory lending practices, we may be subject to other class action suits in
the future.

Although we are licensed to originate loans predominantly in the
eastern and central portions of the United States, we currently originate loans
primarily in the eastern half of the United States. The concentration of loans
in a specific geographic region subjects us to the risk that a downturn in the
economy or recession in the eastern half of the country would more greatly
affect us than if our lending business were more geographically diversified. As
a result, an economic downturn or recession in this region could result in
reduced profitability. See "Risk Factors -- An economic downturn or recession in
the eastern half of the United States could result in reduced profitability,
which would reduce the funds we have available to repay our subordinated debt."

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

Effective December 31, 1999, we de-emphasized and subsequent to that
date, discontinued the origination of business equipment leases but continue to
service the remaining portfolio of leases.

Application of Critical Accounting Policies

Our consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America. The
accounting policies discussed below are considered by management to be critical
to understanding our financial condition and results of operations. The
application of these accounting policies requires significant judgment and
assumptions by management, which are based upon historical experience and future
expectations. The nature of our business and our accounting methods make our
financial condition, changes in financial condition and results of operations
highly dependent on management's estimates. The line items on our income
statement and balance sheet impacted by management's estimates are described
below.

41

Revenue Recognition. Revenue recognition is highly dependent on the
application of Statement of Financial Accounting Standards, referred to as SFAS
in this document, No. 140 "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities" and "gain-on-sale" accounting to our
quarterly loan securitizations. Gains on sales of loans through securitizations
for the year ended June 30, 2002 were 74.9% of total revenues. Securitization
gains represent the difference between the net proceeds to us, including
retained interests in the securitization, and the allocated cost of loans
securitized. The allocated cost of loans securitized is determined by allocating
their net carrying value between the loans, the interest-only strips and the
servicing rights we retain based upon their relative fair values. Estimates of
the fair values of the interest-only strips and the servicing rights we retain
are discussed below. We believe the accounting estimates related to gain on sale
are critical accounting estimates because more than 80% of the securitization
gains were based on estimates of retained interests in fiscal 2002. The amount
recognized as gain on sale for the retained interests we receive as proceeds in
a securitization, in accordance with accounting principles generally accepted in
the United States of America, is highly dependent on management's estimates.

Interest-Only Strips. Interest-only strips, which represent the right
to receive future cash flows from securitized loans represent 58.5% of our total
assets at June 30, 2002 and are carried at their fair values. Fair value is
based on 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 the 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 expected prepayment and credit loss rates on pools of
loans sold through securitizations. We believe the accounting estimates used in
determining the fair value of interest-only strips are critical accounting
estimates because 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, current and expected economic conditions and in the case
of prepayment rate assumptions, consideration of the impact of changes in market
interest rates. The actual loan prepayment rate may be affected by a variety of
economic and other factors, including prevailing interest rates, the
availability of alternative financing to borrowers and the type of loan. Our
expected future cash flows from our interest-only strips are periodically
re-evaluated. The current assumptions for prepayment and credit loss rates are
monitored against actual experience and other economic and market conditions and
are changed if deemed necessary. 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 our estimate of
residual cash flows and 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 accounting adjustment, which would adversely affect our
income in the period of adjustment. See "-- Securitizations" for more detail on
the estimation of, and changes made to the assumptions used in the estimation
of, the fair value of interest-only strips and the sensitivities of these
balances to changes in assumptions and the impact on our financial statements of
changes in assumptions.

42

Interest accretion income represents the yield component of cash flows
received on interest-only strips. We use a prospective approach to estimate
interest accretion. As previously discussed, we periodically update estimates of
residual cash flow from our securitizations. Under the prospective approach,
when it is probable that there is a favorable or unfavorable change in estimated
residual cash flow from the cash flow previously projected, we recognize a
larger or smaller percentage of the cash flow as interest accretion. 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.

Servicing Rights. Servicing rights, which represent the rights to
receive contractual servicing fees from securitization trusts and ancillary fees
from borrowers net of estimated compensation that would be required by a
substitute servicer represented 14.3% of our total assets at June 30, 2002.
Servicing rights are carried at the lower of cost or fair value. The 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. The benefits of servicing are the present value of projected net cash
flows from contractual servicing fees and ancillary servicing fees. We believe
the accounting estimates used in determining the fair value of servicing rights
are critical accounting estimates because the projected cash flows from
servicing fees incorporate assumptions made by management, 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. The
current assumptions for prepayment and credit loss rates are monitored against
actual experience and other economic and market conditions and are changed if
deemed necessary. 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 "-- Securitizations" for more detail on the
estimation of, and changes made to the assumptions used in the estimation of,
the fair value of servicing rights and the sensitivities of these balances to
changes in assumptions and the impact on our financial statements of changes in
assumptions.

Amortization of the servicing rights asset for securitized loans is
calculated individually for each securitized loan pool and is recognized in
proportion to, and over the period of estimated future servicing income on that
particular pool of loans. If our analysis indicates the carrying value of
servicing rights is not recoverable through future cash flows from contractual
servicing and other ancillary fees, a valuation allowance would be required. As
of June 30, 2002, our valuation analysis has not indicated any impairment.
Impairment is measured as the excess of carrying value over fair value.

Special Purpose Entities and Off-Balance Sheet Facilities. Special
purpose entities and off-balance sheet facilities are used in our mortgage loan
securitizations. Asset securitizations are one of the most common off-balance
sheet arrangements in which a company transfers assets off its balance sheet by
selling them to a special purpose entity. The special purpose entities described
below meet our objectives for mortgage loan securitization structures and comply
with accounting principles generally accepted in the United States of America.
Accounting for special purpose entities is under review by the Financial
Accounting Standards Board, referred to as FASB in this document. In June 2002,
the FASB issued a proposed interpretation of Accounting Research Bulletin No. 51
"Consolidated Financial Statements." The proposal provides guidance on
consolidation by a business enterprise of special purpose entities. The
proposal, if adopted as proposed, will not affect our current consolidation
policies for special purpose entities or recognition of gains for the sale of
loans. In the event that the proposal is not adopted as proposed or accounting
rules are changed in the future, our use of special purpose entities, our
revenue recognition for securitization gains for securitized loans and our
off-balance sheet accounting treatment for securitized loans could be materially
impacted.

43

Our securitizations involve a two-step transfer that qualifies for sale
accounting 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 and establishing a true sale under legal standards. Next,
the special purpose entity sells the loans to a qualified special purpose
entity, which we refer to as the trust, transferring title of the loans and
isolating those assets from our assets. Finally, the trust issues certificates
to investors to raise the cash purchase price for the loans being sold, collects
proceeds on behalf of the certificate holders, distributes proceeds and is a
distinct legal entity, independent from us. Under current accounting rules, the
trusts do not qualify for consolidation in our financial statements and carry
the loan collateral as assets and the certificates issued to investors as
liabilities. At June 30, 2002 and 2001, the mortgage securitization trusts held
loans with an aggregate principal balance due of $2.9 billion and $2.4 billion
as assets and owed $2.8 billion and $2.3 billion of investor certificates to
third parties, respectively.

We also use special purpose entities in our sales of loans to a $300
million off-balance sheet mortgage conduit facility. Sales into the off-balance
sheet facility involve a two-step transfer that qualifies for sale accounting
under SFAS No. 140, similar to the process described above. This facility has a
revolving feature and can be directed by the sponsor to dispose of the loans.
Typically this has been accomplished by 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. When loans are sold to this facility, we perform a
probability assessment of the likelihood that the sponsor will transfer the
loans into a term securitization. As the sponsor has typically transferred the
loans to a term securitization in the past, the amount of gain on sale we have
recognized for loans sold to this facility is estimated based on the terms we
would obtain in a term securitization rather than the terms of this facility. At
June 30, 2002, the off-balance sheet mortgage conduit facility held loans with
principal balance due of $56.6 million as assets and owed $54.9 million to third
parties.

Allowance for Loan and Lease Losses. The allowance for loan and lease
losses 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 our ability to collect on outstanding loans and leases based upon a
variety of factors, including, 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. Additions to the
allowance arise from the provision for credit losses charged to operations or
from the recovery of amounts previously charged-off. Loan and lease charge-offs
reduce the allowance. If the actual collection of outstanding loans and leases
is less than we anticipate, further write downs would be required which would
reduce our net income in the period the write down was required.

44

Development of Critical Accounting Estimates. On a periodic basis,
senior management reviews the estimates used in our critical accounting
policies. As a group, senior management discusses the development and selection
of the assumptions used to perform our estimates described above. Management has
discussed the development and selection of the estimates used in our critical
accounting policies as of June 30, 2002 with the Audit Committee of our Board of
Directors. In addition, management has reviewed our disclosure of the estimates
in Management's Discussion and Analysis of Financial Condition and Results of
Operations with the Audit Committee.

Initial Adoption of Accounting Policies. Generally, we do not enter
into derivative financial instrument contracts for trading purposes. However, in
fiscal 2002 we have entered into a derivative financial instrument contract,
which we have not designated as an accounting hedge and therefore is accounted
for as a trading asset or liability. This contract was designed to reduce our
exposure to changes in the fair value of certain interest-only strips due to
changes in the one-month London Inter-Bank Offered Rate, referred to in this
document as LIBOR. The structure of certain securitization trusts includes a
floating interest rate tranche based on one-month LIBOR plus an interest rate
spread. Floating interest rate tranches in a securitization expose us to gains
or losses due to changes in the fair value of the interest-only strip from
changes in the floating interest rate paid to the certificate holders. In order
to manage this exposure we have entered into an interest rate swap agreement to
lock in a fixed interest rate on our third quarter fiscal 2002 securitization's
variable rate tranche. The swap agreement requires a net cash settlement on a
monthly basis of the difference between the fixed interest rate on the swap and
the LIBOR paid on the certificates. The fair value of this swap agreement is
based on estimated market values for the sale of the contract provided by a
third party. As of June 30, 2002 the unrealized change in the fair value of this
derivative financial instrument was a decrease of $0.5 million and an additional
$0.2 million in net cash settlements were paid on the contract. Our
interest-only strips are held as available for sale securities and therefore
changes in the fair value of the interest-only strips are recorded as a
component of equity unless the fair value of the interest-only strip falls below
its cost basis, which would require a write down through current period income.
See "-- Interest Rate Risk Management" for further details of this interest rate
swap agreement.

Impact of Changes in Critical Accounting Estimates in Prior Fiscal Years

Discount rates. During fiscal 2000, a write down of $12.6 million was
recorded on our interest-only strips, of which $11.2 million was due to a change
in the discount rate used to value our interest-only strips. At June 30, 2000,
we increased the discount rate applicable to the residual portion of our
interest-only strips from 11% to 13%. No changes were made in the discount rate
used to determine the fair value of the overcollateralization portion of the
cash flows from our interest-only strips. The change in the discount rate was
considered to be an other than temporary fair value adjustment and was recorded
as expense in fiscal 2000. The factors that led to this other than temporary
decline in fair value of our interest-only strips included:

45

o Sustained increase in market interest rates through the fourth
quarter of fiscal 2000;
o Increases in the all-in cost of our mortgage loan trust investor
certificates from September 1998 through June 2000;
o Increases in the cost of funding our interest-only strips,
particularly the interest rate paid on subordinated debt; and
o Events and conditions in the mortgage lending industry and the
actions by others in that industry.

Prepayment rates. During the nine-month period ended October 1998, the
percentage of home equity loans that we originated containing prepayment fees
increased from less than 50% of loans originated to over 85%, a percentage which
has been maintained since that time. Due to this increase in the volume of loans
originated with prepayment fees, we had reduced the initial annual prepayment
rate assumption on business loans and lengthened the initial assumptions used
for the prepayment ramp period on home equity loans from 12 to 18 months
beginning with the 1999-1 mortgage loan securitization through the 2000-1
mortgage loan securitization and to 24 months beginning with the 2000-2 mortgage
loan securitization. Our experience indicated that when a loan has a prepayment
fee provision, fewer borrowers will prepay, and those prepaying will do so more
slowly. Our actual cumulative prepayment experience through March 31, 2000
demonstrated that only 25% of home equity loans having prepayment fees were
actually prepaid by the borrowers, while 47% of home equity loans without
prepayment fees were prepaid. This cumulative historical performance
demonstrates that it was nearly twice as likely that a loan without a prepayment
fee would be prepaid. The effect of these changes in prepayment rate assumptions
increased the gains on securitizations for fiscal 2000.

In the third quarter of fiscal 2001, we evaluated our accumulated
experience with pools of loans that had a high percentage of loans with
prepayment fees. We had begun using a static pool analysis of prepayments,
whereby we analyzed historical prepayments by period, to determine average
prepayments expected by period. For business purpose loans, we found that
prepayments for the first year are generally lower than we had anticipated, peak
at a higher rate than previously anticipated by month 24 and decline by month
40. Home equity loan prepayments generally ramped faster in the first year than
we had anticipated but leveled more slowly over 30 months and to a lower final
rate than we had been using previously. We utilized this information to modify
our loan prepayment rates and ramp periods to better reflect the amount and
timing of expected prepayments. The effect of these changes implemented in the
third quarter of fiscal 2001 was a net reduction in the value of our
interest-only strips of $3.1 million or less than 1% and an insignificant net
impact on securitization gains for fiscal 2001. The effect on the interest-only
strips of this change in assumptions was recorded through an adjustment to
comprehensive income in accordance with SFAS No. 115 "Accounting for Certain
Investments in Debt and Equity Securities."

Credit loss rates. In fiscal 2000, the initial credit loss assumptions
beginning with the 1999-4 mortgage loan securitization were increased as a
result of an increase in the percentage of second mortgage loans originated and
our concerns regarding high levels of real estate values. The average percentage
of first mortgage loans securitized had declined approximately 10% from the
fiscal 1999 securitizations to the fiscal 2000 securitizations. High real estate
values also affected our loss assumptions because in the event of an economic
downturn, the loan-to-value ratios of the loans could be understated. Both of
these factors increased the potential that the underlying real estate collateral
would not be sufficient to satisfy the loan if a foreclosure were required.
Although our percentage of first mortgages has subsequently increased, we
believe real estate values may limit our ability to maintain the credit loss
experience realized in prior securitizations. The effect of these changes in
credit loss assumptions reduced the gains on securitizations in fiscal 2000 by
approximately $1.7 million.

46

For a description of the impacts of changes in critical accounting
estimates in the year ended June 30, 2002, see "-- Securitizations."

Securitizations

During the year ended June 30, 2002, write downs of $44.1 million were
recorded on our interest-only strips due to increases in prepayment experience.
The income statement impact for fiscal 2002 was a write down of $22.1 million
while the remaining $22.0 million was written down through other comprehensive
income in accordance with the provisions of SFAS No. 115 "Accounting for Certain
Investments in Debt and Equity Securities" and Emerging Issues Task Force
guidance, referred to as EITF in this document, 99-20. The following table
details the pre-tax write downs of the interest-only strips by quarter (in
thousands):

Income Other
Total Statement Comprehensive
Quarter Ended Write down Impact Income Impact
- ---------------------------- -------------------- ------------------ -------------------

December 31, 2001............ $ 11,322 $ 4,462 $ 6,860
March 31, 2002............... 15,513 8,691 6,822
June 30, 2002................ 17,244 8,900 8,344
-------- -------- --------
Total fiscal 2002............ $ 44,079 $ 22,053 $ 22,026
======== ======== ========

Although we increased the prepayment rate assumptions used to value our
interest-only strips in the second quarter of fiscal 2002, prepayment rates
throughout the mortgage industry continued to increase and our prepayment
experience continued to exceed even our revised assumptions. Based on current
economic conditions, published mortgage industry surveys and our own prepayment
experience, we believe prepayments will continue to remain at higher than normal
levels for the near term before returning to average historical levels. As a
result, we have increased our prepayment rate assumptions for home equity loans
for the near term, but at a declining rate, before returning to our historical
levels. However, we cannot predict with certainty what our prepayment experience
will be in the future. Any unfavorable difference between the assumptions used
to value our interest-only strips and our actual experience may have a
significant adverse impact on the value of these assets.

47

The following table summarizes the volume of loan securitizations and
whole loan sales for the years ended June 30, 2002, 2001 and 2000 (in
thousands):

Year Ended June 30,
---------------------------------------
Securitizations: 2002 2001 2000
------ ------ ------

Business loans.......................... $ 129,074 $ 109,892 $ 104,503
Home equity loans....................... 1,222,061 992,174 887,936
Equipment leases........................ -- -- 9,263
----------- ----------- -----------
Total................................... $ 1,351,135 $ 1,102,066 $ 1,001,702
=========== =========== ===========

Gain on sale of loans and leases
through securitization................ $ 185,580 $ 128,978 $ 90,380
Securitization gains as a percentage of
total revenue......................... 74.9% 70.4% 69.2%

Whole loan sales........................ $ 57,679 $ 76,333 $ 102,670
Premiums on whole loan sales............ $ 2,447 $ 2,743 $ 1,735

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. See "-- Liquidity and Capital Resources" for a
discussion of the impact of securitizations on our cash flow.

Several factors affect our ability to complete securitizations on a
profitable basis. These factors include conditions in the securities markets,
such as fluctuations in interest rates described below, conditions in the
asset-backed securities markets relating to the loans we originate and credit
quality of the managed portfolio of loans. 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.

When we securitize our loans by selling them to trusts, we receive cash
and an interest-only strip, which represents our retained interest in
securitized loans. The trust issues multi-class securities, which derive their
cash flows from the pool of securitized loans. These securities, which are
senior in right to our interest-only strips in the trusts, are sold to public or
private investors. In addition, when we securitize our loans we retain the right
to service the loans for a fee, which creates an asset that we refer to as our
servicing rights. Servicing includes processing of mortgage payments, processing
of disbursements for tax and insurance payments, maintenance of mortgage loan
records, performance of collection efforts, including disposition of delinquent
loans, foreclosure activities and disposition of real estate owned, referred to
as REO, and performance of investor accounting and reporting processes.

Interest-Only Strips. As the holder of the interest-only strips, 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 trust investors, 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.

48

Generally, all residual cash flows are initially retained by the trust
to establish required overcollateralization levels in the trust.
Overcollateralization is the excess of the aggregate principal balances of loans
in a securitized pool over the 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 securitized loans. 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 to 36 months or when the
remaining balance of securitized loans are less than 50% of the
original balance of securitized loans.

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
June 30, 2002, investments in interest-only strips totaled $512.6 million,
including the fair value of overcollateralization related cash flows of $236.6
million.

49

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 June 30, 2002
(dollars in millions)

2002-2 2002-1 2001-4 2001-3 2001-2 2001-1 2000-4 2000-3 2000-2
------ ------ ------ ------ ------ ------ ------ ------ ------

Original balance of loans securitized:
Business loans.......................... $ 34 $ 32 $ 29 $ 31 $ 35 $ 29 $ 27 $ 16 $ 28
Home equity loans....................... 346 288 287 269 320 246 248 134 275
------ ------ ------ ------ ------ ------ ------ ------ ------
Total................................... $ 380 $ 320 $ 316 $ 300 $ 355 $ 275 $ 275 $ 150 $ 303
====== ====== ====== ====== ====== ====== ====== ====== ======
Current balance of loans securitized:
Business loans.......................... $ 34 $ 31 $ 28 $ 27 $ 31 $ 25 $ 21 $ 11 $ 20
Home equity loans....................... 346 279 264 229 241 159 143 74 151
------ ------ ------ ------ ------ ------ ------ ------ ------
Total................................... $ 380 $ 310 $ 292 $ 256 $ 272 $ 184 $ 164 $ 85 $ 171
====== ====== ====== ====== ====== ====== ====== ====== ======
Weighted-average interest rate on loans
securitized:
Business loans.......................... 15.99% 15.83% 15.76% 15.93% 15.95% 16.04% 16.09% 16.09% 15.99%
Home equity loans....................... 10.99% 10.88% 10.74% 11.13% 11.21% 11.46% 11.61% 11.45% 11.43%
Total................................... 11.43% 11.37% 11.22% 11.64% 11.74% 12.08% 12.18% 12.05% 11.97%

Percentage of first mortgage loans......... 84% 89% 89% 87% 88% 87% 85% 86% 79%
Weighted-average loan-to-value............. 76% 76% 77% 76% 77% 76% 76% 77% 77%
Weighted-average remaining term (months) on
loans securitized...................... 254 251 250 242 240 231 222 219 230

Original balance of Trust Certificates..... $ 380 $ 320 $ 322 $ 306 $ 355 $ 275 $ 275 $ 150 $ 300
Current balance of Trust Certificates...... $ 380 $ 306 $ 291 $ 252 $ 259 $ 173 $ 152 $ 78 $ 153
Weighted-average pass-through interest rate
to Trust Certificate holders(a)........ 6.70% 6.15% 5.35% 5.72% 6.86% 6.62% 7.05% 7.61% 7.42%
Highest Trust Certificate pass-through
interest rate.......................... 7.39% 6.51% 5.35% 6.14% 6.99% 6.28% 7.05% 7.61% 8.04%

Overcollateralization requirements:
Required percentages:
Initial................................. -- -- -- -- -- -- -- -- 0.90%
Final target............................ 3.50% 4.50% 4.25% 4.00% 4.40% 4.10% 4.50% 4.75% 5.95%
Stepdown overcollateralization.......... 7.00% 9.00% 8.50% 8.00% 8.80% 8.20% 9.00% 9.50% 11.90%
Required dollar amounts:
Initial............................... -- -- -- -- -- -- -- -- $ 3
Final target.......................... $ 13 $ 14 $ 13 $ 12 $ 16 $ 11 $ 12 $ 7 $ 18
Current status:
Overcollateralization amount........... -- $ 4 $ 1 $ 4 $ 13 $ 11 $ 12 $ 7 $ 18
Final target reached or anticipated date
to reach............................... 7/2003 5/2003 7/2003 3/2003 11/2002 Yes Yes Yes Yes
Stepdown reached or anticipated date to
reach.................................. 2/2006 8/2005 3/2005 11/2004 5/2004 10/2003 1/2004 10/2003 7/2003

Annual surety wrap fee..................... (b) 0.21% 0.20% 0.20% 0.20% 0.20% 0.21% 0.21% 0.21%

Servicing rights:
Original balance........................ $ 15 $ 13 $ 13 $ 12 $ 15 $ 11 $ 14 $ 7 $ 14
Current balance......................... $ 15 $ 12 $ 12 $ 10 $ 11 $ 8 $ 9 $ 4 $ 8

(a) Rates for securitizations 2001-1 and forward include rate on notional bonds,
or the impact of premiums received on certificates, included in
securitization structure. The sale of notional bonds allows us to receive
more cash at the closing of a securitization. See "-- Year Ended June 30,
2002 Compared to Year Ended June 30, 2001 -- Gain on Sale" for further
description of the notional bonds.
(b) Credit enhancement for 2002-2 was provided through a senior / subordinated
certificate structure.

50

Summary of Selected Mortgage Loan Securitization Trust Information (Continued)
Current Balances as of June 30, 2002
(dollars in millions)

2000-1 1999-4 1999-3 1999-2 1999-1 1998(a) 1997(a) 1996(a)
------ ------ ------ ------ ------ ------ ------ ------

Original balance of loans securitized:
Business loans.......................... $ 25 $ 25 $ 28 $ 30 $ 16 $ 57 $ 45 $ 29
Home equity loans....................... 212 197 194 190 169 448 130 33
------ ------ ------ ------ ------ ------ ------ ------
Total................................... $ 237 $ 222 $ 222 $ 220 $ 185 $ 505 $ 175 $ 62
====== ====== ====== ====== ====== ====== ====== ======
Current balance of loans securitized:
Business loans.......................... $ 18 $ 17 $ 15 $ 16 $ 8 $ 21 $ 13 $ 7
Home equity loans....................... 112 105 100 102 80 165 29 6
------ ------ ------ ------ ------ ------ ------ ------
Total................................... $ 130 $ 122 $ 115 $ 118 $ 88 $ 186 $ 42 $ 13
====== ====== ====== ====== ====== ====== ====== ======
Weighted-average interest rate on loans
securitized:
Business loans.......................... 16.06% 16.12% 15.89% 15.75% 15.96% 15.95% 15.91% 15.92%
Home equity loans....................... 11.34% 11.07% 10.87% 10.45% 10.67% 10.77% 11.51% 10.94%
Total................................... 11.99% 11.78% 11.55% 11.18% 11.17% 11.36% 12.87% 13.70%

Percentage of first mortgage loans......... 80% 82% 84% 88% 91% 89% 75% 74%
Weighted-average loan-to-value............. 77% 76% 77% 76% 77% 77% 74% 66%
Weighted-average remaining term (months) on
loans securitized........................ 219 213 217 224 220 202 161 121

Original balance of Trust Certificates..... $ 235 $ 220 $ 219 $ 219 $ 184 $ 498 $ 171 $ 61
Current balance of Trust Certificates...... $ 116 $ 110 $ 104 $ 107 $ 79 $ 165 $ 36 $ 9
Weighted-average pass-through interest rate
to Trust Certificate holders............. 7.39% 7.06% 7.07% 6.85% 6.56% 6.38% 7.17% 7.68%

Highest Trust Certificate pass-through
interest rate............................ 7.93% 7.68% 7.49% 7.13% 6.58% 7.15% 7.29% 7.67%

Overcollateralization requirements:
Required percentages:
Initial................................. 0.75% 1.00% 1.00% 0.50% 0.50% 1.50% 2.43% 1.94%
Final target............................ 5.95% 5.50% 5.00% 5.00% 5.00% 5.10% 7.43% 8.94%
Stepdown overcollateralization.......... 11.90% 11.00% 10.00% 10.00% 10.00% 10.21% 14.86% 12.90%
Required dollar amounts:
Initial............................... $ 2 $ 2 $ 2 $ 1 $ 1 $ 7 $ 4 $ 1
Final target.......................... $ 14 $ 12 $ 11 $ 11 $ 9 $ 26 $ 13 $ 6
Current status:
Overcollateralization amount........... $ 14 $ 12 $ 11 $ 11 $ 9 $ 21 $ 6 $ 4
Final target reached or anticipated
date to reach ....................... Yes Yes Yes Yes Yes Yes Yes Yes
Stepdown reached or anticipated date
to reach............................. 4/2003 12/2002 9/2002 10/2002 12/2002 Yes Yes Yes

Annual surety wrap fee..................... 0.19% 0.21% 0.21% 0.19% 0.19% 0.21% 0.26% 0.18%

Servicing rights:
Original balance........................ $ 10 $ 10 $ 10 $ 10 $ 8 $ 18 $ 7 $ 4
Current balance......................... $ 6 $ 5 $ 5 $ 5 $ 3 $ 7 $ 3 $ 1

(a) Amounts represent combined balances and weighted-average percentages for
four 1998 securitization pools, two 1997 securitization pools and two 1996
securitization pools.

51

The estimation 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, prepayment rates and credit loss rates on the pool of loans.
These assumptions are monitored against actual experience and other economic and
market conditions and are changed if deemed necessary. Our methodology for
determining the discount rates, prepayment rates and credit loss rates used to
calculate the fair value of our interest-only strips is described below.

Discount rates. 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 conparisons of our valuation assumptions and performance experience to
others in the non-conforming 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-conforming mortgage
industry has been to add an interest rate 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 an interest rate 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-conforming mortgage industry. Average
interest rate of securitized loans exceeds the industry average by
100 basis points or more. All of the securitized loans have fixed
interest rates, which are more predictable than adjustable rate
loans.

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

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

52

o A portfolio credit grade mix comprised of 61% A credits, 23% B
credits, 14% C credits, and 2% D credits. In addition, our
historical loss experience is below what is experienced by others
in the non-conforming mortgage industry.

Although market interest rates have declined in fiscal years 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 uncertain economic conditions and to
stimulate economic growth. Additionally, the non-conforming 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 pass-through interest
rate in the mortgage securitization. In fiscal 2001, we instituted the use of a
minimum discount rate of 6.5%. At June 30, 2002, the average discount rate
applied to projected overcollateralization cash flows was 7%. The risk
characteristics of the projected overcollateralization cash flows do not include
prepayment risk and have minimal credit risk. For example, if the entire
collateral balance in a securitized pool of loans was prepaid by borrowers, we
would fully recover the overcollateralization portion of the interest-only
strips. 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 and
stepdowns of overcollateralization have generally occurred as scheduled.
Overcollateralization represents our investment in the excess collateral in a
securitized pool of mortgage loans.

The blended discount rate used to value the interest-only strips,
including the overcollateralization cash flows, was 10% at June 30, 2002.

Prepayment rates. The assumptions we use to estimate future prepayment
rates are periodically 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 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 from the average. For pools of mortgage loans greater than
one year old, prepayment experience trends for an individual pool is considered
to be more significant. For these pools, 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.
Current economic conditions, current interest rates and other factors are also
considered in our analysis.

53

As was previously discussed, during the year ended June 30, 2002 our
actual prepayment experience was generally higher, most significantly on home
equity loans, than our historical averages for prepayments. The mortgage
industry in general has had this experience. 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 was 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. Based on current economic conditions, published
mortgage industry surveys and our own prepayment experience, we believe
prepayments will continue to remain at higher than normal levels for the near
term before returning to average historical levels.

In addition to the use of prepayment fees on our loans, we have
implemented programs and strategies in an attempt to reduce loan prepayments in
the future. These programs and strategies may include providing information to a
borrower regarding costs and benefits of refinancing, which at times may
demonstrate a refinancing option is not in the best economic interest of the
borrower. Other strategies include offering second mortgages to existing
qualified borrowers or offering financial incentives to qualified borrowers to
deter prepayment of their loan. We cannot predict with certainty what our
prepayment experience will be in the future and any unfavorable difference
between the assumptions used to value our interest-only strips and our actual
experience may have a significant adverse impact on the value of these assets.

Credit loss rates. Credit loss rates are analyzed in a similar manner
to prepayment rates. Credit loss assumptions are compared to actual loss
experience averages for similar mortgage loan pools and for individual mortgage
loan pools. Delinquency trends and economic conditions are also considered. If
our periodic analysis indicates that loss experience may be different from our
assumptions, we would adjust our assumptions as necessary.

Floating interest rate certificates. Some of the securitization trusts
have issued floating interest rate certificates supported by fixed interest rate
mortgages. The fair value of the excess cash flow we will receive may be
affected by any changes in the interest rates paid on the floating interest rate
certificates. The interest rates paid on the floating interest rate certificates
are based on one-month LIBOR. The assumption used to estimate the fair value of
the excess cash flows received from these securitization trusts is based on a
forward yield curve.

54

Sensitivity analysis. 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...................................... $3,005.6
Balance sheet carrying value of retained interests.................. $ 637.9
Weighted-average collateral life (in years)......................... 4.1

Sensitivity of assumptions used to value retained interests:

Prepayment speed:
Impact on fair value for 10% adverse change......................... $26.2
Impact on fair value for 20% adverse change......................... $49.7

Credit loss rate:
Impact on fair value for 10% adverse change......................... $ 4.1
Impact on fair value for 20% adverse change......................... $ 8.3

Floating interest rate certificates (a):
Impact on fair value for 10% adverse change......................... $ 1.0
Impact on fair value for 20% adverse change......................... $ 2.0

Discount rate:
Impact on fair value for 10% adverse change......................... $21.1
Impact on fair value for 20% adverse change......................... $41.0

(a) The floating interest rate certificates are indexed to one-month LIBOR plus
a trust specific interest rate spread. The base one-month LIBOR 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 management's 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 other assumptions, which might magnify or counteract the impact of
the intended change.

These sensitivities reflect the approximate amount of the fair values
that our interest-only strips and servicing rights would be reduced for the
indicated adverse changes. These reductions would result in a charge to expense
in the income statement in the period incurred and a resulting reduction of
stockholders' equity, net of income taxes. The effect on our liquidity of
changes in the fair values of our interest-only strips and servicing rights are
discussed in "-- Liquidity and Capital Resources."

55

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

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 June 30, 2002

2002-2 2002-1 2001-4 2001-3 2001-2 2001-1 2000-4 2000-3 2000-2
------ ------ ------ ------ ------ ------ ------ ------ ------

Interest-only strip residual discount rate:
Initial valuation.......................... 13% 13% 13% 13% 13% 13% 13% 13% 13%
Current valuation.......................... 13% 13% 13% 13% 13% 13% 13% 13% 13%
Interest-only strip overcollateralization
discount rate .............................. 7% 7% 7% 7% 7% 6% 7% 8% 8%
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 (b)....................... 11% 11% 11% 11% 11% 11% 10% 10% 10%
Home equity loans........................ 22% 22% 22% 22% 22% 22% 24% 24% 24%
Ramp period (months) (a):
Business loans............................ 27 27 27 24 24 24 24 24 24
Home equity loans......................... 30 30 30 30 30 30 24 24 24
Current assumptions:
Expected Constant Prepayment Rate (CPR):
Business loans (b) ...................... 11% 11% 11% 11% 11% 11% 11% 11% 12%
Home equity loans ....................... 22% 22% 22% 22% 22% 22% 22% 22% 22%
Ramp period (months) (a):
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(d)..................... 2% 21% 24% 28% 31% 31% 31% 31% 31%
Current prepayment experience (c):
Business loans........................... -- -- 4% 10% 17% 11% 24% 18% 14%
Home equity loans........................ -- -- 12% 19% 30% 40% 42% 37% 37%

Annual credit loss rates:
Initial assumption......................... 0.40% 0.40% 0.40% 0.40% 0.40% 0.40% 0.40% 0.40% 0.40%
Current assumption......................... 0.40% 0.40% 0.40% 0.40% 0.40% 0.40% 0.40% 0.40% 0.40%
Actual experience.......................... -- -- -- -- 0.01% 0.02% 0.05% 0.25% 0.13%

Servicing fees:
Contractual fees........................... 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.70% 0.50% 0.50%
Ancillary fees............................. 1.25% 1.25% 1.25% 1.25% 1.25% 1.25% 1.25% 1.25% 1.25%

(a) The prepayment ramp is the length of time before a pool of mortgage loans
reaches its expected Constant Prepayment Rate. The business loan prepayment
ramp begins at 3% in month one. The home equity loan prepayment ramp begins
at 2% in month one.
(b) 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.
(c) Rate is a six-month historical average.
(d) The home equity loan prepayment rate ramps have been increased for the next
6 months to provide for the expected near term continuation of higher than
average prepayment experience.

