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Table of Contents

UNITED STATES SECURITIES AND EXCHANGE
COMMISSIONWASHINGTON, D.C. 20549

---

FORM 10-Q







|(Mark One)                                          |                                                                                               
|--------------------------------------------------- | ----------------------------------------------------------------------------------------------
|ý                                                   | QUARTERLY REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|                                                    |                                                                                               
|For the quarterly
      period ended March 31, 2004
|or                                                 
|                                                    |                                                                                               
|o                                                   | 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 0-13660                     
|                                                    |                                                                                               
|                                                   



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AAMES FINANCIAL
  CORPORATION (Exact Name of
Registrant as Specified in its Charter)


---

|                                                                     |  |                                     
|-------------------------------------------------------------------- |  | ------------------------------------
|                                                                     |  |                                     
|DELAWARE                                                             |  | 95-4340340                          
|(State or Other Jurisdiction of
      Incorporation or Organization) |  | (I.R.S. Employer Identification No.)
|                                                                     |  |                                     
|350 SOUTH GRAND AVE, LOS ANGELES,
    CA 90071-3459                 
|(Address of principal executive offices)                            
|                                                                     |  |                                     
|323-210-5000                                                        
|(Issuer's telephone
    number)                                     
|                                                                    

Indicate
  by check mark whether the registrant (1) has filed all reports required to be
  filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months
  (or for such shorter period that the issuer was required to file such reports),
  and (2) has been subject to such filing requirements for the past 90 days.    Yesý  No   o

Indicate
  by check mark whether the registrant is an accelerated filer (as defined in
  Rule 12b-2 of the Exchange Act).    Yeso    Noý

At May 11, 2004, Registrant had 7,170,569 shares of common stock
  outstanding.



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Table of Contents

|                   | **TABLE
        OF CONTENTS** |                      
|------------------ | ----------------------------- | ---------------------
|**Item
      No.** |                               | **Page
      Number**

|                |  |                                                                                                                              |    | 
|--------------- |  | ---------------------------------------------------------------------------------------------------------------------------- | -- | 
|                |  | PART
        I - FINANCIAL INFORMATION                                                                                       |    | 
|                |  |                                                                                                                              |    | 
|Item 1.         |  | Financial
      Statements                                                                                                   | 2  | 
|                |  |                                                                                                                              |    | 
|                |  | Condensed Consolidated Balance Sheets at March 31, 2004
      (Unaudited) and June 30, 2003 (Audited)                        | 2  | 
|                |  |                                                                                                                              |    | 
|                |  | Condensed
      Consolidated Income Statements for the three and nine months ended March
      31, 2004 and 2003 (Unaudited) | 3  | 
|                |  |                                                                                                                              |    | 
|                |  | Condensed
      Consolidated Statements of Cash Flows for the nine months ended March 31,
      2004 and 2003 (Unaudited)    | 4  | 
|                |  |                                                                                                                              |    | 
|                |  | Notes
      to Condensed Consolidated Financial Statements (Unaudited)                                                       | 5  | 
|                |  |                                                                                                                              |    | 
|Item
      2.   |  | Management's
      Discussion and Analysis of Financial Condition and Results of Operations                                  | 10 | 
|                |  |                                                                                                                              |    | 
|Item
      3.   |  | Quantitative
      and Qualitative Disclosures About Market Risk                                                             | 10 | 
|                |  |                                                                                                                              |    | 
|Item
      4.   |  | Controls and Procedures                                                                                                      | 41 | 
|                |  |                                                                                                                              |    | 
|                |  |                                                                                                                              |    | 
|                |  | PART
        II - OTHER INFORMATION                                                                                          |    | 
|                |  |                                                                                                                              |    | 
|Item
      1.   |  | Legal Proceedings                                                                                                            | 43 | 
|                |  |                                                                                                                              |    | 
|Item
      2.   |  | Changes in Securities and Use of Proceeds                                                                                    | 43 | 
|                |  |                                                                                                                              |    | 
|Item
        3. |  | Defaults
      Upon Senior Securities                                                                                        | 43 | 
|                |  |                                                                                                                              |    | 
|Item
        4. |  | Submission
      of Matters to a Vote of Security Holders                                                                    | 43 | 
|                |  |                                                                                                                              |    | 
|Item
        5. |  | Other
      Information                                                                                                      | 43 | 
|                |  |                                                                                                                              |    | 
|Item
      6.   |  | Exhibits
      and Reports on Form 8 K                                                                                       | 43 | 
|                |  |                                                                                                                              |    | 
|                |  | Signature
      Page                                                                                                         | 45 | 
|                |  |                                                                                                                              |    | 



