BUSINESS OF REGISTRANT. Franklin Credit Management Corporation ("FCMC", and together with its wholly-owned subsidiaries, the "Company") is a specialty consumer finance and asset management company primarily engaged in the acquisition, origination, servicing and resolution of performing, sub-performing and non-performing residential mortgage loans and residential real estate. The Company's portfolio consists primarily of non-conforming subprime assets. Mortgage loans are purchased at a discount relative to the aggregate unpaid principal balance of the loans and real estate is acquired in foreclosure or otherwise at a discount relative to the appraised value of the asset.

During 2001, the Company took advantage of market opportunities to increase its volume of loan acquisitions, pursuing a strategy of acquiring primarily higher coupon non-investment grade performing loans. Based on acquisition volume the Company's portfolio grew 36% to $360 million at December 31, 2001 as compared to $264 million at December 31, 2000. The Company expects to continue this strategy, as well as increase both the pace and amount of acquisitions, during 2002.

The Company believes it has built a servicing infrastructure and developed a servicing expertise, which permits the expansion of the Company's portfolio with a minimal increase in incremental costs. In addition, the Company believes that its ability to service and rehabilitate loans reduces its reliance on secondary marketing of portfolios and may provide an advantage as compared to competitors that rely on the secondary market as their primary strategy.

In January 1997, the Company formed a wholly owned subsidiary, Tribeca Lending Corp. ("Tribeca"), to originate primarily subprime residential mortgage loans made to individuals whose credit histories, income and other factors cause them to be classified as non-conforming borrowers. Management believes that lower credit quality borrowers present an opportunity for the Company to earn superior returns for the risks assumed. Tribeca provides first and second mortgages that are originated on a retail basis through marketing efforts that include utilization of the FCMC database. Tribeca is currently licensed as a mortgage banker in Alabama, California, Colorado, Connecticut, District of Columbia, Florida, Georgia, Kentucky, Illinois, Maryland, Massachusetts, Michigan, Missouri, Mississippi, New York, New Jersey, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, South Carolina, Tennessee, Texas, Virginia, Washington State, and West Virginia and is a Department of Housing and Urban Development FHA Title I and Title II approved lender. Tribeca originated loans are typically expected to be sold in the secondary market through whole-loan, servicing-released sales. Tribeca anticipates holding certain of its mortgages in its portfolio when it believes that the return from holding the mortgage, on a risk-adjusted basis, outweighs the return from selling the mortgage in the secondary market.

Since commencing operations in 1990, the Company has purchased, in aggregate, approximately 23,453 loans with a face value of approximately $738 million from primarily private institutions. The Company seeks to develop relationships with mortgage bankers, banks, and other specialty finance companies which may, through on-going purchase arrangements, provide additional sources of mortgage portfolios, individual mortgage assets and real estate assets.

During the year ended December 31, 2001, the Company purchased 3,599 loans with an aggregate face value of $184 million at an aggregate purchase price of $162 million or 88% of face value. As of December 31, 2001, the Company's portfolio included approximately 9,899 loans with an aggregate face

value of $332 million. An allowance for loan losses of approximately $34 million has been recorded against this face value. At December 31, 2001, approximately 94% of the Company's loan portfolio consisted of first mortgages, home equity/home improvement and second mortgages collateralized by real estate, 4% consisted of loans collateralized by other assets, and 2% consisted of unsecured loans. Although the Company attempts to collect on all loans in its portfolio, it is unlikely that the Company will be successful in collecting the full amount due for each loan in its portfolio. In addition, significant administrative and litigation expenses are often incurred in its collection efforts. See "Item 6. Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Item 7. Financial Statements".

The Company sells portfolios of performing, reperforming and nonperforming loans on a whole loan basis. During 2001, the Company sold 125 performing loans with an aggregate face value of $12.3 million, and 154 non-performing loans with an aggregate face value of $11.9 million. During 2000 the Company sold 94 performing loans with a face value of $8 million, and 39 non-performing loans with an aggregate face value of $5 million. The Company expects to continue this strategy when the sale of assets generates a greater cash flow than the risk adjusted net present value of cash flows from holding the assets. The Company does not generally retain the servicing rights on loans it sells.

