<PAGE>   1
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

                                   (Mark One)

   [X]      Quarterly Report Pursuant to Section 13 or 15(d)
                    of the Securities Exchange Act of 1934
            For the quarterly period ended September 30, 1998

                                       or

   [ ]      Transition Report Pursuant to Section 13 or 15(d) of the
            Securities Exchange Act of 1934 For the transition period from
            _____to _____


                         COMMISSION FILE NUMBER 0-19604


                           AAMES FINANCIAL CORPORATION
             [Exact name of Registrant as specified in its charter]

<TABLE>
<S>                                                         <C>
          DELAWARE                                               95-4340340
          --------                                               ----------
[State or other jurisdiction of                              [I.R.S. Employer
incorporation or organization]                              Identification No.]
</TABLE>


               350 SOUTH GRAND AVENUE, LOS ANGELES, CA 90071-3459
               --------------------------------------------------
[Address of Registrant's principal executive offices including zip code]

                                 (323) 210-5000
                                 --------------
                         [Registrant's telephone number,
                              including area code]


                                   NO CHANGES
                                   ----------
              [Former name, former address and former fiscal year,
                          if changed since last report]

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

                          Yes    X                   No
                              -------                   -------

At November 4, 1998, Registrant had 31,015,893 shares of common stock
outstanding.



<PAGE>   2


                                TABLE OF CONTENTS



<TABLE>
<CAPTION>
ITEM NO.                                                                             PAGE NO.
--------                                                                             --------
<S>                                                                                  <C>
PART I - FINANCIAL INFORMATION

Item 1 - Financial Statements

         Consolidated Balance Sheets at September 30, 1998 and June 30, 1998                3
                                                                                
         Consolidated Statements of Income for the three months ended           
         September 30, 1998 and 1997                                                        4
                                                                                
         Consolidated Statements of Cash Flows for the three months ended       
         September 30, 1998 and 1997                                                        5
                                                                                
         Notes to Consolidated Financial Statements                                         6
                                                                             

Item 2 - Management's Discussion and Analysis of Financial Condition
             and Results of Operations                                                   7-41


PART II - OTHER INFORMATION

Item 1 - Legal Proceedings                                                                 41

Item 2 - Changes in Securities                                                             41

Item 3 - Defaults Upon Senior Securities                                                   41

Item 4 - Submission of Matters to a Vote of Security Holders                               41

Item 5 - Other Information                                                                 41

Item 6 - Exhibits and Reports on Form 8-K                                                  41

Signature Page                                                                             42
</TABLE>



                                        2

<PAGE>   3

                  AAMES FINANCIAL CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS




<TABLE>
<CAPTION>
                                                                      SEPTEMBER 30            JUNE 30,
                                                                          1998                  1998
                                                                      -------------        -------------
                                                                       (Unaudited)          (Audited)
<S>                                                                   <C>                  <C>        
ASSETS
Cash and cash equivalents                                             $   5,625,000        $  12,322,000
Loans held for sale, at lower of cost or market                         222,845,000          198,202,000
Accounts receivable                                                      58,488,000           51,072,000
Interest-only strips, estimated at fair market value                    378,475,000          359,600,000
Mortgage servicing rights                                                35,460,000           32,090,000
Residual assets                                                         210,581,000          194,561,000
Equipment and improvements, net                                          14,034,000           13,939,000
Prepaid and other                                                        15,876,000           17,020,000
                                                                      -------------        -------------
  Total assets                                                        $ 941,384,000        $ 878,806,000
                                                                      =============        =============

LIABILITIES AND STOCKHOLDERS'  EQUITY



Borrowings                                                              306,990,000          286,990,000
Revolving warehouse facilities                                          179,948,000          141,012,000
Accounts payable and accrued expenses                                    57,922,000           49,964,000
Income taxes payable                                                     51,461,000           55,437,000
                                                                      -------------        -------------
  Total liabilities                                                     596,321,000          533,403,000
                                                                      -------------        -------------


Stockholders' equity:
    Preferred Stock, par value $.001 per
       share, 1,000,000 shares authorized;
       none outstanding
    Common Stock, par value $.001 per share
       50,000,000 shares authorized;
       31,015,800 and 30,962,600 shares outstanding                          31,000               31,000
Additional paid-in capital                                              250,095,000          249,851,000
Retained earnings                                                        94,937,000           95,521,000
                                                                      -------------        -------------
  Total stockholders' equity                                            345,063,000          345,403,000
                                                                      -------------        -------------
  Total liabilities and stockholders' equity                          $ 941,384,000        $ 878,806,000
                                                                      =============        =============
</TABLE>

  The accompanying notes are an integral part of these financial statements.


                                       3

<PAGE>   4


                  AAMES FINANCIAL CORPORATION AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME
                                   (UNAUDITED)



<TABLE>
<CAPTION>
                                                              THREE MONTHS ENDED
                                                     ------------------------------------------
                                                     SEPTEMBER 30,                SEPTEMBER 30,
                                                         1998                         1997
                                                      -----------                 -------------
<S>                                                   <C>                         <C>        
Revenue:
        Gain on sale of loans                         $38,892,000                   $44,721,000
        Net unrealized gain on valuation
           of interest-only strips                      5,196,000                     5,029,000
        Commissions                                     9,988,000                     5,855,000
        Loan service                                    9,225,000                     9,782,000
        Fees and other                                 13,676,000                    12,525,000
                                                      -----------                   -----------
           Total revenue                              $76,977,000                   $77,912,000
                                                      -----------                   -----------

Expenses:
        Compensation and related expenses              23,794,000                    21,759,000
        Production expenses                            10,930,000                     5,797,000
        General and administrative expenses            13,389,000                     8,085,000
        Interest expense                               12,881,000                    10,098,000
        Provision for loan losses                      15,210,000                     8,570,000
                                                      -----------                   -----------
           Total expenses                              76,204,000                    54,309,000
                                                      -----------                   -----------


Income before income taxes                                773,000                    23,603,000
Provision for income taxes                                325,000                    10,522,000
                                                      -----------                   -----------
Net income                                            $   448,000                   $13,081,000
                                                      ===========                   ===========


Net income per share
               Basic                                        $0.01                         $0.47
                                                      ===========                   ===========
               Diluted                                      $0.01                         $0.40
                                                      ===========                   ===========
               Dividends per share                          $0.03                         $0.03
                                                      ===========                   ===========

Weighted average number
of shares outstanding
               Basic                                   30,977,000                    27,767,000
                                                      ===========                   ===========
               Diluted                                 31,265,000                    35,333,000
                                                      ===========                   ===========
</TABLE>

 The accompanying notes are an integral part of these financial statements.


                                       4

<PAGE>   5

                  AAMES FINANCIAL CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)


<TABLE>
<CAPTION>
                                                                                THREE MONTHS ENDED
                                                                                   SEPTEMBER 30,
                                                                       ------------------------------------
                                                                           1998                   1997
                                                                       ------------            ------------
<S>                                                                    <C>                     <C>         
Operating activities:
     Net income                                                        $    448,000            $ 13,081,000
     Adjustments to reconcile net income to net cash
         provided by (used in) operating activities:
         Provision for loan losses                                       15,210,000               8,570,000
         Net charge-offs for loans                                       (8,628,000)             (4,208,000)
         Depreciation and amortization                                    1,224,000                 899,000
         Deferred income taxes                                                    -               5,233,000
         Gain on sale of loans                                          (54,323,000)            (45,526,000)
         Net unrealized gain on valuation of interest-only strips        (5,196,000)             (5,029,000)
         Amortization of interest-only strip                             34,062,000              22,500,000
         Mortgage servicing rights originated                            (6,195,000)             (4,861,000)
         Mortgage servicing rights amortization                           2,824,000               1,914,000
         Changes in assets and liabilities:
             Loans originated or purchased                             (725,057,000)           (523,139,000)
             Proceeds from sale of loans                                700,414,000             562,410,000
             Decrease (Increase) in:
               Accounts receivable                                       (7,416,000)             (2,306,000)
               Prepaid and other                                          1,144,000              (1,202,000)
               Residual assets                                          (16,020,000)            (18,497,000)
             Increase (decrease) in:
               Accounts payable and accrued expenses                      7,958,000                 634,000
               Income taxes payable                                      (3,976,000)              4,110,000
                                                                       ------------            ------------
Net cash (used in) operating activities                                 (63,527,000)             14,583,000
                                                                       ------------            ------------

Investing activities:
      Purchases of property and equipment                                (1,319,000)               (981,000)
                                                                       ------------            ------------
Net cash (used in) investing activities                                  (1,319,000)               (981,000)
                                                                       ------------            ------------

Financing activities:
     Proceeds from sale of stock or exercise of options                     235,000                  62,000
     Proceeds from borrowing                                             20,000,000                       -
     Amounts outstanding under warehouse facilities                      38,936,000             (33,000,000)
     Dividends paid                                                      (1,022,000)               (916,000)
                                                                       ------------            ------------
Net cash provided by  (used in ) financing activities                    58,149,000             (33,854,000)
                                                                       ------------            ------------
Net increase (decrease) in cash and cash equivalents                     (6,697,000)            (20,252,000)
Cash and cash equivalents at beginning of period                         12,322,000              26,902,000
                                                                       ------------            ------------
Cash and cash equivalents at end of period                             $  5,625,000            $  6,650,000
                                                                       ============            ============
</TABLE>

The accompanying notes are an integral part of these financial statements.



                                       5

<PAGE>   6

                           AAMES FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1:  BASIS OF PRESENTATION

            The consolidated financial statements of Aames Financial
Corporation, a Delaware corporation, and its subsidiaries (collectively, the
"Company") included herein have been prepared by the Company, without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted.

            The consolidated financial statements include the accounts of the
Company and all of its subsidiaries after eliminating all significant
intercompany transactions and reflect all normal, recurring adjustments which
are, in the opinion of management, necessary to present a fair statement of the
results of operations of the Company for the interim periods reported. The
results of operations for the Company for the three months ended September 30,
1998 are not necessarily indicative of the results expected for the full fiscal
year.

NOTE 2:  RECLASSIFICATIONS

            Certain amounts related to fiscal year 1998 have been reclassified
to conform to the fiscal year 1999 presentation.

NOTE 3:  SUBSIDIARY GUARANTORS

            In October 1996, the Company completed an offering of its 9.125%
Senior Notes due 2003 which were guaranteed by all of the Company's operating
subsidiaries, all of which are wholly-owned. The guarantees are joint and
several, full, complete and unconditional. There are no restrictions on the
ability of such subsidiaries to transfer funds to the Company in the form of
cash dividends, loans or advances. The Company is a holding company with limited
assets or operations other than its investments in its subsidiaries. Separate
financial statements of the guarantors are not presented because the aggregate
total assets, net earnings and net equity of such subsidiaries are substantially
equivalent to the total assets, net earnings and net equity of the Company on a
consolidated basis.



                                        6

<PAGE>   7

ITEM 2.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 
            RESULTS OF OPERATIONS

            The following discussion and analysis of the financial condition and
results of operations of the Company should be read in conjunction with the
Company's Consolidated Financial Statements
included in Item 1 of this Form 10-Q.

SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION

            This Report contains statements that constitute "forward-looking
statements" within the meaning of Section 21E of the Exchange Act and Section
27A of the Securities Act. The words "expect," "estimate," "anticipate,"
"predict," "believe," and similar expressions and variations thereof are
intended to identify forward-looking statements. Such statements appear in a
number of places in this filing and include statements regarding the intent,
belief or current expectations of the Company, its directors or officers with
respect to, among other things (a) market conditions in the securitization,
capital, credit and whole loan markets and their future impact on the Company's
operations, (b) trends affecting the Company's liquidity position, including,
but not limited to, its access to warehouse and other credit facilities and its
ability to effect whole loan sales, (c) the impact of the various cash savings
plans and other restructuring strategies being considered by the Company, (d)
the Company's on-going search for a strategic partner, including its discussions
with a potential investor, (e) trends affecting the Company's financial
condition and results of operations, (f) the Company's plans to address the Year
2000 problem and (g) the Company's business and liquidity strategies. The
stockholders of the Company are cautioned not to put undue reliance on such
forward-looking statements. Such forward-looking statements are not guarantees
of future performance and involve risks and uncertainties. Actual results may
differ materially from those projected in this Report, for the reasons, among
others, discussed under the captions, "- Overview -- Market Conditions,"
"-Business Strategies," "- Recent Events," and "- Risk Factors." The Company
undertakes no obligation to publicly revise these forward-looking statements to
reflect events or circumstances that arise after the date hereof. Readers should
carefully review the factors referred to above and the other documents the
Company files from time to time with the Securities and Exchange Commission,
including the Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 1998, the quarterly reports on Form 10-Q filed by the Company during
the remainder of fiscal 1999, and any current reports on Form 8-K filed by the
Company.

OVERVIEW - MARKET CONDITIONS

            Global conditions in the capital and credit markets became
extraordinarily negative during the quarter ended September 30, 1998 and had an
adverse impact on the subprime home equity finance sector generally and the
Company specifically. These market pressures have negatively impacted the
Company's securitization gains, severely restricted the Company's access to
credit facilities, precluded access to public equity and debt markets and has
adversely affected the premiums received in the whole loan market.