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Table of Contents

****Item
  1. Financial Statements

**AAMES
  FINANCIAL CORPORATION AND SUBSIDIARIES 
  CONDENSED CONSOLIDATED BALANCE SHEETS**

|                                                                               | March 31,
      2004
      (Unaudited) | June 30, 2003
      (Audited)
|------------------------------------------------------------------------------ | -------------------------------------- | -----------------------------
|**ASSETS**                                                                     |                                        |                              
|Cash and
      cash equivalents                                                |                                        | $   17,071,000               
|Loans held
      for sale, at lower of cost or market                          |                                        | 797,144,000                  
|Advances
      and other receivables                                           |                                        | 22,097,000                   
|Residual
      interests, at estimated fair value                              |                                        | 48,486,000                   
|Deferred
      income taxes                                                    |                                        | 24,575,000                   
|Equipment
      and improvements, net                                          |                                        | 8,952,000                    
|Prepaid and
      other                                                        |                                        | 16,050,000                   
|                                                                               |                                        |                              
|Total
      assets                                                             |                                        | $ 934,375,000                
|                                                                               |                                        |                              
|                                                                               |                                        |                              
|**LIABILITIES
        AND STOCKHOLDERS EQUITY**                               |                                       
|Borrowings                                                                     |                                        | $   82,718,000               
|Revolving
      warehouse and repurchase facilities                            |                                        | 699,641,000                  
|Accounts
      payable and accrued expenses                                    |                                        | 35,132,000                   
|Accrued dividends
      on convertible preferred stock                         |                                        | --                           
|Income taxes
      payable                                                     |                                        | 7,385,000                    
|                                                                               |                                        |                              
|Total
      liabilities                                                        |                                        | 824,876,000                  
|                                                                               |                                        |                              
|Commitments
      and contingencies                                            |                                        |                              
|Stockholders
      equity:                                                    |                                        |                              
|Series A
      Preferred Stock, par value $0.001 per share; 500,000 shares     |                                        |                              
|authorized;
      none outstanding                                             |                                        | --                           
|Series B
      Convertible Preferred Stock, par value $0.001 per share;        |                                        |                              
|29,704,000
      shares authorized; 26,704,000 shares outstanding              |                                        | 27,000                       
|Series C
      Convertible Preferred Stock, par value $0.001 per share;        |                                        |                              
|34,500,000
      and 61,230,000 shares authorized; 19,794,000 shares and       |                                        |                              
|20,175,000
      shares outstanding                                            |                                        | 20,000                       
|Series D
      Convertible Preferred Stock; par value $0.001 per share;        |                                        |                              
|108,566,000
      shares authorized; 59,920,000 shares and 59,923,000 shares   |                                        |                              
|outstanding                                                                    |                                        | 60,000                       
|Series
      E Preferred Stock; par value $0.001 per share; 26,700,000 shares  |                                        |                              
|authorized;
      none outstanding                                             |                                        | --                           
|Common
      Stock, par value $0.001 per share; 400,000,000 shares authorized; |                                        |                              
|7,164,000
      shares and 6,699,000 shares outstanding                        |                                        | 7,000                        
|Additional
      paid-in capital                                               |                                        | 418,095,000                  
|Retained
      deficit                                                         |                                        | (308,710,000                 
|                                                                               |                                        |                              
|Total
      stockholders equity                                               |                                        | 109,499,000                  
|                                                                               |                                        |                              
|Total
      liabilities and stockholders equity                               |                                        | $ 934,375,000                
|                                                                               |                                        |                              

See accompanying notes
    to condensed consolidated financial statements.


2

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Table of Contents

**AAMES
    FINANCIAL CORPORATION AND SUBSIDIARIES 
    CONDENSED CONSOLIDATED INCOME STATEMENTS (UNAUDITED)**


|                                           | Three Months
      Ended
      March 31, | Nine Months
      Ended
      March 31,
|------------------------------------------ | ---------------------------------------- | ---------------------------------------
|                                           |                                          | **2004**                               
|Revenue:                                   |                                         
|Gain
      on sale of loans                |                                          | $   62,948,000                         
|Write-down
      of residual interests     |                                          | --                                     
|Origination
      fees                     |                                          | 12,980,000                             
|Loan
      servicing                       |                                          | 2,155,000                              
|Debt
      extinguishment income           |                                          | --                                     
|Interest                                   |                                          | 17,621,000                             
|                                           |                                          |                                        
|Total
      revenue, including             |                                          |                                        
|write-down
      of residual               |                                          |                                        
|interests                                  |                                          | 95,704,000                             
|                                           |                                          |                                        
|Expenses:                                  |                                          |                                        
|Personnel                                  |                                          | 46,676,000                             
|Production                                 |                                          | 10,333,000                             
|General
      and administrative           |                                          | 11,375,000                             
|Interest                                   |                                          | 6,523,000                              
|                                           |                                          |                                        
|Total
      expenses                       |                                          | 74,907,000                             
|                                           |                                          |                                        
|Income before
      income taxes           |                                          | 20,797,000                             
|Provision
      (benefit) for income taxes |                                          | (93,000                                
|                                           |                                          |                                        
|Net income                                 |                                          | $   20,890,000                         
|                                           |                                          |                                        
|Net income
      to common stockholders:   |                                          |                                        
|Basic                                      |                                          | $   18,021,000                         
|                                           |                                          |                                        
|Diluted                                    |                                          | $   21,412,000                         
|                                           |                                          |                                        
|Net income
      per common share:         |                                          |                                        
|Basic                                      |                                          | $              2.53                    
|                                           |                                          |                                        
|Diluted                                    |                                          | $              0.20                    
|                                           |                                          |                                        
|Weighted
      average number of common    |                                          |                                        
|shares outstanding:                        |                                          |                                        
|Basic                                      |                                          | 7,120,000                              
|                                           |                                          |                                        
|Diluted                                    |                                          | 104,800,000                            
|                                           |                                          |                                        



See accompanying notes to condensed consolidated
  financial statements.

3

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


|                                                                                      | Nine Months
      Ended
      March 31,
|------------------------------------------------------------------------------------- | ---------------------------------------
|                                                                                      |                                        
|Operating
      activities:                                                           |                                        
|Net
      income                                                                      |                                        
|Adjustments
      to reconcile net income to net cash provided by (used in) operating |                                        
|activities:                                                                           |                                        
|Depreciation
      and amortization                                                   |                                        
|Write-down
      of residual interests                                                |                                        
|Accretion
      of residual interests                                                 |                                        
|Deferred
      income taxes                                                           |                                        
|Mortgage
      servicing rights amortized                                             |                                        
|Debt
      extinguishment income                                                      |                                        
|Changes
      in assets and liabilities:                                              |                                        
|Loans
      held for sale originated                                                  |                                        
|Proceeds
      from sale of loans held for sale                                       |                                        
|Decrease
      in:                                                                    |                                        
|Advances
      and other receivables                                                  |                                        
|Residual
      interests                                                              |                                        
|Prepaid
      and other                                                               |                                        
|Increase
      (decrease) in:                                                         |                                        
|Accounts
      payable and accrued expenses                                           |                                        
|Income
      taxes payable                                                            |                                        
|                                                                                      |                                        
|Net cash
      provided by (used in) operating activities                             |                                        
|                                                                                      |                                        
|                                                                                      |                                        
|Investing
      activities:                                                           |                                        
|Purchases
      of equipment and improvements                                         |                                        
|                                                                                      |                                        
|Net cash
      used in investing activities                                           |                                        
|                                                                                      |                                        
|Financing
      activities:                                                           |                                        
|Reduction
      in borrowings                                                         |                                        
|Net
      proceeds from revolving warehouse and repurchase facilities                 |                                        
|Payment
      of preferred stock dividends                                            |                                        
|Proceeds
      from exercise of common stock options                                  |                                        
|                                                                                      |                                        
|Net cash
      provided by (used in) financing activities                             |                                        
|                                                                                      |                                        
|Net increase
      (decrease) in cash and cash equivalents                            |                                        
|Cash and
      cash equivalents at beginning of period                                |                                        
|                                                                                      |                                        
|Cash and
      cash equivalents at end of period                                      |                                        
|                                                                                      |                                        



See accompanying notes to condensed consolidated
  financial statements.