As of December 31, 2001, the Company owed an aggregate of $314 million ("Senior Debt") to a bank (the "Senior Debt Lender"), which was incurred in connection with the purchase of, and is secured by, the Company's loan and OREO (Other Real Estate Owned) portfolios. In December 2001, the Company's Senior Debt agreement was amended. Under the amendment interest on Senior Debt accrues at variable rates based on the Federal Home Loan Bank of Cincinnati (FHLB) thirty (30) day advance rate plus an additional spread of 3.25%. For all other Senior Debt, acquired prior to March 1, 2000, interest will be based on the Prime Rate plus a margin of between 0% and 1.75%; approximately $68 million of total senior debt falls into this category. At December 31, 2001, the weighted average interest rate on Senior Debt was 5.25%. The Senior Debt Lender has advised the Company that as of December 31, 2001, there was $190 million of Senior Debt available to be used by the Company to purchase additional portfolios of mortgage loans.

The Company employs standardized in-house servicing procedures in the acquisition, origination, and collection of loans. The Company is divided into five operating departments, which are described below:

ACQUISITION DEPARTMENT. The Acquisition Department is divided into the Bulk purchase unit, which is responsible for acquisitions in excess of $1 million and a Flow Unit, which is responsible for acquisitions less than $1 million. The Acquisition Department identifies opportunities to purchase portfolios of mortgage loans, performs due diligence, and assists in the integration of the acquired assets into the Company's existing portfolio. The due diligence process, includes an analysis of the majority of loans in a portfolio, evaluating, among other things, lien position and value of collateral, debt-to-income ratios, the borrower's creditworthiness, employment stability, years of home ownership, education, credit bureau reports and mortgage payment history. The Acquisition Department conducts reviews of the loan files comprising the portfolio, and where appropriate performs an on-site evaluation of the seller's loan servicing department. This process provides the Company additional information critical to properly evaluating the portfolio. The information derived from due diligence is compared to the Company's historical statistical data base, and coupled with the Company's cumulative knowledge of the sub-prime mortgage industry enables the Acquisition Department to project a collection strategy and estimate the collectibility and timing of cash flows with respect to each loan. Based upon this information, the Acquisition Department prepares a bid, which meets the Company's established pricing and yield guidelines. When loans are acquired the Acquisition Department, with the assistance of the Management

Information Systems staff ("MIS"), monitors the electronic transfer of loan data into the Company's data management system.

SERVICING DEPARTMENT. The Servicing Department manages the Company's performing loans and seeks to provide quality customer service and secure full payment of the total face value and accrued charges, by monitoring monthly cash receipts, maintaining customer relations and, where appropriate, entering into extension and modification agreements. The Servicing Department is responsible for the maintenance of real estate tax and insurance escrow accounts. Servicing Department members continuously review and monitor the status of collections and individual loan payments in order to proactively identify and solve potential collection problems as well as identify potential loans for sale to third parties or refinance though Tribeca. Upon acquisition of loan portfolios, the Servicing Department: (i) issues introductory letters with information regarding the change of ownership of the loan, payment information and a toll-free Company information telephone number; (ii) conducts internal audits of newly acquired loans to identify and address any disputes or problems relating to the accounting for these loans; and (iii) issues an audit letter advising the borrower of the outstanding balance, last payment date and remaining term of the loan. As of December 31, 2001, the Servicing Department managed approximately 7,392 accounts, with a total principal outstanding balance of approximately $286 million.

LEGAL DEPARTMENT. The Legal Department manages and monitors the progress of defaulted loans requiring a legal action and the loss mitigation area, which negotiates legal settlement strategies. These loans are identified and referred by the Acquisition or Service Departments to the Legal Department, which prepares an analysis of each loan to determine a litigation or collection strategy to maximize the amount and speed of recovery and minimize costs. This strategy is based upon the individual borrowers' past payment history, current ability to pay, collateral lien position and current collateral value. The Legal Department sets the collection strategy, negotiates settlements, modification and forbearance agreements, and when appropriate retains outside counsel, manages their costs, and monitors ensuing litigation to insure the optimal recovery of the remaining principal and interest balance. The Legal Department monitors each defaulted loan through the foreclosure process, recovery of a money judgment or other settlement, and continues to monitor recovery of deficiency balances after a foreclosure has been completed. As of December 31, 2001, the Legal Department managed approximately 2,469 loans, with a total principal outstanding balance of approximately $74 million.