                                        7

<PAGE>   8
 As identified in the Company's annual report on Form 10-K for the year ended
June 30, 1998, the Company's gain on sale from its $650 million securitization
completed in September 1998 was significantly reduced due to the loss on its
hedge position which was not offset by enhanced securitization execution. The
weak asset-backed market has continued through the date of this Report. The
deterioration in market conditions has also limited the availability of credit
facilities for the subprime home equity finance sector generally. See "-
Business Strategies," "- Liquidity" and "- Risk Factors -- Dependance on Funding
Sources." These market conditions have had a significant impact on the Company's
liquidity and financial condition. While the Company retains access to warehouse
and other credit facilities with borrowing limits aggregating in excess of $1.0
billion, changes in advance rates recently imposed by some of the lenders have
effectively limited the Company to a single $300 million committed warehouse
line. This line in the amount of $300 million expires on April 8, 1999. Although
this line is subject to renewal, the Company believes that without a change in
market conditions or a change in the Company's liquidity position, it is
unlikely that the renewal will be forthcoming. Although the Company is currently
seeking additional credit facilities, current market conditions have severely
hampered the Company's ability to obtain additional warehouse or residual
facilities. Further, the Company's liquidity constraints have been exacerbated
by the drop in home equity stock prices and the consequent unavailability of the
public equity and debt markets. The Company has attempted to address these
liquidity constraints by employing its previously disclosed strategy of
evaluating the market conditions, cash flow and profitability of the whole loan
sales relative to the securitization market and selling its loans in the whole
loan market. However, the weakness in the asset-backed market has caused other
subprime lenders to rely on the whole loan market for their loan disposition
strategy. This has created an abundance in the supply of loans in that market
which has resulted in lowering the prices paid (in some cases to prices lower
than the Company's cost of producing loans) and tightening the underwriting
guidelines applied by the whole loan purchasers. The Company has raised its
prices and modified its underwriting guidelines in response to these changes
which it believes will have the effect of decreasing loan production in the
current quarter. See "-Business Strategies".

            As a company that operates on a negative cash flow basis, the
Company depends on the securitization market, the credit and capital markets and
the whole loan market for its liquidity. See "- Liquidity." Without or with
limited access to the securitization, credit and capital markets and with the
decreased profitability of the whole loan market, the Company's liquidity
position is weak. If the Company cannot obtain additional credit lines secured
by its interest-only strips and residual assets or additional equity capital in
the next 30 days, it may have to engage in extraordinary transactions, such as
seeking subservicing arrangements that include the obligation to make servicing
advances or strategic asset sales, to provide the liquidity necessary to
operate, albeit on a much smaller scale. Management believes that any such
transaction would have a material adverse effect on the Company's results of
operations. However, there can be no assurance that any such extraordinary
transaction will be consummated. See "- Recent Events" and "- Risk Factors --
Strategic Alternatives." Furthermore, the Company's long-term liquidity position
depends on the availability of warehouse lines. Further, provisions in the
Company's primary warehouse line require the Company to maintain a certain level
of profitability over two consecutive quarters. The reduced profitability of the
first fiscal quarter combined with a potential loss in the second fiscal quarter
may violate these provisions. If the Company is unable to receive the necessary
waivers and is deemed to be in default under the line, the line could be
terminated. If the Company were unable to secure replacement lines, it would
have




                                       8
<PAGE>   9

to cease loan production operations which would negatively impact profitability
and jeopardize the Company's ability to continue to operate as a going concern.

BUSINESS STRATEGIES

            In light of current market conditions in the securitization markets,
the Company will not effect a securitization in its second quarter. In addition,
the Company may not be able to effect a securitization in the near future unless
market conditions improve dramatically. The Company, therefore, will be
dependent on the whole loan market for its loan disposition strategy. The
Company has negotiated a forward commitment with an affiliate of its primary
warehouse lender for the sale of its loans servicing released in the aggregate
amount of $500 million. This commitment expires on May 4, 1999. The Company
intends to continue to evaluate the overall market, and, as conditions improve,
utilize the securitization market. Further, in response to pressures in the
whole loan market, the Company increased its pricing and modified the
underwriting guidelines for its loan products. Although these changes will
reduce the Company's loan volume, they should improve the Company's ability to
maximize the returns of the whole loan market. Sales of home equity loans for
cash will mitigate the Company's negative cash flow from operations. Gains
associated with whole loan sales for cash are generally at levels lower the
those recognized when such loans are securitized. Further, prices currently
being paid by whole loan purchasers are less than the Company's cost of
production. Accordingly, sales of loans in the whole loan market are expected to
result in a loss in the quarter ended December 31, 1998. Additionally, so long
as the Company sells whole loans on a servicing released basis, the Company will
no longer grow the servicing portfolio.

            In response to current market conditions, the Company has
implemented and has under discussion certain cash savings plans. The Company has
eliminated the Company's quarterly cash dividend and during October 1998, the
Company ceased operations in the United Kingdom. Further, the Company has slowed
further expansion plans in its retail and broker office network. The Company is
in the process of analyzing its office network to determine whether closing less
profitable offices would be appropriate.

RECENT EVENTS

            The Company has retained Donaldson, Lufkin & Jenrette Securities
Corporation ("DLJ") as a financial advisor to develop strategic alternatives for
the Company. Since its engagement in June, 1997, DLJ has contacted a number of
major financial institutions to explore potential transactions with the Company.
Although a number of these institutions undertook detailed due diligence, none
have made an offer to effect a transaction. The Company is currently in
discussions with a private equity fund (the "Fund") concerning an up to $100
million equity investment in the Company. If such a transaction were to occur,
it would result in a substantial dilution to current stockholders at a price
well below the trading price of the Company's Common Stock on the New York Stock
Exchange at the time this Report was prepared. The Fund has not completed due
diligence, and the Company and the Fund have not entered into a definitive
agreement to consummate the transaction. The parties intend to proceed with due
diligence, subject to certain restrictions on the Company's ability to solicit,
negotiate or discuss alternative strategic transactions with third parties for a
period of time ending no later than December 31, 1998. In connection with these
discussions, the Company has agreed to reimburse the Fund for its out-of-pocket
expenses and the payment of certain fees (including a fee payable in certain
circumstances if the Company consummates an alternative strategic transaction.
Given the preliminary nature of the discussions and the conditions involved,
investors should not place undue reliance on the existence of these discussions.
There can be no assurance that the Fund will in fact make an offer to the
Company that the Company will find acceptable, that an agreement will be entered
into or that a transaction will in fact ever occur. Further, it is not expected
that a transaction with the Fund, even if an agreement were reached, could be
consummated in time to address the short term liquidity requirements of the
Company discussed in other parts of this Report. However, the Company believes
that the transaction contemplated would address the Company's long term
liquidity requirements, and the fact that the Company is in discussions with the
Fund may help facilitate a solution to the Company's short term liquidity
requirements. The Company does not ordinarily disclose developments with respect
to potential strategic transactions before agreements are entered into and
undertakes no obligation to update the disclosures contained herein with respect
to developments after the date hereof.


                                       9
<PAGE>   10

GENERAL

            The Company is a consumer finance company primarily engaged, through
its subsidiaries, in the business of originating, purchasing, selling, and
servicing home equity mortgage loans secured by single family residences. Upon
its formation in 1991, the Company acquired Aames Home Loan, a home equity
lender founded in 1954. In August 1996, the Company acquired One Stop Mortgage,
Inc. ("One Stop") which originates mortgage loans primarily through a broker
network. In late fiscal 1997, the Company began originating small commercial
loans on a limited basis that it currently sells on a whole loan basis servicing
released. In response to current market conditions, the Company has temporarily
curtailed the funding of commercial loan originations.

            The Company's principal market is borrowers whose financing needs
are not being met by traditional mortgage lenders for a variety of reasons,
including the need for specialized loan products or credit histories that may
limit such borrowers' access to credit. The Company believes these borrowers
continue to represent an underserved niche of the home equity loan market and
present an opportunity to earn a superior return for the risk assumed. The
residential mortgage loans originated and purchased by the Company, which
include fixed and adjustable rate loans, are generally used by borrowers to
consolidate indebtedness or to finance other consumer needs rather than to
purchase homes.

            The Company originates and purchases loans nationally through three
production channels - retail, broker and correspondent. For the quarter ended
September 30, 1998, the Company originated and purchased $725 million of
mortgage loans. The Company underwrites and appraises every loan it originates
and generally reviews appraisals and re-underwrites all loans it purchases. In
March 1998, the Company augmented its retail production by establishing One Stop
Retail Direct ("Retail Direct"). Unlike the Company's traditional retail
network, which uses a centralized marketing approach, Retail Direct uses a
decentralized marketing approach at the branch level.

            The Company retains the servicing on the loans it originates or
purchases and securitizes. The Company completed the transfer-in-house of $1.64
billion of loans previously subserviced for the Company by third parties in the
15 month period ending September 30, 1998. Of the Company's $4.44 billion
servicing portfolio, only 1.0% was subserviced by a third party at September 30,
1998. Of the Company's $3.40 billion servicing portfolio at September 30, 1997,
45% was subserviced by a third party at that date. See "- Expenses."

            As a fundamental part of its business and financing strategy, the
Company sells its loans to third party investors in the secondary market. The
Company maximizes opportunities in its loan


                                       10
<PAGE>   11
disposition transactions by disposing of its loan production through a
combination of securitizations and whole loan sales, depending on market
conditions, profitability and cash flows. For a discussion of the impact of
current market conditions on the Company's loan disposition strategies, see
"- Overview -- Market Conditions" and "- Business Strategies." The Company sold
$696 million and $543 million of loans in the quarter ending September 30, 1998
and 1997, respectively. 

            The following table presents the volume of loans originated and
purchased by the Company and the portfolio serviced by the Company during the
periods presented:

<TABLE>
<CAPTION>
                                                                           THREE MONTHS ENDED
                                                                              SEPTEMBER 30,
                                                                              -------------
                                                                              (IN THOUSANDS)
                                                                     1998                     1997
                                                                     ----                     ----
<S>                                                               <C>                     <C>       
Loans originated and purchased:
Broker Network(1)...........................................      $  350,801              $  261,834
Retail(2)...................................................         228,177                 133,546
Correspondent...............................................         146,079                 127,759
                                                                  ----------              ----------
Total.......................................................      $  725,057              $  523,139
                                                                   =========              ==========

Servicing portfolio at period end...........................      $4,441,000(3)           $3,402,000
</TABLE>

      (1) Includes commercial loans.
      (2) Includes loans brokered to institutional investors for 1997.
      (3) Includes $35.4 million of loans subserviced for others by the Company
          on an interim basis.

            Total originations increased 39% to $725 million for the quarter
ended September 30, 1998 from $523 million for the quarter ended September 30,
1997. The Company's core operations, retail and broker, increased 47% to $579
million from $395 million for the quarters ended September 30, 1998 and 1997,
respectively. The growth in core originations was due to the planned geographic
expansion in the retail and broker units. The Company's retail originations were
$228 million for the quarter ended September 30, 1998 compared to $134 million
for the quarter ended September 30, 1997. Origination volume for the broker
network reached $351 million for the quarter ended September 30, 1998 compared
to $262 million for the quarter ended September 30, 1997. Correspondent
purchases were $146 million for the quarter ended September 30, 1998 compared to
$128 million for the quarter ended September 30, 1997.

            At September 30, 1998, the Company operated 95 retail loan offices
serving 33 states (including the District of Columbia), compared to 60 offices
serving 26 states at September 30, 1997. At September 30, 1998, One Stop
operated 51 branches serving 46 states (including the District of Columbia),
compared to 40 branches serving 35 states at September 30, 1997. At September
30, 1998, Retail Direct operated 14 offices serving 10 states. See "- Business
Strategies."


                                       11
<PAGE>   12

CERTAIN ACCOUNTING CONSIDERATIONS

            Accounting for Securitizations. Although the Company's loan
disposition strategy relies on a combination of securitization transactions and
whole loan sales, the Company sold a significant portion of its loan production
in a securitization transaction during the quarter ended September 30, 1998. See
"- Business Strategies." In a securitization, the Company conveys loans that it
has originated or purchased to a separate entity (such as a trust or trust
estate) in exchange for cash proceeds and an interest in the loans securitized
represented by the non-cash gain on sale of loans. The cash proceeds are raised
through an offering of the pass-through certificates or bonds evidencing the
right to receive principal payments on the securitized loans and the interest
rate on the certificate balance or on the bonds. The non-cash gain on sale of
loans represents the difference between the proceeds (including premiums) from
the sale, net of related transaction costs, and the allocated carrying amount of
the loans sold. The allocated carrying amount is determined by allocating the
original amount of loans (including premiums paid on loans purchased) between
the portion sold and any retained interests (interest-only strip), based on
their relative fair values at the date of transfer. The interest-only strip
represents, over the estimated life of the loans, the present value of the
excess of the weighted average coupon on each pool of loans sold over the sum of
the interest rate paid to investors, the contractual servicing fee (currently
 .50%) and a monoline insurance fee, if any, adjusted for the reserve for loan
losses. Unrealized gains or losses include the recognition of an unrealized gain
or loss which represents the initial difference between the allocated carrying
amount and the fair market value of the interest-only strip at the date of sale.
Each agreement that the Company has entered into in connection with its
securitizations requires either the overcollateralization of the trust or the
establishment of a reserve account that may initially be funded by cash
deposited by the Company. The Company's interest in each overcollateralization
amount and reserve account is reflected on the Company's Consolidated Financial
Statements as "residual assets" and is recorded as of the time such amounts are
received by the trust.