56

Summary of Material Mortgage Loan Securitization
Valuation Assumptions and Actual Experience at June 30, 2002 (Continued)

2000-1 1999-4 1999-3 1999-2 1999-1 1998(e) 1997(e) 1996(e)
------ ------ ------ ------ ------ ------- ------- -------

Interest-only strip residual discount rate:
Initial valuation........................ 11% 11% 11% 11% 11% 11% 11% 11%
Current valuation........................ 13% 13% 13% 13% 13% 13% 13% 13%
Interest-only strip overcollateralization
discount rate ............................ 8% 8% 7% 7% 7% 7% 7% 8%
Servicing rights discount rate:
Initial valuation........................ 11% 11% 11% 11% 11% 11% 11% 11%
Current valuation........................ 11% 11% 11% 11% 11% 11% 11% 11%

Prepayment rates:
Initial assumption:
Expected Constant Prepayment Rate (CPR):
Business loans (b)..................... 10% 10% 10% 10% 10% 13% 13% 13%
Home equity loans...................... 24% 24% 24% 24% 24% 24% 24% 24%
Ramp period (months) (a):
Business loans......................... 24 24 24 24 24 24 24 24
Home equity loans...................... 18 18 18 18 18 12 12 12
Current assumptions:
Expected Constant Prepayment Rate (CPR):
Business loans (b)..................... 12% 11% 11% 11% 10% 10% 10% 10%
Home equity loans...................... 22% 22% 22% 22% 22% 24% 25% 21%
Ramp period (months) (a):
Business loans......................... 27 Na Na Na Na Na Na Na
Home equity loans...................... 30 Na Na Na Na Na Na Na
CPR adjusted to reflect ramp:
Business loans(d)...................... 23% 19% 16% 13% 13% 22% 28% 10%
Home equity loans(d)................... 22% 22% 30% 28% 29% 31% 25% 27%
Current prepayment experience (c):
Business loans......................... 19% 30% 27% 20% 23% 22% 32% 2%
Home equity loans(f)................... 31% 30% 30% 28% 29% 31% 24% 29%

Annual credit loss rates:
Initial assumption....................... 0.40% 0.30% 0.25% 0.25% 0.25% 0.25% 0.25% 0.25%
Current assumption....................... 0.40% 0.35% 0.35% 0.25% 0.40% 0.53% 0.34% 0.38%
Actual experience........................ 0.31% 0.35% 0.34% 0.27% 0.37% 0.53% 0.31% 0.37%

Servicing fees:
Contractual fees......................... 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%

(a) The prepayment ramp is the length of time before a pool of mortgage loans
reaches its expected Constant Prepayment Rate. The business loan prepayment
ramp begins at 3% in month one. The home equity loan prepayment ramp begins
at 2% in month one.
(b) 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.
(c) Rate is a six-month historical average.
(d) Business loan assumption ramps down from current rate to 10% remaining
constant at 10% for trusts 1997-2 through 1999-1.
(e) Amounts represent weighted-average percentages for four 1998 securitization
pools, two 1997 securitization pools and two 1996 securitization pools.
(f) The home equity loan prepayment rate ramps have been increased for the next
6 months to provide for the expected near term continuation of higher than
average prepayment experience.
Na = not applicable

Lease Securitizations. We have in the past securitized two pools of
leases. As of December 31, 1999, we de-emphasized, and subsequent to that date
discontinued, 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 less than 1% of
our securitization residual assets at June 30, 2002.

57

Servicing Rights. As the holder of servicing rights on securitized
loans, we are entitled to receive annual contractual servicing fees of 50 to 70
basis points on the aggregate outstanding loan balance. These fees are paid out
of accumulated mortgage loan payments before payments of principal and interest
are made to trust certificate holders. In addition, ancillary fees such as
prepayment fees, late charges, nonsufficient fund fees and other fees are
retained directly by us, as servicer, as payments are collected from the
borrowers. We also retain the interest paid on funds held in the trust's
collection account until these funds are distributed from the trust.

The 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. 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 year ended June
30, 2002 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 conforming 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 conforming mortgage
interest 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.

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 net carrying value of the loans. The
net carrying value of a loan is equal to its principal balance plus its
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 years ended June 30, 2002, 2001 and 2000.

58

Results of Operations
Summary Financial Results
(dollars in thousands, except per share data)

Year Ended June 30, Percentage Change
------------------------------- -----------------
2002 2001 2000 '02/'01 '01/'00
---- ---- ---- ------- -------

Total revenues................... $ 247,901 $ 183,336 $ 130,646 35.2% 40.3%
Total expenses................... $ 234,351 $ 170,151 $ 120,284 37.7% 41.5%
Income before cumulative effect
of a change in accounting
principle.................... $ 7,859 $ 7,911 $ 6,424 (0.7%) 23.1%
Cumulative effect of a change in
accounting principle......... $ -- $ 174 $ --
Net income....................... $ 7,859 $ 8,085 $ 6,424 (2.8%) 25.9%

Return on average assets......... 0.94% 1.22% 1.31%
Return on average equity......... 11.75% 12.22% 10.29%

Per Common Share Data:
Income before cumulative effect
of a change in accounting
principle:
Basic......................... $ 2.68 $ 2.08 $ 1.55 28.8% 34.2%
Diluted....................... $ 2.49 $ 2.04 $ 1.51 22.1% 35.1%
Net income:
Basic......................... $ 2.68 $ 2.13 $ 1.55 25.8% 37.4%
Diluted....................... $ 2.49 $ 2.08 $ 1.51 19.7% 37.7%
Dividends declared per share..... $ 0.28 $ 0.26 $ 0.25 7.7% 4.0%

Overview

Fiscal Year Ended June 30, 2002. For fiscal 2002, net income decreased
$0.2 million, or 2.8%, to $7.9 million compared to $8.1 million for fiscal 2001.
Fiscal 2001 included the impact of a change in the accounting for stock options
issued to non-employee directors of $0.2 million. Excluding this accounting
change net income for fiscal 2002 is level from fiscal 2001.

Diluted net income per share increased to $2.49 for the year ended June
30, 2002, on average common shares of 3,155,000 compared to $2.08 on average
common shares of 3,885,000 for fiscal 2001. The increase in net income per share
for the period was due to the lower number of shares outstanding due to our
repurchases of our common stock. Dividends of $0.28 and $0.26 per share were
paid out for the years ended June 30, 2002 and 2001, respectively. The common
dividend payout ratio based on diluted net income per share was 11.2% for the
year ended June 30, 2002 compared to 12.7% for fiscal 2001.

Increases in the gain on sale recorded during the fiscal year were
mainly due to securitizing a higher volume of loans and a decline in market
interest rates, which provided us more favorable terms in the execution of our
securitizations. This increase was partially offset by a $22.1 million valuation
adjustment on our interest-only strips due to higher than expected prepayment
rates, also resulting from a decline in market interest rates. Additional
expense increases were noted in employee related costs and in general and
administrative expenses mainly due to increases in costs to service the larger
managed portfolio and interest expenses due to the higher subordinated debt
balance. See below for further discussion of gain on sale, the valuation
adjustment of our interest-only strips and expenses.

59

In fiscal 1999, the Board of Directors initiated a stock repurchase
program in view of the price level of our common stock, which was at the time
and has continued to, trade at below book value. In addition, our consistent
earnings growth over the past several years did not result in a corresponding
increase in the market value of our common stock. The repurchase program was
extended in fiscal 2000, 2001 and 2002. The fiscal 2002 extension authorized the
purchase of up to 10% of the then outstanding shares, which totaled
approximately 2,661,000 shares on the date of the extension. To date, we have
repurchased 43,000 shares under the current program. The current repurchase
program terminates in November 2002. We currently have no plans to continue to
repurchase additional shares or extend the repurchase program beyond this date.

The total number of shares repurchased under the stock repurchase
program was: 117,000 shares in fiscal 1999; 327,000 shares in fiscal 2000;
627,000 shares in fiscal 2001; and 352,000 shares in fiscal 2002. The cumulative
effect of the stock repurchase program was an increase in diluted net earnings
per share of $0.41, $0.32 and $0.06 for the years ended June 30, 2002, 2001 and
2000, respectively.

On August 21, 2002, the Board of Directors declared a 10% stock
dividend payable September 13, 2002 to shareholders of record on September 3,
2002. In conjunction with the Board's resolution, all outstanding stock options
and related exercise prices were adjusted. Accordingly, all outstanding common
shares, earnings per common share, average common share and stock option amounts
presented have been adjusted to reflect the effect of this stock dividend.
Amounts presented for fiscal 2001 and 2000 have been similarly adjusted for the
effect of a 10% stock dividend declared on October 1, 2001 which was paid on
November 5, 2001 to shareholders of record on October 22, 2001.

In April 2000, the FASB issued interpretation No. 44 "Accounting for
Certain Transactions Involving Stock Compensation." The guidance, among other
things, changed the accounting for stock options issued to non-employee
directors. Previously, accounting rules required that options issued to
non-employees including directors be expensed based on the fair value of the
options at the time the options were granted. The new interpretation allows
options granted to directors to be accounted for consistently with those granted
to employees if certain conditions are met, and therefore, no expense is
recognized where the exercise price equals or exceeds the fair value of the
shares at the date of grant. In accordance with the guidance, in fiscal 2001, we
recorded $174 thousand as a cumulative effect of a change in accounting
principle, which represented the cumulative amount of expense recognized, net of
taxes, in prior years for stock options issued to non-employee directors.

60

The following schedule details loan and lease originations during the fiscal
years ended June 30, 2002, 2001 and 2000 (in thousands):

Year Ended June 30,
-------------------------------------
2002 2001 2000
------ ------ ------
Business purpose loans ........ $ 133,352 $ 120,537 $ 106,187
Home equity loans ............. 1,246,505 1,096,440 991,621
Equipment leases............... -- -- 19,631
----------- ----------- -----------
$ 1,379,857 $ 1,216,977 $ 1,117,439
=========== =========== ===========

Loan originations for our subsidiary, American Business Credit, Inc.,
which offers business purpose loans secured by real estate, increased $12.8
million, or 10.6%, for the year ended June 30, 2002, to $133.4 million from
$120.5 million for the year ended June 30, 2001. American Business Credit, Inc.
is continuing to expand its marketing efforts in new geographic areas. In
addition, our business loan subsidiary is focusing on cost control by
identifying efficiencies and streamlining the business purpose loan origination
process.

Home equity loans originated by our subsidiaries, Upland Mortgage and
American Business Mortgage Services, and through the Bank Alliance Program,
increased $150.1 million, or 13.7%, for the year ended June 30, 2002, to $1.2
billion from $1.1 billion for the year ended June 30, 2001. Our home equity loan
origination subsidiaries continue 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, American Business Mortgage Services, Inc. is in the process of
expanding its network of loan brokers to include a larger geographical area in
order to reduce concentrations of loans in specific states.

Year Ended June 30, 2002 Compared to Year Ended June 30, 2001

Total Revenues. For fiscal 2002, total revenues increased $64.6
million, or 35.2%, to $247.9 million from $183.3 million for fiscal 2001. Growth
in total revenue 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. For the year ended June 30, 2002, gains of
$185.6 million were recorded on the securitization of $1.4 billion of loans.
This represents an increase of $56.6 million, or 43.9%, over gains of $129.0
million recorded on securitizations of $1.1 billion of loans for the year ended
June 30, 2001.

The increase in securitization gains for the year ended June 30, 2002
was due to both an increase in interest rate spreads earned in our
securitizations and an increase in the volume of loans securitized. The
securitization gain as a percentage of loans securitized increased to 13.7% for
the year ended June 30, 2002 from 11.7% on loans securitized for the year ended
June 30, 2001. 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 "-- Securitizations" for further detail of
how securitization gains are calculated.

61

The increase in interest rate spread for the year ended June 30, 2002
compared to the year ended June 30, 2001 resulted from decreases in pass-through
interest rates on investor certificates issued by securitization trusts. For
loans securitized during the year ended June 30, 2002, the average loan interest
rate was 11.40%, a 0.50% decrease from 11.90% on loans securitized during the
year ended June 30, 2001. However, the average interest rate on trust
certificates issued in mortgage loan securitizations during the year ended June
30, 2002 was 5.51%, a 1.54% decrease from 7.05% during the year ended June 30,
2001. The resulting net improvement in interest rate spread was approximately
104 basis points.

Also contributing to the increase in the securitization gain
percentages for the year ended June 30, 2002, was the increase in the amount of
cash received at the closing of our securitizations. The improvement in the
interest rate spread this fiscal year enabled us to enter into securitization
transactions structured to provide additional cash at the closing of the
securitization through the sale of trust certificates to investors at a premium,
or through the sale of notional bonds, sometimes referred to as interest-only
bonds. During the year ended June 30, 2002 we received additional cash at the
closing of our securitizations, due to these modified structures, of $32.9
million compared to $10.1 million in fiscal 2001. Securitization gains and cash
received at the closing of securitizations were reduced by hedging losses of
$9.4 million in fiscal 2002, compared to losses of $4.3 million in fiscal 2001.

Interest and Fees. For the year ended June 30, 2002, interest and fee
income decreased $1.2 million, or 5.5%, to $21.3 million compared to $22.6
million for the year ended June 30, 2001. Interest and fee income consists
primarily of interest income earned on available for sale loans, premiums earned
on whole loan sales and other ancillary fees collected in connection with loans
and leases.

During the year ended June 30, 2002, interest income decreased $0.7
million, or 7.1%, to $9.5 million from $10.2 million for the year ended June 30,
2001. This decrease was due to a lower weighted-average interest rate on loans
available for sale from the prior fiscal year and lower interest rates earned on
invested cash balances due to general decreases in market interest rates. This
decrease was partially offset by the effect of a modification of the terms of
our securitizations beginning in the second quarter of fiscal 2001, which
allowed us to retain interest income we had accrued up until the point of the
sale. Prior to the second quarter of fiscal 2001, all accrued interest income
was retained by the securitization trust when collected.

Premiums on whole loan sales decreased $0.3 million, to $2.4 million
for the year ended June 30, 2002 from $2.7 million for the year ended June 30,
2001. The volume of whole loan sales decreased 24.3%, to $57.7 million for the
year ended June 30, 2002 from $76.3 million for the year ended June 30, 2001.
The decrease in the volume of whole loan sales for the year ended June 30, 2002
resulted from management's decision to securitize additional loans in the
favorable securitization market experienced during the year.

Other fees decreased $0.2 million for the year ended June 30, 2002 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 2000 to discontinue the origination of new leases. The ability to
collect certain fees on loans we originate in the future may be impacted by
proposed laws and regulations by various authorities. See "Business --
Regulation" for more information regarding how our practices related to fees
could be affected.

62

Interest Accretion on Interest-Only Strips. Interest accretion of $35.4
million was earned in the year ended June 30, 2002 compared to $26.1 million in
the year ended June 30, 2001. The increase reflects the growth in the balance of
our interest-only strips of $114.1 million, or 28.6%, to $512.6 million at June
30, 2002 from $398.5 million at June 30, 2001. In addition, cash flows from
interest-only strips for the year ended June 30, 2002 totaled $100.7 million, an
increase of $17.8 million, or 21.5%, from fiscal 2001 due to the larger size of
our more recent securitizations and additional securitizations reaching final
target overcollateralization levels and step-down overcollateralization levels.

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 year ended June 30, 2002, servicing income decreased $0.2 million, or
3.8%, to $5.5 million from $5.7 million for the year ended June 30, 2001.

The following table summarizes the components of servicing income for
the years ended June 30, 2002, 2001 and 2000 (in thousands):

Year Ended June 30,
----------------------------------
2002 2001 2000
------ ------ ------
Contractual and ancillary fees........... $ 35,314 $ 25,651 $ 17,104
Amortization of servicing rights......... (29,831) (19,951) (12,181)
Servicing rights write down.............. -- -- (684)
---------- ---------- ---------
Net servicing income..................... $ 5,483 $ 5,700 $ 4,239
========== ========== =========

Although higher than expected prepayment experience on home equity
loans in fiscal 2002 has adversely effected the carrying value of our
interest-only strips, no write down has been required for servicing rights.
Because the collection of prepayment fees increased in fiscal 2002, due to
increased prepayment rates, the amortization of servicing rights has also
increased. The level of amortization is recognized in proportion to servicing
income. Therefore, although the estimated fair value of the remaining servicing
rights are lower than we had originally anticipated, the carrying value of
servicing rights on our balance sheet is also lower as a result of increased
levels of amortization in fiscal 2002. A write down for servicing rights may be
required in the future if we continue to experience higher than anticipated
prepayment rates.

Total Expenses. Total expenses increased $64.2 million, or 37.7%, to
$234.4 million for the year ended June 30, 2002 compared to $170.2 million for
the year ended June 30, 2001. As described in more detail below, this increase
was mainly a result of a $22.1 million interest-only strips valuation adjustment
recorded during the year ended June 30, 2002, increased interest expense
attributable to the issuance of additional subordinated debt, increases in
employee related costs and increases in general and administrative expenses.

63

Interest Expense. During fiscal 2002 interest expense increased $12.1
million, or 21.5%, to $68.7 million from $56.5 million for fiscal 2001. The
increase in interest expense was primarily due to an increase in the level of
subordinated debt outstanding. Average subordinated debt outstanding during the
year ended June 30, 2002 was $615.2 million compared to $448.5 million during
the year ended June 30, 2001. The effect of the increase in outstanding debt was
partially offset by a decrease in the average interest rates paid on
subordinated debt. Average interest rates paid on subordinated debt outstanding
decreased to 10.64% during the year ended June 30, 2002 from 11.04% during the
year ended June 30, 2001.

Rates offered on subordinated debt were reduced beginning in the fourth
quarter of fiscal 2001 and have continued downward in fiscal 2002 in response to
decreases in market interest rates as well as our lower cash needs. The average
issuance rate of subordinated debt at its peak, which was the month of February
2001, was 11.85% compared to the average rate of subordinated debt issued in the
month of June 2002 of 8.39%. 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 year ended June 30, 2002
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
interest rates paid on warehouse lines. The average outstanding balances under
warehouse lines of credit were $29.5 million during the year ended June 30,
2002, compared to $52.5 million during the year ended June 30, 2001. This
decrease was due to the increased utilization of our available cash balances and
proceeds from the sale of subordinated debt to fund loan originations and
greater utilization of an off-balance sheet mortgage conduit facility for the
sale of loans. Interest rates paid on warehouse lines are generally based on
one-month LIBOR plus an interest rate spread ranging from 1.25% to 2.5%.
One-month LIBOR has decreased from approximately 3.9% at June 30, 2001 to 1.8%
at June 30, 2002.

Provision for Credit Losses. The provision for credit losses on
available for sale loans and leases for the year ended June 30, 2002 increased
$1.3 million, or 24.4%, to $6.5 million, compared to $5.2 million for the year
ended June 30, 2001. The increase in the provision for credit losses was
primarily due to increases in loans in non-accrual status, which were generally
repurchased from securitization trusts. Non-accrual loans were $7.0 million and
$4.5 million at June 30, 2002 and 2001, respectively. See "-- Managed Portfolio
Quality" for further detail.

While we are under no obligation to do so, at times we elect to
repurchase delinquent loans from the securitization trusts, some of which may be
in foreclosure. 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 purchase price of a delinquent loan is at the loan's outstanding contractual
balance. 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
foreclosure proceedings, or where a completed foreclosure is imminent. The
related allowance for loan losses on these repurchased loans is included in our
provision for credit losses in the period of repurchase. Our ability to
repurchase these loans does not disqualify us for sale accounting under 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 by contract.

64

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. SFAS 140 requires that we record an 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 them. 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.

In accordance with the provisions of SFAS No. 140, we have recorded on
our June 30, 2002 balance sheet a liability of $10.6 million for the repurchase
of loans subject to these removal of accounts provisions, whether or not the
Company plans to repurchase the loans. A corresponding asset for the loans, at
the lower of their cost basis or fair value, has also been recorded.

65

The following table summarizes the principal balances of loans and REO
we have repurchased from the mortgage loan securitization trusts for the years
ended June 30, 2002, 2001 and 2000. We received $19.2 million, $10.9 million and
$2.9 million of proceeds from the liquidation of repurchased loans and REO for
the years ended June 30, 2002, 2001 and 2000, respectively. We had repurchased
loans and REO remaining on our balance sheet in the amounts of $9.4 million,
$4.8 million and $4.4 million at June 30, 2002, 2001 and 2000, respectively. All
loans and REO were repurchased at the contractual outstanding balances at the
time of repurchase and are carried at the lower of their cost basis or fair
value. Mortgage loan securitization trusts are listed only if repurchases have
occurred.

Summary of Loans and REO Repurchased from Mortgage Loan Securitization Trusts
(dollars in thousands)

2000-3 2000-2 2000-1 1999-4 1999-3 1999-2 1999-1 1998-4
------ ------ ------ ------ ------ ------ ------ ------

Year ended June 30, 2002:
Business loans................... $ -- $ -- $ -- $ 194 $ 1,006 $ 341 $ 438 $ 632
Home equity loans................ -- -- 84 944 3,249 2,688 2,419 4,649
------- -------- -------- -------- -------- ------- ------- --------
Total.......................... $ -- $ -- $ 84 $ 1,138 $ 4,255 $ 3,029 $ 2,857 $ 5,281
======= ======== ======== ======== ======== ======= ======= ========
Number of loans repurchased..... -- -- 2 18 47 31 33 58

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

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

(Continued) 1998-3 1998-2 1998-1 1997-2 1997-1 1996-2 1996-1 Total
------ ------ ------ ------ ------ ------ ------ -----
Year ended June 30, 2002:
Business loans................... $ 260 $ 516 $ 1,266 $ 1,729 $ 183 $ -- $ 104 $ 6,669
Home equity loans................ 5,575 1,548 1,770 223 239 60 123 23,571
------- -------- -------- -------- -------- ------- ------- --------
Total.......................... $ 5,835 $ 2,064 $ 3,036 $ 1,952 $ 422 $ 60 $ 227 $ 30,240
======= ======== ======== ======== ======== ======= ======= ========
Number of loans repurchased...... 61 24 37 18 8 1 3 341

Year ended June 30, 2001:
Business loans................... $ 803 $ 215 $ 428 $ 2,252 $ -- $ 380 $ 250 $ 4,501
Home equity loans................ 3,886 1,284 1,686 1,764 -- 92 109 10,549
------- -------- -------- -------- -------- ------- ------- --------
Total......................... $ 4,689 $ 1,499 $ 2,114 $ 4,016 $ -- $ 472 $ 359 $ 15,050
======= ======== ======== ======== ======== ======= ======= ========
Number of loans repurchased...... 48 13 31 37 -- 8 4 154

Year ended June 30, 2000:
Business loans................... $ -- $ 827 $ -- $ 153 $ 2,441 $ 337 $ 259 $ 4,118
Home equity loans................ 106 2,588 165 84 1,123 114 -- 4,710
------- -------- -------- -------- -------- ------- ------- --------
Total.......................... $ 106 $ 3,415 $ 165 $ 237 $ 3,564 $ 451 $ 259 $ 8,828
======= ======== ======== ======== ======== ======= ======= ========
Number of loans repurchased...... 1 24 1 6 35 6 1 81

The allowance for credit losses was $3.7 million, or 6.6% of gross
receivables, at June 30, 2002 compared to $2.5 million, or 2.9% of gross
receivables, at June 30, 2001. This increase was due to an additional provision
for delinquent and non-accrual loans. 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.

66

The following table summarizes changes in the allowance for credit
losses for the fiscal years ended June 30, 2002, 2001 and 2000 (in thousands):

Year Ended June 30,
------------------------------------
2002 2001 2000
---- ---- ----
Balance at beginning of period.......... $ 2,480 $ 1,289 $ 702
Provision for credit losses.............. 6,457 5,190 2,045
(Charge-offs) recoveries, net............ (5,232) (3,999) (1,458)
-------- -------- --------
Balance at end of period................. $ 3,705 $ 2,480 $ 1,289
======== ======== ========

The following table summarizes the changes in the allowance for credit
losses by loan and lease type for the fiscal year ended June 30, 2002 (in
thousands):

Business Home
Purpose Equity Equipment
Loans Loans Leases Total
--------- -------- --------- --------

Balance at beginning of period........... $ 591 $ 1,473 $ 416 $ 2,480
Provision for credit losses.............. 1,721 3,417 1,319 6,457
(Charge-offs) recoveries, net............ (924) (2,892) (1,416) (5,232)
-------- -------- -------- --------
Balance at end of period................. $ 1,388 $ 1,998 $ 319 $ 3,705
======== ======== ======== ========

The following table summarizes net charge-off experience by loan type
for the fiscal years ended June 30, 2002, 2001 and 2000 (in thousands):

Year Ended June 30,
------------------------------------
2002 2001 2000
---- ---- ----
Business purpose loans............... $ 924 $ 1,374 $ 225
Home equity loans.................... 2,892 1,634 85
Equipment leases..................... 1,416 991 1,148
------- ------- -------
Total................................ $ 5,232 $ 3,999 $ 1,458
======= ======= =======

Employee Related Costs. For the year ended June 30, 2002, employee
related costs increased $7.4 million, or 25.7%, to $36.3 million from $28.9
million in the prior year. The increase was primarily attributable to additions
of personnel primarily in the loan servicing and collections areas to service
the larger managed portfolio. Total employees at June 30, 2002 were 1,019
compared to 884 at June 30, 2001. 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 year ended June 30, 2002, sales
and marketing expenses increased $1.0 million, or 4.1%, to $26.0 million from
$24.9 million for the year ended June 30, 2001. Expenses for direct mail
advertising for loan originations and subordinated debt increased $3.8 million
and $0.7 million, respectively, for the year ended June 30, 2002, compared to
the prior fiscal year. This increase was partially offset by a decrease of $2.7
million in newspaper advertising.

67

General and Administrative Expenses. For the year ended June 30, 2002,
general and administrative expenses increased $20.3 million, or 37.2%, to $74.9
million from $54.6 million for the year ended June 30, 2001. This increase was
primarily attributable to increases of approximately $14.3 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 $1.1 million in costs related to the issuance of our subordinated
debt, $0.6 million in depreciation expense and $0.4 million in business
insurance expense.

Interest-Only Strips Valuation Adjustment. During fiscal 2002, a write
down through the Statement of Income of $22.1 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 period. This portion
of the impact of increased prepayments was considered to be other than temporary
and was therefore recorded as an adjustment to earnings in the current period in
accordance with SFAS No. 115 and EITF 99-20. See "-- Securitizations" for
further detail of this adjustment.

Year Ended June 30, 2001 Compared to Year Ended June 30, 2000

Total Revenues. For fiscal 2001, total revenues increased $52.7
million, or 40.3%, to $183.3 million from $130.6 million for fiscal 2000. Growth
in total revenues was mainly the result of increases in gains on the
securitization of mortgage loans and increases in interest accretion earned on
our interest-only strips.

Gain on Sale of Loans and Leases. For the year ended June 30, 2001,
gains of $129.0 million were recorded on the securitization of $1.1 billion of
loans. This was an increase of $38.6 million, or 42.7%, over gains of $90.4
million recorded on securitizations of $1.0 billion of loans and leases for the
year ended June 30, 2000.

The increase in securitization gains was mainly due to increases in
interest rate spreads, and a higher volume of loans securitized. The
securitization gain as a percentage of loans securitized increased to 11.7% for
the year ended June 30, 2001 from 9.0% on loans and leases securitized for the
year ended June 30, 2000. In addition to the increase in interest rate spreads,
a lower write-off for capitalized loan origination costs in accordance with SFAS
No. 91 "Accounting for Nonrefundable Fees and Costs Associated with Originating
or Acquiring Loans and Initial Direct Costs of Leases" contributed to the
increase.

The increase in interest rate spread for the year ended June 30, 2001
compared to the year ended June 30, 2000 resulted from both an increase in the
average interest rate on loans securitized and decreases in pass-through
interest rates on investor certificates issued by securitization trusts. For
loans securitized during the year ended June 30, 2001, the average interest rate
was 11.90%, an increase from 11.77% on loans securitized during the year ended
June 30, 2000. The average interest rate on trust certificates issued in
mortgage loan securitizations during the year ended June 30, 2001 was 7.05%, a
decrease from 7.65% during the year ended June 30, 2000. The resulting net
improvement in interest rate spread was approximately 73 basis points.
Additionally, the improved interest rate spreads allowed us to structure the
securitizations in the third and fourth quarter of fiscal 2001 in such a manner
that we received more cash at the closing of the securitization than had been
received in the past. In fiscal 2001, we received $10.1 million in additional
cash at the closing of securitizations than in fiscal 2000.

68

SFAS No. 91 requires that certain direct loan origination costs related
to the time spent successfully originating loans be deferred and recorded as an
addition to the cost basis of loans originated. These costs are then recognized
as a reduction of the gain on sale recorded at the time loans are securitized.
Because of efficiencies and productivity gains achieved in our loan origination
businesses, we had reviewed and revised our estimates of costs related to time
spent successfully originating loans and had lowered the amount of employee
related costs previously deferred and recorded as a reduction to securitization
gains. See "-- Employee Related Costs" for year ended 2001 compared to year
ended 2000.

These increases were partially offset by an increase in the discount
rate used to estimate the fair value of the residual portion of interest-only
strips received in fiscal 2001 securitizations to 13% from 11% used in the
securitization gain calculations in the first three quarters of fiscal 2000.
Changes in prepayment ramp and credit loss assumptions used in calculating
securitization gains had an insignificant net impact on the change in
securitization gain percentage from fiscal 2000.

Interest and Fees. For fiscal 2001, interest and fee income increased
$3.2 million, or 16.4%, to $22.6 million from $19.4 million for fiscal 2000.

Interest income increased $3.0 million, or 41.2%, to $10.2 million from
$7.2 million for fiscal 2000. The increase was due to a modification of the
terms of our third and fourth fiscal quarter securitizations, 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. In addition, the increase was attributable to an increase in our
average balance of loans and leases available for sale during the period as well
as an increase in the average interest rate on the loans originated during the
current year.

Premiums on whole loan sales increased $1.0 million, to $2.7 million
for fiscal 2001 from $1.7 million for fiscal 2000. The volume of whole loan
sales decreased 25.7%, to $76.3 million for the year ended June 30, 2001 from
$102.7 million for the year ended June 30, 2000. The decrease in the volume of
whole loan sales was mainly the result of our decision to de-emphasize the
origination of conventional first mortgage loans, which were sold on a whole
loan basis. The decrease in volume was offset by an increase in the average
premium earned on whole loan sales during this period.

Other fees collected in connection with loan originations declined $0.8
million primarily due to the lower volume of loans originated for whole loan
sale.

Interest Accretion on Interest-Only Strips. Interest accretion of $26.1
million was earned in fiscal 2001, compared to $16.6 million in fiscal 2000. The
increase reflects the growth in the balance of our interest-only strips of
$120.6 million, or 43.4%, to $398.5 million at June 30, 2001 from $277.9 million
at June 30, 2000. In addition, cash flows for fiscal 2001 from interest-only
strips increased $33.4 million, or 67.5%, to $82.9 million for fiscal 2001 from
$49.5 million for fiscal 2000 due to the larger size of our more recent
securitizations, an additional three securitizations reached final target
overcollateralization levels, and two securitizations reached their stepdown
requirements.

69

Servicing Income. For fiscal 2001, servicing income increased $1.5
million, or 34.5%, to $5.7 million from $4.2 million for fiscal 2000. The
increase was due to the increase in the size of the managed portfolio from $1.9
billion at June 30, 2000 to $2.6 billion at June 30, 2001.

Total Expenses. Total expenses increased $49.9 million, or 41.5%, to
$170.2 million for fiscal 2001 compared to $120.3 million for fiscal 2000. As
described in more detail below, this increase was a result of increased interest
expense attributable to the sale of subordinated debt, increases in employee
related costs, and an increase in general and administrative expenses. These
increases were partially offset by a $12.6 million write down on the fair value
of our interest-only strips in fiscal 2000. No write down was required in fiscal
2001.

Interest Expense. For fiscal 2001 interest expense increased $18.4
million, or 48.3%, to $56.5 million from $38.1 million for fiscal 2000. Average
subordinated debt outstanding during fiscal 2001 was $448.5 compared to $286.6
during fiscal 2000. Average interest rates paid on subordinated debt outstanding
increased to 11.04% during fiscal 2001 from 10.14% during fiscal 2000. Interest
rates paid on subordinated debt increased in fiscal 2001 in response to
increases in interest rates paid by competitors on their subordinated debt
products and to enhance our ability to attract additional funds. Beginning in
the fourth quarter of fiscal 2001, we began reducing the interest rates paid on
our subordinated debt in response to decreases in market interest rates as well
as our lower cash needs.

The increase in interest expense related to subordinated debt was
partially offset by the impact of a decrease in the average outstanding balances
under warehouse lines of credit. The average outstanding balances under
warehouse lines of credit were $52.5 million during fiscal 2001, compared to
$102.7 million during fiscal 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.

Provision for Credit Losses. The provision for credit losses on loans
and leases held as available for sale for fiscal 2001 increased $3.2 million, to
$5.2 million as compared to $2.0 million for fiscal 2000. The increase in the
provision for credit losses was primarily due to higher loan charge-offs, an
increase in the allowance for credit losses on non-accrual loans and an increase
in loans and leases available for sale. The allowance for credit losses was $2.5
million, or 2.9% of gross receivables, at June 30, 2001 compared to $1.3
million, or 2.8% of gross receivables, at June 30, 2000.

70

The following table summarizes the changes in the allowance for credit
losses by loan and lease type for the fiscal year ended June 30, 2001 (in
thousands):

Business Home
Purpose Equity Equipment
Loans Loans Leases Total
--------- -------- --------- --------

Balance at beginning of period........... $ 462 $ 507 $ 320 $ 1,289
Provision for credit losses.............. 1,503 2,600 1,087 5,190
(Charge-offs) recoveries, net............ (1,374) (1,634) (991) (3,999)
------- ------- ------- -------
Balance at end of period................. $ 591 $ 1,473 $ 416 $ 2,480
======= ======= ======= =======

The increase in charge-offs was primarily attributable to an increase
in the number of foreclosures on loans, moving them from non-accrual status
where reserves have been established, to real estate owned, where the assets are
carried at the lower of cost basis or fair value less estimated costs to sell.
Additionally, loan repurchases from securitization trusts increased mainly due
to an increase in the size of our managed portfolio, real estate owned and
delinquencies.

Employee Related Costs. For fiscal 2001 employee related costs
increased to $28.9 million from $12.8 million for fiscal 2000. The increase was
primarily attributable to a shift in the number of employees directly involved
with the loan origination process into areas of loan servicing and support
related to the growth in our total managed portfolio. This shift and
efficiencies and productivity gains achieved in our loan origination business
have resulted in a reduction in the amount of employee related costs which were
deferred and capitalized in accordance with SFAS No. 91.

SFAS No. 91 requires that certain direct loan origination costs related
to the time spent successfully originating loans be deferred and recorded as an
addition to the cost basis of loans originated. These costs are then recognized
as a reduction of the gain on sale recorded at the time loans are securitized.
The number of employees throughout our organization had declined by almost 25
employees from June 30, 2000 to 884 employees as of June 30, 2001. However, the
number of employees involved in the loan origination process had declined by
approximately 94 employees over the same period of time. Because of efficiencies
and productivity gains achieved in certain aspects of our loan origination
business, we had reviewed and revised our estimates of the direct costs related
to time spent successfully originating loans and had lowered the amount of
employee related costs we defer and capitalize. The efficiencies in our loan
origination processes had come mainly from the development of technology that is
now utilized to streamline certain loan origination procedures. Our development
of automatic loan structuring technology provides the capability to loan
officers to present potential borrowers with an array of loan options in a
shorter time. Previously, the development of customized options for the borrower
was a labor-intensive manual effort. In addition, our integrated loan
documentation technology now allows us to save significant time preparing loan
documentation, including ensuring compliance with various state and local
regulations and requirements. Additionally, we had restructured our commission
incentive plans for those involved in the loan origination process. These
changes had resulted in significant savings in the costs of originating loans
which is not readily visible in our period to period comparative expense because
many of these costs were previously deferred and capitalized. The savings in
employee related costs we were able to achieve in the loan origination areas has
been dedicated to other activities and processes which are not eligible to be
deferred in accordance with SFAS No. 91, and therefore, are being recognized as
expense in the period incurred.

71

Sales and Marketing Expenses. For fiscal 2001, sales and marketing
expenses decreased $0.4 million, or 1.5%, to $24.9 million from $25.3 million
for fiscal 2000. Expenses for direct mail advertising increased $6.1 million for
fiscal 2001 compared to the prior year due to increased use of targeted direct
mail programs for our loan products. These targeted programs were considered to
be more cost effective than the television and radio advertising campaigns which
were utilized into the second quarter of fiscal 2000. Television and radio
advertising costs decreased by $3.6 million in fiscal 2001 compared to the prior
year. Other marketing sources such as telemarketing and Internet advertising
were reduced by $2.9 million in fiscal 2001 from fiscal 2000.