4

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Table of Contents

# AAMES
  FINANCIAL CORPORATION
  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  (UNAUDITED)

Note 1:
Basis of Presentation

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

The
condensed 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 in conformity with accounting principles generally
accepted in the United States for the interim periods reported. The results of
operations for the Company for the three and nine months ended March 31, 2004
are not necessarily indicative of the results expected for the full fiscal year.

At
March 31, 2004, Specialty Finance Partners (SFP), a partnership
controlled by Capital Z Financial Services Fund, II, L.P., a Bermuda
partnership (together with SFP, Capital Z) owned preferred stock
representing approximately 42.7% of the Companys combined voting power in
the election of directors and approximately 90.0% of the combined voting power
in all matters other than the election of directors. Representatives or nominees
of Capital Z have five of the nine seats on the Board of Directors, and as
current members terms expire, Capital Z has the continuing right to
appoint and elect four directors and nominate one additional director. As a
result of its beneficial ownership and Board representation, Capital Z has, and
will continue to have, sufficient power to determine the Companys
direction and policies.

Note
2: Residual Forward Sale Facility with Related Party

The
Companys Residual Forward Sale Facility (the Residual
Facility), as amended with Capital Z Investments, L.P., a Bermuda
partnership (CZI), an affiliate of Capital Z, the Companys
largest shareholder, expired on March 31, 2003.

The
Company did not dispose of any of its loans through a securitization during the
nine months ended March 31, 2004. During the three months ended March 31, 2004
and 2003, the Company did not dispose of any of its loans through a
securitization. During the nine months ended March 31, 2003, the Company
securitized $315.0 million of mortgage loans and sold the residual interest
created therein to CZI for $8.7 million under the Residual Facility.

5

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In
connection with obtaining the Residual Facility, the Company initially
capitalized $3.3 million of costs, of which $3.0 million related to a facility
fee paid to CZI. During the three months ended March 31, 2003, the Company wrote
off the remaining unamortized Residual Facility costs of $0.2 million by
charging gain on sale. During the nine months ended March 31, 2003, amortization
of total capitalized Residual Facility costs charged to gain on sale of loans
was $0.8 million.

Note 3:
Guaranty Arrangements

The
Parent has guaranteed amounts outstanding under certain revolving warehouse and
repurchase agreements pursuant to which certain of its wholly-owned operating
subsidiaries are the contractual borrowers. The Parent has also guaranteed
amounts outstanding under a borrowing facility, secured by certain of the
operating subsidiarys residual interests and certain of that
subsidiarys advance receivables (the Financing Facility),
pursuant to which that subsidiary is the contractual borrower. The Parents
guarantees are full, complete and unconditional. On November 17, 2003, the
Company made a $33.0 million principal reduction on the Financing Facility and
Capital Z was released from its role as a limited guarantor on the Financing
Facility.

Note 4:
Per Share Data

The
following table sets forth information regarding basic and diluted net income
per common share for the three and nine months ended March 31, 2004 and 2003
(amounts in thousands, except per share data):

















6

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|                                                | Three
      Months Ended
      March 31, | Nine
      Months Ended
      March 31,
|----------------------------------------------- | ---------------------------------------- | ---------------------------------------
|                                                |                                          | **2004**                               
|**Basic
      net income per common share:**    |                                          |                                        
|Net income                                      |                                          | $   20,890                             
|Less:
      Accrued dividends on Series B, C    |                                          |                                        
|and
      D Convertible Preferred Stock         |                                          | (2,869                                 
|                                                |                                          |                                        
|Basic net
      income to common stockholders   |                                          | $   18,021                             
|                                                |                                          |                                        
|                                                |                                          |                                        
|Basic weighted
      average number of common   |                                          |                                        
|shares
      outstanding                        |                                          | 7,120                                  
|                                                |                                          |                                        
|Basic net
      income per common share         |                                          | $       2.53                           
|                                                |                                          |                                        
|                                                |                                          |                                        
|**Diluted
      net income per common share:**  |                                          |                                        
|Basic net
      income to common                |                                          |                                        
|stockholders                                    |                                          | $   18,021                             
|Plus:
      Accrued dividends on Series B,      |                                          |                                        
|C
      and D Preferred Stock                   |                                          | 2,869                                  
|Interest
      on 5.5% Convertible              |                                          |                                        
|Subordinated
      Debentures                   |                                          | 522                                    
|                                                |                                          |                                        
|Diluted net
      income to common stockholders |                                          | $   21,412                             
|                                                |                                          |                                        
|Basic weighted
      average number of common   |                                          |                                        
|shares
      outstanding                        |                                          | 7,120                                  
|Plus incremental
      shares from assumed:     |                                          |                                        
|Conversions
      of:                           |                                          |                                        
|Series
      B, C and D Convertible             |                                          |                                        
|Preferred
      Stock                           |                                          | 85,061                                 
|5.5%
      Convertible Subordinated             |                                          |                                        
|Debentures                                      |                                          | 824                                    
|Exercise
      of:                              |                                          |                                        
|Common
      stock options                      |                                          | 8,111                                  
|Warrants                                        |                                          | 3,684                                  
|                                                |                                          |                                        
|Diluted weighted
      average number of common |                                          |                                        
|shares outstanding                              |                                          | 104,800                                
|                                                |                                          |                                        
|Diluted net
      income per common share       |                                          | $       0.20                           
|                                                |                                          |                                        

During
the three and nine months ended March 31, 2003, conversion of the 5.5%
Convertible Subordinated Debentures due 2006 and 2012 was not assumed due to
their antidilutive effective.