            The Company determines the present value of the cash flows at the
time each securitization transaction closes using certain estimates made by
management at the time the loans are sold. These estimates include: (i) future
rate of prepayment; (ii) discount rate used to calculate present value; and
(iii) the provision for credit losses on loans sold. There can be no assurance
of the accuracy of management's estimates.

                  Rate of Prepayment. The estimated life of the securitized
                  loans depends on the assumed annual prepayment rate which is a
                  function of estimated voluntary (full and partial) and
                  involuntary (liquidations) prepayments. The prepayment rate
                  represents management's expectations of future prepayment
                  rates based on prior and expected loan performance, the type
                  of loans in the relevant pool (fixed or adjustable rate), the
                  production channel which produced the loan, prevailing
                  interest rates, the presence of prepayment penalties, the
                  loan-to-value ratios and the credit grades of the loans
                  included in the securitization and other industry data. The
                  rate of prepayment may be affected by a variety of economic
                  and other factors. Generally, a declining interest rate
                  environment will result in prepayments on higher credit grade
                  loans. For the


                                       12
<PAGE>   13

                  quarters ended September 30, 1998 and 1997, prepayment rates
                  held constant over the life of the pool used in the valuation
                  of the interest-only strips ranged from 26% to 30.5%. These
                  rates represent a weighted average loan life of approximately
                  2.6 to 3.8 for both periods. See "- Revenue" and "- Risk
                  Factors -- Prepayment Risk."

                  Discount Rate. In order to determine the fair value of the
                  cash flow from the interest-only strips, the Company discounts
                  the cash flows based upon rates prevalent in the market.
                  Currently, the Company uses the weighted average interest
                  rates of the loans included in the pool as the best estimate
                  available of an appropriate discount rate to determine fair
                  value.

                  Provision for Credit Losses on Loans Sold. In determining the
                  provision for credit losses on loans securitized, the Company
                  uses assumptions that it believes are reasonable based on
                  information from its prior securitizations and the
                  loan-to-value ratios and credit grades of the loans included
                  in the current securitizations. At September 30, 1998, the
                  Company had reserves of $56.8 million related to these credit
                  risks, or 1.4% of the outstanding balance of loans securitized
                  as of that date. Losses averaged .80% and .51% of the average
                  servicing portfolio for the quarters ended September 30, 1998
                  and 1997, respectively. The weighted average loan-to-value
                  ratio of the loans serviced by the Company was 72.8% as of
                  September 30, 1998.

            The interest-only strips are amortized over the expected lives of
the related loans and a corresponding reduction in servicing fee income is
recorded. The interest-only strips are recorded at estimated fair value and are
marked to market through a charge (or credit) to earnings. On a quarterly basis,
the Company reviews the fair value of the interest-only strips by analyzing its
prepayment and other assumptions in relation to its actual experience and
current rates of prepayment prevalent in the industry and may adjust its rate of
amortization or take a charge to earnings through an adjustment to net
unrealized gain or loss on valuation of interest-only strips. In its regular
quarterly review of its interest-only strip, the Company considered the
historical performance of its securitized loan pools, the recent prepayment
experience of those pools and the rate of amortization and determined that the
pools were performing in line with management's expectations and that no
adjustment was warranted at September 30, 1998. See "- Risk Factors -- Credit
Risk" and "- Revenue."

            Additionally, upon sale or securitization of servicing retained
mortgages, the Company capitalizes the fair value of originated mortgage
servicing rights ("OMSRs") assets separate from the loan. The Company determines
fair value based on the present value of estimated net future cash flows related
to servicing income. The cost allocated to the servicing rights is amortized
over the period of estimated net future servicing fee income. The Company
periodically reviews the valuation of capitalized servicing fees receivable.
This review is performed on a disaggregated basis for the predominant risk
characteristics of the underlying loans which are loan type and origination
date.


                                       13
<PAGE>   14

            New Accounting Developments. On October 23, 1998, the FASB issued a
draft guide, in question and answer format, entitled: "A Guide to Implementation
of Statement 125 on accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities, Questions and Answers, Second Edition" (the
"Q&A"). The Q&A indicates that two methods have arisen in practice for
accounting for credit enhancements, an item which the Company records as
"residual assets." These methods are the cash-in method and the cash-out method.
The cash-in method treats credit enhancements (pledged loans or cash) as
belonging to the Company. As such, these assets are recorded at their face value
as of the time they are received by the trust. The cash-out method treats credit
enhancements as assets owned by the related securitization trust. As such, these
assets are treated as part of the interest-only strip and are recorded at a
discounted value for the period between when collected by the trust and released
to the Company. The draft Q&A indicates that if no true market exists for credit
enhancement assets, the cash-out method should be used to measure the fair value
of credit enhancements. The draft Q&A remains subject to a comment period and
further amendments prior to becoming final.

            The Company has historically used the cash-in method to account for
its residual assets. It is the Company's belief that the cash-in method of
accounting is appropriate and has been an acceptable accounting convention used
by many in the subprime home equity finance sector and other industries. The
Company has not yet completed the calculations necessary to determine what the
ultimate impact of the cash-out method would have on the carrying value of its
residual assets or how the change would be recorded. At September 30, 1998, the
amount of residual assets included in the Company's balance sheet is $211
million. If the FASB does not modify its current position as reflected in the
draft guide to Financial Accounting Standard 125, the Company believes that a
change to the cash-out method will result in a material write-down of its
interest-only strips and a loss in the quarter in which the write-down is
recorded.

RESULTS OF OPERATIONS-THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997

            The following table sets forth information regarding the components
of the Company's revenue and expenses for the three months ended September 30,
1998 and 1997:


                                       14
<PAGE>   15

<TABLE>
<CAPTION>
                                                                                          THREE MONTHS ENDED
                                                                                             SEPTEMBER 30,
                                                                                          ------------------
                                                                                       1998                 1997
                                                                                       ----                 ----
                                                                                            (IN THOUSANDS)
<S>                                                                                 <C>                  <C>      
Revenue:
Gain on sale of loans..........................................................     $ 38,892             $  44,721
Net unrealized gain on valuation of interest-only
strips      ...................................................................        5,196                 5,029
Commissions....................................................................        9,988                 5,855
Loan service:
Servicing spread...............................................................        3,369                 6,170
Prepayment fees................................................................        3,500                 2,355
Late charge and other servicing fees...........................................        2,356                 1,257
Fees and other:
Closing     ...................................................................          618                   587
Appraisal......................................................................          947                   501
Underwriting...................................................................          453                   246
Interest income................................................................       11,514                11,031
Other       .................................................................            144                   160
                                                                                    --------             ---------
Total revenue..................................................................     $ 76,977             $  77,912
                                                                                    --------             ---------

Expenses:
Compensation and related expenses..............................................     $ 23,794             $  21,759
Production expenses............................................................       10,930                 5,797
General and administrative expenses............................................       13,389                 8,085
Interest expense...............................................................       12,881                10,098
Provision for loan losses......................................................       15,210                 8,570
                                                                                    --------             ---------
            Total expenses.....................................................     $ 76,204             $  54,309

Income (loss) before income taxes..............................................     $    773             $  23,603
Provision for income taxes.....................................................          325                10,522
                                                                                    --------             ---------

Net income (loss)..............................................................     $    448             $  13,081
                                                                                    ========             =========
</TABLE>

REVENUE

            Total revenue for the three months ended September 30, 1998 was
$77.0 million, down slightly from $77.9 million for the three months ended
September 30, 1997. The decrease in total revenue was due primarily to lower
gain on sale resulting from hedge losses and lower than historical spreads on
the Company's $650 million securitization closed in the quarter ended September
30, 1998. During the first fiscal quarter, the Company, as it had historically,
hedged its fixed rate pipeline by purchasing hedges against U.S. Treasuries. In
the past, changes in Treasury rates were generally reflected in the pass-through
rates of the fixed rate portion of the Company's securitization. During 1998's
first fiscal quarter, unsettled market conditions resulted in a loss on the
Company's hedge position without an equivalent benefit from reductions in the
pass-through rate paid on certificates sold in the fixed rate portion of the
Company's securitization. This decrease in gain on


                                       15
<PAGE>   16

sale was mitigated by significant increases in loan production in the Company's
core retail and broker production channels. See "- General."

            Gain on sale, which included $5.20 million of an unrealized gain on
valuation of interest-only strips related to loans sold, for the three months
ended September 30, 1998 was $44.1 million, a 12.9% decrease from $49.8 million
for the corresponding period last year. This decrease reflected the weakened
asset-backed market as a result of widening spreads on asset-backed bonds
relative to U.S. Treasury rates. The increase in the price of U.S. Treasuries
resulted in a hedge loss of $15.3 million (representing a $10.7 million loss
realized in the quarter ended September 30, 1998 and a valuation reserve of $4.6
million on contracts expiring on December 31, 1998) which reduced the reported
gain on sale. The Company securitized $650 million for the period ended
September 30, 1998 compared to $504 million for the period ended September 30,
1997. In light of current market conditions in the securitization markets, the
Company will not effect a securitization in its second quarter. In addition, the
Company may not be able to effect a securitization in the near future unless
market conditions improve dramatically. The Company, therefore, will be
dependent on the whole loan market for its loan disposition strategy. Gains
associated with whole loan sales for cash are generally at levels lower the
those recognized when such loans are securitized. Further, prices currently
being paid by whole loan purchasers are less than the Company's cost of
production. Accordingly, sales of loans in the whole loan market are expected to
result in a loss in the quarter ended December 31, 1998.

            Commissions earned on loan originations continue to be an important
component of total revenue, comprising 13.0% and 7.5% of total revenue for the
three months ended September 30, 1998 and 1997, respectively. Commission revenue
was $9.99 million for the three months ended September 30, 1998, a 70% increase
from $5.86 million for the three months ended September 30, 1997. The increase
in commissions for the three months ended September 30, 1998 was the result of
increased production in the Company's core units offset by lower commissions
earned on broker production. Both channels had significant increases in volume,
but competition in the broker market early in the quarter reduced points
collected at origination on this production.

            Loan service revenue decreased to $9.23 million in the quarter ended
September 30, 1998, from $9.78 million in the comparable quarter in 1997. Loan
service revenue consists of net servicing spread earned on the principal
balances of the loans in the Company's loan servicing portfolio, prepayment
fees, late charges and other fees retained by the Company in connection with the
servicing of loans reduced by the amortization of the interest-only strips and
OMSRs. The decrease in loan service revenues for the three months ended
September 30, 1998 was due primarily to smaller servicing spreads on the
Company's recent securitizations and increased amortization of the interest-only
strips and OMSRs in the current period.

            The Company's loan servicing portfolio at September 30, 1998
increased to $4.44 billion, up 31% from $3.40 billion at September 30, 1997. At
September 30, 1998, 99% of the Company's $4.44 billion servicing portfolio was
serviced in-house, compared to 55% at September 30, 1997. By calendar year-end,
the Company expects to eliminate the use of third party subservicers. See
"-Overview -- Market Conditions." Management believes that the business of loan
servicing provides


                                       16
<PAGE>   17
a more consistent revenue stream and is less cyclical than the business of loan
origination and purchasing. See "- Risk Factors -- Delinquencies and Losses in
Securitization Trusts; Right to Terminate Mortgage Servicing; Negative Impact on
Cash Flow" and "-- Strategic Alternatives."

            The Company has historically experienced delinquency rates that are
higher than those prevailing in its industry. With the Company's focus on higher
credit grade loans, delinquencies in the Company's securitized trusts are
expected to decrease in the future. See "- Revenue." Further, by selling loans
in the whole loan market on a servicing released basis, which the Company
intends to do for the near future, the Company will not be adding new loans to
the servicing portfolio. The seasoning of the old portfolio without the addition
of new loans could cause delinquency rates to rise. The delinquency rate for
September 30, 1998 was 15.6% compared to 14.0% at September 30, 1997.