General and Administrative Expenses. For fiscal 2001, general and
administrative expenses increased $25.2 million, to $54.6 million from $29.3
million for fiscal 2000. The increase was primarily attributable to increases of
approximately $10.8 million in costs associated with servicing and collection of
our larger total managed portfolio including expenses associated with REO and
delinquent loans, $3.4 million of expenses related to investments in Internet
and other technology capabilities, a $2.5 million increase in costs related to
loan originations, a $1.1 million increase in expenses related to the sale of
subordinated debt, a $0.6 million charge related to the closing of branches and
consolidating distribution channels through the creation of American Business
Mortgage Services, Inc., a $0.4 million increase in professional fees, a
one-time expense related to the 1997 acquisition of American Business Mortgage
Services, Inc., and the costs related to continued building of support area
infrastructure.

Provision for Income Taxes. In fiscal 2001, our effective tax rate
increased to 40.0% from 38.0% in fiscal 2000, due to an increase in state tax
liabilities. As a result of our geographic expansion, we have increased the
number of states in which we are now doing significant business and have
increased our tax provision for additional tax liabilities in certain states.

72

Financial Condition

Balance Sheet Information
(Dollars in thousands, except per share data)

June 30,
------------------------------------------
2002 2001 2000
------ ------ ------

Cash and cash equivalents............................ $ 108,599 $ 91,092 $ 69,751
Loan and lease receivables, net:
Available for sale................................ 61,650 83,241 45,746
Interest and fees................................. 12,292 16,549 13,002
Interest-only strips................................. 512,611 398,519 277,872
Servicing rights..................................... 125,288 102,437 74,919
Receivable for sold loans............................ 5,055 14,157 51,283
Total assets......................................... 876,375 766,487 594,282

Subordinated debt.................................... 655,720 537,950 390,676
Warehouse lines and other notes payable.............. 8,486 51,064 50,842
Accrued interest payable............................. 43,069 32,699 17,920
Deferred income taxes................................ 35,124 30,954 22,773
Total liabilities.................................... 806,997 699,625 532,167
Total stockholders' equity........................... 69,378 66,862 62,115

Book value per common share.......................... $ 24.40 $ 20.47 $ 15.44
Total liabilities to tangible equity(c).............. 14.9x 13.5x 11.6x
Adjusted debt to tangible equity (a)(c).............. 12.2x 10.2x 8.3x
Subordinated debt to tangible equity(c).............. 12.1x 10.4x 8.6x
Interest-only strips to adjusted
tangible equity (b)(c)............................ 4.3x 3.5x 2.6x

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

June 30, 2002 Compared to June 30, 2001

Total assets increased $109.9 million, or 14.3%, to $876.4 million at
June 30, 2002 from $766.5 million at June 30, 2001 primarily due to increases in
cash and cash equivalents, interest-only strips and servicing rights which were
partially offset by decreases in loan and lease receivables available for sale
and receivables for sold loans.

Cash and cash equivalents increased $17.5 million, or 19.2%, due to
receipts from sales of subordinated debt, cash receipts on the sale of loans in
securitizations and cash receipts from our interest-only strips.

73

Activity of our interest-only strips for fiscal 2002, 2001 and 2000
were as follows (in thousands):

June 30,
--------------------------------------------
2002 2001 2000
------ ------ ------

Balance at beginning of period................................. $ 398,519 $ 277,872 $ 178,218
Initial recognition of interest-only strips, including
initial overcollateralization of $0, $611 and $11,232........ 153,463 125,408 111,714
Cash flow from interest-only strips............................ (100,692) (82,905) (49,508)
Required purchases of additional overcollateralization......... 47,271 43,945 29,925
Interest accretion............................................. 35,386 26,069 16,616
Net temporary adjustments to fair value(a)..................... 717 8,130 3,510
Other than temporary adjustments to fair value(a).............. (22,053) -- (12,603)
--------- --------- ---------
Balance at end of period....................................... $ 512,611 $ 398,519 $ 277,872
========= ========= =========

(a) Net temporary adjustments to fair value are recorded through other
comprehensive income, which is a component of equity. Other than temporary
adjustments to fair value are recorded through the income statement.

The following table summarizes the purchases of overcollateralization
by trust for the years ended June 30, 2002, 2001, and 2000. See "--
Securitizations" for a discussion of overcollateralization requirements.

Summary of Mortgage Loan Securitization Overcollateralization Purchases
(in thousands)

2002-1 2001-4 2001-3 2001-2 2001-1 2000-4 2000-3 2000-2 2000-1 Other Total
------ ------ ------- ------ ------ ------ ------ ------ ------ ------- -----

Year Ended June 30, 2002:

Required purchases of additional
overcollateralization.......... $ 3,814 $ 908 $ 4,354 $11,654 $ 8,700 $6,326 $3,074 $ 4,978 $ 2,490 $ 973 $ 47,271

2001-2 2001-1 2000-4 2000-3 2000-2 2000-1 1999-4 1999-3 1999-2 Other Total
------- ------ ------ ------- ------ ------ ------ ------- ------- ------- -----
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
======= ====== ======= ======= ======= ====== ====== ======= ======= ======= ========

2000-2 2000-1 1999-4 1999-3 1999-2 1999-1 1998-4 1998-3 Other Total
------ ------- ------- ------- ------ ------ ------ ------ ------- -----
Year Ended June 30, 2000:

Initial overcollateralization................ $2,114 $ 1,776 $ 2,222 $ 2,211 $ -- $ -- $ -- $ -- $ 2,909 $ 11,232
Required purchases of additional
overcollateralization...................... -- 2,303 4,040 5,125 7,585 6,601 1,348 2,923 -- 29,925
------ ------- ------- ------- ------ ------ ------- ------- ------- --------
Total...................................... $2,114 $ 4,079 $ 6,262 $ 7,336 $7,585 $6,601 $ 1,348 $ 2,923 $ 2,909 $ 41,157
====== ======= ======= ======= ====== ====== ======= ======= ======= ========

Servicing rights increased $22.9 million, or 22.3%, to $125.3 million
at June 30, 2002 from $102.4 at June 30, 2001, due to the securitization of $1.4
billion of loans during the year ended June 30, 2002, partially offset by
amortization of the servicing asset for fees collected during the same period.

74

Loan and lease receivables decreased $21.6 million or 25.9% due to the
securitization of more loans than were originated during the period. Receivables
for sold loans decreased $9.1 million, or 64.3%, due to a greater emphasis
placed on securitizing loans rather than selling loans on a whole loan basis
during the fourth quarter of fiscal 2002.

Total liabilities increased $107.4 million, or 15.3%, to $807.0 million
from $699.6 million at June 30, 2001 primarily due to increases in subordinated
debt outstanding, accrued interest payable and other liabilities partially
offset by a decrease in warehouse lines and other notes payable.

During fiscal 2002 subordinated debt increased $117.8 million, or
21.9%, to $655.7 million due to sales of subordinated debt 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. Approximately $31.7 million of the increase in subordinated debt
was due to the reinvestment of accrued interest on the subordinated debt.
Subordinated debt was 12.1 times tangible equity at June 30, 2002, compared to
10.4 times as of June 30, 2001. See "-- Liquidity and Capital Resources" for
further information regarding outstanding debt. Warehouse lines and other notes
payable decreased $42.6 million due to the lower balance of loan receivables
held at June 30, 2002, and greater use of available cash to fund loans. Accrued
interest payable increased $10.4 million, or 31.7%, to $43.1 million from $32.7
million at June 30, 2001 due to an increase in the level of subordinated debt
partially offset by a decrease in average interest rates paid on debt.

Deferred income taxes increased $4.2 million, or 13.5%, to $35.1
million from $31.0 million. This increase was mainly due to higher levels of
debt for tax securitization structures in the first and second quarters of
fiscal 2002. As debt for tax transactions, the tax liability on securitization
gains is deferred and becomes payable in future periods as cash is received from
securitization trusts. These structures created additional deferred tax credits
of $22.1 million which were partially offset by an increase in our federal tax
loss carryforward receivable of $11.9 to a cumulative $31.3 million. In
addition, miscellaneous deferred tax assets increased by $4.3 million and
miscellaneous deferred tax credits decreased by $1.7 million resulting in a net
increase of $6.0 million. The net operating loss carryforward will be utilized
in future periods by structuring more securitization transactions as taxable
transactions.

June 30, 2001 Compared to June 30, 2000

Total assets increased $172.2 million, or 29.0%, to $766.5 million at
June 30, 2001 from $594.3 million at June 30, 2000 primarily due to increases in
cash and cash equivalents, loans and leases available for sale, interest-only
strips and servicing rights.

Cash and cash equivalents increased $21.3 million, or 30.6% due to
receipts from our sales of subordinated debt in excess of our cash needs.

75

Loans and leases available for sale increased $37.5 million, or 82.0%,
to $83.2 million from $45.7 million due to originations of $1,217.0 million and
securitizations and whole loan sales of $1,178.4 million during the year ended
June 30, 2001.

Activity of our interest only strips for fiscal 2001 and 2000 is
detailed in the prior table. In fiscal 2000, a write down of $12.6 million was
recorded on our interest-only strips. The write down included a charge of $11.2
million related to an increase from 11% to 13% in the discount rate used to
value the residual portion of our interest-only strips. See "--Securitizations"
for a discussion of the discount rate and prepayment assumptions.

Servicing rights increased $27.5 million, or 36.7%, to $102.4 million
from $74.9 million at June 30, 2000, due to the recording of $47.5 million of
mortgage servicing rights obtained in connection with loan securitizations,
partially offset by amortization of servicing rights of $20.0 million for fiscal
2001.

Total liabilities increased $167.5 million, or 31.5%, to $699.6 million
from $532.2 million at June 30, 2000 due primarily to an increase in
subordinated debt outstanding. For fiscal 2001 subordinated debt increased
$147.3 million, or 37.7%, to $538.0 million due to sales of subordinated debt
used for repayment of existing debt, loan originations, our operations,
investments in systems and technology and for general corporate purposes
including, but not limited to, repurchases of our outstanding common stock.
Subordinated debt was 10.4 times tangible equity at June 30, 2001, compared to
8.6 times as of June 30, 2000. See "--Liquidity and Capital Resources" for
further information regarding outstanding debt. Accrued interest payable
increased $14.8 million or 82.7%, to $32.7 million due to the higher level of
subordinated debt and higher interest rates paid on subordinated debt.

Deferred income taxes increased $8.2 million, or 35.9% to $31.0 million
from $22.8 million at June 30, 2000. This increase was mainly due to the
structuring of our first and second fiscal quarter securitizations as debt for
tax transactions. In addition, the recognition of unrealized gains in the value
of our interest-only strips, which are held as available for sale, are recorded
as a component of other comprehensive income, net of deferred tax. The deferred
tax on these unrealized gains was $3.3 million for fiscal 2001.

76

Managed Portfolio Quality

The following table provides data concerning delinquency experience,
REO and loss experience for the managed loan and lease portfolio (dollars in
thousands):

June 30,
-------------------------------------------------------------------------------------
2002 2001 2000
Delinquency by Type Amount % Amount % Amount %
- ----------------------------------- -------- --- -------- --- -------- ---

Business Purpose Loans
Total managed portfolio............ $ 361,638 $ 300,192 $ 221,546
=========== =========== ===========
Period of delinquency:
31-60 days....................... $ 2,449 0.68% $ 3,460 1.15% $ 908 0.41%
61-90 days....................... 1,648 0.46 1,837 0.61 1,757 0.79
Over 90 days..................... 32,699 9.04 22,687 7.56 11,362 5.13
----------- ----- ----------- ----- ----------- -----
Total delinquencies.............. $ 36,796 10.17% $ 27,984 9.32% $ 14,027 6.33%
=========== ===== =========== ===== =========== =====
REO................................ $ 6,220 $ 4,530 $ 1,299
=========== =========== ===========
Home Equity Loans
Total managed portfolio............ $ 2,675,559 $ 2,223,429 $ 1,578,038
=========== =========== ===========
Period of delinquency:
31-60 days....................... $ 37,213 1.39% $ 16,227 0.73% $ 6,596 0.42%
61-90 days....................... 22,919 0.86 14,329 0.64 5,659 0.36
Over 90 days..................... 72,918 2.73 47,325 2.13 27,600 1.75
----------- ----- ----------- ----- ----------- -----
Total delinquencies.............. $ 133,050 4.97% $ 77,881 3.50% $ 39,855 2.53%
=========== ===== =========== ===== =========== =====
REO .............................. $ 27,825 $ 23,902 $ 11,823
=========== =========== ===========
Equipment Leases
Total managed portfolio............ $ 28,992 $ 65,774 $ 118,956
=========== =========== ===========
Period of delinquency:
31-60 days....................... $ 411 1.42% $ 595 0.90% $ 475 0.40%
61-90 days....................... 93 0.32 206 0.31 478 0.40
Over 90 days..................... 423 1.46 347 0.53 992 0.83
----------- ----- ----------- ----- ----------- -----
Total delinquencies.............. $ 927 3.20% $ 1,148 1.74% $ 1,945 1.63%
=========== ===== =========== ===== =========== =====

Combined
- -----------------------------------
Total managed portfolio............ $ 3,066,189 $ 2,589,395 $ 1,918,540
=========== =========== ===========
Period of delinquency:
31-60 days....................... $ 40,073 1.31% $ 20,282 0.78% $ 7,979 0.42%
61-90 days....................... 24,660 0.80 16,372 0.63 7,894 0.41
Over 90 days..................... 106,040 3.46 70,359 2.72 39,954 2.08
----------- ----- ----------- ----- ----------- -----
Total delinquencies.............. $ 170,773 5.57% $ 107,013 4.13% $ 55,827 2.91%
=========== ===== =========== ===== =========== =====
REO .............................. $ 34,045 1.11% $ 28,432 1.10% $ 13,122 0.68%
=========== ===== =========== ===== =========== =====

Losses experienced during the
period(a)(b)
Loans............................ $ 15,478 0.56% $ 10,886 0.50% $ 3,319 0.25%
===== ===== =====
Leases........................... 1,415 3.20% 1,003 1.20% 1,339 1.04%
----------- ===== ----------- ===== ----------- =====
Total losses..................... $ 16,893 0.60% $ 11,889 0.53% $ 4,658 0.31%
=========== ===== =========== ===== =========== =====

(a) Percentage based on annualized losses and average managed portfolio.

(b) Losses recorded on our books were $9.0 million ($4.4 million from
charge-offs through the provision for loan losses and $4.6 million for write
downs of REO) and losses absorbed by loan securitization trusts were $7.9
million for the year ended June 30, 2002. Losses recorded on our books were
$7.1 million ($4.0 million from charge-offs through the provision for loan
losses and $3.1 million for write downs of REO) and losses absorbed by loan
securitization trusts were $4.8 million for fiscal 2001. Losses recorded on
our books were $2.1 million ($1.5 million from charge-offs through the
provision for loan losses and $0.6 million for write downs of REO) and
losses absorbed by loan securitization trusts were $2.6 million for fiscal
2000. Losses recorded on our books include losses for loans we hold as
available for sale or REO and loans repurchased from securitization trusts.

77

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

June 30,
-------------------------------------------
2002 2001 2000
------------ ------------- ------------

Delinquencies held as available for sale (a).... $ 5,918 $ 3,382 $ 2,952
11.2% 4.0% 6.6%

Available for sale loans and leases in
non-accrual status (b).......................... $ 6,991 $ 4,514 $ 4,302
13.2% 5.4% 9.4%

Allowance for losses on available for sale
loans and leases................................ $ 3,705 $ 2,480 $ 1,289
6.6% 2.9% 2.8%

Real estate owned on balance sheet.............. $ 3,784 $ 2,322 $ 1,659

- ----------------------------
(a) Delinquent loans and leases held as available for sale are included in
total delinquencies in the previously presented "Managed Portfolio Quality"
table. Included in total delinquencies are loans in non-accrual status of
$5.6 million, $3.2 million, and $2.3 million at June 30, 2002, 2001, and
2000, respectively.

(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 REO) in the total managed
portfolio were $170.8 million at June 30, 2002 compared to $107.0 million, and
$55.8 million at June 30, 2001 and 2000, respectively. Total delinquencies as a
percentage of the total managed portfolio were 5.57% at June 30, 2002 compared
to 4.13% and 2.91% at June 30, 2001 and 2000, respectively. The increase in
delinquencies and delinquency percentages in fiscal 2002 were mainly due to the
impact on our borrowers of continued uncertain economic conditions, which may
include the reduction in other sources of credit to our borrowers and the
seasoning of the managed portfolio. In addition, the delinquency percentage has
increased due to increased prepayment rates resulting from refinancing
activities. Refinancing is not typically available to delinquent borrowers, and
therefore the remaining portfolio is experiencing a higher delinquency rate. A
leveling in the growth of the managed portfolio as a result of higher prepayment
rates and decreases in the origination of new loans also contributed to the
increase in the delinquency percentage in fiscal 2002 from 2001. The increase in
delinquencies and delinquency percentages in fiscal 2001 from 2000 was mainly
due to the seasoning of the managed portfolio together with the slowing of the
growth in the origination of new loans and the resulting slow down of the growth
of the managed portfolio. As the managed portfolio continues to season, and if
our economy continues to lag or worsen, the delinquency rate may continue to
increase. Delinquent loans and leases held as available for sale on our balance
sheet increased from $3.4 million at June 30, 2001 to $5.9 million at June 30,
2002 primarily due to repurchases of loans from our mortgage securitization
trusts.

78

Real estate owned. Total REO, comprising foreclosed properties and
deeds acquired in lieu of foreclosure, increased to $34.0 million, or 1.11%, of
the total managed portfolio at June 30, 2002 compared to $28.4 million, or
1.10%, and $13.1 million, or 0.68%, at June 30, 2001 and 2000, respectively. The
increase in the volume of REO was mainly due to the growth and 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. The acceleration of the foreclosure process had caused a substantial
increase in the balance of properties classified as REO during fiscal 2001. We
are now implementing processes to decrease the cycle time in the disposition of
REO properties. Part of this strategy employed in the fourth quarter of fiscal
2002 includes bulk sales of REO properties as evidenced by the leveling of REO
as a percentage of the managed portfolio. We continue to add additional
personnel to streamline the process of liquidating REO properties and seek
opportunities such as bulk sales to decrease the time REO properties are
carried. Reducing the time properties are carried reduces carrying costs for
interest on funding the cost of the property, legal fees, taxes, insurance and
maintenance related to these properties. As our portfolio seasons and if our
economy continues to lag or worsen, the REO balance may to continue to increase.
REO held by us on our balance sheet increased from $2.3 million at June 30, 2001
to $3.8 million at June 30, 2002 primarily due to repurchases of foreclosed
loans from our mortgage securitization trusts.

Loss experience. During the year ended June 30, 2002, we experienced
net loan and lease charge-offs in our total managed portfolio of $16.9 million.
On an annualized basis, during fiscal 2002, net loan and lease charge-offs were
0.60% of the total managed portfolio. During fiscal 2001, we experienced net
loan and lease charge-offs in our total managed portfolio of $11.9 million, or
0.53% of the average total managed portfolio. For fiscal 2000, net loan and
lease charge-offs in our total managed portfolio were $4.7 million, or 0.31% of
the average total managed portfolio. Principal loss severity experience on
delinquent loans generally has ranged from 5% to 20% of principal and loss
severity experience on REO generally has ranged from 25% to 35% of principal.
The increase in net charge-offs from the prior periods were due to a larger
volume of loans and leases that became delinquent, and or, were liquidated
during the period as well as the seasoning of the managed portfolio. As noted
above, we have attempted to reduce the time a loan remains in seriously
delinquent status until the sale of an REO property in order to reduce carrying
costs on the property. The increase in the charge-off percentage was partially
offset by reductions in our carrying costs due to the acceleration of the timing
of the disposition of REO. See Results of Operations -- Summary of Loans
Repurchased from Mortgage Loan Securitization Trusts" for further detail of loan
repurchase activity. See "-- Securitizations" for more detail on credit loss
assumptions used to estimate the fair value of our interest-only strips and
servicing rights compared to actual loss experience.

79

Real estate values have generally continued to increase in recent
periods and their increases have exceeded the rate of increase of many other
types of investments in the current economy. If in the future this trend
reverses and real estate values begin to decline our loss severity could
increase. See "Risk factors -- A decline in the value of collateral securing our
loans could result in an increase in losses on foreclosure, which could reduce
our profitability and limit our ability to repay our subordinated debt" for
further detail of the effect that declining real estate values could have on our
business.

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, one-month LIBOR yields and the interest rate
spread between the effective rate of interest received on loans available for
sale or securitized (all fixed interest rates) and the interest rates paid
pursuant to credit facilities or the pass-through interest 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 component of our interest rate risk exposure relates to changes in
the fair value of certain interest-only strips due to changes in one-month
LIBOR. The structure of certain securitization trusts includes a floating
interest rate certificate tranche, which pays interest based on one-month LIBOR
plus an interest rate spread. Floating interest rate tranches in a
securitization expose us to gains or losses due to changes in the fair value of
the interest-only strip from changes in the floating interest rate paid to the
certificate holders.

A rising interest rate environment could unfavorably impact our
liquidity and capital resources. Rising interest rates could impact our
short-term liquidity by widening investor interest rate 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.

80

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 credit loss
rates. See "-- Securitizations" 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):

Amount Maturing After June 30, 2002
-----------------------------------------------------------------------------
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
-------- -------- -------- -------- -------- -------- -------- --------

Rate Sensitive Assets:
Loans and leases available for sale (a) ...... $ 54,887 $ 94 $ 106 $ 120 $ 137 $ 6,306 $ 61,650 $ 62,512
Interest-only strips.......................... 83,990 122,889 107,169 93,606 75,950 270,273 753,877 512,611
Servicing rights.............................. 40,980 32,952 25,961 20,333 15,941 51,907 188,074 125,921
Investments held to maturity.................. 87 98 120 178 419 15 917 989

Rate Sensitive Liabilities:
Fixed interest rate borrowings................ $367,111 $141,638 $ 90,740 $19,069 $ 9,534 $ 27,628 $655,720 $654,726
Average interest rate......................... 9.50% 9.76% 10.40% 11.93% 10.80% 11.66% 9.94%
Variable interest rate borrowings............. $ 6,357 $ 190 $ 606 $ 1,053 $ 55 $ 225 $ 8,486 $ 8,486
Average interest rate......................... 3.79% 3.58% 3.58% 3.58% 3.58% 3.58% 3.73%

- ----------------------------
(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 Available for Sale. Gain on sale of loans may be unfavorably
impacted to the extent fixed interest 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 interest rate spread between the average
interest rate on fixed interest rate loans, and the weighted-average
pass-through interest rate to investors for interests issued in connection with
the securitization. Although the average loan interest rate is fixed at the time
the loan is originated, the pass-through interest rate to investors is not fixed
until the pricing of the securitization which occurs just prior to the sale of
the loans. Generally, the period between loan origination and pricing of the
pass-through interest rate is less than 3 months. If market interest rates
required by investors increase prior to securitization of the loans, the
interest rate spread between the average interest rate on the loans and the
pass-through interest rate to investors may be reduced or eliminated. This
factor could have a material adverse effect on our results of operations and
financial condition. We estimate that each 0.1% reduction in the interest rate
spread reduces the gain on sale of loans as a percentage of loans securitized by
approximately 0.25%. See "-- Strategies for use of Derivative Financial
Instruments" for further detail of our interest rate risk management for
available for sale loans.

81

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 an interest rate
spread. The fair value of the excess cash flow we will receive from these trusts
would be affected by any changes in interest rates paid on the floating interest
rate certificates. At June 30, 2002, $188.2 million of debt issued by loan
securitization trusts was floating interest rate certificates based on one-month
LIBOR, representing 6.6% of total debt issued by mortgage loan securitization
trusts. In accordance with accounting principles generally accepted in the
United States of America, the changes in fair value are generally recognized as
part of net adjustments to other comprehensive income, which is a component of
retained earnings. As of June 30, 2002, the interest rate sensitivity for $102.6
million of floating interest rate certificates issued by securitization trusts
is managed with an interest rate swap contract effectively fixing our cost for
this debt. See "-- Strategies for use of Derivative Financial Instruments" for
further detail.

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. 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 85-90%
of home equity loans in the total managed portfolio are subject to prepayment
fees. However, 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 "--
Securitizations" for further information regarding these assumptions and the
impact of prepayments during this period.

Subordinated Debt. We also experience interest rate risk to the extent
that as of June 30, 2002 approximately $288.6 million of our liabilities were
comprised of fixed interest 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 interest rates paid on replacement
debt could exceed interest rates currently paid thereby increasing interest
expense and reducing net income.

Strategies for Use of Derivative Financial Instruments. From time to
time derivative financial instruments are utilized in an attempt to mitigate the
effect of changes in interest rates between the date loans are originated and
the date the fixed interest rate pass-through certificates to be issued by a
securitization trust are priced. Generally, the period between loan origination
and pricing of the pass-through interest rate is less than 3 months. Derivative
financial instruments we use for hedging changes in fair value due to interest
rate changes may include interest rate swaps, futures and forward contracts. The
nature and quantity 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 or our
residual interests in mortgage loans in our mortgage conduit facility, which we
would expect to be included in a term securitization at a future date. The
mortgage loans and mortgage loans underlying residual interests in mortgage
pools consist of essentially similar pools of fixed interest rate loans,
collateralized by real estate (primarily residential real estate) with similar
maturities and similar credit characteristics. Fixed interest rate pass-through
certificates issued by securitization trusts are generally priced to yield an
interest rate spread above interest rate swap yield curves with maturities to
match the maturities of the interest rate pass-through certificates. We may
hedge potential interest rate changes in interest rate swap yield curves with
Eurodollar futures, forward treasury sales, interest rate swaps or derivative
contracts of similar underlying securities. This practice has provided strong
correlation between our hedge contracts and the ultimate pricing we will receive
on the subsequent securitization. The unrealized gain or loss derived from these
derivative financial instruments, which are designated as fair value hedges, is
reported in earnings as it occurs with an offsetting adjustment to the fair
value of the item hedged. The fair value of derivative financial instruments are
based on quoted market prices. The fair value of the items hedged are 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 would no longer be recognized as an adjustment to income.

82

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

SFAS No. 133 was effective on a prospective basis for all fiscal
quarters of fiscal years beginning after June 15, 2000. The adoption of SFAS No.
133 on July 1, 2000 resulted in the cumulative effect of a change in accounting
principle of $15 thousand pre-tax being recognized as expense in the
Consolidated Statement of Income for the year ended June 30, 2001. Due to the
immateriality of the cumulative effect of adopting SFAS No. 133, the $15
thousand pre-tax expense is included in general and administrative expense in
the Consolidated Statement of Income. The tax effects and earnings per share
amounts related to the cumulative effect of adopting SFAS No. 133 are not
material.

We recorded cash losses on the fair value of derivative financial
instruments of $9.4 million, $4.3 million and $2.1 million during the years
ended June 30, 2002, 2001 and 2000, respectively, which were offset by
securitization gains during the periods. Any ineffectiveness related to hedging
transactions during the periods was immaterial. Ineffectiveness is a measure of
the difference in the change in fair value of the derivative financial
instrument as compared to the change in the fair value of the item hedged.

83

There were no derivative contracts accounted for as hedges at June 30,
2002 or 2001. Outstanding derivative contracts by items hedged and associated
unrealized losses as of June 30, 2000 were as follows (in thousands):

Eurodollar Forward
Futures Treasury
Contracts Sales Total
---------- --------- ----------

Loans available for sale:
Notional Amount...................... $ 20,000 $ -- $ 20,000
Unrealized Losses.................... (54) -- (54)
Mortgage Conduit Facility
Assets:
Notional Amount...................... 25,000 35,000 60,000
Unrealized Losses.................... (19) (114) (133)
Loan Commitments:
Notional Amount...................... 20,000 10,000 30,000
Unrealized Losses.................... (25) (23) (48)
---------- --------- ----------
Total:
Notional Amount...................... $ 65,000 $ 45,000 $ 110,000
Unrealized Losses.................... (98) (137) (235)
========== ========= ==========

In addition to the above derivative contracts, at June 30, 2000, we had
an obligation to satisfy a mortgage securitization prefund requirement of $67.9
million, which was satisfied in July 2000. There were no such obligations at
June 30, 2002 or 2001.

Generally, we do not enter into derivative financial instrument
contracts for trading purposes. However, we have entered into a derivative
financial instrument contract, which we have not designated as an accounting
hedge and is therefore accounted for as a trading asset or liability. This
contract was designed to reduce our exposure to changes in the fair value of
certain interest-only strips due to changes in one-month LIBOR. The structure of
certain securitization trusts includes a floating interest rate tranche based on
one-month LIBOR plus an interest rate spread. Floating interest rate tranches in
a securitization expose us to gains or losses due to changes in the fair value
of the interest-only strip from changes in the floating interest rate paid to
the certificate holders. In order to manage this exposure we have entered into
an interest rate swap agreement to lock in a fixed interest rate on our third
quarter fiscal 2002 securitization's variable rate tranche. The swap agreement
requires a net cash settlement on a monthly basis of the difference between the
fixed interest rate on the swap and the LIBOR paid on the certificates. The fair
value of this swap agreement is based on estimated market values for the sale of
the contract provided by a third party. For the year ended June 30, 2002, we
recorded $0.7 million in losses on this swap contract due to decreases in the
interest rate swap yield curve. Of the total losses recognized during the
period, $0.5 million are unrealized losses representing the net change in the
fair value of the contract at June 30, 2002 and $0.2 million are cash losses.
The net unrealized loss of $0.5 million is included in other liabilities. Our
interest-only strips are held as available for sale securities and therefore
changes in the fair value of the interest-only strips are recorded as a
component of equity unless the fair value of the interest-only strips falls
below its cost basis, which would require a write down through current period
income.

84

Terms of the interest rate swap agreement at June 30, 2002 were as
follows (dollars in thousands):

Notional amount...................... $ 102,642
Rate received - Floating (a)......... 1.84%
Rate paid - Fixed.................... 2.89%
Maturity date........................ April 2004
Unrealized loss...................... $ 461
Sensitivity to 0.1% change in
interest rates..................... $ 93

(a) Rate represents the spot rate for one-month LIBOR paid on the securitized
floating interest rate tranche at the end of the period.

Derivative transactions are measured in terms of a notional amount, but
this notional amount is not carried on the balance sheet. The notional amount is
not exchanged between counterparties to the derivative financial instrument,
but, is only used as a basis to determine fair value, which is recorded on the
balance sheet, and to determine interest and other payments between the
counterparties. Our exposure to credit risk in a derivative transaction is
represented by the fair value of those derivative financial instruments in a
gain position. We attempt to manage this exposure by limiting our derivative
financial instruments to those traded on major exchanges and our counterparties
are major financial institutions. At June 30, 2002, we held no derivative
financial instruments in a gain position.

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 that 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 interest 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
interest 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).

Liquidity and Capital Resources

Liquidity and capital resource management is a process focused on
providing the funding to meet our short and long-term cash needs. We have used a
substantial portion of our funding sources to build our managed portfolio and
investments in securitization residual assets with the expectation that they
will generate sufficient cash flows in the future to cover our operating
requirements, including repayment of maturing subordinated debt. Our cash needs
change as the managed portfolio grows, as our interest-only strips grow and
release more cash, as subordinated debt matures, as operating expenses change
and revenues increase. 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 (although no
acquisitions are currently contemplated).

85

Following is a summary of future payments on our contractual
obligations as of June 30, 2002 (in thousands):

Less than 1 to 3 4 to 5 After
Obligation Total 1 year years years 5 years
- ------------------------------- ----------- ----------- ----------- --------- ----------

Subordinated debt.............. $ 655,720 $ 367,111 $ 232,377 $ 28,603 $ 27,629
Accrued interest - subordinated
debt (a) ................... 43,017 24,267 12,726 3,002 3,022
Warehouse and operating lines
of credit................... 8,486 8,486 -- -- --
Operating leases............... 5,922 4,712 1,210 -- --
--------- --------- --------- -------- --------
Total obligations.............. $ 713,145 $ 404,576 $ 246,313 $ 31,605 $ 30,651
========= ========= ========= ======== ========

- -------------------
(a) This table reflects interest payment terms elected by subordinated debt
holders as of June 30, 2002. In accordance with the terms of the
subordinated debt offering, subordinate debt holders have the right to
change the timing of the interest payment on their notes once during the
term of their investment.

The following discussion of liquidity and capital resources should be
read in conjunction with the discussion of the Application of Critical
Accounting Policies.

When loans are sold through a securitization, we retain the rights to
service the loans. As the servicer of securitized loans we are obligated to
advance interest payments for delinquent loans if we deem that the advances will
ultimately be recoverable. These advances can first be made out of funds
available in the trusts' collection account, then from our operating cash if
there are insufficient funds in the trusts' collection account. These advances,
including those made from the trusts' collection account, which if not recovered
from the borrower or proceeds from the liquidation of the loan, require
reimbursement from us. These advances may require funding from our capital
resources and may create greater demands on our cash flow than either selling
loans with servicing released or maintaining a portfolio of loans on balance
sheet. However, these advances have priority of repayment from the succeeding
month's mortgage loan payments to the trusts.

While we are under no obligation to do so, at times we elect to
repurchase delinquent loans from the securitization trusts, some of which may be
in foreclosure. 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 purchase price of a delinquent loan is at the loan's outstanding contractual
balance. 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 31 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.
The related allowance for loan losses for these repurchased loans is included in
our provision for credit losses in the period of repurchase. Our ability to
repurchase these loans does not disqualify us for sale accounting under SFAS No.
140 or other relevant accounting literature because we are not required to
repurchase any loan and our ability to repurchase a loan is limited by contract.
See "-- Results of Operations -- Summary of Loans Repurchased from Mortgage Loan
Securitization Trusts" for further detail of our repurchase activity.

86

Cash flow from operations, the issuance of subordinated debt, and lines
of credit fund our operating cash needs. Loan originations are funded through
borrowings against warehouse credit facilities and sales into an off-balance
sheet facility. Each funding source is described in more detail below.

Cash flow from operations. One of our corporate goals is to achieve
positive cash flow from operations. However, we cannot assure you that we will
achieve our projections regarding declining negative cash flow or positive cash
flow from operations. The achievement of this goal is dependent on our ability
to:

o Manage levels of securitizations to maximize cash flows cash
received at closing and subsequently from interest-only strips and
servicing rights;
o Continue to grow a portfolio of mortgage loans which will
ultimately generate income and cash flows through our servicing
activities and the residual interests we hold in the securitized
loans;
o Build on our established approaches to underwriting loans,
servicing and collecting loans and managing credit risks in order
to control delinquency and losses;
o Continue to invest in technology and other efficiencies to reduce
per unit costs in our loan originations and servicing process,
and
o Control overall expense increases.

Our cash flow from operations is negatively impacted by a number of
factors. The growth of our loan originations negatively impacts our cash flow
from operations because we must bear the expenses of the origination but
generally do not recover the cash outflow from these expenses until we
securitize or sell the underlying loans. With respect to loans securitized, we
may be required to wait more than one year to recover the cash outflow from loan
origination expenses through cash inflows from our residual assets retained in
securitization. A second factor, which negatively impacts our cash flow, is an
increase in market interest rates. If market interest rates increase, the
interest rates that investors demand on the certificates issued by
securitization trusts will also increase. The increase in interest rates paid to
investors reduces the cash we will receive from our interest-only strips.
Although we may have the ability, in a rising interest rate market, to charge
higher loan interest rates to our borrowers, competition, laws and regulations
and other factors may limit or delay our ability to do so.