REAL ESTATE DEPARTMENT. The Real Estate Department manages all properties in order to preserve their value, realize rental income and insure that maximum returns are realized upon sale. The Real Estate Department is responsible for both the sale of OREO as well as for the management of OREO that are held as rental properties until such time as an economically beneficial sale can be arranged. As Of December 31, 2001, the Real Estate Department managed approximately 77 OREO properties, of which 16 were rental properties. The Company seeks to rent those properties for which it believes it can realize a higher return from such rental than from the value expected to be realized in the sale of the property.

TRIBECA LENDING. Tribeca provides first and second mortgages to individuals interested in purchasing or refinancing performing loans in the Company's existing database. Tribeca focuses on developing an array of niche products to fulfill needs such as high loan to value ("LTV"), sub-prime, non-conforming and loss mitigation second mortgages. Loans are originated by a retail sales force generates leads from the Company's database of serviced loans, and external sources. The majority of loans are expected to be warehoused until the inventory reaches the critical mass needed to maximize profits through bulk sales in the secondary market. Tribeca's staff processes, underwrites and closes all loans in its own name.

During 2001, Tribeca originated 386 mortgages with an aggregate principal balance of $41.5 million. During 2000, Tribeca originated 118 mortgages with an aggregate principal balance of $8.2 million.

FORMATION OF THE COMPANY. The Company was organized in Delaware in 1990, by Thomas J. Axon, and Frank B. Evans, Jr., for the purpose of acquiring consumer loan portfolios from the RTC and the FDIC. In March 1993, the Company completed the private placement of $2,000,000 of 15% Debentures (the "15% Debentures") and warrants for the purchase of the Company's Common Stock, the proceeds of which were used to acquire interests in loan portfolios and for operations. In December 1994, the Company merged with Miramar Resources, Inc., a public oil and gas company organized in Delaware that had emerged from bankruptcy proceedings on December 6, 1993.

COMPETITION. The Company faces significant competition in the acquisition of loan portfolios. Many of the Company's competitors have financial resources, acquisition departments and servicing capacity considerably larger than the Company's. Among the Company's largest competitors are Residential Funding Corporation and Bayview Financial Trading Group. Competition for acquisitions is generally based on price, reputation of the purchaser, funding capacity and timing. See "Item 6. Management's Discussion and Analysis of Financial Condition and Results of Operations: General - Cost of Funds".

The market for subprime loan origination is also highly competitive. Tribeca competes with savings banks, mortgage brokers, and mortgage bankers for the origination of mortgages. Among the largest of these competitors are Greenthal Realty Partner, New Century Mortgage, Amquest Mortgage, and Household Financial Service. Many of Tribeca's competitors possess greater financial resources, longer operating histories, and lower costs of capital than Tribeca. Competition for mortgage originations is based upon marketing efforts, loan processing capabilities, funding capacity, loan product desirability and the ability to sell the loans for a premium in the secondary market.

The Company also experiences competition from mortgage and finance companies in the sale of reperforming and newly originated loan portfolios. Important characteristics which impact competition in this market are price, loan-to-value, size of pools and the integrity of portfolio data.

CUSTOMERS. The Company's revenue is derived from interest and purchase discount recognized from the collection of loans, origination fees, rental income, gains recorded from the bulk sale of performing, non-performing and originated loans to banks and other financial institutions, and the result recorded from the sale of OREO. The Company's borrowers are a diverse population and no single borrower represents a significant portion of the Company's loans. The Company sells bulk portfolios of performing and non-performing loans, when such sales are economically beneficial to the Company. While the Company has previously been successful in marketing loan portfolios, which it has sold, and believes there are sufficient buyers for its products no assurance that the Company will be able to successfully market loan portfolios in the future.

SUPPLIERS. The Company acquires its loans through a variety of sources including private and public auctions, negotiated sales, ongoing purchase agreements, and joint-bids with other institutions. The supply of assets available for purchase by the Company is influenced by a number of factors including knowledge by the seller of the Company's interest in purchasing assets, the general economic climate, financial industry regulation, and new loan origination volume. While the Company continues to pursue additional sources for purchasing assets, there can be no assurance that existing and future sources will provide sufficient opportunities for the Company to purchase assets at favorable prices. Prior to 1996 the RTC, and the FDIC, represented the source of the majority of the Company's loan purchases. During the past year, several institutions supplied the Company with its portfolio acquisitions, as measured by

purchase price. The Company's sources of loan acquisition have varied from year to year and the Company expects that this will continue to be the case. During the year the Company continued to grow it's niche of purchasing small individual assets, or pools of assets under a million dollars from various sources. The Company believes that this market is under served and will open up additional opportunities to establish relationships with a continuous supply of loans that would not be available through periodic bulk purchases.