            In some cases, the Company has determined that the proceeds from the
disposal of REO and foreclosed properties are maximized by accelerating
disposition of REO properties rather than holding such properties until market
conditions improve. During the three months ended September 30, 1998, losses
increased to $8.63 million from $4.16 million in the prior year period due
primarily to a loss mitigation strategy adopted during the 1997 fiscal year of
minimizing the REO holding period, thereby reducing carrying costs. However, the
Company saw the benefits of this strategy by the decrease in losses compared to
the previous calendar quarter. Losses were $9.81 million in the quarter ended
June 30, 1998. It is the Company's goal to reduce the REO holding period to
maximize the economics of liquidation transactions. Current loss levels have
also increased due to the seasoning of the lower credit grade loans purchased in
bulk and included in the Company's earlier trusts. The Company has reduced
significantly its bulk purchase program and the purchase in bulk of lower credit
grade loans. While the accelerated efforts to sell properties is expected to
have a short-term impact on loss levels, the seasoning of the lower credit grade
bulk portfolio may contribute to an increase in losses over time. The Company
increased its loan loss provision to $15.2 million representing 2.34% of the
securitized pool balances formed during three months ended September 30, 1998
from $8.57 million representing 1.70% of the pool balance for the three months
ended September 30, 1997. See "- Expenses." The following table sets forth
delinquency, foreclosure, loss and reserve information of the Company's
servicing portfolio for the periods indicated:


                                       17
<PAGE>   18

<TABLE>
<CAPTION>
                                                                      Year Ended                            Three Months Ended
                                                                        June 30,                                September 30,

                                                          1998            1997             1996             1998          1997
                                                          ----            ----             ----             ----          ----
                                                                                 (Dollars in thousands)
<S>                                                     <C>            <C>              <C>              <C>            <C>    
Percentage of dollar amount of delinquent loans
  to loans serviced (period end) (1)(2)(3)(4)

One month                                                    3.8%           4.3%             4.9%             3.9%          3.2%
Two months                                                   1.3%           1.9%             1.8%             1.3%          1.3%
Three or more months:
 Not foreclosed (4)(5)                                       9.0%           8.1%             8.0%             8.8%          8.3%
                                                                                                                  
 Foreclosed (6)                                              1.5%           1.0%             1.0%             1.6%          1.2%
                                                           -----          -----            -----            -----         -----
                                                                                                                  
    Total                                                   15.6%          15.3%            15.7%            15.6%         14.0%
                                                           =====          =====            =====            =====         =====
                                                                                                                  
Percentage of dollar amount of loans foreclosed to
  loans serviced (period end)(2)(4)                          2.0%           1.5%             1.1%            0.58%         0.58%
                                                                                                                  
Number of loans foreclosed(7)                              1,125            560              221              346           241   
                                                                                                                    
Principal amount of foreclosed loans(7)                 $ 84,613       $ 48,029         $ 14,349         $ 25,731       $19,744
Net losses on liquidations(8)                           $ 26,488       $  5,470         $    931         $  8,627       $ 4,160
One time charge-offs to reserve (9)                     $  6,000

Percentage of annualized losses to average
servicing portfolio(4)(10)                                  0.72%          0.24%            0.09%            0.80%         0.51%
Liquidation loss reserve (11)                           $ 50,262       $ 43,586         $ 10,300         $ 56,845       $47,948
</TABLE>

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

(1)         Delinquent loans are loans for which more than one payment is due.

(2)         The delinquency and foreclosure percentages are calculated on the
            basis of the total dollar amount of mortgage loans originated or
            purchased by the Company and, in each case, serviced by the Company,
            and any subservicers as of the end of the periods indicated.
            Percentages for fiscal year 1996 have not been restated to include
            delinquencies on loans originated by One Stop. The Company believes
            any such adjustment would not be material.

(3)         At September 30, 1998, the dollar volume of loans delinquent more
            than 90 days in the Company's eleven REMIC trusts, four of which
            also exceeded certain loss limits, formed in November 1992, June
            1993 and during the period from March 1995 to March 1997 exceeded
            the permitted limit in the related pooling and servicing agreements.
            See "-- Capital Resources" and "- Risk Factors -- Delinquencies and
            Losses in Securitization Trusts; Right to Terminate Mortgage
            Servicing; Negative Impact on Cash Flow."

(4)         The servicing portfolio used in the percentage calculations includes
            $35.4 million of loans subserviced for others by the Company on an
            interim basis at September 30, 1998.

(5)         Represents loans which are in foreclosure but as to which
            foreclosure proceedings have not concluded

(6)         Represents properties acquired following a foreclosure sale and
            still serviced by the Company.

(7)         The increase in the number of loans foreclosed and principal amount
            of loans foreclosed in the periods presented is due to the larger,
            more seasoned servicing portfolio.

(8)         Represents losses, net of gains, on foreclosed properties sold
            during the period indicated, excluding the one time charge referred
            to in footnote (9) below.

(9)         Represents a one time reversal of $6.0 million to the loss reserve
            recorded in March 1998 resulting from the Company's delay in
            recording information transferred from a third party servicer
            regarding loan payoffs. The amount was not sufficiently material to
            require adjustment of previously reported receivables.

(10)        Does not include the one time charge referred to in footnote (9)
            above.

(11)        Represents period end reserves for future liquidation losses.

            Fees and other revenue increased 9.6% to $13.7 million in the three
months ended September 30, 1998 compared to $12.5 million in the three months
ended September 30, 1997. Fees and other revenue consist of fees received by the
Company through its retail loan office network in the form of closing,
appraisal, underwriting and other fees, plus interest income. The dollar amount
of these fees increased in this period due to the larger number of mortgage
loans originated through the Company's retail loan office


                                       18
<PAGE>   19
 network. Interest income increased during the period due to interest earned on
larger amounts of loans held by the Company during the period from origination
or purchase of the loans until the date sold by the Company, offset by declining
weighted average interest rates on loans held. Fees and other revenues are
expected to decline in future periods as originations decrease as a result of
recent pricing and underwriting changes. Further, interest income will decline
due to the Company's reliance on whole loan sales which decreases the average
number of days loans are held by the Company prior to sale. See "-Overview --
Market Conditions" and "-Business Strategies."

EXPENSES

            Compensation and related expenses increased 9.2% to $23.8 million
from $21.8 million for the quarters ended September 30, 1998 and 1997,
respectively. This increase was primarily due to the continued effort to
accommodate increased origination volumes, core origination channel expansion
and increased in-house servicing. However, compensation and related expenses as
a percentage of total loan originations and purchases decreased to 3.3% from
4.2% for the quarters ended September 30, 1998 and 1997, respectively.
Offsetting increased compensation expenses was the waiver by Neil Kornswiet,
President of the Company, of his quarterly bonus due for the quarter ended
September 30, 1998 in the amount of $1.65 million.

            Production expenses, primarily advertising, outside appraisal costs,
travel and entertainment, and credit reporting fees, increased 88% to $10.9
million from $5.80 million for the quarters ended September 30, 1998 and 1997,
respectively. The increase in production expenses reflects the Company's retail
and broker network expansion and higher loan production volume. Production costs
as a percentage of total loan originations and purchases were 1.5% and 1.1% for
the three months ended September 30, 1998 and 1997, respectively.

            General and administrative expenses increased 66% to $13.4 million
from $8.09 million for the quarters ended September 30, 1998 and 1997,
respectively. The increase was primarily the result of increased occupancy and
communication costs related to the Company's core origination
channel expansion and increased origination volumes.

            Interest expense increased to $12.9 million from $10.1 million for
the quarters ended September 30, 1998 and 1997, respectively. The increase was
primarily the result of increased borrowings under various financing
arrangements used to fund the origination and purchase of mortgage loans prior
to their securitization or sale in the secondary market. Interest expense is
expected to increase in future periods due to the Company's continued reliance
on external financing to fund operations.

            The provision for loan losses increased to $15.2 million for the
three months ended September 30, 1998 from $8.57 million in the comparable
period in the prior year. The Company recorded provisions for loan losses of
2.34% and 1.70% of the loans securitized during the quarter ended September 30,
1998 and 1997, respectively. This increase reflects the greater amount of higher
credit grade loans with generally higher loan-to-value ratios originated during
this period, as well as the Company's assessment of provision requirements in
conjunction with its review of the adequacy of the reserve for loan losses.


                                       19
<PAGE>   20

INCOME TAXES

            The Company's provision for income taxes decreased to $325,000 for
the three months ended September 30, 1998 from $10.5 million for the three
months ended September 30, 1997. The effective tax rate decreased to 42% for the
quarter ended September 30, 1998 from 45% for the quarter ended September 30,
1997. This decrease was due primarily as a result of reduced pre-tax earnings in
the current period and non-deductible compensation expense paid during the
quarter ended September 30, 1997.

FINANCIAL CONDITION

            Loans Held for Sale. The Company's portfolio of loans held for sale
increased to $223 million at September 30, 1998, from $198 million at June 30,
1998. This increase is directly related to production volume and the size of the
Company's securitization and sales in the secondary market during the period.
During October 1998, the Company sold $125 million of the $223 million held for
sale at September 30, 1998 in a whole loan sale for cash. See "- Business
Strategies."

            Accounts Receivable. Accounts receivable, representing servicing
fees and advances and other receivables, increased to $58.5 million at September
30, 1998, from $51.1 million at June 30, 1998. The level of servicing related
advances, in any given period, are dependent on portfolio delinquencies and the
timing of cash collections.

            Interest-Only-Strips. Interest-only-strips increased to $378 million
at September 30, 1998 from $360 million at June 30, 1998 reflecting the non-cash
gain recognized on the Company's securitization in the quarter ended September
30, 1998, net of amortization.

            Mortgage Servicing Rights. Mortgage servicing rights increased to
$35.5 million at September 30, 1998 from $32.1 million at June 30, 1998
reflecting the capitalization of mortgage servicing rights on the securitization
in the quarter ended September 30, 1998, net of amortization.

            Residual Assets. Residual assets represent the overcollateralization
amounts and reserve accounts required to be maintained in connection with the
Company's securitizations and recorded at the time such amounts are received by
the trust. Residual assets include cash and mortgage loans in excess of the
principal amounts of the senior and subordinated certificates or bonds of the
securitization trusts. Residual assets increased to $211 million at September
30, 1998 from $195 million at June 30, 1998 due to the additional reserves or
overcollaterization required on the Company's securitization in the current
period and increased levels required on existing pools that exceeded certain
delinquency levels during the year. See "- Certain Accounting Considerations"
and "- Risk Factors -- Delinquencies and Losses in Securitization Trusts; Right
to Terminate Mortgage Servicing; Negative Impact on Cash Flow."

            Equipment and Improvements, Net. Equipment and improvements, net,
increased slightly to $14.0 million at September 30, 1998 from $13.9 million at
June 30, 1998.


                                       20
<PAGE>   21

            Prepaid and Other Assets. Prepaid and other assets decreased to
$15.9 million at September 30, 1998 from $17.0 million at June 30, 1998.

            Borrowings. Borrowings increased to $307 million at September 30,
1998 from $287 million at June 30, 1998 due to advances on the Company's
residual financing line completed in September 1998.

            Revolving Warehouse Facilities. Amounts outstanding under warehouse
facilities increased to $180 million at September 30, 1998 from $141 million at
June 30, 1998, primarily as a result of the increase in mortgage loans held for
sale and from the negative cash flow from operations during the fiscal quarter
ended September 30, 1998 and the resulting decrease in equity capital. Proceeds
from the Company's whole loan sales and securitizations are used to pay down the
Company's warehouse facilities.

LIQUIDITY

            The Company's operations require continued access to short-term and
long-term sources of cash. The Company's primary operating cash requirements
include the funding of: (i) mortgage loan originations and purchases prior to
their securitization and sale, (ii) fees, expenses and hedging costs, if any,
incurred in connection with the securitization and sale of loans, (iii) cash
reserve accounts or overcollateralization requirements in connection with the
securitization and sale of mortgage loans, (iv) tax payments due on recognition
of non-cash gain on sale other than in a debt-for-tax securitization structure,
(v) ongoing administrative and other operating expenses, (vi) interest and
principal payments under the Company's warehouse credit facilities and other
existing indebtedness, (vii) advances in connection with the Company's servicing
portfolio and (viii) costs associated with expanding the Company's core
production units.

            Historically, the Company funded its negative operating cash flow
principally through borrowings from financial institutions, sales of equity
securities and sales of senior and subordinated notes, among other sources. The
deterioration of the credit and capital markets has severely restricted the
Company's access to these markets. See "- Overview -- Market Conditions."
Although the Company plans to improve operating and financing cash flow and
reduce the need to access the public equity and debt markets by selling a
portion of its loan production in the whole loan market for cash and, subject to
easing debt covenants restricting the Company's ability to obtain financing
secured by its interest-only strips and residual assets, adding credit
facilities to finance interest-only strips and residual assets, the decreased
profitability of the whole loan market and the limited availability of the
credit markets may impair the execution of this strategy.

            Without or with limited access to the securitization, credit and
capital markets and with the decreased profitability of the whole loan market,
the Company's liquidity position is weak. If the Company cannot obtain
additional credit lines secured by its interest-only strips and residual assets
or additional equity capital in the next 30 days, it may have to engage in
extraordinary transactions, such as seeking subservicing arrangements that
include the obligation to make servicing advances


                                       21
<PAGE>   22

or strategic asset sales, to provide the liquidity necessary to operate, albeit
on a much smaller scale. Management believes that any such transaction would
have a material adverse effect on the Company's results of operations. However,
there can be no assurance that any such extraordinary transaction will be
consummated. See "- Recent Events" and "- Risk Factors -- Strategic
Alternatives." Furthermore, the Company's long-term liquidity position depends
on the availability of warehouse lines. While the Company retains access to
warehouse and other credit facilities with borrowing limits aggregating in
excess of $1.0 billion, changes in advance rates recently imposed by some of the
lenders have effectively limited the Company to a single $300 million committed
warehouse line. Its primary line in the amount of $300 million expires on April
8, 1999. Although this line is subject to renewal, the Company believes that
without a change in market conditions or a change in the Company's liquidity
position, it is unlikely that the renewal will be forthcoming. Further,
provisions in this line require the Company to maintain a certain level of
profitability over two consecutive quarters. The reduced profitability of the
first fiscal quarter combined with a potential loss in the second fiscal quarter
may violate these provisions. If the Company is unable to receive the necessary
waivers and is deemed to be in default under the line, the line could be
terminated. See "- Overview -- Market Conditions," "- Business Strategies," "-
Recent Events" and "- Risk Factors -- Dependance on Funding Sources" and "--
Strategic Alternatives." If the Company were unable to secure replacement lines,
it would have to cease loan production operations which would negatively impact
profitability and jeopardize the Company's ability to continue to operate as a
going concern.