Even though our loan origination and servicing operations have expanded
during fiscal 2002, negative cash flow from operations decreased $76.3 million,
or 85.1%, for the year ended June 30, 2002 from the prior year. Cash flow from
operations for the year ended June 30, 2002 was a negative $13.3 million.
Although we expect negative cash flow from operations to continue in the
foreseeable future, our goal is to continue to reduce our negative cash flow
from operations from historical levels and then we expect that our cash flow
from operations will become positive. However, negative cash flow from
operations in the next fiscal year may increase from fiscal 2002 because due to
the nature of our operations, we generally expect the level of cash flow from
operations to fluctuate. The extent of progress in the future compared to the
decrease in negative cash flow in fiscal 2002 depends on the items discussed
below.

87

The decline in negative cash flow from operations for the year ended
June 30, 2002 compared to the year ended June 30, 2001, has been achieved
through a combination of items. In addition to our focus on controlling overall
expense increases and realizing efficiencies from our investments in systems and
technology (most significantly in our loan origination areas), the improvement
of our cash flow from operations was attributable to three significant factors.
First, the cash flow we received from our interest-only-strips grew by $17.8
million in fiscal 2002 from fiscal 2001 due to increases in our securitized
portfolio of loans which continue to grow and previous securitizations begin to
provide us with additional residual cash and overcollateralization cash. Second,
due to increases in interest rate spreads received in our securitizations during
fiscal 2002, we were able to structure our securitization transactions to
provide additional cash at the closing of the securitization through the sale of
trust certificates to investors at a premium or through the sale of notional
bonds. In fiscal 2002, we received $32.9 million of additional cash at the
closing of our securitizations from the sale of loans at a premium or through
the sale of Notional bonds compared to $10.1 million in fiscal 2001. We do not
expect to be able to maintain the levels of cash we received at the closing of
fiscal 2002 securitizations unless market interest rates remain at, or near, the
levels noted throughout fiscal 2002, the market is willing to accept the
structure and we can maintain the interest rate spreads achieved in the fiscal
2002 securitizations. Third, in fiscal 2002, we sold an additional $17.9 million
of loan receivables through securitizations and whole loan sales, which were
held as available for sale at the end of fiscal 2001. The proceeds from this
sale increased our operating cash flow in the current year. We do not expect
that we would reduce our existing available for sale portfolio in the future.
Although negative cash flow from operations in future periods may increase from
the level experienced in fiscal 2002, we believe that if our business
projections prove accurate, negative cash flow will decline and we will
ultimately achieve positive cash flow from operations in the future.

As was previously discussed, during the year ended June 30, 2002, 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 portfolio 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, favorable overcollateralization
requirements and levels of cash received at closing on our more recent
securitizations we do not believe our recent increase in prepayment experience
will have a significant impact on our expected cash flows from operations.

Credit facilities. Borrowings against warehouse credit facilities
represent cash advanced to us for a limited duration, generally no more than 270
days, and are secured by loan receivables. These credit facilities provide the
primary funding source for loan originations. 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. We also have a committed
mortgage conduit facility, which enables us to sell our loans into an
off-balance sheet facility. In addition, we have the availability of revolving
credit facilities, which may be used to fund our operations. These credit
facilities are generally extended for a one-year term before the renewal of the
facility must be re-approved by the lender. We periodically review our expected
future credit needs and negotiate credit commitments for those needs as well as
excess capacity in order to allow us flexibility in the timing of the
securitization of our loans.

88

The following is a description of the warehouse and operating lines
of credit and mortgage conduit facilities which were available to us at
June 30, 2002:

Amount Amount
Amount Utilized On- Utilized Off-
Committed Balance Sheet Balance Sheet
--------- ------------- -------------
(in thousands)

Revolving credit and conduit facilities:
Mortgage conduit facility, expiring July 2003 (a)............... $ 300,000 $ Na $ 54,925
Warehouse revolving line of credit, expiring November 2002 (b).. 200,000 -- Na
Warehouse revolving line of credit, expiring March 2003 (c)..... 100,000 -- Na
Warehouse and operating revolving line of credit, expiring
December 2002 (d)............................................. 50,000 6,171 Na
Warehouse revolving line of credit, expiring October 2003 (e)... 25,000 187 Na
Operating revolving line of credit, expiring January 2003 (f)... 1,200 -- Na
--------- ---------- ----------
Total revolving credit facilities.................................. 676,200 6,358 54,925
Other facilities:
Commercial paper conduit for lease production, maturity
matches underlying leases (g)................................. 2,397 2,128 269
--------- ---------- ----------
Total credit facilities............................................ $ 678,597 $ 8,486 $ 55,194
========= ========== ==========

Na - not applicable for facility

(a) $300.0 million mortgage conduit facility. 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 "-- Application of Critical
Accounting Policies" for further discussion of the off-balance sheet
features of this facility.

(b) $200.0 million warehouse line of credit with Credit Suisse First Boston
Mortgage Capital, LLC. The interest rate on the facility is based on
one-month LIBOR plus a margin. Advances under this facility are
collateralized by pledged loans.

(c) $100.0 million warehouse line of credit with Triple-A One Funding Corp., an
affiliate of MBIA Insurance Corporation. This facility was renewed in March
2002 and, based upon our review of our credit needs, the credit limit was
reduced from $200.0 million. Interest rates on this facility are based on
commercial paper rates plus a margin. Advances under this facility are
collateralized by pledged loans.

(d) $50.0 million warehouse and operating credit facility with JP Morgan Chase
Bank. Interest rates on the advances under this facility are based upon
one-month LIBOR plus a margin. Obligations under the facility are
collateralized by pledged loans, REO, and advances to securitization
trusts. Advances on this line for general operating purposes are limited to
$5.0 million and are collateralized by our Class R Certificate of the ABFS
Mortgage Loan Trusts 1997-2 and 1998-3.

89

(e) $25.0 million warehouse line of credit facility from Residential Funding
Corporation. Under this warehouse facility, advances may be obtained,
subject to specific conditions described in the agreements. Interest rates
on the advances are based on one-month LIBOR plus a margin. The obligations
under this agreement are collateralized by pledged loans.

(f) $1.2 million revolving line of credit facility from Firstrust Savings Bank.
The obligations under this facility are collateralized by the cash flows
from our investment in the ABFS 99-A lease securitization trust. The
interest rate on the advances from this facility is one-month LIBOR plus a
margin.

(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.

The warehouse credit agreements require that we maintain specific
financial covenants regarding net worth, leverage, net income, liquidity, total
debt and other standards. Each agreement has multiple individualized financial
covenant thresholds and ratio limits, which we must meet to enable us to
continue to draw on that particular line of credit. At June 30, 2002, we were in
compliance with the terms of all financial covenants. Some of our financial
covenants have minimal flexibility and we cannot say with certainty that we will
continue to comply with the terms of all debt covenants. If we do not comply
with the debt covenants in one of our credit facilities, we can utilize excess
capacity in our other credit facilities for loan funding, request a waiver from
our lender or request a renegotiation of the terms of the agreement in order to
allow us to continue to draw down on the facility. While there can be no
assurance that a waiver or modification of terms would be granted us should one
be requested, in fiscal 2002 we did ask for and obtained a modification of
certain financial covenants under our revolving credit facilities with
Residential Funding Corporation and Triple-A One Funding Corp.

Subordinated debt securities. The issuance of subordinated debt funds
the majority of our remaining operating 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 order to expand our businesses we
have issued subordinated debt to partially fund growth and to partially fund
maturities of subordinated debt. 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. During fiscal 2002, we sold $117.8 million in principal amount of
subordinated debt securities, net of redemptions compared to $147.3 million in
fiscal 2001. The debt had maturities of up to ten years with an average maturity
of 21 months in fiscal 2002 compared to 19 months in fiscal 2001. The reduction
in the level of subordinated debt sold was a result of our focus on becoming
cash flow positive and reducing our reliance on subordinated debt.

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 June 30, 2002, $84.7 million of this debt
was available for future issuance. We are in the process of registering a new
offering for an additional $315.0 million of subordinated debt. There can be no
assurance given as to when the Securities and Exchange Commission will declare
this registration statement effective.

90

We intend to meet our obligation to repay such debt and interest 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. Our cash
balances are sufficient to cover approximately 27.7% of the $391.4 million of
subordinated debt and accrued interest maturities due within one year. Cash
balances were $108.6 million at June 30, 2002, up from $91.1 million at June 30,
2001.

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 interest rate of our subordinated debt
issued in the month of June 2002 was 8.39% and 60.5% of that debt was for terms
of 24 months or longer, compared to debt issued in June 2001 which had a
weighted-average interest rate of 9.52% and 47.6% with terms of 24 months or
longer. Debt issued at our peak rate, which was in February 2001, was at a rate
of 11.85% and only 36.7% was for terms of 24 months or longer.

Sales into special purpose entities and off-balance sheet facilities.
We continue to significantly rely on access to the asset-backed securities
market through securitizations to provide permanent funding of our loan
production. Asset securitizations are one of the most common off-balance sheet
arrangements to apply special purpose entities, such as securitization trusts,
in their structures. The securitization trusts sell certificates to third party
investors which generate cash proceeds for the repayment of borrowings under
warehouse and credit facilities. The off-balance sheet trusts' activities are
restricted to holding title to the loan collateral, issuing certificates to
investors and distributing loan payments to the investors and us in accordance
with the agreement. We also retain the right to service the loans. Residual cash
from the loans after required principal and interest payments are made to the
investors provide us with cash flows from our interest-only strips. 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 and our operating cash needs.

As of June 30, 2002 and 2001, there are loans with an aggregate
principal balance of $2.9 billion and $2.4 billion in 22 separate off-balance
sheet entities which have $2.8 billion and $2.3 billion in investor certificates
outstanding, respectively. We have no additional obligations to the off-balance
sheet facilities other than those required as servicer of the loans and are not
required to make any additional investments in the trusts. See "--
Securitizations -- Summary of Selected Mortgage Loan Securitization Trust
Information" for detail of the composition of each securitization trust.

Other liquidity considerations. A failure to renew or obtain adequate
funding under a warehouse credit or conduit facility, offerings of subordinated
debt, 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.

91

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, assess prepayment fees on loans, diversify lending in the home
equity and business loan markets and 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.

Our June 2002 securitization was structured as a senior / subordinated
certificate structure which provides credit enhancement for senior certificates
by the subordinated certificates. This structure provided us with lower
overcollateralization requirements among other benefits. We have been notified
that we do not qualify as a select servicer under some of the financial
requirements of a rating agency. If we desire to enter into future
securitizations structured as senior / subordinated certificate transactions, we
will be required to enter into an agreement with an alternate servicer who
would, among other responsibilities, assume our responsibilities for servicing
that securitization trust's loans should we be unable to fulfill our servicing
obligations. We do not anticipate that this servicing agreement requirement will
limit our ability to structure future securitizations as a senior / subordinated
structure or that the additional cost to structure such securitizations would be
material. Additionally, other structures could be available to us including an
insured structure, which is the structure of our securitizations from 1996 to
March of 2002.

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
prepayment patterns and declines in real estate collateral values. To the extent
the United States experiences 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 reduced profitability.
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.

92

Related Party Transactions

We have a loan receivable from our Chairman and Chief Executive
Officer, Anthony J. Santilli, for $0.6 million, which was an advance for the
exercise of stock options to purchase 247,513 shares of our common stock in
1995. The loan is due in September 2005 (earlier if the stock is disposed of).
Interest at 6.46% is payable annually. The loan is secured by 247,513 shares of
our common stock, and is shown as a reduction of stockholders' equity in our
financial statements.

On April 2, 2001, we awarded 3,025 shares of our common stock to
Richard Kaufman, our director, as a result of services rendered in connection
with our stock repurchases.

We employ members of the immediate family of some of our directors and
executive officers in various non-corporate executive positions. We believe that
the salaries we pay these individuals are competitive with salaries paid to
other employees in similar positions in our organization and in our industry.

Additionally, we have business relationships with other related
parties, including family members of directors and officers, through which we
have purchased appraisal services, office equipment and real estate advisory
services. None of our related party transactions, individually or collectively,
are material to our results of operations.

Office Facilities

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 $2.9 million. We lease additional space
in Bala Cynwyd under a five-year lease expiring November 2004 at an annual
rental of approximately $0.7 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 Roseland lease has 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.

93

Recent Accounting Pronouncements

Set forth below are accounting pronouncements that may have a future
effect on operations. The following descriptions or recent pronouncements should
be read in conjunction with the significant accounting policies, which have been
adopted that are set forth in Note 1 of the notes to the consolidated financial
statements.

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

In September 2000, the FASB issued 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 our financial condition or results of
operations and is not expected to have a material effect on our financial
condition or results of operations in future periods. However, 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 loans whether or
not we actually repurchase the loans. These rights to repurchase loans are
recorded in Loan receivables - Available for sale, at the estimated fair value
of the loans with a corresponding obligation in Other liabilities at the loans
outstanding principal balance, which would be the repurchase price of the loan
should we choose to repurchase the loan.

94

In July 2001, the FASB issued SFAS No. 142 "Goodwill and Other
Intangible Assets." SFAS No. 142 establishes standards for the accounting of
intangible assets that are acquired individually or with a group of other assets
in financial statements upon their acquisition, and the accounting of goodwill
and other intangible assets after they have been initially recognized in the
financial statements. In addition, SFAS No. 142 requires additional financial
statement disclosure for goodwill and other intangibles. Under the new standard,
amortization of goodwill and intangible assets with an indefinite useful life
was 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.
The provisions of SFAS No. 142 were required to be applied starting with fiscal
years beginning after December 15, 2001. Early application was permitted for
entities with fiscal years beginning after March 15, 2001. We adopted the new
standard on July 1, 2001.

Because our goodwill is no longer being amortized, 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, we performed a
transitional impairment test, which did not indicate impairment of goodwill
under the provisions of the new standard.

For the year ended June 30, 2001 and 2000, we recorded amortization of
goodwill in the amount of $1.3 million and $1.2 million, respectively. Adjusted
to exclude amortization of goodwill, net income and diluted net income per share
for the year ended June 30, 2001 were $8.9 million and $2.29 and for the year
ended June 30, 2000 were $7.2 million and $1.69, respectively.

In June 2002, the FASB issued a proposed interpretation of Accounting
Research Bulletin No. 51 "Consolidated Financial Statements." The proposal
provides guidance on consolidation by a business enterprise of special purpose
entities, referred to as SPE's. The proposal defines the primary beneficiary of
an SPE as a business enterprise that has a controlling financial interest in the
SPE. The proposal requires that the primary beneficiary of an SPE consolidate an
SPE's assets, liabilities and results of the activities of the SPE in their
financial statements and provide certain disclosures regarding both consolidated
and unconsolidated SPE's. SPE's whose structures effectively disburse risk would
not be required to be consolidated by any party. Although we use SPE's
extensively in our loan securitization activities, the proposal, if adopted as
written, will not affect our current consolidation policies for SPE's. The
proposed interpretation does not change the guidance incorporated in SFAS No.
140 which precludes consolidation of a qualifying SPE by a transferor of assets
to that SPE. The proposal as currently contemplated will therefore have no
effect on our financial condition or results of operations and would not be
expected to effect it in the future.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

The information required to be included in this Item 7A regarding
Quantitative and Qualitative Disclosures About Market Risk is incorporated by
reference from "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Interest Rate Risk Management."

95

Item 8. Financial Statements

Index to Consolidated Financial Statements Page
- ------------------------------------------ ----
Report of Independent Certified Public Accountants......................... 97
Consolidated Balance Sheets as of June 30, 2002 and 2001................... 98
Consolidated Statements of Income for the years ended
June 30, 2002, 2001 and 2000...................................... 99
Consolidated Statements of Stockholders' Equity for the years ended
June 30, 2002, 2001 and 2000...................................... 100
Consolidated Statements of Cash Flow for the years ended
June 30, 2002, 2001 and 2000...................................... 101
Notes to Financial Statements.............................................. 103

96

Report of Independent Certified Public Accountants

American Business Financial Services, Inc.
Bala Cynwyd, Pennsylvania

We have audited the accompanying consolidated balance sheets of American
Business Financial Services, Inc. and subsidiaries as of June 30, 2002 and 2001,
and the related consolidated statements of income, stockholders' equity, and
cash flow for each of the years in the three-year period ended June 30, 2002.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
American Business Financial Services, Inc. and subsidiaries as of June 30, 2002
and 2001, and the consolidated results of their operations and their cash flow
for each of the years in the three-year period ended June 30, 2002 in conformity
with accounting principles generally accepted in the United States of America.

/s/ BDO Seidman LLP

BDO Seidman LLP
Philadelphia, Pennsylvania
August 23, 2002

97

American Business Financial Services, Inc. and Subsidiaries

Consolidated Balance Sheets

June 30,
2002 2001
---------------------------------------
(dollar amounts in thousands)

Assets
Cash and cash equivalents $ 108,599 $ 91,092
Loan and lease receivables, net
Available for sale 61,650 83,241
Interest and fees 12,292 16,549
Interest-only strips (includes the fair value of
overcollateralization related cash flows of $236,629 and
$183,087 at June 30, 2002 and 2001) 512,611 398,519
Servicing rights 125,288 102,437
Receivable for sold loans 5,055 14,157
Prepaid expenses 3,640 3,457
Property and equipment, net 18,446 20,750
Other assets 28,794 36,285
---------------------------------------
Total assets $ 876,375 $ 766,487
=======================================
Liabilities
Subordinated debt $ 655,720 $ 537,950
Warehouse lines and other notes payable 8,486 51,064
Accrued interest payable 43,069 32,699
Accounts payable and accrued expenses 13,690 8,324
Deferred income taxes 35,124 30,954
Other liabilities 50,908 38,634
---------------------------------------
Total liabilities 806,997 699,625
---------------------------------------
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 in 2002 and 3,645,092 shares in 2001
(including Treasury shares of 801,823 in 2002 and 379,648 in
2001) 4 4
Additional paid-in capital 23,985 23,984
Accumulated other comprehensive income 11,479 10,337
Retained earnings 47,968 43,922
Treasury stock, at cost (13,458) (10,785)
---------------------------------------
69,978 67,462
Note receivable (600) (600)
---------------------------------------
Total stockholders' equity 69,378 66,862
---------------------------------------
Total liabilities and stockholders' equity $ 876,375 $ 766,487
=======================================

See accompanying notes to financial statements.

98

American Business Financial Services, Inc. and Subsidiaries

Consolidated Statements of Income

Year ended June 30,
2002 2001 2000
-----------------------------------------------------
(dollar amounts in thousands
except per share data)

Revenues
Gain on sale of loans and leases $ 185,580 $ 128,978 $ 90,380
Interest and fees 21,338 22,582 19,400
Interest accretion on interest-only strips 35,386 26,069 16,616
Servicing income 5,483 5,700 4,239
Other income 114 7 11
-----------------------------------------------------
Total revenues 247,901 183,336 130,646
-----------------------------------------------------
Expenses
Interest 68,683 56,547 38,122
Provision for credit losses 6,457 5,190 2,045
Employee related costs 36,313 28,897 12,847
Sales and marketing 25,958 24,947 25,336
General and administrative 74,887 54,570 29,331
Interest-only strips fair value adjustment 22,053 - 12,603
-----------------------------------------------------
Total expenses 234,351 170,151 120,284
-----------------------------------------------------
Income before provision for income taxes 13,550 13,185 10,362
Provision for income taxes 5,691 5,274 3,938
-----------------------------------------------------
Income before cumulative effect of a change in
accounting principle 7,859 7,911 6,424
Cumulative effect of a change in accounting principle - 174 -
-----------------------------------------------------
Net income $ 7,859 $ 8,085 $ 6,424
=====================================================
Earnings per common share
Income before cumulative effect of a change in
accounting principle:
Basic $ 2.68 $ 2.08 $ 1.55
Diluted $ 2.49 $ 2.04 $ 1.51
Net income:
Basic $ 2.68 $ 2.13 $ 1.55
Diluted $ 2.49 $ 2.08 $ 1.51
Average common shares (in thousands):
Basic 2,934 3,797 4,143
Diluted 3,155 3,885 4,246

See accompanying notes to financial statements.

99

American Business Financial Services, Inc. and Subsidiaries

Consolidated Statements of Stockholders' Equity

Common Stock
--------------------------- Accumulated
Number of Additional Other
Shares Paid-In Comprehensive Retained
Outstanding Amount Capital Income Earnings
------------------------------------------------------------------------

Balance, June 30, 1999 4,339 $ 3 $ 23,339 $ 3,354 $ 33,596
Comprehensive income:
Net income - - - - 6,424
Unrealized gains on interest-only strips - - - 2,104 -
------------------------------------------------------------------------
Total comprehensive income - - - 2,104 6,424
Issuance of non-employee stock options - - 130 - -
Exercise of stock options 77 1 218 - -
Cash dividends ($0.25 per share) - - - - (1,014)
Repurchase of treasury shares (394) - - - -
Stock dividend (5% of outstanding shares)
Issuance of treasury shares - - - - -
Issuance of new shares - - 604 - (2,156)
------------------------------------------------------------------------
Balance, June 30, 2000 4,022 4 24,291 5,458 36,850
Comprehensive income:
Net income - - - - 8,085
Unrealized gains on interest-only strips - - - 4,879 -
------------------------------------------------------------------------
Total comprehensive income - - - 4,879 8,085
Issuance of non-employee stock options - - (333) - -
Cash dividends ($0.26 per share) - - - - (1,013)
Repurchase of treasury shares (759) - - - -
Issuance of new shares 3 - 26 - -
------------------------------------------------------------------------
Balance, June 30, 2001 3,266 4 23,984 10,337 43,922

Comprehensive income:
Net income - - - - 7,859
Unrealized gains on interest-only strips - - - 1,142 -
------------------------------------------------------------------------
Total comprehensive income - - - 1,142 7,859
Stock dividend (10% of outstanding shares) - - - (2,979)
Cash dividends ($0.28 per share) - - - - (834)
Repurchase of treasury shares (423) - - - -
Exercise of stock options 1 - 1 - -
------------------------------------------------------------------------
Balance, June 30, 2002 2,844 $ 4 $ 23,985 $ 11,479 $ 47,968
========================================================================

[RESTUBBED TABLE]

Total
Treasury Note Stockholders'
Stock Receivable Equity
----------------------------------------------

Balance, June 30, 1999 $ (1,446) $ (600) $ 58,246
Comprehensive income:
Net income - - 6,424
Unrealized gains on interest-only strips - - 2,104
----------------------------------------------
Total comprehensive income - - 8,528
Issuance of non-employee stock options - - 130
Exercise of stock options - - 219
Cash dividends ($0.25 per share) - - (1,014)
Repurchase of treasury shares (3,994) - (3,994)
Stock dividend (5% of outstanding shares)
Issuance of treasury shares 1,552 - 1,552
Issuance of new shares - - (1,552)
----------------------------------------------
Balance, June 30, 2000 (3,888) (600) 62,115
Comprehensive income:
Net income - - 8,085
Unrealized gains on interest-only strips - - 4,879
----------------------------------------------
Total comprehensive income - - 12,964
Issuance of non-employee stock options - - (333)
Cash dividends ($0.26 per share) - - (1,013)
Repurchase of treasury shares (6,897) - (6,897)
Issuance of new shares - - 26
----------------------------------------------
Balance, June 30, 2001 (10,785) (600) 66,862

Comprehensive income:
Net income - - 7,859
Unrealized gains on interest-only strips - - 1,142
----------------------------------------------
Total comprehensive income - - 9,001
Stock dividend (10% of outstanding shares) 2,979 - -
Cash dividends ($0.28 per share) - - (834)
Repurchase of treasury shares (5,652) - (5,652)
Exercise of stock options - - 1
----------------------------------------------
Balance, June 30, 2002 $ (13,458) $ (600) $ 69,378
==============================================

See accompanying notes to financial statements.

100

American Business Financial Services, Inc. and Subsidiaries

Consolidated Statements of Cash Flow

Year ended June 30,
2002 2001 2000
-----------------------------------------------------
(dollar amounts in thousands)

Cash flows from operating activities
Net income $ 7,859 $ 8,085 $ 6,424
Adjustments to reconcile net income to net cash used
in operating activities:
Gain on sales of loans and leases (185,580) (128,978) (90,380)
Depreciation and amortization 40,615 30,434 21,452
Interest accretion on interest-only strips (35,386) (26,069) (16,616)
Interest-only strips fair value adjustment 22,053 - 12,603
Provision for credit losses 6,457 5,190 2,045
Loans and leases originated for sale (1,434,176) (1,256,090) (1,174,518)
Proceeds from sale of loans and leases 1,443,898 1,218,370 1,112,686
Principal payments on loans and leases 12,654 7,658 9,686
Decrease (increase) in accrued interest and fees on
loan and lease receivables 4,257 (3,547) (6,139)
Purchase of initial overcollateralization on
securitized loans - - (11,232)
Required purchase of additional overcollateralization
on securitized loans (47,271) (43,945) (29,925)
Cash flow from interest-only strips 100,692 82,905 49,508
Increase in prepaid expenses (183) (1,248) (538)
Increase in accrued interest payable 10,370 14,779 9,046
Increase (decrease) in accounts payable and accrued
expenses 5,366 (5,252) (4,376)
Accrued interest payable reinvested in subordinated
debt 31,706 16,026 11,309
Increase in deferred income taxes 4,595 4,930 6,169
Increase (decrease) in loans in process 736 (4,012) 10,484
Other, net (1,969) (8,841) (8,202)
-----------------------------------------------------
Net cash used in operating activities (13,307) (89,605) (90,514)
-----------------------------------------------------

Cash flows from investing activities
Purchase of property and equipment, net (4,472) (9,210) (11,523)
Purchase of investments - - (713)
Principal receipts and maturity of investments 28 751 32
-----------------------------------------------------
Net cash used in investing activities (4,444) (8,459) (12,204)
-----------------------------------------------------

101

American Business Financial Services, Inc. and Subsidiaries

Consolidated Statements of Cash Flow (continued)

Year ended June 30,
2002 2001 2000
-----------------------------------------------------
(dollar amounts in thousands)

Cash flows from financing activities
Proceeds from issuance of subordinated debt $ 224,062 $ 217,694 $ 254,281
Redemptions of subordinated debt (137,998) (86,446) (86,567)
Net (repayments) borrowings on revolving lines of
credit (34,077) 8,095 (14,153)
Borrowings on lease funding facility - - 12,294
Principal payments on lease funding facility (3,345) (3,866) (2,955)
Repayments of repurchase agreement - (3,605) (1,072)
Repayments of other notes payable (5,156) (402) (1,963)
Financing costs incurred (1,743) (4,155) (5,002)
Exercise of employee stock options 1 - 219
Cash dividends paid (834) (1,013) (1,014)
Repurchase of treasury stock (5,652) (6,897) (3,994)
-----------------------------------------------------
Net cash provided by financing activities 35,258 119,405 150,074
-----------------------------------------------------

Net increase in cash and cash equivalents 17,507 21,341 47,356
Cash and cash equivalents at beginning of year 91,092 69,751 22,395
-----------------------------------------------------
Cash and cash equivalents at end of year $ 108,599 $ 91,092 $ 69,751
=====================================================

Supplemental disclosures of cash flow information:
Cash paid (net refunds received) during
the year for:
Interest $ 26,729 $ 25,620 $ 17,767
Income taxes $ 1,511 $ 662 $ (469)

Supplemental disclosure of noncash financing activity:
Noncash transaction recorded in connection with
acquisition of subsidiary
Decrease in acquisition debt $ - $ - $ (457)
Decrease in loan and lease receivables $ - $ - $ 457

See accompanying notes to financial statements.

102

American Business Financial Services, Inc. and Subsidiaries

Notes to Financial Statements

June 30, 2002

1. Summary of Significant Accounting Policies

Business

American Business Financial Services, Inc. ("ABFS"), together with its
subsidiaries (the "Company"), is a diversified financial service organization
operating predominantly in the eastern and central portions of 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, a regional processing center located in
Roseland, New Jersey and a network of retail branch 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,
mortgage and home equity loans, typically to credit-impaired borrowers secured
by first and second mortgages. In addition, the Company offers subordinated debt
securities to the public, the proceeds of which are used for repayment of
existing debt, loan originations, the Company's operations, investments in
systems and technology, and for general corporate purposes including, but not
limited to, repurchase of the Company's outstanding common stock.

Effective December 31, 1999 the Company de-emphasized and subsequent to that
date, discontinued the equipment leasing origination business but continues to
service the remaining portfolio of leases.

Business Conditions

For its ongoing operations, the Company depends upon frequent financings,
including the sale of unsecured subordinated debt securities and borrowings
under warehouse credit facilities or lines of credit. If it is unable to renew
or obtain adequate funding through its sale of subordinated debt securities or
under a warehouse credit facility, or other borrowings, the lack of adequate
funds would reduce profitability. To the extent that the Company is not
successful in maintaining or replacing existing subordinated debt securities
upon maturity, it may have to limit loan originations or sell loans earlier than
intended and restructure its operations. Limiting originations or earlier sales
of loans could reduce profitability. The Company has historically experienced
negative cash flow from operations since 1996 primarily because in general, its
business strategy of selling loans through securitization has not generated cash
flow immediately. Although in the year ended June 30, 2002, negative cash
flow from operations has declined from prior years, the Company
expects this negative cash flow from operations to continue in the

103

American Business Financial Services, Inc. and Subsidiaries

Notes to Financial Statements (Continued)

June 30, 2002

1. Summary of Significant Accounting Policies (continued)

Business Conditions (continued)

foreseeable future. If the Company continues to experience negative cash flows
from operations, its ability to make principal and interest payments due under
the terms of the subordinated debentures could be impaired. At June 30, 2002,
there were approximately $367.1 million of subordinated debentures which will
mature through June 30, 2003.

The Company obtains the funds to repay the subordinated debentures at their
maturities by securitizing loans, selling whole loans and selling additional
subordinated debentures. The Company could, in the future, generate cash flows
by securitizing, selling, or borrowing against its interest-only strips and
selling servicing rights generated in past securitizations. If the Company is
unable in the future to securitize loans, to sell whole loans, or to realize
cash flows from interest-only strips and servicing rights generated in past
securitizations, its ability to repay the subordinated debentures could be
impaired.

In the event the Company was for any reason prohibited from offering additional
subordinated debentures, the Company has developed a contingent financial
restructuring plan including cash flow projections for the next twelve-month
period. Based on the Company's current cash flow projections, the Company
anticipates being able to make all scheduled subordinated maturities and vendor
payments.

The contingent financial restructuring plan is based on actions that the Company
would take to reduce its operating expenses and conserve cash. These actions
would include reducing capital expenditures, transitioning from securitizing the
majority of loans originated to selling those loans on a whole loan basis,
eliminating or downsizing various lending, overhead and support groups, and
scaling back the development of new business distribution channels and less
profitable businesses.

Basis of Financial Statement Presentation

The consolidated financial statements include the accounts of ABFS and its
subsidiaries (all of which are wholly owned). The consolidated financial
statements have been prepared in accordance with accounting principles generally
accepted in the United States of America. All significant intercompany balances
and transactions have been eliminated. In preparing the consolidated financial
statements, management is required to make estimates and assumptions which
affect the reported amounts of assets and liabilities as of the date of the
consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. These estimates include, among other things, estimated prepayment,
credit loss and discount rates on interest-only strips and servicing

104

American Business Financial Services, Inc. and Subsidiaries

Notes to Financial Statements (Continued)

June 30, 2002

1. Summary of Significant Accounting Policies (continued)

Basis of Financial Statement Presentation (continued)

rights, estimated servicing revenues and costs, valuation of real estate owned,
the net recoverable value of interest and fee receivables and determination of
the allowance for credit losses.

Certain prior period financial statement balances have been reclassified to
conform to current period presentation. All outstanding shares, average common
shares, earnings per common share and stock option amounts have been
retroactively adjusted to reflect the effect of a 10% stock dividend declared
August 21, 2002 and amounts reported for June 30, 2001 and 2000 have been
retroactively adjusted to reflect the effect of a 10% stock dividend declared
October 1, 2001. See Note 10 for further description.

Cash and Cash Equivalents

Cash equivalents consist of short-term investments with an initial maturity of
three months or less. The Company held restricted cash balances of $9.0 million
and $6.4 million related to borrower escrow accounts at June 30, 2002 and 2001,
respectively.

Loan and Lease Receivables

Loan and lease receivables - Available for sale are loans and leases the Company
plans to sell or securitize and are carried at the lower of aggregate cost
(principal balance, including unamortized origination costs and fees) or fair
value. Fair value is determined by quality of credit risk, types of loans
originated, current interest rates, economic conditions, and other relevant
factors.

Loan and lease receivables - Interest and fees are comprised mainly of accrued
interest and fees on loans and leases that are less than 90 days delinquent.
These amounts are carried at their estimated net recoverable value.

Allowance for Credit Losses

The Company's allowance for credit losses on available for sale loans and leases
is maintained to account for loans and leases that are delinquent and are
expected to be ineligible for sale into a securitization, delinquent loans that
have been repurchased from securitization trusts and to account for estimates
for credit losses on loans and leases that are current. The allowance is
calculated based upon management's estimate of its ability to collect on
outstanding loans and leases 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'

105

American Business Financial Services, Inc. and Subsidiaries

Notes to Financial Statements (Continued)

June 30, 2002

1. Summary of Significant Accounting Policies (continued)

Allowance for Credit Losses (continued)

ability to repay and collateral considerations. Additions to the allowance arise
from the provision for credit losses charged to operations or from the recovery
of amounts previously charged-off. Loan and lease charge-offs reduce the
allowance.

Loan and Lease Origination Costs and Fees

Direct loan and lease origination costs and loan fees such as points and other
closing fees are recorded as an adjustment to the cost basis of the related loan
and lease receivable. This asset is recognized in the Consolidated Statement of
Income, in the case of loans, as an adjustment to the gain on sale recorded at
the time the loans are securitized, or in the case of leases, are recognized as
amortization expense over the term of the leases.

Interest-Only Strips

The Company sells a majority of its originated loans through securitizations. In
connection with these securitizations, the Company receives cash and an
interest-only strip, which represents the Company's retained interest in the
securitized loans. As a holder of the interest-only strips, the Company is
entitled to receive certain excess (or residual) cash flows and
overcollateralization cash flows, which are derived from payments made to a
trust from the securitized loans after deducting payments to investors in the
securitization trust and other miscellaneous fees. These retained interests are
carried at their fair value. Fair value is based on 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 the 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
expected prepayment and credit loss rates on the pools of loans sold through
securitizations. Cash flows are discounted from the date the cash is expected to
be available to the Company (the "cash-out method"). 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, current and
expected economic conditions and in the case of prepayment rate assumptions,
consideration of the impact of changes in market interest rates. Excess cash
flows are retained by the trust until certain overcollateralization levels are
established. The overcollateralization is the excess of the aggregate principal
balances of loans in a securitized pool over investor interests. The
overcollateralization serves as credit enhancement for the investors.

106

American Business Financial Services, Inc. and Subsidiaries

Notes to Financial Statements (Continued)

June 30, 2002

1. Summary of Significant Accounting Policies (continued)

Interest-Only Strips (continued)

The expected future cash flows from interest-only strips are periodically
re-evaluated. The current assumptions for prepayment and credit loss rates are
monitored against actual experience and other economic conditions and are
changed if deemed necessary.

The securitization trusts and its investors have no recourse to other assets of
the Company for failure of the securitized loans to pay when due. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Securitizations" for further discussion of how the assumptions
used to estimate fair value are determined, comparisons of the Company's
assumptions to actual experience and sensitivities of the interest-only strips
balance to changes in assumptions.