Note
5: Pro forma Stock Based Compensation

The
Company applies Accounting Principles Board Opinion 25 and related
interpretations in accounting for its stock-based compensation plans and
arrangements. No compensation cost has been recognized for its stock option
plan. If compensation cost for the stock option plan and arrangements had been
determined based on the fair value at the grant dates for awards under this plan
consistent with the method prescribed by Statement of Financial Accounting
Standards (SFAS) No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure, an amendment of SFAS No.
123", the Companys net income and basic and diluted income per common
share during the three and nine months ended March 31, 2004 and 2003 would have
reflected the pro forma amounts indicated below (amounts in thousands, except
per share data):

7

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|                                                 | Three
      Months Ended
      March 31, | Nine
      Months Ended
      March 31,
|------------------------------------------------ | ---------------------------------------- | ---------------------------------------
|                                                 |                                          | **2004**                               
|Net income:                                      |                                          |                                        
|As
      reported                                |                                          | $     20,890                           
|Pro
      forma                                  |                                          | 20,405                                 
|Basic net
      income to common stockholders:   |                                          |                                        
|As
      reported                                |                                          | 18,021                                 
|Pro
      forma                                  |                                          | 17,536                                 
|Diluted net
      income to common stockholders: |                                          |                                        
|As
      reported                                |                                          | 21,412                                 
|Pro
      forma                                  |                                          | 20,927                                 
|Basic net
      income per common share:         |                                          |                                        
|As
      reported                                |                                          | 2.53                                   
|Pro
      forma                                  |                                          | 2.46                                   
|Diluted net
      income per common share:       |                                          |                                        
|As
      reported                                |                                          | 0.20                                   
|Pro
      forma                                  |                                          | 0.20                                   

The
fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions:

| | Three
      Months Ended
      March 31, | Nine
      Months Ended
      March 31,
| | ---------------------------------------- | ---------------------------------------
| |                                          | **2004**                               

|Dividend
      yield          |  | 0.00      | % | 0.00      | % | 0.00      | % | 0.00      | %
|----------------------------- |  | --------- | - | --------- | - | --------- | - | --------- | -
|Expected
      volatility     |  | 103.00    | % | 118.00    | % | 108.00    | % | 118.00    | %
|Risk-free
      interest rate |  | 2.99      | % | 2.97      | % | 2.99      | % | 2.97      | %
|Expected
      life of option |  | 4.5 years |   | 4.5 years |   | 4.5 years |   | 4.5 years |  

The
pro forma stock based compensation cost, net of tax effect was $0.5 million and
$0.2 million during the three months ended March 31, 2004 and March 31, 2003,
respectively, and was $1.1 million and $0.9 million during the nine months ended
March 31, 2004 and 2003, respectively.

Note
6: Income Taxes

Deferred
income tax assets and liabilities are recognized to reflect the future tax
consequences of net operating loss carry forwards and differences between the
tax basis and financial reporting basis of assets and liabilities. The
investment in the Company by Capital Z resulted in a change of control for
income tax purposes, thereby potentially limiting the Companys ability to
utilize net operating loss carry forwards and certain other future deductions.

8

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The
Company has recognized that it is more likely than not that certain future tax
benefits, primarily net operating loss carry forwards, will be realized as a
result of future income. Accordingly, during the three and nine months ended
March 31, 2004, the Company decreased its deferred tax valuation allowance to
recognize higher than previously anticipated net deferred tax assets. During the
three months ended March 31, 2004, the Company decreased its deferred tax
valuation allowance by $2.8 million to recognize higher than previously
anticipated net deferred tax assets for federal purposes and provided $2.7
million for state taxes. During the nine months ended March 31, 2004, the
Company decreased its deferred tax valuation allowance by approximately $22.1
million to recognize deferred tax assets. During the three and nine months ended
March 31, 2003, the Company provided $0.9 million and $3.1 million,
respectively, for taxes, substantially all of which related to tax on excess
inclusion income on the securitization trusts.

Note
7: Borrowings and Debt Extinguishment Income

On
December 13, 2002, the Company consummated its offer to exchange (the
Exchange Offer) its newly issued 5.5% Convertible Subordinated
Debentures due 2012 (the 2012 Debentures) for its outstanding 5.5%
Convertible Subordinated Debentures due 2006 (the 2006 Debentures).
The Company exchanged $49.6 million of the outstanding 2006 Debentures that were
tendered and issued an equal amount of 2012 Debentures. On December 23,
2002, the Company redeemed $19.8 million, or 40.0%, of the principal amount
outstanding on the 2012 Debentures through a scheduled mandatory sinking fund
payment. On December 31, 2002, SFP forgave $25.0 million principal balance of
its 2012 Debentures due it from the Company. At March 31, 2004, amounts
outstanding under the 2006 Debentures were $64.4 million. The $4.8 million of
2012 Debentures were fully redeemed on June 30, 2003.

During
the three and nine months ended March 31, 2003, the Company redeemed $3.0
million and $22.1 million, respectively, of its 9.125% Senior Notes (the
Senior Notes) at discounts from par for $2.9 million and $19.9
million, respectively.

During
the three and nine months ended March 31, 2003, debt extinguishment income was
$0.1 million and $27.2 million, respectively. All of the $0.1 million of debt
extinguishment income during the three months ended March 31, 2003 related to
the redemption of the Companys Senior Notes. Of the $27.2 million of debt
extinguishment income during the nine months ended March 31, 2003, $25.0
million and $2.2 million related to the redemption of the 2012 Debentures and
Senior Notes, respectively.