            Under the terms of the Company's Indenture, dated October 21, 1996
with respect to its 9.125% Senior Notes due 2003, the Company's ability to incur
certain additional indebtedness, including residual financing, is limited to two
times stockholder equity. Warehouse indebtedness is not included in the
indebtedness limitations. Further, until the Company receives investment grade
ratings for the notes issued under the Indenture, the amount of residual
financing the Company may incur on its residuals and interest-only strips
allocable to post-September 1996 securitizations is limited to 75% of the
difference between such post-September 1996 residuals and $225 million. Under
one of the Company's warehouse lines, the Company is currently limited to $50
million of indebtedness secured by its interest-only strips. The Company was
initially unable to ease such restrictions, and due to current market conditions
and the Company's liquidity position, it is unlikely that the Company will be
successful in its further attempts to do so.

            Although the Company's loan disposition strategy consists of a
combination of securitizations and whole loan sales, whole loan sales will be
the sole disposition method during the second fiscal quarter. The Company will
continue to monitor market conditions and cash flow and will use the
securitization market when it deems it advisable. During the three months ended
September 30, 1998 and 1997, the Company securitized $650 million and $504
million of loans, respectively. In connection with securitization transactions
completed during these periods, the Company was required to provide credit
enhancements in the form of overcollateralization amounts or reserve accounts.
In addition, during the life of the related securitization trusts, the Company
subordinates a portion of the excess cash flow otherwise due it to the rights of
holders of senior interests as a credit enhancement to support the sale of the
senior interests. The terms of the securitization trusts generally require that
all excess cash flow otherwise payable to the Company during the early months of
the trusts be used to increase the cash reserve accounts or to repay the


                                       22
<PAGE>   23
 senior interests in order to increase overcollateralization to specified
maximums. Overcollateralization requirements increase up to approximately twice
the level otherwise required when the delinquency rates exceed the specified
limit. As of September 30, 1998, the Company was required to maintain an
additional $88.7 million in overcollateralization amounts as a result of the
level of its delinquency rates above that which would have been required to be
maintained if the applicable delinquency rates had been below the specified
limit. Of this amount, at September 30, 1998, $61.2 million remains to be added
to the overcollateralization amounts from future spread income on the loans held
by these trusts. See "- Risk Factors -- Delinquencies and Losses in
Securitization Trusts; Right to Terminate Mortgage Servicing; Negative Impact on
Cash Flow."

            In the Company's securitizations structured as a REMIC, the
recognition of non-cash gain on sale has a negative impact on the cash flow of
the Company since the Company is required to pay federal and state taxes on a
portion of these amounts in the period recognized although it does not receive
the cash representing the gain until later periods as the related service fees
are collected and applicable reserve or overcollateralization requirements are
met.

            The Company also incurs certain expenses in connection with
securitizations, including underwriting fees, credit enhancement fees, trustee
fees, hedge costs, and other costs, which in the three months ended September
30, 1998 approximated 2.07% of the principal amount of the securitized mortgage
loans.

CAPITAL RESOURCES

            The Company has historically financed its operating cash
requirements primarily through (i) warehouse facilities and working capital
lines of credit, (ii) the securitization and sale of mortgage loans, and (iii)
the issuance of debt and equity securities. Current market conditions have
severely limited the Company's ability to access the credit, securitization and
capital markets. See "- Overview -- Market Conditions."

            Warehouse Facilities. At September 30, 1998, the Company had three
warehouse facilities in place. One facility is a warehouse line and working
capital line of credit with a syndicate of ten commercial banks. This facility
provides for a maximum borrowing amount of $400 million ($100 million of which
is an uncommitted bid facility which in the current market conditions is no
longer available to the Company) and is secured by loans originated and
purchased by the Company as well as certain servicing receivables. The warehouse
line bears an interest rate of either 1.05% over the federal funds rate or .80%
over one-month LIBOR and the working capital line bears an interest rate of
either 1.60% over the federal funds rate or 1.35% over the one month LIBOR.
These rates are subject to increase based on the Company's consolidated
leverage, and there can be no assurances that rates will remain stable in the
near future. This line is currently scheduled to expire on April 8, 1999.
Although this line is subject to renewal, the Company believes that without a
change in market conditions or a change in the Company's liquidity position, it
is unlikely that the renewal will be forthcoming. Further, provisions in this
line require the Company to maintain a certain level of profitability over two
consecutive quarters. The reduced profitability of the first


                                       23
<PAGE>   24

fiscal quarter combined with a potential loss in the second fiscal quarter may
violate these provisions. See "- Business Strategies." If the Company is unable
to receive the necessary waivers and is deemed to be in default under the line,
the line would be terminated. There is an additional warehouse line of credit
from an investment bank that is secured by loans originated and purchased by the
Company. This line of $300 million bears interest at a rate of .65% over
one-month LIBOR and expires on March 11, 1999. The third line is from a
commercial bank with a maximum borrowing capacity of $300 million at a rate of
 .25% over one-month LIBOR, subject to quarterly revisions, which expires on
February 15, 1999. Due to current market conditions, the advance rates on the
latter two lines have been adjusted down to the point where it is no longer
feasible for the Company to use either of them. There can be no assurance that
the Company will be able to obtain warehouse facilities with higher advance
rates or maintain these or similar facilities in the future. The Company will
continue to require short-term warehouse facilities. The levels of short-term
warehouse facilities required is dependent on production volume levels and the
timing of loan sales in the secondary market. If the Company is unable to renew
or replace existing warehouse lines, it would have to cease loan production
operations which would negatively impact profitability and jeopardize the
Company's ability to continue to operate as a going concern.

            In September 1998, the Company entered into a revolving line of
credit with a maximum borrowing capacity of $50 million secured by certain of
the Company's interest-only strips. The collateral is subject to mark-to-market
valuation, or may otherwise be deemed unacceptable, in the sole discretion of
the lender. To the extent such provisions result in a shortfall, the line
provides for the term out of the loan or the delivery of additional collateral
to bring the line back to compliance. This line had $20 million outstanding at
September 30, 1998 and expires on September 3, 1999. Additional borrowings under
this line are dependent upon the Company securitizing its loans. See "- Business
Strategies" and "- Risk Factors -- Dependence on Funding Sources."

            Additionally, in September 1998, the Company entered into a
repurchase facility secured by multifamily residential and commercial mortgage
loans. The repurchase facility provides for a maximum borrowing amount of $50
million. The repurchase facility bears an interest rate for each transaction
mutually agreed upon by the Company and the financial institution at the time of
the transaction. The repurchase facility had no outstanding balance at September
30, 1998 and expires on September 9, 1999. See "- General."

            Loan Sales. The Company's ability to sell loans originated and
purchased by it in the secondary market is necessary to generate cash proceeds
to pay down its warehouse facilities and fund new originations and purchases.
The ability of the Company to sell loans in the secondary market on acceptable
terms is essential for the continuation of the Company's loan origination and
purchase operations. Current market conditions have restricted access to the
asset-backed market and adversely impacted the availability of, and pricing in,
the whole loan market. See "- Overview -- Market Conditions," "- Business
Strategies" and "- Risk Factors -- Risk of Adverse Changes in the Secondary
Market for Mortgage Loans."


                                       24
<PAGE>   25

            Other Capital Resources. The Company has historically funded
negative cash flow primarily from the sale of its equity and debt securities.
However, current market conditions have restricted the Company's ability to
access the public equity and debt markets. In December 1991, July 1993, June
1995, October 1996 and April 1998, the Company effected public offerings of its
common stock with net proceeds to the Company aggregating $217 million. In March
1995, the Company completed an offering of its 10.5% Senior Notes due 2002 with
net proceeds to the Company of $22.2 million. In February 1996, the Company
completed an offering of its 5.5% Convertible Subordinated Debentures due 2006
with net proceeds to the Company of $112 million. In October 1996, the Company
completed an offering of its 9.125% Senior Notes due 2003 with net proceeds to
the Company of $145 million. Under the agreements relating to these debt
issuances, the Company is required to comply with various operating and
financial covenants including covenants which may restrict the Company's ability
to pay certain distributions, including dividends. At September 30, 1998, the
Company had available $60.0 million for the payment of such distributions under
the most restrictive of such covenants.

            On April 27, 1998, the Company issued 2.78 million shares of its
common stock, or 9.9% of the Company's outstanding shares, to private entities
controlled by Ronald Perelman and Gerald Ford, at an aggregate purchase price of
approximately $38 million. The Company also issued warrants to these entities to
purchase an aggregate additional 9.9% of the Company's stock at an exercise
price of $17.2031 (125% of the purchase price of the stock), subject to
customary anti-dilution provisions. The warrants are exercisable only upon a
change in control of the Company and expire in three years.

            The Company had cash and cash equivalents of approximately $5.62
million at September 30, 1998. See "- Risk Factors -- Negative Cash Flow and
Capital Needs."

YEAR 2000 COMPLIANCE AND TECHNOLOGICAL ENHANCEMENT

            Readers are cautioned that forward-looking statements contained in
this Year 2000 disclosure should be read in conjunction with the Company's
disclosures under the heading, "Special Note on Forward-looking Statements,"
beginning on page 7 above. Readers should understand that the dates on which the
Company believes the Year 2000 project will be completed are based upon
management's best estimates, which were derived utilizing numerous assumptions
of future events, including the availability of certain resources, third-party
modification plans and other factors. However, there can be no guarantee that
these estimates will be achieved, or that there will not be a delay in, or
increased costs associated with, the implementation of the Company's Year 2000
Compliance Project. A delay in specific factors that might cause differences
between the estimates and actual results include, but are not limited to, the
availability and cost of personnel trained in these areas, the ability of
locating correct all relevant computer code, timely responses to and corrections
by third parties and suppliers, the ability to implement interfaces between the
new systems and the systems not being replaced, and similar uncertainties. Due
to the general uncertainty inherent in the Year 2000 problem, resulting in part
from the uncertainty of the Year 2000 readiness of third parties and the
inter-connection of national and international


                                       25
<PAGE>   26

businesses, the Company cannot ensure that its ability to timely and cost
effectively resolve problems associated with the Year 2000 issue that may effect
its operations and business, or expose
it to third party liability.

            The Company's year 2000 compliance program consists of four
phases--inventory, risk assessment process, corrective action and testing. The
Company has completed the inventory phase which included the identification of
all computer hardware and software, electronic data exchanges, operating
systems, communications systems and non-information items. As a corollary to the
inventory phase, the Company has made inquiries of its significant vendors as to
their year 2000 readiness.

            The Company has also completed the risk assessment process of
assigning risk factors to each system used by the Company to determine the
priority and resource allocation of its year 2000 efforts. The Company expects
to complete the corrective action and testing phases with respect to mission
critical systems by June 1999. The Company will complete any remaining testing
and compliance by the end of 1999.

            Costs to Address the Company's Year 2000 Issues. The Company
anticipates that costs relating to year 2000 issues are not expected to be
material since the Company primarily relies on third party software for its
primary information technology systems and does not require significant internal
reprogramming resources to change program codes. The Company is in the process
of converting or is scheduled to convert its major computer systems, including
the loan origination system and the financial system from in-house to
vendor-supported systems. These conversions were planned to upgrade and improve
functionality rather than as a result of year 2000 issues.

            Risks of the Company's Year 2000 Issues. The most significant risk
associated with the Company's year 2000 compliance would result from the loss of
the Company's vendor supported servicing system and the inability to maintain
the ongoing loan service operations, including payment processing, collections
and investor remittance processing. The Company's servicing platform uses
software supplied by a subsidiary of Fiserv, Inc. To reduce the risk of
non-compliance, the Company intends to rely on the vendor's representations
regarding year 2000 compliance, the Company's testing efforts, as well as the
testing results of other companies that use the same software. The testing and
other costs relating to the Company's year 2000 compliance program are not
expected to be material.

            Another year 2000 risk relates to the Company's vendor supported
loan origination system. In the event of year 2000 issues with respect to the
software used with such system (also supplied by a subsidiary of Fiserv, Inc.),
the Company's ability to originate loans would be diminished and may result in
reduced loan production until the problem is resolved. The Company intends to
rely on the vendor's assurances and Company testing to minimize the risk of
non-compliance of this system.


                                       26
<PAGE>   27

            Contingency Plans. The Company has no reason to believe that its
most significant systems will not be year 2000 compliant. If testing indicates
any of the systems are not compliant, the Company will develop appropriate
contingency plans.