Servicing Rights

When loans are sold through a securitization, the servicing of the loans is
retained and the Company capitalizes the benefit associated with the rights to
service securitized loans. Servicing rights represent the rights to receive
contractual servicing fees from securitization trusts and ancillary fees from
borrowers net of estimated compensation that would be required by a substitute
servicer. Servicing rights are carried at the lower of cost or fair value. The
benefits of servicing are the present value of projected net cash flows from
contractual servicing fees and ancillary servicing fees. The projected cash
flows from servicing fees incorporate assumptions made by management, 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.

Amortization of the servicing rights asset for securitized loans is calculated
individually for each securitized loan pool and is recognized in proportion to
servicing income on that particular pool of loans.

The expected future cash flows from servicing rights are periodically
re-evaluated. The current assumptions for prepayment and credit loss rates are
monitored against actual experience and other economic conditions and are
changed if deemed necessary. If the Company's 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.

See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Securitizations" for further discussion of how the assumptions
used to estimate fair value are determined, comparisons of the Company's
assumptions to actual experience and sensitivities of the servicing rights
balance to changes in assumptions.

107

American Business Financial Services, Inc. and Subsidiaries

Notes to Financial Statements (Continued)

June 30, 2002

1. Summary of Significant Accounting Policies (continued)

Prepaid Assets

Prepaid assets are comprised mainly of amounts paid for insurance coverage and
printed marketing materials and customer lists, which have not yet been
utilized. Costs for printed materials and customer lists are expensed as they
are utilized. Other marketing and advertising costs are expensed as incurred.

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization is computed using the straight-line
method over the estimated useful life of the assets ranging from 3 to 15 years.

Financing Costs and Amortization

Financing costs incurred in connection with public offerings of subordinated
debt securities are recorded in other assets and are amortized over the term of
the related debt.

Investments Held to Maturity

Investments classified as held to maturity recorded in other assets consist of
asset-backed securities that the Company has the positive intent and ability to
hold to maturity. These investments are stated at amortized cost.

Real Estate Owned

Property acquired by foreclosure or in settlement of loan and lease receivables
is recorded in other assets, and is carried at the lower of the cost basis in
the loan or fair value of the property less estimated costs to sell.

Goodwill

Goodwill is recorded in other assets and represents the excess of cost over the
fair value of the net assets acquired from the Company's 1997 acquisition of New
Jersey Mortgage and Investment Corp. (now American Business Mortgage Services,
Inc.). Periodically, the Company performs a review for events or changes in
circumstances that may indicate that the carrying amount of goodwill might
exceed the fair value, which would require an adjustment to the goodwill balance
for the amount of impairment. The Company utilizes estimated future cash

108

American Business Financial Services, Inc. and Subsidiaries

Notes to Financial Statements (Continued)

June 30, 2002

1. Summary of Significant Accounting Policies (continued)

Goodwill (continued)

flows of the purchased subsidiary compared to the carrying value of the
subsidiary including goodwill to determine if impairment exists. At June 30,
2002, no goodwill impairment existed.

See "-- Recent Accounting Pronouncements" for further detail of the required
change in accounting for goodwill, which the Company adopted July 1, 2001. For
segment reporting purposes, the goodwill balance is allocated to the loan
origination segment. See Note 20 for segment reporting.

Revenue Recognition

The Company derives its revenue principally from gains on sales of loans,
interest accretion on interest-only strips, interest and fee income on loans and
leases, and servicing income. Gains on sales of loans through securitizations
represent the difference between the net proceeds to the Company, including
retained interests in the securitization and the allocated cost of loans or
leases securitized. The allocated cost of loans securitized is determined by
allocating their net carrying value between the loans, the interest-only strips
and the servicing rights retained by the Company based upon their relative fair
values.

Interest accretion income represents the yield component of cash flows received
on interest-only strips. The Company uses a prospective approach to estimate
interest accretion. As previously discussed, the Company updates estimates of
residual cash flow from the securitizations. Under the prospective approach,
when it is probable that there is a favorable or unfavorable change in estimated
residual cash flow from the cash flow previously projected, the Company
recognizes a larger or smaller percentage of the cash flow as interest
accretion. Any change in value of the underlying interest-only strip could
impact the 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.

Interest and fee income consists of interest earned on loans and leases while
held in the Company's managed portfolio, premiums earned on loans sold with
servicing released and other ancillary fees collected in connection with loan
origination. Interest income is recognized based on the simple interest or
scheduled interest method depending on the original structure of the loan.
Accrual of interest income is suspended when the receivable is contractually
delinquent for 90 days or more. The accrual is resumed when the receivable
becomes contractually current, and past-due interest income is recognized at
that time. In addition, a detailed review will cause earlier suspension if
collection is doubtful. Premiums earned on loans sold with servicing

109

American Business Financial Services, Inc. and Subsidiaries

Notes to Financial Statements (Continued)

June 30, 2002

1. Summary of Significant Accounting Policies (continued)

Revenue Recognition (continued)

released, referred to as whole loan sales, are the difference between the net
proceeds from the sale and the loans' net carrying value. The net carrying value
of loans is equal to their principal balance plus unamortized origination costs
and fees.

Servicing income is recognized as contractual fees and other fees for servicing
loans and leases are incurred, net of amortization of servicing rights assets.

Derivative Financial Instruments

The primary market risk exposure that the Company faces is interest rate risk.
Interest rate risk occurs due to potential changes in interest rates between the
date fixed rate loans are originated and the date of securitization. From time
to time, derivative financial instruments are utilized in an attempt to mitigate
the effect of changes in interest rates between the date loans are originated
and the date the fixed interest rate pass-through certificates to be issued by a
securitization trust are priced. Generally, the period between loan origination
and pricing of the pass-through interest rate is less than 3 months. Derivative
financial instruments the Company uses for hedging changes in fair value due to
interest rate changes may include interest rate swaps, futures and forward
contracts. The nature and quantity 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 or
the Company's residual interests in mortgage loans in a mortgage conduit
facility, which the Company would expect to be included in a term securitization
at a future date. The mortgage loans and mortgage loans' underlying residual
interests in mortgage pools consist of essentially similar pools of fixed
interest rate loans, collateralized by real estate (primarily residential real
estate) with similar maturities and similar credit characteristics. Fixed
interest rate pass-through certificates issued by securitization trusts are
generally priced to yield an interest rate spread above interest rate swap yield
curves with maturities to match the maturities of the interest rate pass-through
certificates. The Company may hedge potential interest rate changes in interest
rate swap yield curves with Eurodollar futures, forward Treasury sales, interest
rate swaps or derivative contracts of similar underlying securities. This
practice has provided strong correlation between the hedge contracts and the
ultimate pricing the Company receives on the subsequent securitization. The
unrealized gain or loss derived from these derivative financial instruments,
which are designated as fair value hedges, is reported in earnings as it occurs
with an offsetting adjustment to the fair value of the item hedged. The fair
value of derivative financial instruments are based on quoted market prices. The
fair value of the items hedged are based on current pricing of these assets in a

110

American Business Financial Services, Inc. and Subsidiaries

Notes to Financial Statements (Continued)

June 30, 2002

1. Summary of Significant Accounting Policies (continued)

Derivative Financial Instruments (continued)

securitization. Cash flow related to hedging activities is reported as it
occurs. The effectiveness of the Company's hedges is continuously monitored. If
correlation did not exist, the related gain or loss on the hedged item would no
longer be recognized as an adjustment to income.

Generally, the Company does not enter into derivative financial instrument
contracts for trading purposes. However, the Company has entered into a
derivative financial instrument contract, which was not designated as an
accounting hedge and is therefore accounted for as a trading asset or liability.
This contract was designed to reduce the exposure to changes in the fair value
of certain interest-only strips due to changes in one-month LIBOR. The structure
of certain securitization trusts includes a floating interest rate tranche based
on one-month LIBOR plus an interest rate spread. Floating interest rate tranches
in a securitization expose the Company to gains or losses due to changes in the
fair value of the interest-only strip from changes in the floating interest rate
paid to the certificate holders. In order to manage this exposure the Company
has entered into an interest rate swap agreement to lock in a fixed interest
rate on the Company's third quarter fiscal 2002 securitization's variable rate
tranche. The swap agreement requires a net cash settlement on a monthly basis of
the difference between the fixed interest rate on the swap and the LIBOR paid on
the certificates. The fair value of this swap agreement is based on estimated
market values for the sale of the contract provided by a third party. The fair
value of the contract is recorded in other assets or other liabilities as
appropriate. Net changes in the fair value during a period are included in
administrative expenses in the Statement of Income. The interest-only strips are
held as available for sale securities and therefore changes in the fair value of
the interest-only strips is recorded as a component of equity unless the fair
value of the interest-only strip falls below its cost basis, which would require
a write down through current period income.

See Note 18 for further discussion of the Company's use of derivative financial
instruments.

Income Taxes

The Company and its subsidiaries file a consolidated federal income tax return.
Under the asset and liability method used by the Company to provide for income
taxes, deferred tax assets and liabilities are recognized for the expected
future tax consequences of temporary differences between the financial statement
and tax basis carrying amounts of existing assets and liabilities.

Recent Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133 "Accounting for Derivative

111

American Business Financial Services, Inc. and Subsidiaries

Notes to Financial Statements (Continued)

June 30, 2002

1. Summary of Significant Accounting Policies (continued)

Recent Accounting Pronouncements (continued)

Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. If certain conditions are
met, a derivative may be specifically designated as (a) a hedge of the exposure
to changes in the fair value of a recognized asset or liability or an
unrecognized firm commitment (fair value hedge), (b) a hedge of the exposure to
variable cash flows of a forecasted transaction (cash flow hedge), or (c) a
hedge of the foreign currency exposure of a net investment in a foreign
operation. If a derivative is a hedge, depending on the nature of the hedge
designation, changes in the fair value of a derivative are either offset against
the change in the fair value of assets, liabilities, or firm commitments through
earnings or recognized in other comprehensive income until the hedged item is
recognized in earnings. The ineffective portion of a derivative's change in fair
value will be recognized in earnings immediately. SFAS No. 133 was effective on
a prospective basis for all fiscal quarters of fiscal years beginning after June
15, 2000. The adoption of SFAS No. 133 on July 1, 2000 resulted in the
cumulative effect of a change in accounting principle of $15 thousand pre-tax
being recognized as expense in the Consolidated Statement of Income for the year
ended June 30, 2001. Due to the immateriality of the cumulative effect of
adopting SFAS No. 133, the $15 thousand pre-tax expense is included in general
and administrative expense in the Consolidated Statement of Income. The tax
effects and earnings per share amounts related to the cumulative effect of
adopting SFAS No. 133 are not material.

In September 2000, the FASB issued 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

112

American Business Financial Services, Inc. and Subsidiaries

Notes to Financial Statements (Continued)

June 30, 2002

1. Summary of Significant Accounting Policies (continued)

Recent Accounting Pronouncements (continued)

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 loans.
These rights to repurchase loans are recorded in Loan receivables - Available
for sale, at the estimated fair value of the loans. The Company records a
corresponding obligation in Other liabilities at the loans outstanding principal
balance, which would be the repurchase price of the loan should the Company
choose to repurchase the loan.

In July 2001, the FASB issued SFAS No. 142 "Goodwill and Other Intangible
Assets." SFAS No. 142 establishes standards for the accounting of intangible
assets that are acquired individually or with a group of other assets in
financial statements upon their acquisition, and the accounting of goodwill and
other intangible assets after they have been initially recognized in the
financial statements. In addition, SFAS No. 142 requires additional financial
statement disclosure for goodwill and other intangibles. Under the new standard,
amortization of goodwill and intangible assets with an indefinite useful life
was 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.
The provisions of SFAS No. 142 were required to be applied starting with fiscal
years beginning after December 15, 2001. Early application was permitted for
entities with fiscal years beginning after March 15, 2001. The Company adopted
the new standard on July 1, 2001.

Because the Company's goodwill is no longer being amortized, 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.

For the year ended June 30, 2001 and 2000, the Company recorded amortization
of goodwill in the amount of $1.3 million and $1.2 million, respectively.
Adjusted to exclude amortization of

113

American Business Financial Services, Inc. and Subsidiaries

Notes to Financial Statements (Continued)

June 30, 2002

1. Summary of Significant Accounting Policies (continued)

Recent Accounting Pronouncements (continued)

goodwill, net income and diluted net income per share for the year ended June
30, 2001 were $8.9 million and $2.29 and for the year ended June 30, 2000 were
$7.2 million and $1.69, respectively.

In June 2002, the FASB issued a proposed interpretation of Accounting Research
Bulletin No. 51 "Consolidated Financial Statements." The proposal provides
guidance on consolidation by a business enterprise of special purpose entities
("SPE's"). The proposal defines the primary beneficiary of an SPE as a business
enterprise that has a controlling financial interest in the SPE. The proposal
requires that the primary beneficiary of an SPE consolidate an SPE's assets,
liabilities and results of the activities of the SPE in their financial
statements and provide certain disclosures regarding both consolidated and
unconsolidated SPE's. SPE's whose structures effectively disburse risk would not
be required to be consolidated by any party. Although the Company uses SPE's
extensively in their loan securitization activities, the proposal, if adopted as
written, will not affect the Company's current consolidation policies for SPE's.
The proposed interpretation does not change the guidance incorporated in SFAS
No. 140 which precludes consolidation of a qualifying SPE by a transferor of
assets to that SPE. The proposal as currently contemplated will therefore have
no effect on the Company's financial condition or results of operations and
would not be expected to affect it in the future.

114

American Business Financial Services, Inc. and Subsidiaries

Notes to Financial Statements (Continued)

June 30, 2002

2. Loan and Lease Receivables

Loan and lease receivables - available for sale were comprised of the following
(in thousands):

June 30,
2002 2001
---------------------------

Real estate secured loans $ 48,116 $ 68,838
Leases (net of unearned income of
$668 and $1,324) 8,211 14,455
---------------------------
56,327 83,293
Less: allowance for credit losses on loan and lease
receivables available for sale 3,705 2,480
---------------------------

52,622 80,813
Receivable for securitized loans 9,028 2,428
---------------------------
$ 61,650 $ 83,241
===========================

In accordance with the Company's securitization trust agreements, the Company
has the right, but not the obligation, to repurchase a limited amount of
delinquent loans from securitization trusts. In accordance with the provisions
of SFAS No. 140, the Company has recorded an obligation for the repurchase of
loans subject to these removal of accounts provisions, whether or not the
Company plans to repurchase the loans. The obligation for the loans' purchase
price is recorded in Other liabilities. A corresponding receivable is recorded
at the lower of the loans' cost basis or fair value.

Real estate secured loans have contractual maturities of up to 30 years.

At June 30, 2002 and 2001, the accrual of interest income was suspended on real
estate secured loans of $7.0 million and $4.5 million, respectively. The
allowance for loan losses includes reserves established for expected losses on
these loans in the amount of $2.9 million and $1.2 million at June 30, 2002 and
2001, respectively. Average balances of non-accrual loans during the years ended
June 30, 2002 and 2001 were $6.7 million and $4.8 million, respectively.

Substantially all leases are direct finance-type leases whereby the lessee has
the right to purchase the leased equipment at the lease expiration for a nominal
amount.

115

American Business Financial Services, Inc. and Subsidiaries

Notes to Financial Statements (Continued)

June 30, 2002

3. Allowance for Credit Losses

The activity for the allowance of credit losses is summarized as follows (in
thousands):

Year ended June 30,
2002 2001 2000
-----------------------------------------------------

Balance at beginning of year $ 2,480 $ 1,289 $ 702
Provision for credit losses:
Business purpose loans 1,721 1,503 660
Home equity loans 3,417 2,600 350
Equipment leases 1,319 1,087 1,035
-----------------------------------------------------
Total provision 6,457 5,190 2,045
-----------------------------------------------------
Charge-offs, net of recoveries:
Business purpose loans (924) (1,374) (225)
Home equity loans (2,892) (1,634) (85)
Equipment leases (1,416) (991) (1,148)
-----------------------------------------------------
Total charge-offs, net (5,232) (3,999) (1,458)
-----------------------------------------------------

Balance at end of year $ 3,705 $ 2,480 $ 1,289
=====================================================

Ratio of losses in the portfolio
during the period to the average
managed portfolio (a) 0.60% 0.53% 0.31%
Ratio of allowance to gross
receivables 6.58% 2.89% 2.84%

(a) The average managed portfolio includes loans and leases held as available
for sale and securitized loans and leases serviced for others. See Note 6
for detail of the total managed portfolio.

Recoveries of loans and leases previously charged-off were $302 thousand, $434
thousand and $53 thousand during the years ended June 30, 2002, 2001 and 2000,
respectively.

While the Company is under no obligation to do so, at times it elects to
repurchase delinquent loans from the securitization trusts, some of which may be
in foreclosure. The Company elects 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 purchase price of a delinquent loan is at the loan's outstanding contractual
balance. A foreclosed loan is one where the Company, as servicer, has initiated
formal foreclosure proceedings against the borrower and a delinquent loan is one
that is 31 days or more past due.

116

American Business Financial Services, Inc. and Subsidiaries

Notes to Financial Statements (Continued)

June 30, 2002

3. Allowance for Credit Losses (continued)

The foreclosed and delinquent loans the Company typically elects to repurchase
are usually 90 days or more delinquent and the subject of completed foreclosure
proceedings or where a completed foreclosure is imminent. The related
charge-offs on these repurchased loans are included in the provision for credit
losses in the period of charge-off.

The following table summarizes the principal balances of loans and real estate
owned (REO) repurchased from securitization trusts (dollars in thousands):

Year ended June 30,
2002 2001 2000
----------------------------------------

Business purpose loans $ 6,669 $ 4,501 $ 4,118
Home equity loans 23,571 10,549 4,710
----------------------------------------
Total $ 30,240 $ 15,050 $ 8,828
========================================

Number of loans repurchased 341 154 81
========================================

The Company received $19.2 million, $10.9 million and $2.9 million of proceeds
from the liquidation of repurchased loans and REO for the years ended June 30,
2002, 2001 and 2000, respectively. We had repurchased loans remaining on the
balance sheet in the amounts of $7.3 million, $2.8 million and $2.9 million at
June 30, 2002, 2001 and 2000, respectively and REO of $2.1 million, $2.0 million
and $1.5 million at June 30, 2002, 2001 and 2000, respectively.

117

American Business Financial Services, Inc. and Subsidiaries

Notes to Financial Statements (Continued)

June 30, 2002

4. Securitizations

The following schedule details loan and lease securitizations (dollars in
millions):

Year ended June 30,
2002 2001 2000
-----------------------------------------

Loans and leases securitized:
Business purpose loans $ 129.1 $ 109.9 $ 104.5
Home equity loans 1,222.0 992.2 887.9
Equipment leases - - 9.3
-----------------------------------------
$ 1,351.1 $ 1,102.1 $1,001.7
=========================================

Number of term securitizations:
Business purpose and home equity loans 4 4 4
Equipment leases - - 1

Cash proceeds:
Business purpose and home equity loans $ 1,374.6 $ 1,113.8 $ 993.0
Equipment leases - - 10.0

Gains:
Business purpose and home equity loans $ 185.6 $ 129.0 $ 90.2
Equipment leases - - 0.2
-----------------------------------------
$ 185.6 $ 129.0 $ 90.4
=========================================

118

American Business Financial Services, Inc. and Subsidiaries

Notes to Financial Statements (Continued)

June 30, 2002

4. Securitizations (continued)

The table below summarizes certain cash flows received from and paid to
securitization trusts (in millions):

Year ended June 30,
2002 2001
------------------------

Proceeds from new securitizations $ 1,374.6 $ 1,113.8
Contractual servicing fees received 35.3 25.6
Other cash flows received on retained interests (a) 53.4 36.2
Purchases of delinquent or foreclosed assets (30.2) (15.1)
Servicing advances (7.5) (5.2)
Reimbursement of servicing advances 7.2 2.8

(a) Amount is net of required purchases of additional overcollateralization.

The Company's securitizations involve a two-step transfer that qualified for
sale accounting under SFAS No. 125 and also qualify under SFAS No. 140. First,
the Company sells the loans to an SPE, which has been established for the
limited purpose of buying and reselling the loans and establishing a true sale
under legal standards. Next, the SPE sells the loans to a qualified SPE, which
is a trust transferring title of the loans and isolating those assets from the
Company's assets. Finally, the trust issues certificates to investors to raise
the cash purchase price for the loans being sold, collects proceeds on behalf of
the certificate holders, distributes proceeds and is a distinct legal entity,
independent from the Company.

The Company also uses SPEs in the sales of loans to a $300 million off-balance
sheet mortgage conduit facility. Sales into the off-balance sheet facility
involve a two-step transfer that qualifies for sale accounting under SFAS No.
140, similar to the process described above. This facility has a revolving
feature and can be directed by the sponsor to dispose of the loans. Typically
this has been accomplished by 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 the Company and its subsidiaries
and as a result, transfers to the facility are treated as sales for financial
reporting purposes. When loans are sold to this facility, the Company performs a
probability assessment of the likelihood that the sponsor will transfer the
loans into a term securitization. As the sponsor has typically transferred the
loans to a term securitization in the past, the amount of gain on sale
recognized for loans sold to this facility is estimated based on the terms the
Company would obtain in a term securitization rather than the terms of this
facility. At June 30, 2002, the off-balance sheet mortgage conduit facility held
loans with principal balance due of $56.6 million as assets and owed $54.9
million to third parties.

119

American Business Financial Services, Inc. and Subsidiaries

Notes to Financial Statements (Continued)

June 30, 2002

4. Securitizations (continued)

Prior to March 2001, the Company had an arrangement with a warehouse lender,
which included an off-balance sheet facility. The sale into this off-balance
sheet conduit facility involved a two step transfer that also qualified for sale
accounting under SFAS No. 125. The Company terminated this facility in March
2001.

During the year ended June 30, 2002, due to increases in prepayment experience,
write downs of $44.1 million were recorded on interest-only strips. The income
statement impact for fiscal 2002 was a write down of $22.1 million while the
remaining $22.0 million was written down through other comprehensive income in
accordance with the provisions of SFAS No. 115 "Accounting for Certain
Investments in Debt and Equity Securities" and Emerging Issues Task Force
guidance, referred to as EITF in this document, 99-20. The write down reduced
net income by $12.8 million and reduced diluted earnings per share by $4.05.

Although in the second quarter of fiscal 2002 the Company increased its
prepayment rate assumptions used to value the interest-only strips, prepayment
rates throughout the mortgage industry continued to increase and the Company's
prepayment experience continued to exceed even its revised assumptions. Based on
current economic conditions, published mortgage industry surveys and the
Company's prepayment experience, the Company believes prepayments will continue
to remain at higher than normal levels for the near term before returning to
average historical levels. Therefore the Company has increased the prepayment
rate assumptions for home equity loans for the near term, but at a declining
rate, before returning to historical levels. However, the Company cannot predict
with certainty what its prepayment experience will be in the future. Any
unfavorable difference between the assumptions used to value interest-only
strips and actual experience may have a significant adverse impact on the value
of these assets.

In fiscal 2000, a write down of $12.6 million was recorded on the Company's
interest-only strips. The write down included a charge of $11.2 million related
to an increase from 11% to 13% in the discount rate used to value the residual
portion of the interest-only strips. This change in the discount rate was
considered an other than temporary fair value adjustment and was recorded as
expense in fiscal 2000. The factors that led to this other than temporary
decline in fair value include:

o Sustained increase in market interest rates;

o Increases in the all-in cost of the Company's mortgage loan trust investor
certificates;

o Increases in the Company's cost of funding its interest-only strips,
particularly the interest rate paid on subordinated debt; and

o Events and conditions in the mortgage lending industry and the actions by
others in that industry.

120

American Business Financial Services, Inc. and Subsidiaries

Notes to Financial Statements (Continued)

June 30, 2002

4. Securitizations (continued)

The write down in fiscal 2000 also included a charge of $1.9 million for the
impact of changes in one-month LIBOR deemed to be other than temporary. A
portion of the certificates issued to investors by securitization trusts have
floating interest rates based on one-month LIBOR plus a spread. The fair value
of the excess cash flow the Company will receive from these trusts would be
affected by any changes in rates paid on the floating interest rate
certificates. The write down included a credit of $0.5 million for the net
impact of adjustments made to the prepayment assumptions on mortgage loan
securitizations at June 30, 2000. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Securitizations" for a
discussion of the discount rate and prepayment assumptions. The write down
reduced net income by $7.8 million and reduced diluted earnings per share by
$1.84.

Information regarding the initial and current assumptions applied in determining
the fair values of the mortgage related interest-only strips and servicing
rights are detailed in "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Securitizations."

Information regarding the sensitivity of the current fair value of interest-only
strips and servicing rights to adverse changes in the key assumptions used to
value these assets is detailed in "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Application of Critical
Accounting Policies."

5. Interest-Only Strips

Interest-only strips were comprised of the following (in thousands):

June 30,
2002 2001
-------------------------------

Interest-only strips
Available for sale $ 510,770 $ 395,520
Trading assets 1,841 2,999
-------------------------------
$ 512,611 $ 398,519
===============================

Interest-only strips include overcollateralization balances that represent
undivided interests in securitizations maintained to provide credit enhancement
to investors in securitization trusts. At June 30, 2002 and 2001, the fair value
of overcollateralization related cash flows were $236.6 million and $183.1
million, respectively.

121

American Business Financial Services, Inc. and Subsidiaries

Notes to Financial Statements (Continued)

June 30, 2002

5. Interest-Only Strips (continued)

The activity for interest-only strip receivables is summarized as follows (in
thousands):

Year ended June 30,
2002 2001
-------------------------------

Balance at beginning of year $ 398,519 $ 277,872
Initial recognition of interest-only strips, including
initial overcollateralization of $0 and $611,
respectively 153,463 125,408
Cash flow from interest-only strips (100,692) (82,905)
Required purchases of additional overcollateralization 47,271 43,945
Interest accretion 35,386 26,069
Net adjustments to fair value (a) 717 8,130
Other than temporary fair value adjustment (a) (22,053) -
-------------------------------
Balance at end of year $ 512,611 $ 398,519
===============================

(a) Net temporary adjustments to fair value are recorded through other
comprehensive income, which is a component of equity. Other than temporary
adjustments to fair value are recorded through the income statement.

See Note 4 for further description of the write down recognized in fiscal 2002.

6. Servicing Rights

The total managed loan and lease portfolio, which includes loans and leases held
by the Company as available for sale, and securitized loans and leases serviced
for others, is as follows (in thousands):

June 30,
2002 2001
-----------------------------------

Home equity loans $ 2,675,559 $ 2,223,429
Business purpose loans 361,638 300,192
Equipment leases 28,992 65,774
-----------------------------------
$ 3,066,189 $ 2,589,395
===================================

122

American Business Financial Services, Inc. and Subsidiaries

Notes to Financial Statements (Continued)

June 30, 2002

6. Servicing Rights (continued)

The activity for the loan and lease servicing rights asset is summarized as
follows (in thousands):

Year ended June 30,
2002 2001
------------------------------

Balance at beginning of year $ 102,437 $ 74,919
Initial recognition of servicing rights 52,682 47,469
Amortization (29,831) (19,951)
------------------------------
Balance at end of year $ 125,288 $ 102,437
==============================

Servicing rights are periodically valued by the Company based on the current
estimated fair value of the 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 of Financial Condition and Results of Operations --
Securitizations." Impairments, if they occurred, would be recognized in a
valuation allowance for each impaired stratum in the period of impairment. To
date, the Company's valuation analysis has not indicated any impairment other
than the $0.7 million write down recorded in fiscal 2000 and no valuation
allowance has been required. At June 30, 2002 and 2001, the periodic valuations
supported the carrying value of servicing rights.

7. Property and Equipment

Property and equipment is comprised of the following (in thousands):

June 30,
2002 2001
-------------------------

Computer software $ 18,789 $ 16,374
Computer hardware 4,845 5,147
Office furniture and equipment 8,038 8,745
Leasehold improvements 2,481 2,579
-------------------------
34,153 32,845
Less accumulated depreciation and amortization 15,707 12,095
-------------------------
$ 18,446 $ 20,750
=========================

Depreciation and amortization expense was $6.8 million, $6.2 million and $4.4
million for the years ended June 30, 2002, 2001 and 2000, respectively.

123

American Business Financial Services, Inc. and Subsidiaries

Notes to Financial Statements (Continued)

June 30, 2002

8. Other Assets and Other Liabilities

Other assets are comprised of the following (in thousands):

June 30,
2002 2001
---------------------------

Goodwill $ 15,121 $ 15,121
Financing costs, debt offerings 5,849 7,707
Real estate owned 3,784 2,322
Due from securitization trusts for servicing related
activities 1,616 5,430
Investments held to maturity 917 945
Other 1,507 4,760
---------------------------
$ 28,794 $ 36,285
===========================

Other liabilities are comprised of the following (in thousands):

June 30,
2002 2001
---------------------------

Commitments to fund closed loans $ 29,866 $ 29,130
Obligation for repurchase of securitized loans 10,621 2,478
Escrow deposits held 9,011 6,425
Trading liability, at fair value 461 -
Other 949 601
---------------------------
$ 50,908 $ 38,634
===========================

See Note 2 for an explanation for the obligation for repurchase of securitized
loans.

124

American Business Financial Services, Inc. and Subsidiaries

Notes to Financial Statements (Continued)

June 30, 2002

9. Subordinated Debt and Warehouse Lines and Other Notes Payable

Subordinated debt was comprised of the following (in thousands):

June 30,
2002 2001
----------------------------

Subordinated debt (a) $ 640,411 $ 524,003
Subordinated debt - money market notes (b) 15,309 13,947
----------------------------
Total subordinated debt $ 655,720 $ 537,950
============================

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

June 30,
2002 2001
---------------------------

Warehouse and operating revolving line of credit (c) $ 6,171 $ 34,199
Lease funding facility (d) 2,128 5,474
Warehouse revolving line of credit (e) 187 11,235
Other debt - 156
---------------------------
Total warehouse lines and other notes payable $ 8,486 $ 51,064
===========================

(a) Subordinated debt due July 2002 through June 2012, interest rates ranging
from 5.0% to 13.50%; average rate at June 30, 2002 was 9.82%, average
maturity was 17 months, 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, collateralized by certain loan receivables, advances to
securitization trusts, real estate owned and certain interest-only strips.
(d) Lease funding facility matures through December 2004, collateralized by
certain lease receivables.
(e) $25 million warehouse revolving line of credit expiring October 2003,
collateralized by certain loan receivables.

Principal payments on subordinated debt, warehouse lines and other notes payable
for the next five years are as follows (in thousands): year ending June 30, 2003
- - $375,597; 2004 - $141,638; 2005 - $90,740; 2006 - $19,070; and, 2007 - $9,533.

125

American Business Financial Services, Inc. and Subsidiaries

Notes to Financial Statements (Continued)

June 30, 2002

9. Subordinated Debt and Warehouse Lines and Other Notes Payable (continued)

Warehouse lines and other notes payable were collateralized by $10.8 million of
loan and lease receivables.

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

o $1.2 million operating line of credit expiring January 2003, fundings to be
collateralized by an investment in the 99-A lease securitization trust.
This line was unused at June 30, 2002.

o $100 million revolving line of credit expiring March 2003, fundings to be
collateralized by certain loan receivables. This line was unused at June
30, 2002.

o $200 million revolving line of credit expiring November 2002,
collateralized by certain loan receivables. This line was unused at June
30, 2002.

o $300.0 million facility, expiring July 2003, which provides for the sale of
mortgage loans into an off-balance sheet funding facility. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Critical Accounting Policies -- Special Purpose Entities and
Off-Balance Sheet Facilities" for further discussion of the off-balance
sheet features of this facility. At June 30, 2002, $54.9 million of this
facility was utilized.

Interest rates on the revolving credit facilities range from London Inter-Bank
Offered Rate ("LIBOR") plus 1.25% to LIBOR plus 2.50% or the commercial paper
rate plus 0.99%. The weighted-average interest rate paid on the revolving credit
facilities was 3.35% and 5.42% at June 30, 2002 and 2001, respectively.

The terms of the warehouse lines and operating lines of credit require the
Company to meet specific financial covenants and other standards. Each agreement
has multiple individualized financial covenant thresholds and ratio limits,
which the Company must meet to enable the Company to draw on that particular
line of credit. At June 30, 2002, the Company was in compliance with the terms
of all debt agreements.

Subsequent to June 30, 2002 the Company entered into a series of leases for
computer equipment which qualify as capital leases. The total principal amount
of debt to be recorded under these leases is $1.0 million. The leases have an
imputed interest rate of 8.0% and mature through January 2006.

The Company paid commitment fees and non usage fees on warehouse lines and
operating lines of credit of $0.7 million, $0.4 million and $0.2 million in the
years ended June 30, 2002, 2001 and 2000, respectively.

126

American Business Financial Services, Inc. and Subsidiaries

Notes to Financial Statements (Continued)

June 30, 2002

9. Subordinated Debt and Warehouse Lines and Other Notes Payable (continued)

Under a registration statement declared effective by the Securities and Exchange
Commission on October 16, 2001, the Company registered $325.0 million of
subordinated debt. As of June 30, 2002, $84.7 million of debt was available for
future issuance. The Company is in the process of registering a new offering for
an additional $315.0 million of subordinated debt. There can be no assurance
given as to when the Securities and Exchange Commission will declare this
registration statement effective.

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. The
Company's assets, including the stock it holds in its subsidiaries, are
available to repay the subordinated debt in the event of default following
payment to holders of the senior debt. In the event of the Company's default and
liquidation of its subsidiaries to repay the debt holders, creditors of the
subsidiaries must be paid or provision made for their payment from the assets of
the subsidiaries before the remaining assets of the subsidiaries can be used to
repay the holders of the subordinated debt securities.

10. Stockholders' Equity

In fiscal 1999, the Board of Directors initiated a stock repurchase program in
view of the price level of the Company's common stock, which was at the time,
and has continued to, trade at below book value. In addition, the Company's
consistent earnings growth over the past several years did not result in a
corresponding increase in the market value of its common stock. The repurchase
program was extended in fiscal 2000, 2001 and 2002. The fiscal 2002 extension
authorized the purchase of up to 10% of the then outstanding shares, which
totaled approximately 2,661,000 shares on the date of the extension. To date the
Company has repurchased 43,000 shares under the current program. The current
repurchase program terminates in November 2002. The Company currently has no
plans to continue to repurchase additional shares or extend the repurchase
program beyond this date.

The total number of shares repurchased under the stock repurchase program was:
117,000 in fiscal 1999; 327,000 in fiscal 2000; 627,000 in fiscal 2001; and
352,000 in fiscal 2002. The cumulative effect of the stock repurchase program
was an increase in diluted earnings per share of $0.41, $0.32 and $0.06 for the
years ended June 30, 2002, 2001, and 2000, respectively.

On August 21, 2002, the Board of Directors declared a 10% stock dividend payable
September 13, 2002 to shareholders of record on September 3, 2002. In
conjunction with the Board's resolution, all outstanding stock options and
related exercise prices were adjusted. Accordingly, all outstanding common
shares, earnings per common share, average common share and stock

127

American Business Financial Services, Inc. and Subsidiaries

Notes to Financial Statements (Continued)

June 30, 2002

10. Stockholders' Equity (continued)

option amounts presented have been adjusted to reflect the effect of this stock
dividend. Amounts presented for fiscal 2001 and 2000 have been similarly
adjusted for the effect of a 10% stock dividend declared October 1, 2001, which
was paid on November 5, 2001 to shareholders of record on October 22, 2001.