Note
8. Stockholders Equity

During
the nine months ended March 31, 2004, the Company cancelled 30,000 shares of
Series C Convertible Preferred Stock. During the nine months ended March 31,
2004, the Company paid $61.4 million of dividends on its Series B, C and D
Convertible Preferred Stock, of which $2.9 million was paid during the three
months ended March 31, 2004.

9

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On
September 16, 2003, the Company amended and restated its certificate of
incorporation permitting the Company to issue up to 26.7 million shares of
Series E Preferred Stock, par value $0.001 per share, and reduced the number of
authorized shares of Series C Convertible Preferred Stock accordingly.

Note
9: Reclassifications

Certain
amounts in the fiscal 2003 financial statements have been reclassified to
conform to the fiscal 2004 presentation.

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 Aames Financial Corporation (the Company)
  should be read in conjunction with the Companys Condensed Consolidated
  Financial Statements included in Item 1 of this Form 10-Q.

Item
  3. Quantitative and Qualitative Disclosures About Market Risk. The following
  discussion includes Managements Discussion and Analysis of Financial Condition
  and Results of Operations and Quantitative and Qualitative Disclosures about
  Market Risk.

Special
Note Regarding Forward-Looking Information

From
time to time the Company may publish forward-looking statements relating to such
matters as anticipated financial performance, business prospects and similar
matters. The Private Securities Litigation Reform Act of 1995 provides a safe
harbor for forward-looking statements. In order to comply with the terms of the
safe harbor, the Company notes that a variety of factors could cause the
Companys actual results and experience to differ materially from the
anticipated results or other expectations expressed in the Companys
forward-looking statements. The risks and uncertainties that may affect the
operations, performance and results of the Companys business include the
following: increases in mortgage lending interest rates; adverse changes in the
secondary market for mortgage loans; decline in real estate values; limited cash
flow to fund operations; dependence on short-term financing facilities;
concentration of operations in California, Florida and Texas; extensive
government regulation; intense competition in the mortgage lending industry and
the condition of the U.S. economy and financial system. For a more complete
discussion of these risks and uncertainties, see Item 7. Managements
Discussion and Analysis of Financial Condition and Results of Operations 
Risk Factors in the Companys Annual Report on Form 10-K for the year
ended June 30, 2003 and subsequent filings by the Company with the United States
Securities and Exchange Commission.

General

The
Company is a consumer finance company primarily engaged, through its
subsidiaries, in the business of originating, selling and servicing mortgage
loans collateralized by single family residences. Upon its formation in 1991,
the Company acquired Aames Home Loan, a home equity lender making loans in
California since it was founded in 1954. In 1995, the Company expanded its
retail presence outside of California and began purchasing loans from
correspondents. In August 1996, the Company acquired its broker production
channel through the acquisition of One Stop Mortgage, Inc. In 1999, the
Company consolidated its loan production channels into one company, and the
retail and broker production channels now operate under the name Aames
Home Loan.

10

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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 residential mortgage loan market and
present an opportunity to earn a superior return for the risk assumed. The
residential mortgage loans originated by the Company, which include fixed and
adjustable rate loans, are generally used by borrowers to consolidate
indebtedness, to finance other consumer needs, to purchase homes and, to a
lesser extent, to refinance existing mortgage indebtedness.

The
Company originates loans through its retail and broker production channels. The
Companys retail channel produces loans through its retail branch network
and through the National Loan Centers, which serve customers outside of areas
served by branches and customers obtained through affiliations with sites on the
Internet. The Companys broker channel produces loans through account
executives working throughout the United States, including purchasing a limited
amount of closed loans from mortgage brokers on a continuous or flow
basis, and by sourcing loans through telemarketing and the Internet.

*Business
  Strategy.* The Company continues to focus on increasing its profitability
  through executing its core business strategy of: (i) increasing the amount
  and value of its loan production; (ii) reducing its unit cost of production;
  and (iii) maintaining adequate liquidity and access to the capital markets.

Continuing
to Improve our Efficiency and Loan Quality and Serving as an Efficient High
Quality Originator. We intend to accomplish this by increasing the use of
technology to streamline further our loan origination and underwriting
processes, by rigorously applying and continuously improving our underwriting
criteria and processes in order to minimize defaults and losses and by
collecting comprehensive performance data on our portfolio to refine our
underwriting guidelines and risk-based pricing.

Growing
our loan originations by growing both our retail and wholesale channels,
improving market penetration in our existing markets, increasing loan
originations through the Internet and building the Aames Home Loan
brand. In addition, we will continue to originate loan products that are less
sensitive to increases in interest rates than rate-term refinance mortgage
loans, such as purchase money mortgage loans and cash-out refinance loans, which
we believe makes our originations less vulnerable to declines resulting from
increases in interest rates.

Maintaining
Adequate Liquidity and Access to the Capital Markets. The Company intends to
continue to increase and diversify its funding sources by expanding its current
funding relationships and identifying new funding sources. The Company intends
to continue to fund its operations by disposing of a majority of its loan
production for cash in the whole loan market, monetizing the
overcollateralization on the Companys portfolio of mortgage loans in
securitization trusts, monetizing residual interests, mortgage servicing rights
and the rights to prepayment fees on the mortgage loans in its new
securitizations, if any, monetizing servicing advances and developing new
sources for working capital.

11

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The
strategies discussed above contain forward-looking statements. Such statements
are based on current expectations and are subject to risks, uncertainties and
assumptions, including those discussed under Item 7.
Managements Discussion and Analysis of Financial Condition and Results of
OperationsRisk Factors included in the Companys Annual Report
on Form 10-K for the year ended June 30, 2003. Should one or more of
these risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those anticipated, estimated
or projected. Thus, no assurance can be given that the Company will be able to
accomplish the above strategies.

Recent
Events

Proposed
REIT Conversion. On March 24, 2004, Aames Investment Corporation, a
wholly-owned subsidiary of the Company, filed preliminary registration
statements on Forms S-4, including the preliminary joint proxy
statement/prospectus constituting a part thereof, and S-11 with the United
States Securities and Exchange Commission in connection with the Companys
proposed conversion into a real estate investment trust, or REIT, and initial
public offering.