RISK MANAGEMENT

            The Company's earnings may be directly affected by the level of and
fluctuation in interest rates and the level of prepayment in the Company's
securitizations. The Company currently hedges its fixed rate pipeline and some
LIBOR-based tranches in its fixed rate securitizations, and continues to explore
other avenues of risk mitigation, although none have been employed to date. The
current fixed rate hedge products utilized are swap agreements with third
parties that sell United States Treasury securities not yet purchased and the
purchase of Treasury put options. The hedge instrument used on the existing
LIBOR-based tranches secured by fixed rate mortgages is an interest rate
contract with a specified LIBOR rate cap. See "- Certain Accounting
Considerations" and "- Risk Factors -- Prepayment, Credit and Basis Risk." The
amount and timing of hedging transactions are determined by members of the
Company's senior management. During the quarter ending September 30, 1998,
market conditions became extremely unsettled resulting in a break down in the
historical relationship between U.S. Treasury securities and the pass-through
rates on asset-backed securitizations. Historically, the use of an interest rate
hedge against Treasuries has been a more conservative method of limiting
interest rate risk. Changes in Treasury rates were generally reflected in the
pass-through rates of the fixed rate portion of the Company's securitizations.
However, during the quarter ending September 30, 1998, current market conditions
resulted in a loss on the Company's Treasury hedge without receiving an
equivalent benefit from reductions in the pass-through rates paid on the
certificates sold on the fixed rate portion of the Company's first quarter 1998
securitization. This weak asset-backed market resulted in a significantly lower
gain on sale recorded in the period and significantly larger negative cash flow
for the first quarter ending September 30, 1998. The Company is currently
re-evaluating its current hedging policy, and currently has no effective hedge
in place. While the Company monitors the interest rate environment and employs
fixed rate hedging strategies, there can be no assurance that the earnings of
the Company would not be adversely affected during any period of unexpected
changes in interest rates or prepayment rates.

FINANCIAL INSTRUMENTS AND OFF-BALANCE SHEET ACTIVITIES

            Securitizations - Hedging Interest Rate Risk. The most significant
variable in the determination of gain on sale in a securitization is the spread
between the weighted average coupon on the securitized loans and the
pass-through interest rate. In the interim period between loan origination or
purchase and securitization of such loans, the Company is exposed to interest
rate risk. The majority of loans are securitized within 90 days of origination
or purchase. However, a portion of the loans are held for sale or securitization
for as long as 12 months (or longer, in very limited circumstances) prior to
securitization. If interest rates rise during the period that the mortgage loans
are held, the spread between the weighted average interest rate on the loans to
be securitized and the pass-through interest rates on the securities to be sold
(the latter having


                                       27
<PAGE>   28
 increased as a result of market rate movements) would narrow. Upon
securitization, this would result in a reduction of the Company's related gain
on sale. The Company mitigates this exposure through swap agreements with third
parties that sell United States Treasury securities not yet purchased and the
purchase of Treasury Put Options. During the period, gain on sale included hedge
losses of $15.3 million and $251,000 in the three months ended September 30,
1998 and 1997, respectively. These hedging activities help mitigate the risk of
absolute movements in interest rates but they do not mitigate the risk of a
widening in the spreads between pass-through certificates and U.S. Treasury
securities with comparable maturities.

            The Company enters into swap agreements with third parties that sell
United States Treasury Securities not yet purchased. At September 30, 1998 the
Company had outstanding notional balances of such Treasury swap agreements in
the amount of $85 million. This position expires on December 31, 1998 and had a
market value at September 30, 1998 of $80 million. Management believes that due
to current conditions in the securitization market, selling U.S. Treasury
securities not yet purchased does not substantially offset the effects of
pricing in the related securitization. Consequently, the Company recorded the
related hedge loss at September 30, 1998 for the $4.6 million shortfall in the
gain on sale for the current period. The Company had a similar position at June
30, 1998 in the notional amount of $250 million. This position expired on
September 30, 1998 and had a market value at June 30, 1998 of $248 million. Due
to market conditions in the quarter ended September 30, 1998, this position
deteriorated to a loss of $10.7 million which was recorded in gain on sale for
the current quarter. These transactions are subject to Treasury interest rate
fluctuation and require cash settlement at expiration or voluntary termination.

            The Company also had LIBOR cap contracts outstanding at September
30, 1998 and 1997 in the notional amount of $7.2 million and $84.6 million,
respectively. These positions were valued at par at both quarter ends as their
contractual cap (strike price) exceeded the LIBOR market rate at September 30,
1998 and 1997. The September 30, 1998 position expires December 23, 1998 and the
September 30, 1997 position had expiration dates from March 30, 1998 to December
23, 1998. These instruments have no negative risk above the original premiums
paid in cash. However, if the LIBOR market rate exceeds the contractual cap, the
Company will receive cash in settlement.

            Interest-Only Strips and OMSRs. The Company had interest-only strips
of $378 million and $360 million outstanding at September 30, 1998 and June 30,
1998, respectively. The Company also had OMSRs outstanding at September 30, 1998
and June 30, 1998 in the amount of $35.5 million and $32.1 million,
respectively. Both of these instruments are valued at market at September 30,
1998 and June 30, 1998. The Company values these assets based on the present
value of future revenue streams net of expenses and related loan loss reserves
using various assumptions. The discount rate used to calculate the present value
of the interest-only strips and OMSRs was 10.2% and 10.8% for the Company's
Securitizations of September 30, 1998 and June 30, 1998, respectively. The
weighted average life used for valuation at September 30, 1998 and June 30, 1998
was 2.6 to 3.8 years.


                                       28
<PAGE>   29

            These assets are subject to risk in accelerated mortgage prepayment
or losses in excess of assumptions used in valuation. Ultimate cash flows
realized from these assets would be reduced should prepayments or losses exceed
assumptions used in the valuation. Conversely, cash flows realized would be
greater should prepayments or losses be below expectations.

RISK FACTORS

            Negative Cash Flow and Capital Needs. The Company has historically
operated, and expects to continue to operate, on a negative cash flow basis. The
Company's primary cash requirements include the funding of: (i) mortgage loan
originations and purchases pending their securitization and sale; (ii) fees,
expenses and hedging costs, if any, incurred in connection with the
securitization of loans; (iii) cash reserve accounts or overcollateralization
requirements in connection with the securitization and sale of the loans; (iv)
tax payments due on recognition of non-cash gain on sale, other than in a
debt-for-tax securitization structure; (v) ongoing administrative and other
operating expenses; (vi) interest and principal payments under the Company's
warehouse credit facilities and other existing indebtedness; (vii) advances in
connection with the Company's servicing portfolio; and (viii) costs associated
with expanding the Company's core production units. The more significant of
these cash requirements is a result of the Company's use of securitization as a
loan disposition strategy. In a securitization, the Company recognizes a
non-cash gain on sale of the loans securitized upon the closing of the
securitization, but does not receive the cash representing such gain until it
receives the excess cash flow, which in general is payable over the actual life
of the loans securitized after overcollateralization requirements are met. The
Company incurs significant expense in connection with a securitization and
generally incurs both current and deferred tax liabilities as a result of the
gain on sale. Although the Company will not execute a securitization during the
quarter ended December 31, 1998 and will rely on whole loan sales for cash, the
cash received upon such sales will not be sufficient to eliminate the Company's
negative cash flow and may not be sufficient to sustain the Company as a going
concern. See "- Overview -- Market Conditions." Further, the Company has
implemented, is in the process of implementing or has under discussion various
cash savings plans. However, there can be no assurance that such plans will be
successfully implemented or if successfully implemented will provide liquidity
sufficient to eliminate the Company's negative cash flow. Therefore, the Company
requires continued access to short- and long-term external sources of cash to
fund its operations.

            In the past, the Company relied on the public equity and debt
markets to meet its capital needs. However, the uncertainties in those markets
have rendered them inaccessible to the Company at the present time. The
Company's primary sources of liquidity in the near term are expected to be
fundings under warehouse facilities and whole loan sales. The Company currently
has $1.0 billion available to it in warehouse lines. However, in response to
current market conditions, the lenders on two lines aggregating $600 million
have lowered the advance rates on those lines to the point where it is no longer
feasible for the Company to use either of them. The third lender has informed
the Company that a $100 million uncommitted facility is not available to the
Company under current market conditions. Further, provisions in the one
remaining line


                                       29
<PAGE>   30

require the Company to maintain a certain level of profitability over two
consecutive quarters. The reduced profitability of the first fiscal quarter
combined with a potential loss in the second fiscal quarter may violate these
provisions. If the Company is unable to receive the necessary waivers and is
deemed to be in default under the line, the line would be terminated. If the
Company were unable to secure replacement lines, it would have to cease loan
production operations which would negatively impact profitability and jeopardize
the Company's ability to continue to operate as a going concern. If not
terminated, this line expires on April 8, 1988. Although this line is subject to
renewal, the Company believes that without a change in market conditions or a
change in the Company's liquidity position, it is unlikely that the renewal will
be forthcoming. Other potential sources of liquidity include access to
additional financing on residuals and additional warehouse lines. See "--
Dependance on Funding Sources." However, the market for these credit lines has
been severely restricted. Further, current market conditions have adversely
affected the premiums received on the whole loan market. See "- Overview --
Market Conditions."

            The Company's primary and potential sources of liquidity as
described in the paragraph above (assuming access to residual financing,
availability of the capital markets and implementation of the cash savings plans
which by no means can be assured) are expected to be sufficient to fund the
Company's liquidity requirements through at least the next 12 months if the
Company's future operations are consistent with management's current growth
expectations. See "- Recent Events." If available at all, the type, timing and
terms of financing selected by the Company will be dependent upon the Company's
cash needs, the availability of other financing sources, limitations under debt
covenants and the prevailing conditions in the financial markets. However, due
to the weaknesses in the credit and capital markets, there can be no assurance
that any such sources will be available to the Company at any given time or that
favorable terms will be available or that restrictions currently in place will
be eased. If the Company cannot obtain additional credit lines secured by its
interest-only strips and residual assets or additional equity capital in the
next 30 days, it may have to engage in extraordinary transactions, such as
entering into a subservicing arrangement that includes an obligation to make
servicing advances or strategic asset sales, to provide the liquidity necessary
to operate, albeit on a much smaller scale. Management believes that any such
transaction would have a material adverse effect on the Company's results of
operations. However, no assurance can be given that any such transactions will
be consummated. See "- Recent Events" and "- Risk Factors -- Strategic
Alternatives." As a result of the limitations described above, the Company may
be restricted in the amount of loans that it will be able to produce and dispose
of.

            Delinquencies and Losses in Securitization Trusts; Right to
Terminate Mortgage Servicing; Negative Impact on Cash Flow. A substantial
majority of the Company's servicing portfolio consists of loans securitized by
the Company and sold to REMIC or owner trusts in securitization transactions.
Generally, the form of agreement entered into in connection with these
securitizations contains specified limits on delinquencies (i.e., loans past due
90 days or more) and losses that may be incurred in each trust. Losses occur
when the liquidation proceeds from disposal of foreclosed properties, less
liquidation expenses, are less than the principal balances of the loans
previously secured by such properties and related interest and servicing
advances (see below). If, at any measuring date, the delinquencies or losses
with respect to any trust credit-enhanced by monoline


                                       30
<PAGE>   31

insurance were to exceed the limits applicable to such trust, provisions of the
agreements permit the monoline insurance company to terminate the Company's
servicing rights to the affected trust.

            At September 30, 1998, the dollar volume of loans delinquent more
than 90 days in the Company's 11 securitization trusts formed in November 1992
and June 1993 and during the period from March 1995 to March 1997 exceeded the
permitted limit in the related pooling and servicing agreements. The higher
delinquency rates negatively affect the Company's cash flows by increasing the
required overcollateralization levels, thereby deferring the Company's receipt
of cash and by obligating the Company, as servicer, to advance past due
interest. Higher delinquency levels leading to higher loss levels also adversely
influence the Company's assumptions underlying the gain on sale in a
securitization transaction. Additionally, the higher delinquency rates permit
the monoline insurance company to terminate the Company's servicing rights with
respect to the affected trusts. The Company has implemented various plans to
lower the delinquency rates in its future trusts, including diversifying the
loans it originates and purchases to include higher credit grade loans. The
delinquency rate for September 30, 1998 and June 30, 1998 was 15.6%.

            Four of the 11 trusts referred to above plus one additional trust
(representing in the aggregate 11% of the dollar volume of the Company's
servicing portfolio) exceeded one of two loss limits at September 30, 1998. The
limit that has been exceeded provides that losses may not exceed a certain
threshold (which ranges from .50% to .91% of the original pool balances in the
relevant securitization trusts) on a rolling 12 month basis. The other limit,
which was not exceeded, provides that losses may not exceed a certain cumulative
threshold (which ranges from 1.3% to 2.0% of the original pool balances in the
relevant securitization trusts) since the inception of the trust.

            Management believes that current loss levels have increased in part
due to a loss mitigation strategy of minimizing the real estate owned ("REO")
holding period, thereby reducing carrying costs, which accelerated the volume of
liquidated properties in the recent period. It is the Company's goal to reduce
the REO holding period to maximize the economics of liquidation transactions.
Current loss levels have also increased due to the seasoning of the lower credit
grade loans purchased in bulk and included in the Company's earlier trusts. The
Company has reduced significantly purchases in bulk of lower credit grade loans.
While the accelerated efforts to sell properties is expected to have a
short-term impact on loss levels, the seasoning of the lower credit grade bulk
portfolio and the current origination of higher credit grade loans may
contribute to an increase in losses over time.