The Company increased its quarterly dividend to $0.07 per share in fiscal 2002.
Dividends of $0.28, $0.26 and $0.25 were paid in the years ended June 30, 2002,
2001 and 2000, respectively.

In May 2002 the Company registered 440,000 shares of its common stock for use in
a dividend reinvestment plan. The dividend reinvestment plan is intended to
allow shareholders to purchase the Company's common stock with dividend payments
from their existing common stock holdings. As of June 30, 2002, this option is
in the process of being offered to the common stock shareholders.

11. Employee Benefit Plan

The Company has a 401(k) defined contribution plan, which was established in
1995, available to all employees who have been with the Company for one month
and have reached the age of 21. Employees may generally contribute up to 15% of
their earnings each year, subject to IRS imposed limitations. For participants
with one or more years of service the Company, at its discretion, may match up
to 25% of the first 5% of earnings contributed by the employee, and may match an
additional 25% of the first 5% of earnings contributed by the employee in
Company stock. The Company's contribution was $350 thousand, $307 thousand and
$304 thousand for the years ended June 30, 2002, 2001 and 2000, respectively.

128

American Business Financial Services, Inc. and Subsidiaries

Notes to Financial Statements (Continued)

June 30, 2002

12. Stock Option and Stock Incentive Plans

The Company has stock option plans that provide for the periodic granting of
options to key employees and non-employee directors. These plans have been
approved by the Company's shareholders. Options are generally granted to key
employees at the market price of the Company's stock on the date of grant and
expire five to ten years from date of grant. Options either fully vest when
granted or over periods of up to five years. At June 30, 2002, 236,024 shares
were available for future grant under the Company's stock option plans.

A summary of key employee stock option activity for the years ended June 30,
2002, 2001 and 2000 follows. Stock option activity has been retroactively
adjusted for the effect of the stock dividends described in Note 10.

Weighted-Average
Number of Shares Exercise Price
---------------------------------------

Options outstanding, June 30, 1999 368,763 $ 13.84
Options granted 273,036 10.75
Options exercised (50,503) 2.14
Options canceled (27,315) 17.18
---------------------------------------
Options outstanding, June 30, 2000 563,981 13.23
Options granted 81,675 5.32
Options canceled (91,052) 15.82
---------------------------------------
Options outstanding, June 30, 2001 554,604 11.64
Options granted 110,311 12.81
Options exercised (121) 10.75
Options canceled (61,336) 7.32
---------------------------------------
Options outstanding, June 30, 2002 603,458 $ 11.95
=======================================

129

American Business Financial Services, Inc. and Subsidiaries

Notes to Financial Statements (Continued)

June 30, 2002

12. Stock Option and Stock Incentive Plans (continued)

The Company also issues stock options to non-employee directors. Options
generally are granted to non-employee directors at or above the market price of
the stock on the date of grant, fully vest when granted and expire three to ten
years after the date of grant.

A summary of non-employee director stock option activity for the three years
ended June 30, 2002, 2001 and 2000 follows. Stock option activity has been
retroactively adjusted for the effect of the stock dividends described in Note
10.
Weighted-Average
Number of Shares Exercise Price
-----------------------------------------

Options outstanding, June 30, 1999 190,575 $ 8.24
Options granted 48,400 10.75
Options exercised (27,225) 4.14
-----------------------------------------
Options outstanding, June 30, 2000 211,750 9.45
Options granted 48,400 5.27
Options exercised (25,410) 18.30
-----------------------------------------
Options outstanding, June 30, 2001 234,740 7.63
Options granted 59,400 13.97
Options canceled (25,410) 11.81
-----------------------------------------
Options outstanding, June 30, 2002 268,730 $ 8.64
=========================================

130

American Business Financial Services, Inc. and Subsidiaries

Notes to Financial Statements (Continued)

June 30, 2002

12. Stock Option and Stock Incentive Plans (continued)

The Company accounts for stock options issued under these plans using the
intrinsic value method, and accordingly, no expense is recognized where the
exercise price equals or exceeds the fair value of the common stock at the date
of grant. Had the Company accounted for stock options granted under these plans
using the fair value method, pro forma net income and earnings per share would
have been as follows (in thousands, except per share amounts):

June 30,
2002 2001 2000
------------------------------------------

Net income
As reported $ 7,859 $ 8,085 $ 6,424
Pro forma 7,689 8,168 6,161

Earnings per share - basic
As reported $ 2.68 $ 2.13 $ 1.55
Pro forma 2.62 2.15 1.49

Earnings per share - diluted
As reported $ 2.49 $ 2.08 $ 1.51
Pro forma 2.44 2.10 1.45

The weighted-average fair value of options granted during the fiscal years ended
June 30, 2002, 2001 and 2000 were $5.85, $2.15 and $4.21, respectively. The fair
value of options granted was estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions:

June 30,
2002 2001 2000
-------------------------------------------------

Expected volatility 50% 40% 30%
Expected life 8 yrs. 8 yrs. 8 yrs.
Risk-free interest rate 3.4% - 5.3% 5.0% - 5.9% 6.1% - 6.7%

131

American Business Financial Services, Inc. and Subsidiaries

Notes to Financial Statements (Continued)

June 30, 2002

12. Stock Option and Stock Incentive Plans (continued)

The following tables summarize information about stock options outstanding under
these plans at June 30, 2002:

Options Outstanding
- --------------------------------------------------------------------------------
Weighted Remaining Weighted-
Range of Exercise Number of Contractual Average
Prices of Options Shares Life in Years Exercise Price
- --------------------------------------------------------------------------------

$ 3.93 to 5.63 230,657 4.3 $ 4.64
10.75 to 12.59 372,176 6.7 11.21
13.97 to 15.75 206,462 3.9 15.08
17.22 to 20.46 62,893 5.5 18.75
-------------------------------------------------------
872,188 5.3 $ 10.93
=======================================================

Options Exercisable
- --------------------------------------------------------------------------------
Weighted Remaining Weighted-
Range of Exercise Number of Contractual Average
Prices of Options Shares Life in Years Exercise Price
- --------------------------------------------------------------------------------

$ 3.93 to 5.63 187,097 3.3 $ 4.53
10.75 to 12.59 143,096 4.5 10.75
13.97 to 15.75 142,937 4.3 15.35
17.22 to 20.46 50,314 5.5 18.75
-------------------------------------------------------
523,444 4.2 $ 10.55
=======================================================

In April 2000, the FASB released interpretation No. 44 "Accounting for Certain
Transactions Involving Stock Compensation." The guidance, among other things,
changed the accounting for stock options issued to non-employee directors.
Previously, accounting rules required that options issued to non-employees,
including directors, be expensed based on the fair value of the options at the
time the options were granted. The new interpretation allows options granted to
directors to be accounted for consistently with those granted to employees if
certain conditions are met, and therefore, no expense is recognized where the
exercise price equals or exceeds the fair value of the shares at the date of
grant. In accordance with the guidance, in fiscal 2001, the Company recorded

132

American Business Financial Services, Inc. and Subsidiaries

Notes to Financial Statements (Continued)

June 30, 2002

12. Stock Option and Stock Incentive Plans (continued)

$174 thousand as a cumulative effect of a change in accounting principle, which
represents the cumulative amount of expense recognized in prior years for stock
options issued to non-employee directors.

In fiscal 2002 the Board of Directors adopted, and the shareholders approved, a
stock incentive plan. The stock incentive plan provides for awards to officers
and other employees of the Company in the form of the Company's common stock.
Awards made pursuant to this plan are under the direction of the Compensation
Committee of the Board of Directors and are dependent on the Company, and
individuals receiving the grant, achieving certain goals developed by the
Compensation Committee. The vesting schedule for awards under this plan, if any,
are set by the Compensation Committee at time of grant. The total number of
shares authorized to be granted under the Stock Incentive Plan are 165,000
shares. However the number of shares issuable can be adjusted in the event of a
reorganization, recapitalization, stock split, stock dividend, merger,
consolidation or other change in the corporate structure of the Company. As of
June 30, 2002 there had been no shares granted under this plan.

13. Income Taxes

The provision for income taxes consists of the following (in thousands):

Year ended June 30,
2002 2001 2000
-----------------------------------------

Current
Federal $ 1,455 $ 383 $ 935
State 250 76 -
-----------------------------------------
1,705 459 935
-----------------------------------------
Deferred
Federal 3,986 4,641 3,003
State - 174 -
-----------------------------------------
3,986 4,815 3,003
-----------------------------------------
Total provision for income taxes $ 5,691 $ 5,274 $ 3,938
=========================================

133

American Business Financial Services, Inc. and Subsidiaries

Notes to Financial Statements (Continued)

June 30, 2002

13. Income Taxes (continued)

There were no tax benefits from the utilization of net operating loss
carryforwards in the year ended June 30, 2002 and 2000 while the tax benefits
from the utilization of net operating loss carryforwards were $3.6 million for
the year ended June 30, 2001.

The cumulative temporary differences resulted in net deferred income tax assets
or liabilities consisting primarily of the following (in thousands):

Year ended June 30,
2002 2001
----------------------------

Deferred income tax assets:
Allowance for credit losses $ 1,297 $ 867
Net operating loss carryforwards 60,720 39,633
Other 6,303 2,353
----------------------------
68,320 42,853

Less valuation allowance 29,326 20,156
----------------------------
38,994 22,697
----------------------------

Deferred income tax liabilities:
Loan and lease origination costs/fees, net 138 1,799
Interest-only strips and other receivables 73,980 51,852
----------------------------
74,118 53,651
----------------------------
Net deferred income tax liability $ 35,124 $ 30,954
============================

The valuation allowance represents the income tax effect of state net operating
loss carryforwards of the Company, which are not presently expected to be
utilized.

134

American Business Financial Services, Inc. and Subsidiaries

Notes to Financial Statements (Continued)

June 30, 2002

13. Income Taxes (continued)

A reconciliation of income taxes at federal statutory rates to the Company's tax
provision is as follows (in thousands):

Year ended June 30,
2002 2001 2000
-----------------------------------------

Federal income tax at statutory rates $ 4,742 $ 4,615 $ 3,627
Nondeductible items 65 534 623
Other, net 884 125 (312)
-----------------------------------------
$ 5,691 $ 5,274 $ 3,938
=========================================

For income tax reporting, the Company has net operating loss carryforwards
aggregating approximately $366.6 million available to reduce future state income
taxes for various states as of June 30, 2002. If not used, substantially all of
the carryforwards will expire at various dates from June 30, 2002 to June 30,
2004.

14. Commitments and Contingencies

Operating Leases

As of June 30, 2002, the Company leases property under noncancelable operating
leases requiring minimum annual rentals as follows (in thousands):

Year ending June 30,

2003 $ 4,713
2004 948
2005 261
2006 -
2007 -
--------
$ 5,922
========

Rent expense for leased property was $4.9 million, $5.2 million, $3.6 million,
respectively, for the years ended June 30, 2002, 2001, and 2000.

135

American Business Financial Services, Inc. and Subsidiaries

Notes to Financial Statements (Continued)

June 30, 2002

14. Commitments and Contingencies (continued)

Employment Agreements

In January 1997, the Company entered into employment agreements, as amended,
with three executives under which they are entitled to an initial annual base
compensation of $625 thousand, collectively, automatically adjusted for
increases in the Consumer Price Index and may be adjusted for merit increases.
The agreements with two of the executives also provide for bonus payments up to
225% of the executive's annual salary under a cash bonus plan established by the
Company's Board of Directors. The third executive is entitled to a bonus payment
of up to 50% of the executive's annual salary. The agreements terminate upon the
earlier of: (a) the executive's death, permanent disability, termination of
employment for cause, voluntary resignation or 70th birthday; (b) the later of
five years from any anniversary date of the agreements for two executives and
three years for one executive; or (c) five years from the date of notice to the
executive of the Company's intention to terminate the agreement for two
executives and three years for one executive. In addition, two of the executives
are entitled to a cash payment equal to 299% of the last five years average
annual compensation in the event of a "change in control," as defined in the
agreement. The remaining executive is entitled to a similar payment but only if
he is terminated in connection with a change in control.

The Company has also entered into an employment agreement with another executive
under which the executive is entitled to receive an initial annual base
compensation of $335 thousand which shall be reviewed annually and may be
adjusted for merit increases. The executive is eligible for a cash bonus payment
of up to 50% of the executive's annual base compensation based upon the Company
achieving specific goals and objectives. This agreement terminates upon: (a) the
earlier of the executive's death, permanent disability, termination of
employment for cause, voluntary resignation or 70th birthday; or (b) upon notice
to the executive of the Company's intention to terminate the agreement without
cause in which case the executive will receive a cash payment equal to his
annual base salary. This agreement is binding upon any successor of the Company
by merger, consolidation, purchase or otherwise. In the event of a change in
control, this executive will receive his highest annual salary for the
twelve-month period preceding the termination of his employment and his highest
annual bonus paid in any of the three fiscal years preceding termination. In
addition, this executive is eligible for a cash bonus payment of up to 50% of
the executive's annual base compensation at the time of award based upon the
executive achieving specific goals and objectives.

136

American Business Financial Services, Inc. and Subsidiaries

Notes to Financial Statements (Continued)

June 30, 2002

14. Commitments and Contingencies (continued)

The Company has also entered into an employment arrangement with another
executive under which the executive is entitled to receive an initial annual
base compensation of $275 thousand. In addition, this executive is eligible for
a cash bonus payment of up to 50% of the executive's annual base compensation
based upon the Company achieving specific goals and objectives. This executive
is entitled to receive one year's base salary if terminated for any reason,
except for cause as defined in the agreement. This executive is also entitled to
a severance payment equal to two times the executive's highest annual base
salary and bonus earned within a specified period if terminated due to a change
in control of the Company or within twenty-four months of a change in control of
the Company the executive resigns due to circumstances specified in the
agreement.

Other

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 state and local governmental
authorities have increased their focus on lending practices by some companies in
the subprime industry, more commonly referred to as "predatory lending"
practices. State, local and federal governmental agencies have imposed sanctions
for practices including, but not limited to, charging borrowers excessive fees,
imposing higher interest rates than the borrower's credit risk warrants and
failing to adequately disclose the material terms of loans to the borrowers. As
a result of these initiatives, the Company is unable to predict whether state,
local or federal authorities will require changes in the Company's lending
practices in the future, including the reimbursement of borrowers as a result of
fees charged or the imposition of fines, or the impact of those changes on the
Company's profitability. The Pennsylvania Attorney General reviewed certain fees
charged to Pennsylvania customers by the Company's subsidiary, HomeAmerican
Credit, Inc., which does business as Upland Mortgage. Although the Company
believes that these fees were fair and in compliance with applicable federal and
state laws, the Company agreed to reimburse borrowers approximately $221,000
with respect to a particular fee and to reimburse the Commonwealth of
Pennsylvania $50,000 for their costs of investigation and for future public
protection purposes. The Company has satisfied the monetary commitments and
obligations to the Pennsylvania Attorney General. The reserve, which the Company
previously established, was adequate to cover the resolution of this matter.

137

American Business Financial Services, Inc. and Subsidiaries

Notes to Financial Statements (Continued)

June 30, 2002

15. Legal Proceedings

On February 26, 2002, a purported class action titled Calvin Hale v.
HomeAmerican Credit, Inc., No. 02 C 1606, United States District Court for the
Northern District of Illinois, was filed in the Circuit Court of Cook County,
Illinois (subsequently removed by Upland Mortgage to the captioned federal
court) against the Company's subsidiary, HomeAmerican Credit, Inc., which does
business as Upland Mortgage, on behalf of borrowers in Illinois, Indiana,
Michigan and Wisconsin who paid a document preparation fee on loans originated
since February 4, 1997. The plaintiff alleges that the charging of, and the
failure to properly disclose the nature of, a document preparation fee were
improper under applicable state law. The plaintiff seeks restitution,
compensatory and punitive damages and attorney's fees and costs, in unspecified
amounts. The Company believes that its imposition of this fee is permissible
under applicable law and intends to vigorously defend the case.

The Company's lending subsidiaries, including HomeAmerican Credit, Inc. which
does business as Upland Mortgage, are involved, from time to time, in class
action lawsuits, other litigation, claims, investigations by governmental
authorities, and legal proceedings arising out of their lending activities from
time to time including the purported class action entitled, Calvin Hale v.
HomeAmerican Credit, Inc., d/b/a Upland Mortgage, described above. Due to the
Company's current expectation regarding the ultimate resolution of these
actions, management believes that the liabilities resulting from these actions
will not have a material adverse effect on the Company's consolidated financial
position or results of operations. The Company maintains a reserve which
management believes is sufficient to cover these matters. However, due to the
inherent uncertainty in litigation and since the ultimate resolutions of these
proceedings are influenced by factors outside of the Company's control, it is
possible that the Company's estimated liability under these proceedings may
change or that actual results will differ from its estimates.

In addition, from time to time, the Company is involved as plaintiff or
defendant in various legal proceedings arising in the normal course of business.
While the Company cannot predict the ultimate outcome of these various legal
proceedings, it is management's opinion that the resolution of these legal
actions should not have a material effect on the Company's financial position,
results of operations or liquidity.

138

American Business Financial Services, Inc. and Subsidiaries

Notes to Financial Statements (Continued)

June 30, 2002

16. Related Party Transactions

The Company has a loan receivable from an officer of the Company for $600
thousand, which was an advance for the exercise of stock options to purchase
247,513 shares of the Company's common stock in 1995. The loan is due in
September 2005 (earlier if the stock is disposed of). Interest at 6.46% is
payable annually. The loan is secured by 247,513 shares of the Company's stock,
and is shown as a reduction of stockholders' equity on the accompanying balance
sheet.

On April 2, 2001, the Company awarded 3,025 shares of its common stock to a
director of the Company as a result of services rendered in connection with its
stock repurchases.

The Company employs members of the immediate family of some of its directors and
executive officers in various non-corporate executive positions. The salaries
paid to these individuals are competitive with salaries paid to other employees
in similar positions within the Company and in its industry.

Additionally, the Company has business relationships with other related parties
including family members of directors and officers through which the Company has
purchased appraisal services, office equipment and real estate advisory
services. None of these related party transactions, individually or
collectively, are material to the Company's results of operations.

139

American Business Financial Services, Inc. and Subsidiaries

Notes to Financial Statements (Continued)

June 30, 2002

17. Fair Value of Financial Instruments

No active market exists for certain of the Company's assets and liabilities.
Therefore, fair value estimates are based on judgments regarding credit risk,
investor expectation of future economic conditions, normal cost of
administration and other risk characteristics, including interest rates and
prepayment risk. These estimates are subjective in nature and involve
uncertainties and matters of judgment and, therefore, cannot be determined with
precision. Changes in assumptions could significantly affect the estimates.

The following table summarizes the carrying amounts and fair value estimates of
financial instruments recorded on the Company's financial statements at June 30,
2002 and 2001 (in thousands):

June 30, 2002 June 30, 2001
Carrying Value Fair Value Carrying Value Fair Value
------------------------------- -------------------------------

Assets
Cash and cash equivalents $ 108,599 $ 108,599 $ 91,092 $ 91,092
Loans and leases available for sale 61,650 62,512 83,241 83,565
Interest-only strips 512,611 512,611 398,519 398,519
Servicing rights 125,288 125,951 102,437 104,747
Investments held to maturity 917 989 945 983

Liabilities
Subordinated debt and warehouse lines
and notes payable $ 664,206 $ 663,212 $ 589,014 $ 587,986

The methodology and assumptions utilized to estimate the fair value of the
Company's financial instruments are as follows:

Cash and cash equivalents - For these short-term instruments, the
carrying amount approximates fair value.

140

American Business Financial Services, Inc. and Subsidiaries

Notes to Financial Statements (Continued)

June 30, 2002

17. Fair Value of Financial Instruments (continued)

Loans and leases available for sale - Fair value is determined by recent
sales and securitizations.

Interest-only strips - Fair value is determined using estimated
discounted future cash flows taking into consideration anticipated
prepayment rates and credit loss rates of the underlying loans and
leases.

Servicing rights - Fair value is determined using estimated discounted
future cash flows taking into consideration anticipated prepayment rates
and credit loss rates of the underlying loans and leases.

Investments held to maturity - Represent mortgage loan backed securities
retained in securitizations. Fair value is determined using estimated
discounted future cash flows taking into consideration anticipated
prepayment rates and credit loss rates of the underlying loans and pass
through investment certificate interest rates of current securitizations.

Subordinated debt and notes payable - The fair value of fixed debt is
estimated using the rates currently available to the Company for debt of
similar terms.

The carrying value of mortgage backed securities retained in securitizations,
which were held-to-maturity investment securities were as follows (in
thousands):

Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
----------------------------------------------------

June 30, 2002 $ 917 $ 72 $ - $ 989

June 30, 2001 $ 945 $ 38 $ - $ 983

Mortgage backed securities mature through July 2007.

141

American Business Financial Services, Inc. and Subsidiaries

Notes to Financial Statements (Continued)

June 30, 2002

18. Derivative Financial Instruments

SFAS No. 133 was effective on a prospective basis for all fiscal quarters of
fiscal years beginning after June 15, 2000. The adoption of SFAS No. 133 on July
1, 2000 resulted in the cumulative effect of a change in accounting principle of
$15 thousand pre-tax being recognized as expense in the Consolidated Statement
of Income for the year ended June 30, 2001. Due to the immateriality of the
cumulative effect of adopting SFAS No. 133, the $15 thousand pre-tax expense is
included in general and administrative expense in the Consolidated Statement of
Income. The tax effects and earnings per share amounts related to the cumulative
effect of adopting SFAS No. 133 are not material.

The Company recorded cash losses on the fair value of derivative financial
instruments of $9.4 million, $4.3 million and $2.1 million during the years
ended June 30, 2002, 2001 and 2000, respectively, which were offset by
securitization gains during the periods. Any ineffectiveness related to hedging
transactions during the period was immaterial. Ineffectiveness is a measure of
the difference in the change in fair value of the derivative financial
instrument as compared to the change in the fair value of the item hedged.

There were no outstanding derivative contracts accounted for as hedges at June
30, 2002 or 2001. Outstanding derivative contracts by items hedged and
associated unrealized losses as of June 30, 2000 were as follows (in thousands):

Eurodollar Forward
Futures Treasury
Contracts Sales Total
--------------------------------------------

Loans available for sale:
Notional amount $ 20,000 $ - $ 20,000
Unrealized losses (54) - (54)
Mortgage conduit facility Assets:
Notional amount 25,000 35,000 60,000
Unrealized losses (19) (114) (133)
Loan commitments:
Notional amount 20,000 10,000 30,000
Unrealized losses (25) (23) (48)
--------------------------------------------
Total:
Notional amount $ 65,000 $ 45,000 $ 110,000
Unrealized losses (98) (137) (235)
============================================

142

American Business Financial Services, Inc. and Subsidiaries

Notes to Financial Statements (Continued)

June 30, 2002

18. Derivative Financial Instruments (continued)

In addition to the above derivative contracts, at June 30, 2000, the Company had
an obligation to satisfy a mortgage securitization prefund requirement of $67.9
million, which was satisfied in July 2000. There were no such obligations at
June 30, 2002 or 2001.

For the year ended June 30, 2002, the Company had recorded $0.7 million in
losses on a swap contract which is not designated as an accounting hedge. This
contract was designed to reduce the exposure to changes in the fair value of
certain interest-only strips due to changes in one-month LIBOR. The loss on the
swap contract was due to decreases in interest rate swap yield curve during the
period the contract was in place. Of the total losses recognized during the
period, $0.5 million are unrealized losses representing the net change in the
fair value of the contract at June 30, 2002 and $0.2 are cash losses. The net
unrealized loss of $0.5 million is included as a trading liability in Other
liabilities.

Terms of the interest rate swap agreement at June 30, 2002 were as follows
(dollars in thousands):

Notional amount...................... $ 102,642
Rate received - Floating (a)......... 1.84%
Rate paid - Fixed.................... 2.89%
Maturity Date........................ April 2004
Unrealized loss...................... $ 461
Sensitivity to 0.1% change in
interest rates..................... $ 93

(a) Rate represents the spot rate for one-month LIBOR paid on the securitized
floating interest rate tranche at the end of the period.

143

American Business Financial Services, Inc. and Subsidiaries

Notes to Financial Statements (Continued)

June 30, 2002

19. Reconciliation of Basic and Diluted Earnings Per Common Share

Year ended June 30,
2002 2001 2000
-----------------------------------------------------
(in thousands except per share data)

(Numerator)
Income before cumulative effect of a change
in accounting principle $ 7,859 $ 7,911 $ 6,424
Cumulative effect of a change in accounting
principle - 174 -
-----------------------------------------------------
Net income $ 7,859 $ 8,085 $ 6,424
=====================================================
(Denominator)
Average Common Shares:
Average common shares outstanding 2,934 3,797 4,143
Average potentially dilutive shares 221 88 103
-----------------------------------------------------
Average common and potentially dilutive
shares 3,155 3,885 4,246
=====================================================

Earnings per common share:
Basic:
Income before cumulative effect of a change
in accounting principle $ 2.68 $ 2.08 $ 1.55
Cumulative effect of a
change in accounting principle - 0.05 -
-----------------------------------------------------
Net income $ 2.68 $ 2.13 $ 1.55
=====================================================

Diluted:
Income before cumulative effect of a change
in accounting principle $ 2.49 $ 2.04 $ 1.51
Cumulative effect of a
change in accounting principle - 0.04 -
-----------------------------------------------------
Net income $ 2.49 $ 2.08 $ 1.51
=====================================================

144

American Business Financial Services, Inc. and Subsidiaries

Notes to Financial Statements (Continued)

June 30, 2002

20. Segment Information

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

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

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

The Treasury and Funding segment offers the Company's subordinated debt
securities pursuant to a registered public offering and obtains other sources of
funding for the Company's general operating and lending activities.

All Other mainly represents segments that do not meet the SFAS No. 131 defined
thresholds for determining reportable segments, financial assets not related to
operating segments, mainly comprised of interest-only strips, unallocated
overhead and other expenses of the Company unrelated to the reportable segments
identified.

The reporting segments follow the same accounting policies used for the
Company's consolidated financial statements as described in the summary of
significant accounting policies. Management evaluates a segment's performance
based upon profit or loss from operations before income taxes.

Reconciling items represent elimination of inter-segment income and expense
items, and are included to reconcile segment data to the consolidated financial
statements.

145

American Business Financial Services, Inc. and Subsidiaries

Notes to Financial Statements (Continued)

June 30, 2002

20. Segment Information (continued)

Year ended June 30, 2002
-------------------------------------------------------------------------------------
Loan Treasury and Reconciling
Origination Funding Servicing All Other Items Consolidated
-------------------------------------------------------------------------------------
(in thousands)

External revenues:
Gain on sale of loans and leases $ 185,580 $ - $ - $ - $ - $ 185,580
Interest income 7,199 998 1,309 35,386 - 44,892
Non-interest income 11,646 1 35,387 102 (29,707) 17,429
Inter-segment revenues - 70,586 - 68,335 (138,921) -
Operating expenses:
Interest expense 22,387 67,256 298 49,328 (70,586) 68,683
Non-interest expense 41,547 11,613 31,375 52,163 - 136,698
Depreciation and amortization 3,348 142 1,095 2,332 - 6,917
Interest-only strips valuation adjustment - - - 22,053 - 22,053
Inter-segment expense 98,042 - - - (98,042) -
Income tax expense (benefit) 16,423 (3,119) 1,650 (9,263) - 5,691
-------------------------------------------------------------------------------------

Net income $ 22,678 $ (4,307) $ 2,278 $ (12,790) $ - $ 7,859
=====================================================================================
Segment assets $ 95,017 $ 202,621 $ 124,914 $ 541,950 $ (88,127) $ 876,375
=====================================================================================

146

American Business Financial Services, Inc. and Subsidiaries

Notes to Financial Statements (Continued)

June 30, 2002

20. Segment Information (continued)

Year ended June 30, 2001
-------------------------------------------------------------------------------------
Loan Treasury and Reconciling
Origination Funding Servicing All Other Items Consolidated
-------------------------------------------------------------------------------------
(in thousands)

External revenues:
Gain on sale of loans and leases $ 128,978 $ - $ - $ - $ - $ 128,978
Interest income 7,298 1,033 1,898 26,069 - 36,298
Non-interest income 12,279 - 25,456 - (19,675) 18,060
Inter-segment revenues - 56,692 - 45,249 (101,941) -
Operating expenses:
Interest expense 22,610 51,715 471 38,443 (56,692) 56,547
Non-interest expense 37,488 12,312 24,340 31,763 - 105,903
Depreciation and amortization 3,713 124 895 2,969 - 7,701
Inter-segment expense 64,924 - - - (64,924) -
Income tax expense (benefit) 7,929 (2,571) 659 (743) - 5,274
-------------------------------------------------------------------------------------
Income before the cumulative effect of a
change in accounting principle $ 11,891 $ (3,855) $ 989 $ (1,114) $ - $ 7,911
=====================================================================================
Segment assets $ 124,837 $ 153,696 $ 106,107 $ 451,594 $ (69,747) $ 766,487
=====================================================================================

147

American Business Financial Services, Inc. and Subsidiaries

Notes to Financial Statements (Continued)

June 30, 2002

21. Quarterly Data Statement (unaudited)

The interim financial statements below contain all adjustments (consisting of
normal recurring accruals and the elimination of intercompany balances)
necessary in management's opinion for a fair presentation of financial position
and results of operations. The following tables summarize financial data by
quarters (in thousands, except per share amounts):

Fiscal 2002 Quarters Ended
----------------------------------------------------------------------
June 30, March 31, December 31, September 30,
----------------------------------------------------------------------

Revenues

Gain on sale of loans and leases $ 56,441 $ 49,220 $ 44,563 $ 35,356
Interest and fees 4,579 5,292 5,526 5,941
Interest accretion on interest-only
strips 9,466 9,538 8,646 7,736
Servicing income 1,267 1,282 1,298 1,636
Other income 7 103 1 3
----------------------------------------------------------------------
Total revenues 71,760 65,435 60,034 50,672

Total expenses (a) 67,818 62,399 55,810 48,324
----------------------------------------------------------------------

Income before provision for income
taxes 3,942 3,036 4,224 2,348
Provision for income taxes 1,656 1,275 1,774 986
----------------------------------------------------------------------

Net income $ 2,286 $ 1,761 $ 2,450 $ 1,362
======================================================================

Earnings per common share:
Basic $ 0.80 $ 0.58 $ 0.87 $ 0.43
Diluted $ 0.75 $ 0.55 $ 0.79 $ 0.40

(a) Include adjustments to the fair value of interest only strips of $8.9
million, $8.7 million and $4.5 million for the quarters ended June 30, March
31 and December 31, respectively.

148

American Business Financial Services, Inc. and Subsidiaries

Notes to Financial Statements (Continued)

June 30, 2002

21. Quarterly Data Statement (unaudited) (continued)

Fiscal 2001 Quarters Ended
(in thousands) June 30, March 31, December 31, September 30,
-------------------------------------------------------------------------

Revenues
Gain on sale of loans and leases $ 37,449 $ 34,430 $ 31,009 $ 26,090
Interest and fees 6,027 5,300 6,017 5,238
Interest accretion on interest-only
strips 8,212 6,438 5,821 5,598
Servicing income 1,422 1,117 1,666 1,495
Other income 1 2 2 2
-------------------------------------------------------------------------
Total revenues 53,111 47,287 44,515 38,423

Total expenses 50,985 42,487 40,512 36,167
-------------------------------------------------------------------------

Income before provision for income 2,126 4,800 4,003 2,256
taxes
Provision for income taxes 850 1,920 1,602 902
-------------------------------------------------------------------------
Income before cumulative effect of a 1,276 2,880 2,401 1,354
change in accounting principle
Cumulative effect of a change in
accounting principle 174 - - -
-------------------------------------------------------------------------
Net Income $ 1,450 $ 2,880 $ 2,401 $ 1,354
=========================================================================
Earnings per common share:
Income before cumulative effect of a
change in accounting principle:
Basic $ 0.39 $ 0.75 $ 0.60 $ 0.34
Diluted $ 0.37 $ 0.75 $ 0.59 $ 0.33
Net income:
Basic $ 0.44 $ 0.75 $ 0.60 $ 0.34
Diluted $ 0.41 $ 0.75 $ 0.59 $ 0.33

149

Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure

On August 2, 2001, Ernst & Young LLP resigned as the independent
accountants for the Company. Ernst & Young LLP had been engaged as the Company's
auditor on May 17, 2001, replacing BDO Seidman, LLP. During the period of
engagement through August 2, 2001, Ernst & Young LLP did not issue any reports
on the financial statements of the Company.

During fiscal 2001 and the subsequent interim period through August 2,
2001, the Company did not have any disagreements with Ernst & Young LLP, on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreements, if not resolved to the
satisfaction of Ernst & Young LLP, would have caused it to make a reference to
the subject matter of the disagreements in connection with its report. During
fiscal 2001 and the subsequent interim period through August 2, 2001, none of
the events described in Regulation S-K Item 304 (a)(1)(v) occurred.

The Company's Board of Directors approved the reengagement of BDO
Seidman, LLP as the Company's independent accountants effective August 8, 2001.
BDO Seidman, LLP acted as the Company's independent accountants during the
two-year period ended June 30, 2000 through May 17, 2001. During the two years
ended June 30, 2000 and the subsequent interim period through May 17, 2001, the
Company consulted with BDO Seidman, LLP regarding the application of accounting
principles in the normal course of BDO Seidman, LLP's engagement as the
Company's independent auditors. BDO Seidman, LLP issued reports on the Company's
financial statements during the two-year period ended June 30, 2000. The reports
of BDO Seidman, LLP on the financial statements of the Company during the
two-year period ended June 30, 2000 did not contain an adverse opinion, or a
disclaimer of opinion, and were not qualified or modified as to uncertainty,
audit scope or accounting principles.

During the two-year period ended June 30, 2000, and interim period from
July 1, 2000 through May 17, 2001, the Company did not have any disagreements
with BDO Seidman, LLP, on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of BDO Seidman, LLP, would
have caused it to make a reference to the subject matter of the disagreements in
connection with its report.

150

PART III

Item 10. Directors and Executive Officers of the Registrant

The information required to be included in Item 10 of Part III of this
Form 10-K incorporates by reference certain information from our definitive
proxy statement, for our 2002 annual meeting of stockholders to be filed with
the SEC not later than 120 days after the end of our fiscal year covered by this
report.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Exchange Act ("Section 16(a)") requires our
directors, executive officers, and persons who own more than 10% of a registered
class of our equity securities, to file with the SEC initial reports of
ownership and reports of changes in ownership of our common stock and other
equity securities. Officers, directors and greater than 10% stockholders are
required by SEC regulation to furnish us with copies of all Section 16(a) forms
they file.

To our knowledge, based solely on a review of the copies of such
reports furnished to us and written representations that no other reports were
required, during the fiscal year ended June 30, 2002, our officers, directors
and greater than 10% beneficial owners have complied with all Section 16(a)
filing requirements.

Item 11. Executive Compensation

The information required to be included in Item 11 of Part III of this
Form 10-K incorporates by reference certain information from our definitive
proxy statement, for our 2002 annual meeting of stockholders to be filed with
the SEC not later than 120 days after the end of our fiscal year covered by this
report.

Item 12. Security Ownership of Certain Beneficial Owners and Management

The information required to be included in Item 12 of Part III of this
Form 10-K incorporates by reference certain information from our definitive
proxy statement, for our 2002 annual meeting of stockholders to be filed with
the SEC not later than 120 days after the end of our fiscal year covered by this
report.