After
  careful review, on May 12, 2004 the Companys Board of Directors unanimously
  approved a plan to change the Companys corporate structure to become a
  REIT and conduct an initial public offering of the shares of Aames Investment
  common stock, subject to relevant legal, accounting and financial matters and
  stockholder approval.

Registration
statements relating to the issuance of Aames Investment common stock in
connection with the proposed REIT conversion and initial public offering have
been filed with the SEC but have not yet become effective. These securities may
not be sold nor may offers to buy be accepted prior to the time the registration
statements become effective. This disclosure shall not constitute an offer to
sell or the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of any
such State.

Aames
Investment will file a final Form S-4 registration statement, including a
definitive joint proxy statement/prospectus constituting a part thereof, and
other documents with the SEC. Stockholders of the Company are encouraged to read
the registration statement and any other relevant documents filed with the SEC,
including the joint proxy statement/ prospectus that will be part of the
registration statement, because they will contain important information about
the proposed merger. The final joint proxy statement prospectus will be mailed
to shareholders of the Company. Investors and security holders are able to
obtain the documents free of charge at the SECs web site,
www.sec.gov. After the registration statement containing the joint proxy
statement/prospectus is declared effective by the SEC, the joint proxy
statement/prospectus and other documents will be available free of charge by
directing a request to John F. Madden, Jr., Secretary, Aames Financial
Corporation, 350 South Grand Avenue, 43rd Floor, Los Angeles,
California 90071, or emailing the Companys Investor Relations Department
at info@aamescorp.com.

12

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The
  Company, Aames Investment, their directors, and certain of their executive officers
  may be considered participants in the solicitation of proxies in connection
  with the proposed reorganization and information about such persons interest
  therein, including by way of security holdings or otherwise, may be found in
  the proxy statement for the Companys 2003 annual meeting of stockholders
  and in the registration statement on Form S-4 filed by Aames Investment, including
  the definitive proxy statement/prospectus constituting a part thereof that will
  be sent to the Companys stockholders.

The
  statements above regarding the Companys REIT conversion may be deemed
  to be forward-looking statements under federal securities laws and the Company
  intends that such forward-looking statements be subject to the safe-harbor created
  thereby. Such forward-looking statements include, but are not limited to, the
  expectation that the Company will complete the REIT conversion.

During
the three months ended March 31, 2004, the Company recorded net income of
$20.9 million compared to $6.7 million of net income during the comparable
three month period a year ago.

Total
revenue during the three months ended March 31, 2004 increased $30.2 million to
$95.7 million from $65.5 million during the comparable three month period a year
ago. During the three months ended March 31, 2004, the Company did not record
any debt extinguishment income and did not write down its residual interests.
Total revenue during the three months ended March 31, 2003 includes $0.1
million of debt extinguishment income. Excluding the $0.1 million of debt
extinguishment income during the three months ended March 31, 2003, operating
revenue increased $30.3 million during the three months ended March 31, 2004
from operating revenue during the comparable three month period in 2003. The
$30.3 million increase in operating revenue was comprised of increases of $27.8
million, $1.0 million, $0.9 million and $0.6 million, in gain on sale of loans,
interest income, loan servicing fees and origination fees, respectively.

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Total
expenses during the three months ended March 31, 2004 increased $17.0 million to
$74.9 million from $57.9 million during the three months ended March 31, 2003.
The increase in expenses during the three months ended March 31, 2004 from
expenses reported during the comparable three month period a year ago was
attributable primarily to increases of $14.7 million, $3.5 million and $0.5
million in personnel, production and general and administrative expenses,
respectively, partially offset by a $1.7 million decrease in interest expense.

As
previously reported, on March 31, 2004, the Company made dividend payments of
$2.9 million on its Series B Convertible Preferred Stock, Series C Convertible
Preferred Stock, and Series D Convertible Preferred Stock (collectively, the
Preferred Stock). The Company had previously obtained waivers from
certain lenders permitting the Company to pay the dividend on its Preferred
Stock.

**Business**

Mortgage
Loan Production. The Company originates mortgage loans through its retail
and broker production channels. The Companys retail channel produces loans
through its retail branch network and through the National Loan Centers, which
serve customers located outside areas served by the retail branch network and by
customers obtained through affiliations with sites on the Internet. The
Companys broker channel produces loans through account executives working
throughout the United States, including purchasing a limited amount of closed
loans from mortgage brokers on a continuous or flow basis, and by
sourcing loans through telemarketing and the Internet. The Company generally
underwrites the loans it originates to its underwriting guidelines and, to a
lesser extent, to the underwriting guidelines of its investors in the secondary
markets, and appraises the collateral on every loan it originates. The
underwriting of a mortgage loan to be originated by the Company generally
includes a review of the completed loan package, including the loan application,
a current appraisal, a preliminary title report and a credit report.











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The
following table presents the volume of loans originated by the Company during
the periods presented (in thousands):

|                       | Three
      Months Ended | Nine Months
      Ended
|---------------------- | ------------------------ | -----------------------
|                       |                          | **March
        31,**  
|                       |                          | **2004**               
|                       |                          |                        
|Retail                 |                          | $   586,527            
|Broker(1)              |                          | 1,279,701              
|                       |                          |                        
|Total
      production |                          | $1,866,228             
|                       |                          |                        

|(1) |  | The Company did not purchase closed loans on a flow basis from correspondents
during the three months ended March 31, 2004. Includes the purchase of closed
loans on a flow basis from correspondents of $6.8 million and $0.2 million
during the three months ended March 31, 2003 and December 31, 2003,
respectively, and $4.1 million and $11.1 million during the nine months ended
March 31, 2004 and 2003, respectively.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Total
Loan Production. Total loan production during the three months ended March
31, 2004 increased $206.7 million, or 12.5%, to $1.9 billion over the $1.7
billion reported during the three months ended December 31, 2003, and increased
$849.4 million, or 83.5%, over the $1.0 billion of total loan production
reported during the three months ended March 31, 2003. Total loan production
during the nine months ended March 31, 2004 increased $1.7 billion, or 52.6%, to
$5.0 billion over the $3.3 billion of total loan production during the nine
months ended March 31, 2003. Total loan production during the three and
nine months ended March 31, 2004 increased due to continued strong demand for
sub-prime mortgage products, growth of the Companys wholesale and retail
sales force, improved marketing results, and geographic expansion of our
wholesale channel.