REGULATION. The Company's lending activities are subject to the Federal Truth-in-Lending Act ("TILA") and Regulation Z (including the Home Ownership and Equity Protection Act of 1994), the Equal Credit Opportunity Act of 1974, as amended ("ECOA") and Regulation B, the Fair Credit Reporting Act of 1970, as amended, the Real Estate Settlement Procedures Act of 1974, as amended ("RESPA") and Regulation X, the Home Mortgage Disclosure Act ("HMDA") and Regulation C, the Federal Debt Collection Practices Act and the Fair Housing Act, as well as other federal and state statutes and regulations affecting the Company's activities. Failure to comply with these requirements can lead to loss of approved status, demands for indemnification or mortgage loan repurchases, certain rights of recision for mortgage loans, class action lawsuits and administrative enforcement actions.

The Company is subject to the rules and regulations of, and examinations by, the Department of Housing and Urban Development ("HUD"), the Federal Trade Commission and other federal and state regulatory authorities with respect to originating, underwriting, funding, acquiring, selling and servicing mortgage loans. In addition, there are other federal, State and City statutes and regulations affecting such activities. These rules and regulations, among other things, impose licensing obligations on the Company, establish eligibility criteria for loans, prohibit discrimination, provide for inspection and appraisals of properties, require credit reports on prospective borrowers, regulate payment features and, in some cases, fix maximum interest rates, fees and loan amounts. The Company is required to submit annual audited financial statements to various governmental regulatory agencies that require the maintenance of specified net worth levels.

Regulation Z requires a written statement showing an annual percentage rate of finance charges and requires that other information be presented to debtors when consumer credit contracts are executed. RESPA requires written disclosure concerning settlement fees and charges, mortgage-servicing transfer practices and escrow or impound account practices. It also prohibits the payment or receipt of "kickbacks" or referral fees in connection with the performance of settlement services. The Fair Credit Reporting Act requires certain disclosures to applicants concerning information that is used as a basis for denial of credit. HMDA requires collection and reporting of statistical data concerning borrower demographics. ECOA prohibits discrimination against applicants with respect to any aspect of a credit transaction on the basis of sex, marital status, race, color, religion, national origin, age, derivation of income from public assistance programs, or the good faith exercise of a right under the Federal Consumer Credit Protection Act. The Fair Housing Act prohibits discrimination in mortgage lending on the basis of race, color, religion, sex, handicap, familial status or national origin.

The interest rates which the Company may charge on its loans are subject to Federal and State usury laws, which specify the maximum rate, which may be charged to consumers. In addition, both federal and state truth-in-lending regulations require that the Company disclose to its borrowers prior to execution of the loans all material terms and conditions of the financing, including the payment schedule and total obligation under the loans. The Company believes that it is in compliance in all-material respects with such regulations.

Failure to comply with any of the foregoing federal and state laws and regulations could result in the imposition of civil and criminal penalties on the Company, class action lawsuits and administrative enforcement actions. The Company does not expend material amounts of financial resources complying with federal, state or local laws and regulations.

ENVIRONMENTAL MATTERS. In the course of its business the Company has acquired, and may acquire in the future, properties securing loans that are in default. It is possible that hazardous substances or waste, contamination, pollutants or sources thereof could be discovered on such properties after acquisition by the Company. In such event, the Company would seek to have such loans repurchased by the prior seller, as this discovery would constitute a breach of contract. In rare cases, the Company may retain the property the Company may be required by law to remove such substances from the affected properties at its sole cost and expense. There can be no assurance that (i) the cost of such removal would not substantially exceed the value of the affected properties or the loans secured by the properties, (ii) the Company would have adequate remedies against the prior owner or other responsible parties, or (iii) the Company would not find it difficult or impossible to sell the affected properties either prior to or following such removal.

Employees. As of December 31, 2001, the Company had 97 full-time employees, including 7 in the Acquisitions Department, 23 in the Service Department, 8 in the Legal Department, 2 in the Real Estate Department, 7 in the Accounting Department, 5 in the MIS Department, and 3 in the Marketing Department, 6 clerical employees, 11 managerial employees, and 25 employees in Tribeca.

The Company has never experienced a material work stoppage or slowdown due to labor disagreements. The Company believes that its relations with all employees are satisfactory. None of the Company's employees are covered by a collective bargaining agreement.