            Although the monoline insurance company has the right to terminate
servicing with respect to the trusts referred to above, no servicing rights have
been terminated and the Company believes that the likelihood of such an event is
remote. There can be no assurance, however, that the Company's servicing rights
with respect to the mortgage loans in such trusts, or any other trusts which
exceeds the specified delinquency or loss limits in future periods, will not be
terminated.


                                       31
<PAGE>   32

            The Company's cash flow is also adversely impacted by high
delinquency rates in its trusts. Generally, provisions in the agreements have
the effect of requiring the overcollateralization account, which is funded
primarily by the excess spread on the loans held in the trust, to be increased
when the delinquency rates exceed the specified limit up to approximately twice
the level otherwise required when the delinquency rates do not exceed the
specified limit. As of September 30, 1998, the Company was required to maintain
an additional $88.7 million in overcollateralization amounts as a result of the
level of its delinquency rates above that which would have been required to be
maintained if the applicable delinquency rates had been below the specified
limit. Of this amount, at September 30, 1998, $61.2 million remains to be added
to the overcollateralization amounts from future spread income on the loans held
by these trusts.

            Risk of Changes in Interest Rate Environment. A substantial and
sustained increase in long-term interest rates could, among other things: (i)
decrease the demand for consumer credit; (ii) adversely affect the ability of
the Company to originate or purchase loans; and (iii) reduce the average size of
loans underwritten by the Company. A significant decline in long-term interest
rates could decrease the size of the Company's loan servicing portfolio by
increasing the level of loan prepayments, thereby shortening the life and
reducing the value of the Company's interest-only strips and also reduce the
gains on loan dispositions. A substantial and sustained increase in short-term
interest rates could, among other things, (i) increase the Company's borrowing
cost and (ii) reduce the gains recognized by the Company upon their
securitization and sale of loans.

            Year 2000 Compliance and Technology Enhancements. As part of the
Company's overall systems enhancement program, the Company is utilizing both
internal and external resources to identify, correct, reprogram or replace, and
test its systems for year 2000 compliance. It is anticipated that all of the
Company's year 2000 compliance efforts will be completed on time. There can be
no assurance, however, that the systems of other companies on which the
Company's systems rely will be timely reprogrammed for year 2000 compliance.

            The Company has recently installed and is testing a year 2000
compliant loan origination system that is expected to add approximately $2.0
million per year to the Company's technology costs over the next three years.
Other technology enhancements are being reviewed but, to date,
the costs for such enhancements have not been determined.

            Prepayment Risk. If actual prepayments occur more quickly than was
projected at the time loans were sold, the carrying value of the interest-only
strips may have to be adjusted through a charge to earnings in the period of
adjustment or through increased amortization. Non-cash gain on sale on
securitizations has historically been the most significant component of the
Company's reported revenues. Gain on sale represents the recognition of the
present value of the excess cash flow on securitized loans, which is based on
certain estimates made by management at the time loans are sold, including
estimates regarding prepayment rates. The rate of prepayment of loans may be
affected by a variety of economic and other factors, as discussed above.
Estimates of prepayment rates are made based on management's expectations of
future prepayment rates, which are based, in part, on the historic performance
of the Company's loans and other considerations.


                                       32
<PAGE>   33

See "- Certain Accounting Considerations." There can be no assurance of the
accuracy of management's estimates.

            Credit Risk. Loans made to borrowers in the lower credit grades have
historically resulted in a higher risk of delinquency and loss than loans made
to borrowers who utilize conventional mortgage sources. While the Company
believes that the underwriting criteria and collection methods it employs enable
it to mitigate the higher risks inherent in loans made to these borrowers, no
assurance can be given that such criteria or methods will afford adequate
protection against such risks. In the event that loans originated and purchased
by the Company experience higher delinquencies, foreclosures or losses than
anticipated, the Company's results of operations or financial condition could be
adversely affected.

            Collateral securing the Company's loans may not be sufficient to
cover the principal amount of the loans in the event of liquidation. Losses not
covered by the underlying properties, if in excess of the Company's provision
for such losses, could have a material adverse effect on the Company's results
of operations and financial condition. In addition, historical loss rates affect
the assumptions used by the Company in computing its non-cash gain on sale.

            In determining the adjustment for credit risk for a particular
securitization, the Company utilizes assumptions that it believes are reasonable
based on the information on its prior securitizations and the loan-to-value
ratios and credit grades of the loans included in the current securitizations.
At September 30, 1998, the Company had reserves of $56.8 million related to
these credit risks, or 1.40% of the outstanding balance of loans securitized as
of that date. Losses averaged .80% of the average servicing portfolio for the
quarter ended September 30, 1998. Accordingly, the Company believes its
allowance for credit losses is adequate to cover anticipated losses on
previously securitized pools. However, with the Company's recent migration to
higher credit grade loans, the average loan-to-value ratio of its servicing
portfolio has increased. At September 30, 1998, the average initial combined
loan-to-value ratio of the Company's servicing portfolio was 72.8%. Therefore,
the Company's low historical loan loss rates may not be an accurate indication
of anticipated future losses.

            Adjustable rate loans account for a substantial portion of the
mortgage loans originated or purchased by the Company. Substantially all such
adjustable rate mortgages include a "teaser" rate, i.e., an initial interest
rate significantly below the fully indexed interest rate at origination.
Although these loans are underwritten at the indexed rate as of the first
adjustment date, credit-impaired borrowers may encounter financial difficulties
as a result of increases in the interest rate over the life of the loan.

            Basis Risk. The value of the Company's interest-only strips created
as a result of the securitization of adjustable rate mortgage ("ARM") loans is
subject to so-called basis risk. Basis risk arises when the ARM (including fixed
initial rate mortgage) loans in a securitization trust bear interest based on an
index or adjustment period that is different from the mortgage-backed securities
issued by the trust. Accordingly, in the absence of effective hedging
strategies, in a period of


                                       33
<PAGE>   34

increasing interest rates, the value of the interest-only strips would be
adversely affected because the interest rates on the mortgage-backed securities
issued by a securitization trust could adjust faster than the interest rates on
the Company's ARMs in the trust. Moreover, ARMs are typically subject to
periodic and lifetime interest rate caps, which limit the amount an ARM's
interest rate can change during any given period. Hence, in a period of rapidly
increasing interest rates, the value of the interest-only strips could be
adversely affected in the absence of effective hedging strategies because the
interest rates on the mortgage-backed securities issued by a securitization
trust could increase without limitation by caps, while the interest rates on the
Company's ARMs would be so limited.

            Dependence on Funding Sources. The Company is dependent upon its
access to warehouse and other credit facilities in order to fund new
originations and purchases of mortgage loans pending securitization or sale. At
September 30, 1998, the Company had warehouse facilities with certain financial
institutions and investment banks with aggregate actual borrowing capacity of
$1.0 billion. However, in response to market conditions, two lenders with lines
aggregating $600 million have reduced the advance rates on those lines to a
level that requires the Company to advance more cash than is currently available
and another warehouse lender has informed the Company that a $100 million
uncommitted facility is not available under current market conditions. See "--
Risk of Adverse Changes in the Secondary Market for Mortgage Loans." The
Company's warehouse facilities expire between February 1999 and April 1999. See
"-- Negative Cash Flow and Capital Needs." Although the Company is in
negotiations for additional warehouse lines with higher advance rates, there can
be no assurance that such warehouse lines will be available. In response to
reduced borrowing capacity, the Company has made changes in its underwriting
guidelines and increased pricing which will have the effect of slowing
production. See "- Overview -- Market Conditions." Further, the Company has
entered into a forward commitment for $500 million under which loans will be
sold twice a month. These events should results in a more efficient use of the
$300 million in economical committed warehouse facilities the Company currently
has in place. In September 1998, the Company entered into a $50 million
revolving line of credit secured by its interest-only strips which expires on
September 3, 1999. The Company currently has $20 million outstanding on this
line. Future borrowings under this line, if available at all, are subject to the
Company engaging in securitization transactions. See "- Business Strategies."
Additionally, in September 1998, the Company entered into a $50 million
repurchase facility secured by multifamily residential and commercial mortgage
loans. However, due to market conditions, the Company has currently curtailed
funding commercial loan originations. The Company is currently negotiating with
various financial institutions and investment banks to obtain additional credit
facilities. There can be no assurance that the Company will be able to secure
such financing. Further, there can be no assurance that such financing will be
obtainable on favorable terms. To the extent that the Company is unable to
extend or replace existing facilities, arrange new warehouse or other credit
facilities or obtain additional forward commitments, the Company may have to
curtail loan origination and purchasing activities, which would have a material
adverse effect on the Company's financial position and results of operations and
jeopardize the Company's ability to continue to operate as a going concern.


                                       34
<PAGE>   35

            Risk of Adverse Changes in the Secondary Market for Mortgage Loans.
The Company's ability to sell loans originated and purchased by it in the
secondary market is necessary to generate cash proceeds to pay down its
warehouse facilities and fund new originations and purchases. See "-- Dependence
on Funding Sources." The ability of the Company to sell loans in the secondary
market on acceptable terms is essential for the continuation of the Company's
loan origination and purchase operations. The value of and market for the
Company's loans are dependent upon a number of factors, including general
economic conditions, interest rates and governmental regulations. Adverse
changes in such factors may affect the Company's ability to securitize or sell
whole loans for acceptable prices within a reasonable period of time. Adverse
changes in the global markets have severely weakened the asset-backed market.
With the asset-backed market so weakened, many subprime lenders have recently
sought access to the whole loan market for liquidity. This has resulted in an
abundant supply of loans in the whole loan market thereby putting downward
pressure on the price for loans so sold and tightening underwriting guidelines
for loans to be purchased. In response to these conditions, the Company has
increased its prices and modified its underwriting guidelines. There can be no
assurance, however, that these changes will make the whole loan market more
profitable for, or more accessible to, the Company.

            The Company has in the past sold a substantial portion of its loans
through securitizations, and if conditions in the asset-backed market improve,
will again securitize a significant portion of its loans. In order to gain
access to the secondary market in securitization transactions, the Company has
utilized monoline insurance companies to provide financial guarantee insurance
on the senior interests in loans sold in the secondary market in order to obtain
ratings for such interests. Although the Company has used the
senior/subordinated structure, which relies on the internal credit enhancements
of the pool rather than monoline insurance, the Company expects to utilize
monoline insurance companies for at least a portion of its future
securitizations. Any substantial reduction in the size or availability of the
secondary market for the Company's loans, or the unwillingness of the monoline
insurance companies to provide financial guarantee insurance for the senior
interests in loans sold in the secondary market, or other accounting, tax or
regulatory changes adversely affecting the Company's securitization program,
could have a material adverse effect on the Company's financial position and
results of operations.

            With its strategy of selling a portion of its loans on a whole loan
basis in the secondary market, the Company relies on institutional purchasers,
such as investment banks, financial institutions and other mortgage lenders, to
purchase loans directly from the Company. There can be no assurance that such
purchasers will be willing to purchase loans on terms satisfactory to the
Company or that the market for such loans will continue. To the extent the
Company cannot successfully identify whole loan purchasers or negotiate
favorable terms for loan purchases, the Company's results of operations and
financial condition could be materially adversely affected.

            Dependence on Broker Network. The Company depends on independent
mortgage brokers for the origination and purchase of its broker loans, which
constitute a significant portion of the Company's loan production. These
independent mortgage brokers negotiate with multiple lenders for each
prospective borrower. The Company competes with these lenders for the
independent


                                       35
<PAGE>   36

brokers' business on pricing, service, loan fees, costs and other factors. The
Company's competitors also seek to establish relationships with such brokers,
who are not obligated by contract or otherwise to do business with the Company.
The Company's future results of operations and financial condition may be
vulnerable to changes in the volume and cost of its broker loans resulting from,
among other things, competition from other lenders and purchasers of such loans.

            Risks Involved in Commercial Mortgage Lending. The Company offers
commercial mortgage loans on a limited basis in amounts ranging from $250,000 to
$2.0 million secured by commercial properties, such as multifamily residences,
retail establishments, office buildings, light industrial/warehouse facilities
and mobile home parks. Due to current market conditions, the Company has
temporarily curtailed the funding of commercial loans. During the quarter ended
September 30, 1998, the Company sold $8.07 million of commercial loans to third
parties, servicing released. The Company bears certain risks during the time it
holds the loans pending their sale. Commercial mortgage lending is generally
viewed as exposing the lender to a greater risk of loss than residential
mortgage lending, in part, because it typically involves larger loans to single
borrowers or groups of related borrowers than residential mortgage loans.
Further, the repayment of commercial mortgages secured by income-producing
properties is typically dependent upon the tenant's ability to meet its
obligations under the lease relating to such property, which in turn depends
upon profitable operations of the related property. In the event of a default on
any commercial mortgage held by the Company, the Company bears the risk of loss
of principal to the extent of any deficiency between the value of the related
mortgage property, plus any payments from an insurer or guarantor, and the
amount owed on the commercial mortgage.