Retail
Production. The Companys total retail production was $586.5 million
during the three months ended March 31, 2004, a decrease of $5.3 million, or
0.1%, from the $591.9 million of total retail production during the three months
ended December 31, 2003, and an increase of $192.3 million, or 48.8%, over the
$394.2 million of total retail production during the three months ended
March 31, 2003. During the nine months ended March 31, 2004, total retail
production was $1.8 billion, an increase of $392.5 million, or 28.8%, over the
$1.4 billion of total retail production during the nine months ended March 31,
2003.

Broker
Production. The Companys total broker production increased $212.1
million, or 19.9%, to $1.3 billion during the three months ended March 31,
2004 over the $1.1 billion of total broker production during the three months
ended December 31, 2003, and increased $657.1 million, or 105.6%, over the
$622.6 million reported during the three months ended March 31, 2003.
During the nine months ended March 31, 2004, total broker mortgage loan
production increased $1.3 billion, or 69.3%, to $3.3 billion over the $1.9
billion of total broker production during nine months ended March 31, 2003.

15

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Through
its Broker Direct program, the Company makes outbound telemarketing
calls to brokers that have been inactive for the past 90 days and brokers who
are not currently doing business with the Company or are outside the geographic
areas served by the loan officers. The Company also obtains leads through its
internet web site Aamesdirect.com. The Company expects Broker
direct to continue to generate an increasing dollar amount and percentage
of broker loan production in the coming quarters as general market acceptance by
brokers of broker telemarketing and Internet use grows and the Company continues
to enhance its Broker Direct capabilities.

The
following table sets forth the number of retail branches and broker operations
centers operated by the Company at March 31, 2004 and 2003:

|                                         | March
      31,
|---------------------------------------- | ---------------
|                                         |                
|                                         |                
|Retail branches                          |                
|National
      Loan Centers              |                
|Regional
      broker operations centers |                

Loan
Securitizations and Sales. As a fundamental part of its business and
financing strategy, the Company sells mortgage loans to third party investors in
the secondary markets as market conditions allow. The Company generally seeks to
dispose of substantially all of its loan production within 90 days. The
Company applies the net proceeds of the loan dispositions, whether through
securitizations or whole loan sales, to pay down its warehouse and repurchase
facilities in order to make available capacity under these facilities for future
funding of mortgage loans. The Company maximizes opportunities in its loan
disposition transactions by selling its loan production through a combination of
securitizations and whole loan sales, depending on market conditions, relative
profitability and cash flows. The Company generally realizes higher gain on sale
on securitization than it does on whole loan sales for cash. The higher gain on
sale in securitization transactions is attributable to the excess servicing
spread associated with retaining a residual interest in the securitization, net
of transactional costs. In a securitization, the underlying pass-through
certificates or bonds are generally overcollateralized by the Company depositing
mortgage loans with a principal balance exceeding the principal balance of the
pass-through certificates or bonds. The upfront overcollateralization required
in securitizations is generally cash flow negative to the Company in the early
years of the securitization. In whole loan sales with servicing released, the
gain on sale is generally lower than gains realized in securitizations, but the
Company receives the gain in the form of cash.











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The
following table sets forth certain information regarding the Companys loan
dispositions during the three months ended March 31, 2004, 2003 and December 31,
2003, and the nine months ended March 31, 2004 and 2003 (in thousands):

|                               | Three
      Months EndedMarch 31, | December
      31, | Nine Months
      EndedMarch 31,
|------------------------------ | --------------------------------- | ------------------ | --------------------------------
|                               |                                   | **2004**           | ****                            
|                               |                                   |                    |                                 
|Whole loan
      sales         |                                   | $1,763,435         |                                 
|Loans pooled
      and sold in |                                   |                    |                                 
|securitizations                |                                   | --                 |                                 
|                               |                                   |                    |                                 
|Total
      loan dispositions  |                                   | $1,763,435         |                                 
|                               |                                   |                    |                                 

During
the three months ended March 31, 2004, total mortgage loan dispositions
increased $48.8 million, or 2.8%, to $1.8 billion over the $1.7 billion of total
loan dispositions reported during the three months ended December 31, 2003, and
increased $515.3 million, or 41.3%, over the $1.2 billion of total loan
dispositions during the three months ended March 31, 2003. Total loan
dispositions during the nine months ended March 31, 2004 increased $1.3 billion,
or 39.5%, to $4.7 billion over the $3.3 billion of total loan dispositions
reported during the comparable nine month period a year ago. All of the
Companys $1.8 billion and $4.7 billion of loan dispositions during the
three and nine months ended March 31, 2004, respectively, were in the form of
whole loan sales for cash with servicing released. The Companys sole
reliance on whole loan sales as its loan disposition strategy during the three
and nine months ended March 31, 2004 was due to attractive pricing conditions
prevailing in the whole loan sale markets. During the three months ended
March 31, 2003, loans sold in whole loan sales for cash and with servicing
released were $1.2 billion. During the nine months ended March 31, 2003, loans
sold in securitizations and whole loan sales for cash were $315.0 million and
$3.0 billion, respectively. The Company relied more heavily upon whole loan
sales than upon securitizations as its loan disposition strategy during the
three and nine months ended March 31, 2003 due to attractive pricing conditions
prevailing in the whole loan markets during such periods and, to a lesser
extent, due to the limited capacity in the Residual Facility until its
expiration which occurred on March 31, 2003. Changes in the secondary mortgage
markets, the current interest rate environment and the current economic climate
could affect the mix in the composition of the Companys strategy of
selling loans in the form of securitizations or whole loan sales.