Item 13. Certain Relationships and Related Transactions

The information required to be included in Item 13 of Part III of this
Form 10-K incorporates by reference certain information from our definitive
proxy statement, for our 2002 annual meeting of stockholders to be filed with
the SEC not later than 120 days after the end of our fiscal year covered by this
report.

151

Item 14. Controls and Procedures

Subject to the SEC's rules and regulations, disclosure pursuant to this
Item 14 is not required for reports for periods ending prior to August 29, 2002,
including this Form 10-K for the year ended June 30, 2002.

PART IV

Item 15. Exhibits and Reports on Form 8-K

Exhibit
Number Description
-------- -----------------------------------------------------------------------------------------------

3.1 Amended and Restated Certificate of Incorporation (Incorporated by reference from Exhibit 3.1
of the ABFS Annual Report on Form 10-KSB for the fiscal year ended June 30, 1996 filed on
September 27, 1996, File No. 0-22472 (the "1996 Form 10-KSB").

3.2 Bylaws of ABFS (Incorporated by reference from Exhibit 3.2 of the Registration Statement on Form
SB-2 filed December 27, 1996, Registration Number 333-18919 (the "1996 Form SB-2")).

4.1 Form of Unsecured Investment Note (Incorporated by reference from Exhibit 4.1 of Amendment
No. 1 to the Registration Statement on Form SB-2 filed April 29, 1994, Registration Number
33-76390).

4.2 Form of Unsecured Investment Note issued pursuant to Indenture with First Trust, National
Association, a national banking association (Incorporated by reference from Exhibit 4.5 of
Amendment No. One to the Registration Statement on Form SB-2 filed on December 14, 1995,
Registration Number 33-98636 (the "1995 Form SB-2")).

4.3 Form of Indenture by and between ABFS and First Trust, National Association, a national
banking association (Incorporated by reference from Exhibit 4.6 of the Registration Statement
on Form SB-2 filed on October 26, 1995, Registration Number 33-98636).

4.4 Form of Indenture by and between ABFS and First Trust, National Association, a national
banking association (Incorporated by reference from Exhibit 4.4 of the Registration Statement
on Form SB-2 filed March 28, 1997, Registration Number 333-24115 (the "1997 Form SB-2")).

4.5 Form of Unsecured Investment Note (Incorporated by reference from Exhibit 4.5 of the 1997 Form
SB-2).

4.6 Form of Indenture by and between ABFS and First Trust, National Association, a national
banking association (Incorporated by reference from Exhibit 4.4 of the Registration Statement
on Form SB-2 filed May 23, 1997, Registration Number 333-24115).

4.7 Form of Unsecured Investment Note (Incorporated by reference from Exhibit 4.5 of the Registration
Statement on Form SB-2 filed May 23, 1997, Registration Number 333-24115).

4.8 Form of Indenture by and between ABFS and U.S. Bank Trust, National Association, a national
banking association (Incorporated by reference from Exhibit 4.8 of Registrant's Registration
Statement on Form S-2, No. 333-63859, filed September 21, 1998).

152

Exhibit
Number Description
-------- -----------------------------------------------------------------------------------------------

4.9 Form of Unsecured Investment Note (Incorporated by reference from Exhibit 4.9 of Registrant's
Registration Statement on Form S-2, No. 333-63859, filed September 21, 1998).

4.10 Form of Indenture by and between ABFS and U.S. Bank Trust National Association (Incorporated
by reference from Exhibit 4.10 of Registrant's Registration Statement on Form S-2, No.
333-87333, filed September 17, 1999).

4.11 Form of Indenture by and between ABFS and U.S. Bank Trust National Association. (Incorporated
by reference from Exhibit 4.11 of Registrant's Registration Statement on Form S-2, No.
333-40248, filed June 27, 2000.)

4.12 Form of Investment Note. (Incorporated by reference from Exhibit 4.12 of Registrant's Registration
Statement on Form S-2, No. 333-40248, filed June 27, 2000.)

4.13 Form of Indenture by and between ABFS and U.S. Bank Trust National Association. (Incorporated by
reference from Exhibit 4.13 of Registrant's Registration Statement on Form S-2, No. 333-63014,
filed on June 14, 2001.)

4.14 Form of Investment Note. (Incorporated by reference from Exhibit 4.14 of Registrant's Registration
Statement on Form S-2, No. 333-63014, filed on June 14, 2001.)

4.15 Form of Indenture by and between ABFS and U.S. Bank National Association. (Incorporated by
reference from Exhibit 4.15 of Registrant's Registration Statement on Form S-2, No. 333-90366,
filed on June 12, 2002 (the "2002 Form S-2").)

4.16 Form of Investment Note. (Incorporated by reference from Exhibit 4.16 of Registrant's 2002 Form
S-2.)

10.1 Amended and Restated Stock Option Plan (Incorporated by reference from Exhibit 10.2 of ABFS'
Quarterly Report on Form 10-QSB from the quarter ended September 30, 1997, File No. 0-22474). **

10.2 Stock Option Award Agreement (Incorporated by reference from Exhibit 10.1 of the Registration
Statement on Form S-11 filed on February 26, 1993, Registration No. 33-59042 (the "Form S-11")).
**

10.3 1995 Stock Option Plan for Non-Employee Directors (Incorporated by reference from Exhibit 10.6 of
the Amendment No. 1 to the 1996 Form SB-2 filed on February 4, 1996 Registration No. 333-18919
(the "Amendment No. 1 to the 1996 Form SB-2")). **

10.4 Form of Option Award Agreement for Non-Employee Directors Plan for Formula Awards (Incorporated by
reference from Exhibit 10.13 of the 1996 Form 10-KSB). **

10.5 1997 Non-Employee Director Stock Option Plan (including form of Option Agreement) (Incorporated by
reference from Exhibit 10.1 of the September 30, 1997 Form 10-QSB). **

10.6 Lease dated January 7, 1994 by and between TCW Realty Fund IV Pennsylvania Trust and ABFS
(Incorporated by reference from Exhibit 10.9 of the Registration Statement on Form SB-2 filed
March 15, 1994, File No. 33-76390).

153

Exhibit
Number Description
-------- -----------------------------------------------------------------------------------------------

10.7 First Amendment to Agreement of Lease by and between TCW Realty Fund IV Pennsylvania Trust and
ABFS dated October 24, 1994. (Incorporated by reference from Exhibit 10.9 of ABFS' Annual Report
on Form 10-KSB for the fiscal year ended June 30, 1995 (the "1995 Form 10-KSB")).

10.8 Second Amendment to Agreement of Lease by and between TCW Realty Fund IV Pennsylvania Trust and
ABFS dated December 23, 1994 (Incorporated by reference from Exhibit 10.10 of the 1995 Form
10-KSB).

10.9 Third Amendment to Lease between TCW Realty Fund IV Pennsylvania Trust and ABFS dated July 25,
1995 (Incorporated by reference from Exhibit 10.11 of the 1995 Form 10-KSB).

10.10 Promissory Note of Anthony J. Santilli and Stock Pledge Agreement dated September 29, 1995
(Incorporated by reference from Exhibit 10.14 of the 1995 Form SB-2).

10.11 Form of Employment Agreement with Anthony J. Santilli, Beverly Santilli and Jeffrey M. Ruben
(Incorporated by reference from Exhibit 10.15 of the Amendment No. 1 to the 1996 Form SB-2). **

10.12 Amendment One to Anthony J. Santilli's Employment Agreement (Incorporated by reference from
Exhibit 10.3 of the September 30, 1997 Form 10-QSB). **

10.13 Amendment One to Beverly Santilli's Employment Agreement (Incorporated by reference from Exhibit
10.4 of the September 30, 1997 Form 10-QSB). **

10.14 Management Incentive Plan (Incorporated by reference from Exhibit 10.16 of the 1996 Form SB-2). **

10.15 Form of Option Award Agreement for Non-Employee Directors Plan for Non-Formula Awards
(Incorporated by reference from Exhibit 10.18 of the Amendment No. 1 to the 1996 Form SB-2). **

10.16 Form of Pooling and Servicing Agreement related to the Company's loan securitizations dated May 1,
1996, August 31, 1996, February 28, 1997, September 1, 1997, February 1, 1998, June 1, 1998, and
September 1, 1998 (Incorporated by reference from Exhibit 4.1 of ABFS' Quarterly Report on Form
10-QSB for the quarter ended March 31, 1995 (the "March 31, 1995 Form 10-QSB")).

10.17 Form of Sales and Contribution Agreement related to the Company's loan securitizations dated May
1, 1996 and September 27, 1996 (Incorporated by reference from Exhibit 4.1 of the March 31, 1995
Form 10-QSB).

10.18 Form of Indenture related to the Company's loan securitizations dated December 1, 1998, March 1,
1999, June 1, 1999, September 1, 1999, December 1, 1999, March 1, 2000, June 1, 2000, September 1,
2000, December 1, 2000, September 1, 2001 and December 1, 2001. (Incorporated by reference from
Exhibit 10.18 to the Registration Statement on Form S-2 filed June 14, 2001, Registration No.
333-63014 (the "2001 Form S-2")).

10.19 Form of Unaffiliated Seller's Agreement related to the Company's loan securitizations dated
December 1, 1998, March 1, 1999, June 1, 1999, September 1, 1999, December 1, 1999, March 1, 2000,
June 1, 2000, September 1, 2000, December 1, 2000, September 1, 2001 and December 1, 2001.
(Incorporated by reference from Exhibit 10.19 to the 2001 Form S-2).

154

Exhibit
Number Description
-------- -----------------------------------------------------------------------------------------------

10.20 Fourth Amendment to Lease between TCW Realty Fund IV Pennsylvania Trust and ABFS dated April 9,
1996 (Incorporated by reference from Exhibit 10.22 to the Amendment No. 1 to the 1997 SB-2).

10.21 Fifth Amendment to Lease between TCW Realty Fund IV Pennsylvania Trust and ABFS dated October 8,
1996 (Incorporated by reference from Exhibit 10.23 to the Amendment No. 1 to the 1997 SB-2).

10.22 Sixth Amendment to Lease between TCW Realty Fund IV Pennsylvania Trust and ABFS dated March 31,
1997 (Incorporated by reference from Exhibit 10.24 to the Amendment No. 1 to the 1997 SB-2).

10.23 Agreement for Purchase and Sale of Stock between Stanley L. Furst, Joel E. Furst and ABFS dated
October 27, 1997 (Incorporated by reference from ABFS' Current Report on Form 8-K dated October
27, 1997, File No. 0-22747).

10.24 Standard Form of Office Lease and Rider to Lease dated April 2, 1993 by and between 5 Becker Farm
Associates and NJMIC (Incorporated by reference from Exhibit 10.29 of Post-Effective Amendment No.
1 to the Registration Statement on Form SB-2 filed on January 22, 1998, Registration No.
333-2445).

10.25 First Amendment of Lease by and between 5 Becker Farm Associates and NJMIC dated July 27, 1994
(Incorporated by reference from Exhibit 10.30 of Post-Effective Amendment No. 1 to the
Registration Statement on Form SB-2 filed on January 22, 1998, Registration No. 333-2445).

10.26 Form of Debenture Note related to NJMIC's subordinated debt (Incorporated by reference from
Exhibit 10.31 of Post-Effective Amendment No. 1 to the Registration Statement on Form SB-2 filed
on January 22, 1998, Registration No. 333-2445).

10.27 Form of Standard Terms and Conditions of Servicing Agreement related to NJMIC's lease
securitizations dated May 1, 1995 and March 1, 1996. (Incorporated by reference from Exhibit 10.33
of Post-Effective Amendment No. 1 to the Registration Statement on Form SB-2 filed on January 22,
1998, Registration No. 333-2445).

10.28 Form of Standard Terms and Conditions of Lease Acquisition Agreement related to NJMIC's lease
securitizations dated May 1, 1995 and March 1, 1996 (Incorporated by reference from Exhibit 10.34
of Post-Effective Amendment No. 1 to the Registration Statement on Form SB-2 filed on January 22,
1998, Registration No. 333-2445).

10.29 Amended and Restated Specific Terms and Conditions of Servicing Agreement related to NJMIC's lease
securitization dated May 1, 1995 (Incorporated by reference from Exhibit 10.35 of Post-Effective
Amendment No. 1 to the Registration Statement on Form SB-2 filed on January 22, 1998, Registration
No. 333-2445).

10.30 Amended and Restated Specific Terms and Conditions of Lease Acquisition Agreement related to
NJMIC's lease securitization dated May 1, 1995 (Incorporated by reference from Exhibit 10.36 of
Post-Effective Amendment No. 1 to the Registration Statement on Form SB-2 filed on January 22,
1998, Registration No. 333-2445).

155

Exhibit
Number Description
-------- -----------------------------------------------------------------------------------------------

10.31 Specific Terms and Conditions of Servicing Agreement related to NJMIC's lease securitization dated
March 1, 1996 (Incorporated by reference from Exhibit 10.37 of Post-Effective Amendment No. 1 to
the Registration Statement on Form SB-2 filed on January 22, 1998, Registration No. 333-2445).

10.32 Specific Terms and Conditions of Lease Acquisition Agreement related to NJMIC's lease
securitization dated March 1, 1996 (Incorporated by reference from Exhibit 10.38 of Post-Effective
Amendment No. 1 to the Registration Statement on Form SB-2 filed on January 22, 1998, Registration
No. 333-2445).

10.33 Form of Indenture related to the lease-backed securitizations among ABFS Equipment Contract Trust
1998-A, American Business Leasing, Inc. and The Chase Manhattan Bank dated June 1, 1998 and among
ABFS Equipment Contract Trust 1999-A, American Business Leasing, Inc. and The Chase Manhattan Bank
dated June 1, 1999. (Incorporated by reference from Exhibit 10.39 of Registrant's Registration
Statement on Form S-2, No. 333-63859, filed September 21, 1998).

10.34 Form of Receivables Sale Agreement related to the lease-backed securitizations ABFS Equipment
Contract Trust 1998-A, dated June 1, 1998, and ABFS Equipment Contract Trust 1999-A, dated June 1,
1999. (Incorporated by reference from Exhibit 10.34 of the 2001 Form S-2).

10.35 Form of Unaffiliated Seller's Agreement related to the Company's home equity loan securitizations
dated March 27, 1997, September 29, 1997, February 1, 1998, June 1, 1998, and September 1, 1998
(Incorporated by reference from Exhibit 10.40 of Registrant's Registration Statement on Form S-2,
No. 333-63859, filed September 21, 1998).

10.36 $100.0 Million Receivables Purchase Agreement, dated September 30, 1998 among American Business
Lease Funding Corporation, American Business Leasing, Inc. and a syndicate of financial
institutions led by First Union Capital Markets and First Union National Bank, as liquidity agent.
(Incorporated by reference from Exhibit 10.1 of the Registrant's September 30, 1998 Form 10-Q).

10.37 Lease Agreement dated August 30, 1999 related to One Presidential Boulevard, Bala Cynwyd,
Pennsylvania (Incorporated by reference to Exhibit 10.1 of the Registrant's September 30, 1999
Form 10-Q).

10.38 Employment Agreement between American Business Financial Services, Inc. and Albert Mandia
(Incorporated by reference to Exhibit 10.2 of the Registrant's September 30, 1999 Form 10-Q). **

10.39 Change in Control Agreement between American Business Financial Services, Inc. and Albert Mandia
(Incorporated by reference to Exhibit 10.3 of the Registrant's September 30, 1999 Form 10-Q). **

10.40 American Business Financial Services, Inc. Amended and Restated 1999 Stock Option Plan
(Incorporated by reference from Exhibit 10.4 of the Registrant's Quarterly Report on Form 10-Q
from the quarter ended September 30, 2001 filed on November 14, 2001). **

156

Exhibit
Number Description
-------- -----------------------------------------------------------------------------------------------

10.41 Amendment No. 3 to Receivables Purchase Agreement, dated as of October 13, 1999 among American
Business Lease Funding Corporation, American Business Leasing, Inc. and a syndicate of
financial institutions led by First Union Securities, Inc. as Deal Agent (Incorporated by
reference from Exhibit 10.3 of the Registrant's December 31, 1999 Form 10-Q).

10.42 Amendment No. 4, dated as of November 12, 1999, to the Receivables Purchase Agreement, dated
as of September 30, 1998, among American Business Lease Funding Corporation, American Business
Leasing, Inc. and a syndicate of financial institutions led by First Union Securities, Inc. as
Deal Agent (Incorporated by reference from Exhibit 10.4 of the Registrant's December 31, 1999
Form 10-Q).

10.43 Amendment No. 5, dated as of November 29, 1999, to the Receivables Purchase Agreement, dated
as of September 30, 1998, among American Business Lease Funding Corporation, American Business
Leasing, Inc. and a syndicate of financial institutions led by First Union Securities, Inc. as
Deal Agent (Incorporated by reference from Exhibit 10.5 of the Registrant's December 31, 1999
Form 10-Q).

10.44 Amendment No. 6, dated as of December 14, 1999, to the Receivables Purchase Agreement, dated
as of September 30, 1998, among American Business Lease Funding Corporation, American Business
Leasing, Inc. and a syndicate of financial institutions led by First Union Securities, Inc. as
Deal Agent (Incorporated by reference from Exhibit 10.6 of the Registrant's December 31, 1999
Form 10-Q).

10.45 Seventh Amendment, dated as of December 31, 1999, to the Receivables Purchase Agreement, dated as
of September 30, 1998, among American Business Lease Funding Corporation, American Business
Leasing, Inc. and a syndicate of financial institutions led by First Union Securities, Inc. as
Deal Agent (Incorporated by reference from Exhibit 10.7 of the Registrant's December 31, 1999 Form
10-Q).

10.46 Eight Amendment, dated as of January 10, 2000, to the Receivables Purchase Agreement, dated as of
September 30, 1998, among American Business Lease Funding Corporation, American Business Leasing,
Inc. and a syndicate of financial institutions led by First Union Securities, Inc. as Deal Agent
(Incorporated by reference from Exhibit 10.8 of the Registrant's December 31, 1999 Form 10-Q).

10.47 Sale and Servicing Agreement, dated as of March 1, 2000, by and among Prudential Securities
Secured Financing Corporation, ABFS Mortgage Loan Trust 2000-1, Chase Bank of Texas, N.A., as
collateral agent, The Chase Manhattan Bank, as indenture trustee and American Business Credit,
Inc., as Servicer (Incorporated by reference from Exhibit 10.1 of the Registrant's March 31, 2000
Form 10-Q).

10.48 Warehousing Credit and Security Agreement dated as of May 5, 2000 between New Jersey Mortgage and
Investment Corp., American Business Credit, Inc., HomeAmerican Credit, Inc. d/b/a Upland Mortgage
and Residential Funding Corporation. (Incorporated by reference from Exhibit 10.63 of Registrant's
Registration Statement on Form S-2, No. 333-40248, filed June 27, 2000.)

157

Exhibit
Number Description
-------- -----------------------------------------------------------------------------------------------

10.49 Sale and Servicing Agreement dated as of July 6, 2000 by and among ABFS Greenmont, Inc., as
Depositor, HomeAmerican Credit, Inc., d/b/a Upland Mortgage, and New Jersey Mortgage and
Investment Corp., as Originators and Subservicers, ABFS Mortgage Loan Warehouse Trust 2000-2,
as Trust, American Business Credit, Inc., as an Originator and Servicer, American Business
Financial Services, Inc., as Sponsor, and The Chase Manhattan Bank, as Indenture Trustee and
Collateral Agent (Incorporated by reference from Exhibit 10.64 of the Registrant's Annual
Report on Form 10-K for the fiscal year ended June 30, 2000 (the "2000 Form 10-K")).

10.50 Indenture dated as of July 6, 2000 between ABFS Mortgage Loan Warehouse Trust 2000-2 and The Chase
Manhattan Bank. (Incorporated by reference from Exhibit 10.65 of the 2000 Form 10-K).

10.51 Employment Agreement by and between American Business Financial Services, Inc. and Milton Riseman
(Incorporated by reference from Exhibit 10.66 of the 2000 Form 10-K). **

10.52 Letter Employment Agreement by and between American Business Financial Services, Inc. and Ralph
Hall (Incorporated by reference from Exhibit 10.67 of the 2000 Form 10-K). **

10.53 Master Loan and Security Agreement, dated as of January 22, 2001, between American Business
Credit, Inc., HomeAmerican Credit, Inc., d/b/a Upland Mortgage, and American Business Mortgage
Services, Inc., f/k/a New Jersey Mortgage and Investment Corp., as Borrowers, American Business
Financial Services, Inc., as Guarantor, and Morgan Stanley Dean Witter Mortgage Capital Inc., as
Lender (Incorporated by reference from Exhibit 10.1 of Registrant's December 31, 2000 Form 10-Q).

10.54 Senior Secured Credit Agreement, among: American Business Credit, Inc. ("ABC"), a Pennsylvania
corporation, HomeAmerican Credit, Inc. ("HAC"), a Pennsylvania corporation doing business under
the assumed or fictitious name Upland Mortgage, and New Jersey Mortgage and Investment Corp., a
New Jersey corporation whose name will be changed in January 2001 to American Business Mortgage,
American Business Financial Services, Inc. (the "Parent"), and The Chase Manhattan Bank
(Incorporated by reference from Exhibit 10.2 of Registrant's December 31, 2000 Form 10-Q).

10.55 Sale and Servicing Agreement, dated as of March 1, 2001, by and among ABFS OSO, Inc., a Delaware
corporation, as the Depositor, American Business Credit, Inc., a Pennsylvania corporation,
HomeAmerican Credit, Inc., d/b/a Upland Mortgage, a Pennsylvania corporation, and American
Business Mortgage Services, Inc., a New Jersey corporation, as the Originators, American Business
Financial Services Inc., a Delaware corporation, as the Guarantor, ABFS Mortgage Loan Warehouse
Trust 2001-1, a Delaware business trust, as the Trust, American Business Credit, Inc., a
Pennsylvania corporation, as the Servicer, EMC Mortgage Corporation, a Delaware corporation, as
the Back-up Servicer, and The Chase Manhattan Bank, a New York banking corporation, as the
Indenture Trustee and the Collateral Agent. (Incorporated by reference from Exhibit 10.72 of
Registrant's Post-Effective Amendment No. One to the Registration Statement on Form S-2, No.
333-40248, filed April 5, 2001.)

10.56 Indenture, dated as of March 1, 2001, by and among Triple-A One Funding Corporation, a Delaware
corporation, as the Initial Purchaser, ABFS Mortgage Loan Warehouse Trust 2001-1, a Delaware
statutory business trust, and its successors and assigns, as the Trust or the Issuer, The Chase
Manhattan Bank, a New York banking corporation, and its successors, as the Indenture Trustee, and
American Business Financial Services, Inc., as the Guarantor. (Incorporated by reference from
Exhibit 10.73 of Registrant's Post-Effective Amendment No. One to the Registration Statement on
Form S-2, No. 333-40248, filed April 5, 2001.)

158

Exhibit
Number Description
-------- -----------------------------------------------------------------------------------------------

10.57 Insurance and Reimbursement Agreement, dated as of March 28, 2001, among MBIA Insurance
Corporation, a New York stock insurance company, ABFS Mortgage Loan Warehouse Trust 2001-1, a
Delaware business trust, as the Trust, ABFS OSO, Inc., a Delaware corporation, as the Depositor,
American Business Credit, Inc., a Pennsylvania corporation, as the Originator and the Servicer,
HomeAmerican Credit, Inc., a Pennsylvania corporation, d/b/a Upland Mortgage, as the Originator,
American Business Mortgage Services, Inc., a New Jersey corporation, as the Originator, American
Business Financial Services, Inc., a Delaware corporation, as the Guarantor, The Chase Manhattan
Bank, as the Indenture Trustee, and Triple-A One Funding Corporation, a Delaware corporation, as
the Initial Purchaser. (Incorporated by reference from Exhibit 10.74 of Registrant's
Post-Effective Amendment No. One to the Registration Statement on Form S-2, No. 333-40248, filed
April 5, 2001.)

10.58 Pooling and Servicing Agreement, relating to ABFS Mortgage Loan Trust 2001-1, dated as of March 1,
2001, by and among Morgan Stanley ABS Capital I Inc., a Delaware corporation, as the Depositor,
American Business Credit, Inc., a Pennsylvania corporation, as the Servicer, and The Chase
Manhattan Bank, a New York banking corporation, as the Trustee. (Incorporated by reference from
Exhibit 10.75 of Registrant's Post-Effective Amendment No. One to the Registration Statement on
Form S-2, No. 333-40248, filed April 5, 2001.)

10.59 Unaffiliated Seller's Agreement, dated as of March 1, 2001, by and among Morgan Stanley ABS
Capital I, Inc., a Delaware corporation, and its successors and assigns, as the Depositor, ABFS
2001-1, Inc., a Delaware corporation, and its successors, as the Unaffiliated Seller, American
Business Credit, Inc., a Pennsylvania corporation, HomeAmerican Credit, Inc., d/b/a Upland
Mortgage, a Pennsylvania corporation, and American Business Mortgage Services Inc., a New Jersey
corporation, as the Originators. (Incorporated by reference from Exhibit 10.76 of Registrant's
Post-Effective Amendment No. One to the Registration Statement on Form S-2, No. 333-40248, filed
April 5, 2001.)

10.60 Amended and Restated Sale and Servicing Agreement dated as of June 28, 2001 by and among ABFS
Greenmont, Inc., as Depositor, HomeAmerican Credit, Inc. d/b/a Upland Mortgage and American
Business Mortgage Services, Inc. f/k/a New Jersey Mortgage and Investment Corp., as Originators
and Subservicers, ABFS Mortgage Loan Warehouse Trust 2000-2, as Trust, American Business Credit,
Inc., as an Originator and Servicer, American Business Financial Services, Inc., as Sponsor and
The Chase Manhattan Bank, as Indenture Trustee and Collateral Agent. (Incorporated by reference
from Exhibit 10.60 to the Form 10-K for the fiscal year ended June 30, 2001 filed on September 28,
2001.)

10.61 Letter Agreement dated July 1, 2000 between ABFS and Albert W. Mandia. (Incorporated by reference
to Exhibit 10.61 of Amendment No. 1 to the 2001 Form S-2 filed on October 5, 2001.)**

10.62 American Business Financial Services, Inc. 2001 Incentive Plan. (Incorporated by reference from
Exhibit 10.1 to the Form 10-Q for the quarter ended September 30, 2001 filed on November 14, 2001
(the "September 2001 Form 10-Q")).**

10.63 American Business Financial Services, Inc. 2001 Stock Incentive Plan Restricted Stock Agreement.
(Incorporated by reference from Exhibit 10.2 of the September 2001 Form 10-Q).**

10.64 American Business Financial Services, Inc. 2001 Executive Management Incentive Plan. (Incorporated
by reference from Exhibit 10.3 of the September 2001 Form 10-Q).**

159

Exhibit
Number Description
-------- -----------------------------------------------------------------------------------------------

10.65 December 2001 Amendment to Senior Secured Credit Agreement dated December 2001, among American
Business Financial Services, 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, Inc. and JPMorgan Chase Bank. (Incorporated by reference from
Exhibit 10.1 to Registrant's Quarterly Report on Form 10-Q for the quarter ended December 31, 2001
filed on February 14, 2002 (the "December 2001 Form 10-Q")).

10.66 Master Repurchase Agreement between Credit Suisse First Boston Mortgage Capital LLC and ABFS Repo
2001, Inc. (Incorporated by reference to Exhibit 10.2 from the December 2001 Form 10-Q.)

10.67 Master Contribution Agreement, dated as of November 16, 2001 by and between American Business
Financial Services, Inc. and ABFS Repo 2001, Inc. (Incorporated by reference from Exhibit 10.3 to
the December 2001 Form 10-Q.)

10.68 Custodial Agreement dated as of November 16, 2001, by and among ABFS Repo 2001, Inc., a Delaware
corporation; American Business Credit, Inc., a Pennsylvania corporation; JPMorgan Chase Bank, a
New York banking corporation; and Credit Suisse First Boston Mortgage Capital LLC. (Incorporated
by reference from Exhibit 10.4 to the December 2001 Form 10-Q).

10.69 Guaranty, dated as of November 16, 2001, by and among American Business Financial Services, Inc.,
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. (Incorporated by
reference from Exhibit 10.5 to the December 2001 Form 10-Q.)

10.70 Amendment No. 1 to the Indenture dated March 1, 2001 among Triple-A One Funding Corporation, ABFS
Mortgage Loan Warehouse Trust 2001-1 and JPMorgan Chase Bank. (Incorporated by reference from
Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31,
2002 filed on May 15, 2002 (the "March 2002 Form 10-Q".)

10.71 Amendment No. 2 to the Sale and Servicing Agreement dated as of March 1, 2001 by and among ABFS
OSO Inc., a Delaware corporation, as Depositor, ABFS Mortgage Loan Warehouse Trust 2001-1, a
Delaware business trust, as the Trust, American Business Financial Services, Inc., a Delaware
corporation, as Guarantor, American Business Credit, Inc., a Pennsylvania corporation, as
Servicer, JPMorgan Chase Bank f/k/a The Chase Manhattan Bank, a New York banking corporation, as
Indenture Trustee and as Collateral Agent and MBIA Insurance Corporation, a New York stock
insurance company, as Note Insurer. (Incorporated by reference from Exhibit 10.2 to the March 2002
Form 10-Q.)

10.72 3/02 Amended and Restated Senior Secured Credit Agreement dated as of March 15, 2002 among:
American Business Credit, Inc. and certain affiliates and JPMorgan Chase Bank, as Agent and as a
Lender. (Incorporated by reference from Exhibit 10.3 to the March 2002 Form 10-Q.)

10.73 $1.2 million Committed Line of Credit Note between American Business Financial Services, Inc. and
Firstrust Savings Bank dated January 18, 2002. (Incorporated by reference from Exhibit 10.4 to the
March 2002 Form 10-Q.)

10.74 American Business Financial Services, Inc. Dividend Reinvestment and Stock Purchase Plan.
(Incorporated by reference from Exhibit 10. 1 of the Registrant's Registration Statement on Form
S-3, No. 333-87574, filed on May 3, 2002.)

160

Exhibit
Number Description
-------- -----------------------------------------------------------------------------------------------

10.75 Pooling and Servicing Agreement, relating to ABFS Mortgage Loan Trust 2001-2, dated as of June 1,
2001, by and among Bear Stearns Asset Backed Securities, Inc., a Delaware corporation, American
Business Credit, Inc., a Pennsylvania corporation, and The Chase Manhattan Bank, a New York
banking corporation. (Incorporated by reference from Exhibit 10.75 of the Registrant's 2002 Form
S-2.)

10.76 Unaffiliated Seller's Agreement, dated June 1, 2001 by and among Bear Stearns Asset Backed
Securities, Inc., a Delaware corporation, ABFS 2001-2, Inc., a Delaware corporation, American
Business Credit, Inc., a Pennsylvania corporation, HomeAmerican Credit, Inc., d/b/a Upland
Mortgage, a Pennsylvania corporation, and American Business Mortgage Services, Inc., a New Jersey
corporation. (Incorporated by reference from Exhibit 10.76 of the Registrant's 2002 Form S-2.)

10.77 Pooling and Servicing Agreement, relating to ABFS Mortgage Loan Trust 2002-1, dated as of March 1,
2002, by and among Bear Stearns Asset Backed Securities, Inc., a Delaware corporation, American
Business Credit, Inc., a Pennsylvania corporation and JPMorgan Chase Bank, a New York banking
corporation. (Incorporated by reference from Exhibit 10.77 of the Registrant's 2002 Form S-2.)

10.78 Unaffiliated Seller's Agreement, dated as of March 1, 2002 by and among Bear Stearns Asset Backed
Securities, Inc., a Delaware corporation, ABFS 2002-1, Inc., a Delaware corporation, American
Business Credit, Inc., a Pennsylvania corporation, HomeAmerican Credit, Inc. d/b/a Upland
Mortgage, a Pennsylvania corporation and American Business Mortgage Services, Inc., a New Jersey
corporation. (Incorporated by reference from Exhibit 10.78 of the Registrant's 2002 Form S-2.)

10.79 Pooling and Services Agreement relating to ABFS Mortgage Loan Trust 2002-2, dated as of June 1,
2002, by and among Credit Suisse First Boston Mortgage Securities Corp., a Delaware corporation,
American Business Credit, Inc., a Pennsylvania corporation, and JP Morgan Chase Bank, a New York
corporation.

10.80 Unaffiliated Seller's Agreement, dated as of June 1, 2002, by and among Credit Suisse First Boston
Mortgage Securities Corp., a Delaware corporation, ABFS 2002-2, Inc., a Delaware corporation,
American Business Credit, Inc., a Pennsylvania corporation, and Home American Credit Inc., d/b/a
Upland Mortgage, a Pennsylvania corporation, and American Business Mortgage Services, Inc., a New
Jersey corporation.

10.81 Indemnification Agreement dated June 21, 2002, by ABFS 2002-2, Inc., American Business Credit,
Inc., Home American Credit, Inc. and American Business Mortgage Services, Inc. in favor of Credit
Suisse First Boston Mortgage Securities Corp. and Credit Suisse First Boston Corp.

10.82 First Amended and Restated Warehousing Credit and Security Agreement between American Business
Credit, Inc., a Pennsylvania corporation, American Business Mortgage Services, Inc., a New Jersey
corporation, HomeAmerican Credit, Inc., a Pennsylvania corporation, and Residential Funding
Corporation, a Delaware corporation dated as of July 1, 2002.

10.83 Promissory Note between American Business Credit, Inc., a Pennsylvania corporation, American
Business Mortgage Services, Inc., a New Jersey corporation, HomeAmerican Credit, Inc., a
Pennsylvania corporation, and Residential Funding Corporation, a Delaware corporation dated July
1, 2002.

161

Exhibit
Number Description
-------- -----------------------------------------------------------------------------------------------

10.84 Guaranty dated July 1, 2002 given by American Business Financial Services, Inc., a Delaware
corporation, to Residential Funding Corporation, a Delaware corporation.

11.1 Statement of Computation of Per Share Earnings (Included in Note 19 of the Notes to June 30, 2002
Consolidated Financial Statements).

12.1 Computation of Ratio of Earnings to Fixed Charges.

16.1 Letter regarding change in certifying accountants. (Incorporated by reference from Exhibit 16.1 of
the Registrant's Current Report on Form 8-K dated May 17, 2001.)

16.2 Letter regarding change in certifying accountants. (Incorporated by reference from Exhibit 16.2 of
the Registrant's Current Report on Form 8-K dated August 2, 2001.)

21.1 Subsidiaries of the Registrant

23.1 Consents of BDO Seidman, LLP.

99.1 Chief Executive Officer's Certificate

99.2 Chief Financial Officer's Certificate

- ----------------------------
** Indicates management contract or compensatory plan or arrangement.

(f) Reports on Form 8-K:

There were no Current Reports on Form 8-K filed during the quarter ended June
30, 2002.

162

SIGNATURES

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

AMERICAN BUSINESS FINANCIAL SERVICES, INC.

Date: September 18, 2002 By: /s/ Anthony J. Santilli
-----------------------------------------
Name: Anthony J. Santilli
Title: Chairman, President, Chief Executive
Officer, Chief Operating Officer and
Director (Duly Authorized Officer)

In accordance with the Exchange Act, this report has been signed
below by the following persons on behalf of the registrant and in the capacities
and on the dates indicated.