            Commercial mortgages generally are non-recourse to the borrower. In
the event of foreclosure on a commercial mortgage, the value of the property and
other collateral securing the commercial mortgage may be less than the principal
amount outstanding on the commercial mortgage and the accrued but unpaid
interest. Also, under the terms of leases with respect to commercial properties,
there may be costs and delays involved in enforcing rights of a property owner
against tenants in default who may seek the protection of the bankruptcy laws
which can result in termination of lease contracts all of which may adversely
affect the timing and amount of payment received by the Company with respect to
such commercial mortgages.

            Strategic Alternatives. The Company continues to retain Donaldson,
Lufkin & Jenrette Securities Corporation ("DLJ") as a financial advisor to
develop strategic alternatives for the Company. Since its engagement in June,
1997, DLJ has contacted a number of major financial institutions to explore
potential transactions with the Company. Although a number of these institutions
undertook detailed due diligence, none have made an offer to effect a
transaction. DLJ continues to evaluate opportunities for the Company, including
possible business combinations, equity infusions and asset sales. The Company is
currently in discussions with an entity concerning a substantial equity infusion
that would result in substantial dilution to the Company's stockholders. See "-
Recent Events." No assurance can be given that any such opportunities will be
consummated.

            Competition. The Company faces intense competition in the business
of originating, purchasing and selling mortgage loans. Competition among
industry participants can take many forms, including convenience in obtaining a
loan, customer service, marketing and distribution


                                       36
<PAGE>   37

channels, amount and term of the loan, loan origination fees and interest rates.
Many of the Company's competitors are substantially larger and have considerably
greater financial, technical and marketing resources than the Company. The
Company's competitors in the industry include other consumer finance companies,
mortgage banking companies, commercial banks, investment banks, credit unions,
thrift institutions, credit card issuers and insurance companies. In the future,
the Company may also face competition from government-sponsored entities, such
as FNMA and FHLMC. These government-sponsored entities may enter the subprime
mortgage market and target potential customers in the Company's highest credit
grades, who constitute a significant portion of the Company's customer base.

            The historical level of gains realized by the Company and its
competitors on the sale of non conforming mortgage loans could attract
additional competitors into this market. Certain large finance companies and
conforming mortgage originators have announced their intention to originate, or
have purchased companies that originate and purchase, non-conforming mortgage
loans, and some of these large mortgage companies, thrifts and commercial banks
have begun offering non-conforming loan products to customers similar to the
borrowers targeted by the Company. In addition, establishing a broker-sourced
loan business requires a substantially smaller commitment of capital and human
resources than a direct-sourced loan business. This relatively low barrier to
entry permits new competitors to enter this market quickly and compete with the
Company's wholesale lending business.

            Additional competition may lower the rates the Company can charge
borrowers and increase the cost to purchase loans, thereby potentially lowering
the gain on future loan sales or securitizations. Increased competition may also
reduce the volume of the Company's loan origination and loan sales and increase
the demand for the Company's experienced personnel and the potential that such
personnel will leave the Company for the Company's competitors.

            Competitors with lower costs of capital have a competitive advantage
over the Company. During periods of declining rates, competitors may solicit the
Company's customers to refinance their loans. In addition, during periods of
economic slowdown or recession, the Company's borrowers may face financial
difficulties and be more receptive to the offers of the Company's competitors to
refinance their loans.

            The Company's correspondent and broker programs depend largely on
independent mortgage bankers and brokers and other financial institutions for
the purchases of new loans. The Company's competitors also seek to establish
relationships with the same sources. The Company's future results may become
more exposed to fluctuations in the volume and cost of the Company's purchases
resulting from competition from other purchasers of such loans, market
conditions and other factors.

            Concentration of Operations in California. At September 30, 1998, a
significant portion of the loans serviced by the Company were secured by
properties located in California. Because the Company's servicing portfolio is
currently concentrated in California, the Company's financial


                                       37
<PAGE>   38

position and results of operations have been and are expected to continue to be
influenced by general trends in the California economy and its residential real
estate market. Residential real estate market declines may adversely affect the
values of the properties securing loans such that the principal balances of such
loans, together with any primary financing on the mortgaged properties, will
equal or exceed the value of the mortgaged properties. In addition, California
historically has been vulnerable to certain natural disaster risks, such as
earthquakes and erosion-caused mudslides, which are not typically covered by the
standard hazard insurance policies maintained by borrowers. Uninsured disasters
may adversely impact the Company's ability to recover losses on properties
affected by such disasters and adversely impact the Company's results of
operations.

            Timing of Loan Sales. The Company's loan disposition strategy calls
for substantially all of its production to be sold in the secondary market each
quarter. However, market and other considerations, including the conformity of
loan pools to monoline insurance company and rating agency requirements, could
affect the timing of such transactions. Any delay in the sale of a significant
portion of the Company's loan production beyond a quarter-end would postpone the
recognition of gain on sale related to such loans until their sale and would
likely result in losses for such quarter being reported by the Company.

            Economic Conditions. The risks associated with the Company's
business become more acute in any economic slowdown or recession. Periods of
economic slowdown or recession may be accompanied by decreased demand for
consumer credit and declining real estate values. Any material decline in real
estate values reduces the ability of borrowers to use home equity to support
borrowings and increases the current combined loan-to-value ratios of loans
previously made by the Company, thereby weakening collateral coverage and
increasing the possibility of a loss in the event of liquidation. Further,
delinquencies, foreclosures and losses generally increase during economic
slowdowns or recessions. Because of the Company's focus on credit-impaired
borrowers, the actual rates of delinquencies, foreclosures and losses on such
loans could be higher than those generally experienced in the mortgage lending
industry. In addition, in an economic slowdown or recession, the Company's
servicing costs may increase. Any sustained period of increased delinquencies,
foreclosure, losses or increased costs could adversely affect the Company's
ability to securitize or sell loans in the secondary market and could increase
the cost of these transactions.
 See "-- Credit Risk" and "-- Risk of Adverse Changes in the Secondary Market
for Mortgage Loans."

            Contingent Risks. Although the Company sells substantially all the
mortgage loans which it originates or purchases, the Company retains some degree
of credit risk on substantially all loans sold on a servicing retained basis.
During the period of time that loans are held pending sale, the Company is
subject to the various business risks associated with the lending business
including the risk of borrower default, the risk of foreclosure and the risk
that a rapid increase in interest rates would result in a decline in the value
of loans to potential purchasers. The documents governing the Company's
securitization program require the Company to establish deposit accounts or
build overcollateralization levels through retention of excess cash flow
distributions in such accounts or application of excess cash flow distributions
to reduce the principal balances of the senior interests


                                       38
<PAGE>   39

issued by the related trust, respectively. Such amounts serve as credit
enhancement for the related trust and are therefore available to fund losses
realized on loans held by such trust. The Company continues to be subject to the
risks of default and foreclosure following securitization and the sale of loans
to the extent of excess cash flow distributions required to be retained or
applied to reduce principal from time-to-time. Such amounts are a condition to
obtaining the requisite rating on the related interests in each trust. In
addition, documents governing the Company's securitization program and whole
loan sales require the Company to commit to repurchase or replace loans which do
not conform to the representations and warranties made by the Company at the
time of sale.

            When borrowers are delinquent in making monthly payments on loans
included in a securitization trust, the Company is required to advance interest
payments with respect to such delinquent loans. These advances require funding
from the Company's capital resources but have priority of repayment from
collections or recoveries on the loans in the related pool in the
succeeding month.

            In the ordinary course of its business, the Company is subject to
claims made against it by borrowers and private investors arising from, among
other things, losses that are claimed to have been incurred as a result of
alleged breaches of fiduciary obligations, misrepresentations, errors and
omissions of employees and officers of the Company, incomplete documentation and
failures by the Company to comply with various laws and regulations applicable
to its business. The Company believes that liability with respect to any
currently asserted claims or legal actions is not likely to be material to the
Company's financial position or results of operations; however, any claims
asserted in the future may result in legal expenses or liabilities which could
have a material adverse effect on the Company's financial position and results
of operations.

            The Company currently hedges its fixed rate pipeline and some
LIBOR-based tranches in its fixed rate securitizations, and continues to explore
other avenues of risk mitigation, although none have been employed to date. The
amount and timing of hedging transactions are determined by members of the
Company's senior management. During the first quarter ending September 30, 1998,
market conditions became extremely unsettled resulting in a break down in the
historical relationship between U.S. Treasury securities and the pass-through
rates on asset-backed securitizations. Historically, the use of an interest rate
hedge against Treasuries has been a more conservative method of limiting
interest rate risk. Changes in Treasury rates were generally reflected in the
pass-through rates of the fixed rate portion of the Company's securitizations.
However, during the first quarter ending September 30, 1998, current market
conditions have resulted in a loss on the Company's Treasury hedge without
receiving an equivalent benefit from reductions in the pass- through rates paid
on the certificates sold on the fixed rate portion of the Company's first
quarter 1998 securitization. This weak asset-backed market will result in a
significantly lower gain on sale and significantly larger negative cash flow for
the first quarter ending September 30, 1998. The Company is currently
re-evaluating its current hedging policy. While the Company monitors the
interest rate environment and employs fixed rate hedging strategies, there can
be no assurance that the earnings of the Company would not be adversely affected
during any period of unexpected changes in interest rates or prepayment rates.


                                       39
<PAGE>   40

            Government Regulation. The Company's operations are subject to
extensive regulation, supervision and licensing by federal, state and local
governmental authorities and are subject to various laws and judicial and
administrative decisions imposing requirements and restrictions on part or all
of its operations. The Company's consumer lending activities are subject to the
Federal Truth-in-Lending Act and Regulation Z (including the Home Ownership and
Equity Protection Act of 1994), the Federal Equal Credit Opportunity Act, as
amended, and Regulation B, the Fair Credit Reporting Act of 1970, as amended,
the Federal Real Estate Settlement Procedures Act and Regulation X, the Home
Mortgage Disclosure Act, the Federal Debt Collection Practices Act and the
National Housing Act of 1934, as well as other federal and state statutes and
regulations affecting the Company's activities. The Company is also subject to
the rules and regulations of, and examinations by, state regulatory authorities
with respect to originating, processing, underwriting, selling, securitizing and
servicing loans. These rules and regulations, among other things, impose
licensing obligations on the Company, establish eligibility criteria for
mortgage loans, prohibit discrimination, govern inspections and appraisals of
properties and credit reports on loan applicants, regulate assessment,
collection, foreclosure and claims handling, investment and interest payments on
escrow balances and payment features, mandate certain disclosures and notices to
borrowers and, in some cases, fix maximum interest rates, fees and mortgage loan
amounts. Failure to comply with these requirements can lead to loss of approved
status, certain rights of rescission for mortgage loans, class action lawsuits
and administrative enforcement action.

           Members of Congress and government officials have from time-to-time
suggested the elimination of the mortgage interest deduction for federal income
tax purposes, either entirely or in part, based on borrower income, type of loan
or principal amount. Because many of the Company's loans are made to borrowers
for the purpose of consolidating consumer debt or financing other consumer
needs, the competitive advantages of tax deductible interest, when compared with
alternative sources of financing, could be eliminated or seriously impaired by
such government action. Accordingly, the reduction or elimination of these tax
benefits could have a material adverse effect on the demand for loans of the
kind offered by the Company.

PART II - OTHER INFORMATION

Item 1.     Legal Proceedings - None

Item 2.     Changes in Securities - None

Item 3.     Defaults upon Senior Securities - None

Item 4.     Submission of Matters to a Vote of Security Holders - None

Item 5.     Other Information - None

Item 6.     Exhibits and Reports on Form 8-K

            (a)  Exhibits


                                40
<PAGE>   41

                 10.3(c) Amendment No. 1 to the Second Amended and Restated 
                         Employment Agreement between Registrant and Cary H.
                         Thompson.

                 10.4(c) Amended and Restated Employment Agreement between 
                         Registrant and Neil B. Kornswiet.

                 10.22   Residuals Financing Agreement, dated as of September 4,
                         1998 between Registrant and NationsBank, N.A.

                 11      Computation of Per Share Earnings

                 27.1    Financial Disclosure Schedule

            (b)  Reports on Form 8-K: A current report on Form 8-K dated
                 August 12, 1998 (reporting earnings, production volume
                 and cash dividends) was filed during the quarter ended
                 September 30, 1998.




                                       41
<PAGE>   42

                           AAMES FINANCIAL CORPORATION

                                   SIGNATURES






      Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this Report on Form 10-Q to be signed on
its behalf by the undersigned, thereunto duly authorized.












                                            AAMES FINANCIAL CORPORATION


Date: November 16, 1998                     By: /s/ David A. Sklar
                                                ------------------
                                                David A. Sklar
                                                Executive Vice President-Finance
                                                and Chief Financial and
                                                Accounting Officer



                                       42
<PAGE>   43

                                  EXHIBIT INDEX

<TABLE>
<CAPTION>
Exhibit No.        Description of Exhibit
-----------        ----------------------
<S>                <C>
     10.3(c)       Amendment No. 1 to the Second Amended and Restated Employment Agreement between
                   Registrant and Cary H. Thompson.
     10.4(c)       Amended and Restated Employment Agreement between Registrant and Neil B. Kornswiet.
     10.22         Residuals Financing Agreement, dated as of September 4, 1998 between Registrant and
                   NationsBank, N.A.
     11            Computation of Per Share Earnings
     27.1          Financial Disclosure Schedule
</TABLE>