Signature Capacity Date
- -------------------------------- ----------------------------------------------- -------------------

/s/ Anthony J. Santilli
- --------------------------------
Anthony J. Santilli Chairman, President, Chief Executive Officer, September 18, 2002
Chief Operating Officer and Director (Principal
Executive and Operating Officer)
/s/ Albert W. Mandia
- --------------------------------
Albert W. Mandia Executive Vice President and Chief Financial September 18, 2002
Officer (Principal Financial and Accounting
Officer)
/s/ Leonard Becker
- --------------------------------
Leonard Becker Director September 18, 2002

- --------------------------------
Richard Kaufman Director September 18, 2002

- --------------------------------
Michael DeLuca Director September 18, 2002

/s/ Harold Sussman
- --------------------------------
Harold Sussman Director September 18, 2002

/s/ Jerome Miller
- --------------------------------
Jerome Miller Director September 18, 2002

163

CERTIFICATIONS

I, Anthony J. Santilli, certify that:

1. I have reviewed the annual report on Form 10-K of American Business Financial
Services, Inc;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered in this annual
report; and

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report.

Date: September 18, 2002 /s/ Anthony J. Santilli
---------------------------------------------
Anthony Santilli
Chairman, President, Chief Executive Officer,
Chief Operating Officer, and Director
(principal executive officer)

I, Albert W. Mandia, certify that:

1. I have reviewed the annual report on Form 10-K of American Business Financial
Services, Inc;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered in this annual
report; and

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report.

Date: September 18, 2002 /s/ Albert W. Mandia
--------------------------------------------
Albert W. Mandia
Executive Vice President and
Chief Financial Officer
(principal financial officer)

164

EXHIBIT INDEX
-------------

Exhibit
Number Description
-------- -----------------------------------------------------------------------------------------------

3.1 Amended and Restated Certificate of Incorporation (Incorporated by reference from Exhibit 3.1 of
the ABFS Annual Report on Form 10-KSB for the fiscal year ended June 30, 1996 filed on September
27, 1996, File No. 0-22472 (the "1996 Form 10-KSB").

3.2 Bylaws of ABFS (Incorporated by reference from Exhibit 3.2 of the Registration Statement on Form
SB-2 filed December 27, 1996, Registration Number 333-18919 (the "1996 Form SB-2")).

4.1 Form of Unsecured Investment Note (Incorporated by reference from Exhibit 4.1 of Amendment No. 1
to the Registration Statement on Form SB-2 filed April 29, 1994, Registration Number 33-76390).

4.2 Form of Unsecured Investment Note issued pursuant to Indenture with First Trust, National
Association, a national banking association (Incorporated by reference from Exhibit 4.5 of
Amendment No. One to the Registration Statement on Form SB-2 filed on December 14, 1995,
Registration Number 33-98636 (the "1995 Form SB-2")).

4.3 Form of Indenture by and between ABFS and First Trust, National Association, a national banking
association (Incorporated by reference from Exhibit 4.6 of the Registration Statement on Form SB-2
filed on October 26, 1995, Registration Number 33-98636).

4.4 Form of Indenture by and between ABFS and First Trust, National Association, a national banking
association (Incorporated by reference from Exhibit 4.4 of the Registration Statement on Form SB-2
filed March 28, 1997, Registration Number 333-24115 (the "1997 Form SB-2")).

4.5 Form of Unsecured Investment Note (Incorporated by reference from Exhibit 4.5 of the 1997 Form
SB-2).

4.6 Form of Indenture by and between ABFS and First Trust, National Association, a national banking
association (Incorporated by reference from Exhibit 4.4 of the Registration Statement on Form SB-2
filed May 23, 1997, Registration Number 333-24115).

4.7 Form of Unsecured Investment Note (Incorporated by reference from Exhibit 4.5 of the Registration
Statement on Form SB-2 filed May 23, 1997, Registration Number 333-24115).

4.8 Form of Indenture by and between ABFS and U.S. Bank Trust, National Association, a national
banking association (Incorporated by reference from Exhibit 4.8 of Registrant's Registration
Statement on Form S-2, No. 333-63859, filed September 21, 1998).

4.9 Form of Unsecured Investment Note (Incorporated by reference from Exhibit 4.9 of Registrant's
Registration Statement on Form S-2, No. 333-63859, filed September 21, 1998).

4.10 Form of Indenture by and between ABFS and U.S. Bank Trust National Association (Incorporated by
reference from Exhibit 4.10 of Registrant's Registration Statement on Form S-2, No. 333-87333,
filed September 17, 1999).

4.11 Form of Indenture by and between ABFS and U.S. Bank Trust National Association. (Incorporated by
reference from Exhibit 4.11 of Registrant's Registration Statement on Form S-2, No. 333-40248,
filed June 27, 2000.)

165

Exhibit
Number Description
-------- -----------------------------------------------------------------------------------------------

4.12 Form of Investment Note. (Incorporated by reference from Exhibit 4.12 of Registrant's Registration
Statement on Form S-2, No. 333-40248, filed June 27, 2000.)

4.13 Form of Indenture by and between ABFS and U.S. Bank Trust National Association. (Incorporated by
reference from Exhibit 4.13 of Registrant's Registration Statement on Form S-2, No. 333-63014,
filed on June 14, 2001.)

4.14 Form of Investment Note. (Incorporated by reference from Exhibit 4.14 of Registrant's Registration
Statement on Form S-2, No. 333-63014, filed on June 14, 2001.)

4.15 Form of Indenture by and between ABFS and U.S. Bank National Association. (Incorporated by
reference from Exhibit 4.15 of Registrant's Registration Statement on Form S-2, No. 333-90366,
filed on June 12, 2002 (the "2002 Form S-2").)

4.16 Form of Investment Note. (Incorporated by reference from Exhibit 4.16 of Registrant's 2002
Form S-2.)

10.1 Amended and Restated Stock Option Plan (Incorporated by reference from Exhibit 10.2 of ABFS'
Quarterly Report on Form 10-QSB from the quarter ended September 30, 1997, File No. 0-22474). **

10.2 Stock Option Award Agreement (Incorporated by reference from Exhibit 10.1 of the Registration
Statement on Form S-11 filed on February 26, 1993, Registration No. 33-59042 (the "Form S-11")).
**

10.3 1995 Stock Option Plan for Non-Employee Directors (Incorporated by reference from Exhibit 10.6 of
the Amendment No. 1 to the 1996 Form SB-2 filed on February 4, 1996 Registration No. 333-18919
(the "Amendment No. 1 to the 1996 Form SB-2")). **

10.4 Form of Option Award Agreement for Non-Employee Directors Plan for Formula Awards (Incorporated by
reference from Exhibit 10.13 of the 1996 Form 10-KSB). **

10.5 1997 Non-Employee Director Stock Option Plan (including form of Option Agreement) (Incorporated by
reference from Exhibit 10.1 of the September 30, 1997 Form 10-QSB). **

10.6 Lease dated January 7, 1994 by and between TCW Realty Fund IV Pennsylvania Trust and ABFS
(Incorporated by reference from Exhibit 10.9 of the Registration Statement on Form SB-2 filed
March 15, 1994, File No. 33-76390).

10.7 First Amendment to Agreement of Lease by and between TCW Realty Fund IV Pennsylvania Trust and
ABFS dated October 24, 1994. (Incorporated by reference from Exhibit 10.9 of ABFS' Annual Report
on Form 10-KSB for the fiscal year ended June 30, 1995 (the "1995 Form 10-KSB")).

10.8 Second Amendment to Agreement of Lease by and between TCW Realty Fund IV Pennsylvania Trust and
ABFS dated December 23, 1994 (Incorporated by reference from Exhibit 10.10 of the 1995 Form
10-KSB).

10.9 Third Amendment to Lease between TCW Realty Fund IV Pennsylvania Trust and ABFS dated July 25,
1995 (Incorporated by reference from Exhibit 10.11 of the 1995 Form 10-KSB).

166

Exhibit
Number Description
-------- -----------------------------------------------------------------------------------------------

10.10 Promissory Note of Anthony J. Santilli and Stock Pledge Agreement dated September 29, 1995
(Incorporated by reference from Exhibit 10.14 of the 1995 Form SB-2).

10.11 Form of Employment Agreement with Anthony J. Santilli, Beverly Santilli and Jeffrey M. Ruben
(Incorporated by reference from Exhibit 10.15 of the Amendment No. 1 to the 1996 Form SB-2). **

10.12 Amendment One to Anthony J. Santilli's Employment Agreement (Incorporated by reference from
Exhibit 10.3 of the September 30, 1997 Form 10-QSB). **

10.13 Amendment One to Beverly Santilli's Employment Agreement (Incorporated by reference from Exhibit
10.4 of the September 30, 1997 Form 10-QSB). **

10.14 Management Incentive Plan (Incorporated by reference from Exhibit 10.16 of the 1996 Form SB-2). **

10.15 Form of Option Award Agreement for Non-Employee Directors Plan for Non-Formula Awards
(Incorporated by reference from Exhibit 10.18 of the Amendment No. 1 to the 1996 Form SB-2). **

10.16 Form of Pooling and Servicing Agreement related to the Company's loan securitizations dated May 1,
1996, August 31, 1996, February 28, 1997, September 1, 1997, February 1, 1998, June 1, 1998, and
September 1, 1998 (Incorporated by reference from Exhibit 4.1 of ABFS' Quarterly Report on Form
10-QSB for the quarter ended March 31, 1995 (the "March 31, 1995 Form 10-QSB")).

10.17 Form of Sales and Contribution Agreement related to the Company's loan securitizations dated May
1, 1996 and September 27, 1996 (Incorporated by reference from Exhibit 4.1 of the March 31, 1995
Form 10-QSB).

10.18 Form of Indenture related to the Company's loan securitizations dated December 1, 1998, March 1,
1999, June 1, 1999, September 1, 1999, December 1, 1999, March 1, 2000, June 1, 2000, September 1,
2000, December 1, 2000, September 1, 2001 and December 1, 2001. (Incorporated by reference from
Exhibit 10.18 to the Registration Statement on Form S-2 filed June 14, 2001, Registration No.
333-63014 (the "2001 Form S-2")).

10.19 Form of Unaffiliated Seller's Agreement related to the Company's loan securitizations dated
December 1, 1998, March 1, 1999, June 1, 1999, September 1, 1999, December 1, 1999, March 1, 2000,
June 1, 2000, September 1, 2000, December 1, 2000, September 1, 2001 and December 1, 2001.
(Incorporated by reference from Exhibit 10.19 to the 2001 Form S-2).

10.20 Fourth Amendment to Lease between TCW Realty Fund IV Pennsylvania Trust and ABFS dated April 9,
1996 (Incorporated by reference from Exhibit 10.22 to the Amendment No. 1 to the 1997 SB-2).

10.21 Fifth Amendment to Lease between TCW Realty Fund IV Pennsylvania Trust and ABFS dated October 8,
1996 (Incorporated by reference from Exhibit 10.23 to the Amendment No. 1 to the 1997 SB-2).

10.22 Sixth Amendment to Lease between TCW Realty Fund IV Pennsylvania Trust and ABFS dated March 31,
1997 (Incorporated by reference from Exhibit 10.24 to the Amendment No. 1 to the 1997 SB-2).

167

Exhibit
Number Description
-------- -----------------------------------------------------------------------------------------------

10.23 Agreement for Purchase and Sale of Stock between Stanley L. Furst, Joel E. Furst and ABFS dated
October 27, 1997 (Incorporated by reference from ABFS' Current Report on Form 8-K dated October
27, 1997, File No. 0-22747).

10.24 Standard Form of Office Lease and Rider to Lease dated April 2, 1993 by and between 5 Becker Farm
Associates and NJMIC (Incorporated by reference from Exhibit 10.29 of Post-Effective Amendment No.
1 to the Registration Statement on Form SB-2 filed on January 22, 1998, Registration No.
333-2445).

10.25 First Amendment of Lease by and between 5 Becker Farm Associates and NJMIC dated July 27, 1994
(Incorporated by reference from Exhibit 10.30 of Post-Effective Amendment No. 1 to the
Registration Statement on Form SB-2 filed on January 22, 1998, Registration No. 333-2445).

10.26 Form of Debenture Note related to NJMIC's subordinated debt (Incorporated by reference from
Exhibit 10.31 of Post-Effective Amendment No. 1 to the Registration Statement on Form SB-2 filed
on January 22, 1998, Registration No. 333-2445).

10.27 Form of Standard Terms and Conditions of Servicing Agreement related to NJMIC's lease
securitizations dated May 1, 1995 and March 1, 1996. (Incorporated by reference from Exhibit 10.33
of Post-Effective Amendment No. 1 to the Registration Statement on Form SB-2 filed on January 22,
1998, Registration No. 333-2445).

10.28 Form of Standard Terms and Conditions of Lease Acquisition Agreement related to NJMIC's lease
securitizations dated May 1, 1995 and March 1, 1996 (Incorporated by reference from Exhibit 10.34
of Post-Effective Amendment No. 1 to the Registration Statement on Form SB-2 filed on January 22,
1998, Registration No. 333-2445).

10.29 Amended and Restated Specific Terms and Conditions of Servicing Agreement related to NJMIC's lease
securitization dated May 1, 1995 (Incorporated by reference from Exhibit 10.35 of Post-Effective
Amendment No. 1 to the Registration Statement on Form SB-2 filed on January 22, 1998, Registration
No. 333-2445).

10.30 Amended and Restated Specific Terms and Conditions of Lease Acquisition Agreement related to
NJMIC's lease securitization dated May 1, 1995 (Incorporated by reference from Exhibit 10.36 of
Post-Effective Amendment No. 1 to the Registration Statement on Form SB-2 filed on January 22,
1998, Registration No. 333-2445).

10.31 Specific Terms and Conditions of Servicing Agreement related to NJMIC's lease securitization dated
March 1, 1996 (Incorporated by reference from Exhibit 10.37 of Post-Effective Amendment No. 1 to
the Registration Statement on Form SB-2 filed on January 22, 1998, Registration No. 333-2445).

10.32 Specific Terms and Conditions of Lease Acquisition Agreement related to NJMIC's lease
securitization dated March 1, 1996 (Incorporated by reference from Exhibit 10.38 of Post-Effective
Amendment No. 1 to the Registration Statement on Form SB-2 filed on January 22, 1998, Registration
No. 333-2445).

168

Exhibit
Number Description
-------- -----------------------------------------------------------------------------------------------

10.33 Form of Indenture related to the lease-backed securitizations among ABFS Equipment Contract
Trust 1998-A, American Business Leasing, Inc. and The Chase Manhattan Bank dated June 1, 1998
and among ABFS Equipment Contract Trust 1999-A, American Business Leasing, Inc. and The Chase
Manhattan Bank dated June 1, 1999. (Incorporated by reference from Exhibit 10.39 of
Registrant's Registration Statement on Form S-2, No. 333-63859, filed September 21, 1998).

10.34 Form of Receivables Sale Agreement related to the lease-backed securitizations ABFS Equipment
Contract Trust 1998-A, dated June 1, 1998, and ABFS Equipment Contract Trust 1999-A, dated June 1,
1999. (Incorporated by reference from Exhibit 10.34 of the 2001 Form S-2).

10.35 Form of Unaffiliated Seller's Agreement related to the Company's home equity loan securitizations
dated March 27, 1997, September 29, 1997, February 1, 1998, June 1, 1998, and September 1, 1998
(Incorporated by reference from Exhibit 10.40 of Registrant's Registration Statement on Form S-2,
No. 333-63859, filed September 21, 1998).

10.36 $100.0 Million Receivables Purchase Agreement, dated September 30, 1998 among American Business
Lease Funding Corporation, American Business Leasing, Inc. and a syndicate of financial
institutions led by First Union Capital Markets and First Union National Bank, as liquidity agent.
(Incorporated by reference from Exhibit 10.1 of the Registrant's September 30, 1998 Form 10-Q).

10.37 Lease Agreement dated August 30, 1999 related to One Presidential Boulevard, Bala Cynwyd,
Pennsylvania (Incorporated by reference to Exhibit 10.1 of the Registrant's September 30, 1999
Form 10-Q).

10.38 Employment Agreement between American Business Financial Services, Inc. and Albert Mandia
(Incorporated by reference to Exhibit 10.2 of the Registrant's September 30, 1999 Form 10-Q). **

10.39 Change in Control Agreement between American Business Financial Services, Inc. and Albert Mandia
(Incorporated by reference to Exhibit 10.3 of the Registrant's September 30, 1999 Form 10-Q). **

10.40 American Business Financial Services, Inc. Amended and Restated 1999 Stock Option Plan
(Incorporated by reference from Exhibit 10.4 of the Registrant's Quarterly Report on Form 10-Q
from the quarter ended September 30, 2001 filed on November 14, 2001). **

10.41 Amendment No. 3 to Receivables Purchase Agreement, dated as of October 13, 1999 among American
Business Lease Funding Corporation, American Business Leasing, Inc. and a syndicate of financial
institutions led by First Union Securities, Inc. as Deal Agent (Incorporated by reference from
Exhibit 10.3 of the Registrant's December 31, 1999 Form 10-Q).

10.42 Amendment No. 4, dated as of November 12, 1999, to the Receivables Purchase Agreement, dated as of
September 30, 1998, among American Business Lease Funding Corporation, American Business Leasing,
Inc. and a syndicate of financial institutions led by First Union Securities, Inc. as Deal Agent
(Incorporated by reference from Exhibit 10.4 of the Registrant's December 31, 1999 Form 10-Q).

169

Exhibit
Number Description
-------- -----------------------------------------------------------------------------------------------

10.43 Amendment No. 5, dated as of November 29, 1999, to the Receivables Purchase Agreement, dated as of
September 30, 1998, among American Business Lease Funding Corporation, American Business Leasing,
Inc. and a syndicate of financial institutions led by First Union Securities, Inc. as Deal Agent
(Incorporated by reference from Exhibit 10.5 of the Registrant's December 31, 1999 Form 10-Q).

10.44 Amendment No. 6, dated as of December 14, 1999, to the Receivables Purchase Agreement, dated as of
September 30, 1998, among American Business Lease Funding Corporation, American Business Leasing,
Inc. and a syndicate of financial institutions led by First Union Securities, Inc. as Deal Agent
(Incorporated by reference from Exhibit 10.6 of the Registrant's December 31, 1999 Form 10-Q).

10.45 Seventh Amendment, dated as of December 31, 1999, to the Receivables Purchase Agreement, dated as
of September 30, 1998, among American Business Lease Funding Corporation, American Business
Leasing, Inc. and a syndicate of financial institutions led by First Union Securities, Inc. as
Deal Agent (Incorporated by reference from Exhibit 10.7 of the Registrant's December 31, 1999 Form
10-Q).

10.46 Eight Amendment, dated as of January 10, 2000, to the Receivables Purchase Agreement, dated as of
September 30, 1998, among American Business Lease Funding Corporation, American Business Leasing,
Inc. and a syndicate of financial institutions led by First Union Securities, Inc. as Deal Agent
(Incorporated by reference from Exhibit 10.8 of the Registrant's December 31, 1999 Form 10-Q).

10.47 Sale and Servicing Agreement, dated as of March 1, 2000, by and among Prudential Securities
Secured Financing Corporation, ABFS Mortgage Loan Trust 2000-1, Chase Bank of Texas, N.A., as
collateral agent, The Chase Manhattan Bank, as indenture trustee and American Business Credit,
Inc., as Servicer (Incorporated by reference from Exhibit 10.1 of the Registrant's March 31, 2000
Form 10-Q).

10.48 Warehousing Credit and Security Agreement dated as of May 5, 2000 between New Jersey Mortgage and
Investment Corp., American Business Credit, Inc., HomeAmerican Credit, Inc. d/b/a Upland Mortgage
and Residential Funding Corporation. (Incorporated by reference from Exhibit 10.63 of Registrant's
Registration Statement on Form S-2, No. 333-40248, filed June 27, 2000.)

10.49 Sale and Servicing Agreement dated as of July 6, 2000 by and among ABFS Greenmont, Inc., as
Depositor, HomeAmerican Credit, Inc., d/b/a Upland Mortgage, and New Jersey Mortgage and
Investment Corp., as Originators and Subservicers, ABFS Mortgage Loan Warehouse Trust 2000-2, as
Trust, American Business Credit, Inc., as an Originator and Servicer, American Business Financial
Services, Inc., as Sponsor, and The Chase Manhattan Bank, as Indenture Trustee and Collateral
Agent (Incorporated by reference from Exhibit 10.64 of the Registrant's Annual Report on Form 10-K
for the fiscal year ended June 30, 2000 (the "2000 Form 10-K")).

10.50 Indenture dated as of July 6, 2000 between ABFS Mortgage Loan Warehouse Trust 2000-2 and The Chase
Manhattan Bank. (Incorporated by reference from Exhibit 10.65 of the 2000 Form 10-K).

10.51 Employment Agreement by and between American Business Financial Services, Inc. and Milton Riseman
(Incorporated by reference from Exhibit 10.66 of the 2000 Form 10-K). **

170

Exhibit
Number Description
-------- -----------------------------------------------------------------------------------------------

10.52 Letter Employment Agreement by and between American Business Financial Services, Inc. and Ralph
Hall (Incorporated by reference from Exhibit 10.67 of the 2000 Form 10-K). **

10.53 Master Loan and Security Agreement, dated as of January 22, 2001, between American Business
Credit, Inc., HomeAmerican Credit, Inc., d/b/a Upland Mortgage, and American Business Mortgage
Services, Inc., f/k/a New Jersey Mortgage and Investment Corp., as Borrowers, American Business
Financial Services, Inc., as Guarantor, and Morgan Stanley Dean Witter Mortgage Capital Inc., as
Lender (Incorporated by reference from Exhibit 10.1 of Registrant's December 31, 2000 Form 10-Q).

10.54 Senior Secured Credit Agreement, among: American Business Credit, Inc. ("ABC"), a Pennsylvania
corporation, HomeAmerican Credit, Inc. ("HAC"), a Pennsylvania corporation doing business under
the assumed or fictitious name Upland Mortgage, and New Jersey Mortgage and Investment Corp., a
New Jersey corporation whose name will be changed in January 2001 to American Business Mortgage,
American Business Financial Services, Inc. (the "Parent"), and The Chase Manhattan Bank
(Incorporated by reference from Exhibit 10.2 of Registrant's December 31, 2000 Form 10-Q).

10.55 Sale and Servicing Agreement, dated as of March 1, 2001, by and among ABFS OSO, Inc., a Delaware
corporation, as the Depositor, American Business Credit, Inc., a Pennsylvania corporation,
HomeAmerican Credit, Inc., d/b/a Upland Mortgage, a Pennsylvania corporation, and American
Business Mortgage Services, Inc., a New Jersey corporation, as the Originators, American Business
Financial Services Inc., a Delaware corporation, as the Guarantor, ABFS Mortgage Loan Warehouse
Trust 2001-1, a Delaware business trust, as the Trust, American Business Credit, Inc., a
Pennsylvania corporation, as the Servicer, EMC Mortgage Corporation, a Delaware corporation, as
the Back-up Servicer, and The Chase Manhattan Bank, a New York banking corporation, as the
Indenture Trustee and the Collateral Agent. (Incorporated by reference from Exhibit 10.72 of
Registrant's Post-Effective Amendment No. One to the Registration Statement on Form S-2, No.
333-40248, filed April 5, 2001.)

10.56 Indenture, dated as of March 1, 2001, by and among Triple-A One Funding Corporation, a Delaware
corporation, as the Initial Purchaser, ABFS Mortgage Loan Warehouse Trust 2001-1, a Delaware
statutory business trust, and its successors and assigns, as the Trust or the Issuer, The Chase
Manhattan Bank, a New York banking corporation, and its successors, as the Indenture Trustee, and
American Business Financial Services, Inc., as the Guarantor. (Incorporated by reference from
Exhibit 10.73 of Registrant's Post-Effective Amendment No. One to the Registration Statement on
Form S-2, No. 333-40248, filed April 5, 2001.)

10.57 Insurance and Reimbursement Agreement, dated as of March 28, 2001, among MBIA Insurance
Corporation, a New York stock insurance company, ABFS Mortgage Loan Warehouse Trust 2001-1, a
Delaware business trust, as the Trust, ABFS OSO, Inc., a Delaware corporation, as the Depositor,
American Business Credit, Inc., a Pennsylvania corporation, as the Originator and the Servicer,
HomeAmerican Credit, Inc., a Pennsylvania corporation, d/b/a Upland Mortgage, as the Originator,
American Business Mortgage Services, Inc., a New Jersey corporation, as the Originator, American
Business Financial Services, Inc., a Delaware corporation, as the Guarantor, The Chase Manhattan
Bank, as the Indenture Trustee, and Triple-A One Funding Corporation, a Delaware corporation, as
the Initial Purchaser. (Incorporated by reference from Exhibit 10.74 of Registrant's
Post-Effective Amendment No. One to the Registration Statement on Form S-2, No. 333-40248, filed
April 5, 2001.)

171

Exhibit
Number Description
-------- -----------------------------------------------------------------------------------------------

10.58 Pooling and Servicing Agreement, relating to ABFS Mortgage Loan Trust 2001-1, dated as of March 1,
2001, by and among Morgan Stanley ABS Capital I Inc., a Delaware corporation, as the Depositor,
American Business Credit, Inc., a Pennsylvania corporation, as the Servicer, and The Chase
Manhattan Bank, a New York banking corporation, as the Trustee. (Incorporated by reference from
Exhibit 10.75 of Registrant's Post-Effective Amendment No. One to the Registration Statement on
Form S-2, No. 333-40248, filed April 5, 2001.)

10.59 Unaffiliated Seller's Agreement, dated as of March 1, 2001, by and among Morgan Stanley ABS
Capital I, Inc., a Delaware corporation, and its successors and assigns, as the Depositor, ABFS
2001-1, Inc., a Delaware corporation, and its successors, as the Unaffiliated Seller, American
Business Credit, Inc., a Pennsylvania corporation, HomeAmerican Credit, Inc., d/b/a Upland
Mortgage, a Pennsylvania corporation, and American Business Mortgage Services Inc., a New Jersey
corporation, as the Originators. (Incorporated by reference from Exhibit 10.76 of Registrant's
Post-Effective Amendment No. One to the Registration Statement on Form S-2, No. 333-40248, filed
April 5, 2001.)

10.60 Amended and Restated Sale and Servicing Agreement dated as of June 28, 2001 by and among ABFS
Greenmont, Inc., as Depositor, HomeAmerican Credit, Inc. d/b/a Upland Mortgage and American
Business Mortgage Services, Inc. f/k/a New Jersey Mortgage and Investment Corp., as Originators
and Subservicers, ABFS Mortgage Loan Warehouse Trust 2000-2, as Trust, American Business Credit,
Inc., as an Originator and Servicer, American Business Financial Services, Inc., as Sponsor and
The Chase Manhattan Bank, as Indenture Trustee and Collateral Agent. (Incorporated by reference
from Exhibit 10.60 to the Form 10-K for the fiscal year ended June 30, 2001 filed on September 28,
2001.)

10.61 Letter Agreement dated July 1, 2000 between ABFS and Albert W. Mandia. (Incorporated by reference
to Exhibit 10.61 of Amendment No. 1 to the 2001 Form S-2 filed on October 5, 2001.)**

10.62 American Business Financial Services, Inc. 2001 Incentive Plan. (Incorporated by reference from
Exhibit 10.1 to the Form 10-Q for the quarter ended September 30, 2001 filed on November 14, 2001
(the "September 2001 Form 10-Q")).**

10.63 American Business Financial Services, Inc. 2001 Stock Incentive Plan Restricted Stock Agreement.
(Incorporated by reference from Exhibit 10.2 of the September 2001 Form 10-Q).**

10.64 American Business Financial Services, Inc. 2001 Executive Management Incentive Plan. (Incorporated
by reference from Exhibit 10.3 of the September 2001 Form 10-Q).**

10.65 December 2001 Amendment to Senior Secured Credit Agreement dated December 2001, among American
Business Financial Services, 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, Inc. and JPMorgan Chase Bank. (Incorporated by reference from
Exhibit 10.1 to Registrant's Quarterly Report on Form 10-Q for the quarter ended December 31, 2001
filed on February 14, 2002 (the "December 2001 Form 10-Q")).

10.66 Master Repurchase Agreement between Credit Suisse First Boston Mortgage Capital LLC and ABFS Repo
2001, Inc. (Incorporated by reference to Exhibit 10.2 from the December 2001 Form 10-Q.)

172

Exhibit
Number Description
-------- -----------------------------------------------------------------------------------------------

10.67 Master Contribution Agreement, dated as of November 16, 2001 by and between American Business
Financial Services, Inc. and ABFS Repo 2001, Inc. (Incorporated by reference from Exhibit 10.3 to
the December 2001 Form 10-Q.)

10.68 Custodial Agreement dated as of November 16, 2001, by and among ABFS Repo 2001, Inc., a Delaware
corporation; American Business Credit, Inc., a Pennsylvania corporation; JPMorgan Chase Bank, a
New York banking corporation; and Credit Suisse First Boston Mortgage Capital LLC. (Incorporated
by reference from Exhibit 10.4 to the December 2001 Form 10-Q).

10.69 Guaranty, dated as of November 16, 2001, by and among American Business Financial Services, Inc.,
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. (Incorporated by
reference from Exhibit 10.5 to the December 2001 Form 10-Q.)

10.70 Amendment No. 1 to the Indenture dated March 1, 2001 among Triple-A One Funding Corporation, ABFS
Mortgage Loan Warehouse Trust 2001-1 and JPMorgan Chase Bank. (Incorporated by reference from
Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31,
2002 filed on May 15, 2002 (the "March 2002 Form 10-Q".)

10.71 Amendment No. 2 to the Sale and Servicing Agreement dated as of March 1, 2001 by and among ABFS
OSO Inc., a Delaware corporation, as Depositor, ABFS Mortgage Loan Warehouse Trust 2001-1, a
Delaware business trust, as the Trust, American Business Financial Services, Inc., a Delaware
corporation, as Guarantor, American Business Credit, Inc., a Pennsylvania corporation, as
Servicer, JPMorgan Chase Bank f/k/a The Chase Manhattan Bank, a New York banking corporation, as
Indenture Trustee and as Collateral Agent and MBIA Insurance Corporation, a New York stock
insurance company, as Note Insurer. (Incorporated by reference from Exhibit 10.2 to the March 2002
Form 10-Q.)

10.72 3/02 Amended and Restated Senior Secured Credit Agreement dated as of March 15, 2002 among:
American Business Credit, Inc. and certain affiliates and JPMorgan Chase Bank, as Agent and as a
Lender. (Incorporated by reference from Exhibit 10.3 to the March 2002 Form 10-Q.)

10.73 $1.2 million Committed Line of Credit Note between American Business Financial Services, Inc. and
Firstrust Savings Bank dated January 18, 2002. (Incorporated by reference from Exhibit 10.4 to the
March 2002 Form 10-Q.)

10.74 American Business Financial Services, Inc. Dividend Reinvestment and Stock Purchase Plan.
(Incorporated by reference from Exhibit 10. 1 of the Registrant's Registration Statement on Form
S-3, No. 333-87574, filed on May 3, 2002.)

10.75 Pooling and Servicing Agreement, relating to ABFS Mortgage Loan Trust 2001-2, dated as of June 1,
2001, by and among Bear Stearns Asset Backed Securities, Inc., a Delaware corporation, American
Business Credit, Inc., a Pennsylvania corporation, and The Chase Manhattan Bank, a New York
banking corporation. (Incorporated by reference from Exhibit 10.75 of the Registrant's 2002 Form
S-2.)

173

Exhibit
Number Description
-------- -----------------------------------------------------------------------------------------------

10.76 Unaffiliated Seller's Agreement, dated June 1, 2001 by and among Bear Stearns Asset Backed
Securities, Inc., a Delaware corporation, ABFS 2001-2, Inc., a Delaware corporation, American
Business Credit, Inc., a Pennsylvania corporation, HomeAmerican Credit, Inc., d/b/a Upland
Mortgage, a Pennsylvania corporation, and American Business Mortgage Services, Inc., a New Jersey
corporation. (Incorporated by reference from Exhibit 10.76 of the Registrant's 2002 Form S-2.)

10.77 Pooling and Servicing Agreement, relating to ABFS Mortgage Loan Trust 2002-1, dated as of March 1,
2002, by and among Bear Stearns Asset Backed Securities, Inc., a Delaware corporation, American
Business Credit, Inc., a Pennsylvania corporation and JPMorgan Chase Bank, a New York banking
corporation. (Incorporated by reference from Exhibit 10.77 of the Registrant's 2002 Form S-2.)

10.78 Unaffiliated Seller's Agreement, dated as of March 1, 2002 by and among Bear Stearns Asset Backed
Securities, Inc., a Delaware corporation, ABFS 2002-1, Inc., a Delaware corporation, American
Business Credit, Inc., a Pennsylvania corporation, HomeAmerican Credit, Inc. d/b/a Upland
Mortgage, a Pennsylvania corporation and American Business Mortgage Services, Inc., a New Jersey
corporation. (Incorporated by reference from Exhibit 10.78 of the Registrant's 2002 Form S-2.)

10.79 Pooling and Services Agreement relating to ABFS Mortgage Loan Trust 2002-2, dated as of June 1,
2002, by and among Credit Suisse First Boston Mortgage Securities Corp., a Delaware corporation,
American Business Credit, Inc., a Pennsylvania corporation, and JP Morgan Chase Bank, a New York
corporation.

10.80 Unaffiliated Seller's Agreement, dated as of June 1, 2002, by and among Credit Suisse First Boston
Mortgage Securities Corp., a Delaware corporation, ABFS 2002-2, Inc., a Delaware corporation,
American Business Credit, Inc., a Pennsylvania corporation, and Home American Credit Inc., d/b/a
Upland Mortgage, a Pennsylvania corporation, and American Business Mortgage Services, Inc., a New
Jersey corporation.

10.81 Indemnification Agreement dated June 21, 2002, by ABFS 2002-2, Inc., American Business Credit,
Inc., Home American Credit, Inc. and American Business Mortgage Services, Inc. in favor of Credit
Suisse First Boston Mortgage Securities Corp. and Credit Suisse First Boston Corp.

10.82 First Amended and Restated Warehousing Credit and Security Agreement between American Business
Credit, Inc., a Pennsylvania corporation, American Business Mortgage Services, Inc., a New Jersey
corporation, HomeAmerican Credit, Inc., a Pennsylvania corporation, and Residential Funding
Corporation, a Delaware corporation dated as of July 1, 2002.

10.83 Promissory Note between American Business Credit, Inc., a Pennsylvania corporation, American
Business Mortgage Services, Inc., a New Jersey corporation, HomeAmerican Credit, Inc., a
Pennsylvania corporation, and Residential Funding Corporation, a Delaware corporation dated July
1, 2002.

10.84 Guaranty dated July 1, 2002 given by American Business Financial Services, Inc., a Delaware
corporation, to Residential Funding Corporation, a Delaware corporation.

11.1 Statement of Computation of Per Share Earnings (Included in Note 19 of the Notes to June 30, 2002
Consolidated Financial Statements).

174

Exhibit
Number Description
-------- -----------------------------------------------------------------------------------------------

12.1 Computation of Ratio of Earnings to Fixed Charges.

16.1 Letter regarding change in certifying accountants. (Incorporated by reference from Exhibit 16.1 of
the Registrant's Current Report on Form 8-K dated May 17, 2001.)

16.2 Letter regarding change in certifying accountants. (Incorporated by reference from Exhibit 16.2 of
the Registrant's Current Report on Form 8-K dated August 2, 2001.)

21.1 Subsidiaries of the Registrant

23.1 Consents of BDO Seidman, LLP.

99.1 Chief Executive Officer's Certificate

99.2 Chief Financial Officer's Certificate

- ----------------------------
** Indicates management contract or compensatory plan or arrangement.

175