In
prior quarters, when the Company disposed of loans in securitization
transactions, each agreement that the Company entered into in connection with
such securitizations required either the overcollateralization of the trust or
the establishment of a reserve account that may initially be funded by cash
deposited by the Company. If delinquencies or losses exceed certain established
limits, as applicable, certain additional credit-enhancement aspects of the
trust are triggered. In a securitization credit-enhanced by a monoline insurance
policy, any further losses experienced in excess of the established
overcollateralization amount by holders of the senior interests in the related
trust will be paid by the insurer under such policy. To date, there have been no
claims on any monoline insurance policy obtained in any of the Companys
securitizations. In a senior/subordinated structure, losses in excess of the
overcollateralization amount generally are allocated first to the holders of the
subordinated interests and then to the holders of the senior interests of the
trust.

17

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Loan
Servicing. Servicing includes collecting and remitting loan payments,
accounting for principal and interest, contacting delinquent borrowers, managing
borrower defaults and liquidating foreclosed properties. As a means to maximize
cash flow from securitizations, the Company has, since January 2000, been
selling the servicing rights in securitizations for cash. Moreover, the Company
does not retain servicing on loans it sells in whole loan sale markets.

The
Companys servicing portfolio consists mainly of mortgage loans securitized
prior to January 1, 2000 for which the Company retained servicing and loans
serviced on an interim basis, consisting of loans held for sale and loans
subserviced for others on an interim basis.

The
following table sets forth certain information regarding the Companys
servicing portfolio at March 31, 2004 and 2003 and June 30, 2003 (dollars
in millions):

|                                         | March 31, | June
      30,
|---------------------------------------- | --------- | --------------
|                                         |           | **2004**      
|Mortgage
      loans serviced:           |           |               
|Loans
      serviced on an interim basis |           | $   2,074.7   
|Loans
      in securitization trusts     |           | 260.7         
|                                         |           |               
|serviced
      in-house                  |           | 2,335.4       
|Loans
      in securitization trusts     |           |               
|subserviced
      by others              |           | 59.7          
|                                         |           |               
|Total
      servicing portfolio          |           | $   2,395.1   
|                                         |           |               
|Percentage
      serviced in-house       |           | 97.5          
|                                         |           |               

Excluding
loans serviced on an interim basis, the Company has not added any new loans to
the servicing portfolio since January 1, 2000 due to the Companys sale of
all of its mortgage loan production in whole loan sales and securitizations with
servicing released since that time. The Companys total servicing portfolio
at March 31, 2004 increased $655.1 million, or 37.6%, to $2.4 billion over
$1.7 billion at June 30, 2003, reflecting a $1.2 billion increase in loans
serviced on an interim basis partially offset by a $508.6 million decline in
mortgage loans serviced in securitization trusts due to the Companys call
of certain securitization trusts and, to a lesser extent, loan servicing
portfolio runoff, in the form of principal amortization, prepayments and
liquidations. The Companys portfolio of mortgage loans serviced on an
interim basis increased $1.2 billion to $2.1 billion at March 31, 2004 over
$911.0 million at June 30, 2003, and increased $975.4 million over the $1.1
billion of mortgage loans serviced on an interim basis at March 31, 2003. The
increase at March 31, 2004 was attributable to the Companys increased
mortgage loan production volumes resulting in higher loans held for sale
serviced by the Company on its own behalf and to increased loan disposition
volumes resulting in increased interim servicing for loan buyers who have not
transferred the loans to new servicers.

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The
  Companys portfolio of mortgage loans in securitization trusts serviced
  in-house, declined by $480.3 million, or 64.8%, to $260.7 million at March 31,
  2004 from $741.0 million at June 30, 2003 due primarily to calls of securitization
  trusts in August, 2003 and November, 2003 which caused the Companys portfolio
  of mortgage loans in securitization trusts to decline by $304.1 million and,
  to a lesser extent, portfolio run-off. The Companys $260.7 million portfolio
  of mortgage loans in securitization trusts serviced in-house at March 31,
  2004 reflected a decrease of $592.0 million, or 69.4%, from the $852.7 million
  at March 31, 2003. The decrease is due to the Company calling seventeen securitization
  trusts and, to a lesser extent, to servicing portfolio run-off, in the form
  of principal amortization, prepayments and liquidations.

The Company expects six of the remaining seven securitization trusts, which
  had a mortgage loan balance at March 31, 2004 of $236.3 million, to be
  callable in calendar year 2004 and expects to call these securitization trusts
  by the end of calendar year 2004.

The
following table sets forth delinquency, foreclosure, and loss information of the
Companys servicing portfolio at or during the periods indicated:

|                                                         | At or during
      the
|-------------------------------------------------------- | ----------------------
|
|
|                                                         |                       
|Percentage
      of dollar amount of delinquent loans to |                       
|loans
      serviced (period end)(1)(2):                 |                       
|One month                                                |                       
|Two months                                               |                       
|Three or
      more months:                              |                       
|Not
      foreclosed(3)                                  |                       
|Foreclosed(4)                                            |                       
|                                                         |                       
|Total                                                    |                       
|                                                         |                       
|                                                         |                       
|Percentage
      of total dollar amount of delinquent    |                       
|loans
      in:                                          |                       
|Loans
      serviced on an interim basis                 |                       
|Loans
      in securitization trusts serviced in-house   |                       
|and
      by others                                      |                       
|Percentage
      of dollar amount of loans foreclosed    |                       
|during
      the period to servicing portfolio(2)(6)     |                       
|Number of
      loans foreclosed during the period       |                       
|Principal
      amount of foreclosed loans during the    |                       
|period                                                   |                       
|Number of
      loans liquidated during the period       |                       
|Net losses
      on liquidations during the period(5) .  |                       
|Percentage
      of annualized losses to servicing       |                       
|portfolio(2)(6)                                          |                       
|Servicing
      portfolio at period end                  |                       

_________________

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|(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  serviced  by the  Company,  and any  subservicers  as
of the end of the  periods  indicated,  including  loans  serviced on an interim  basis
of $2.1  billion and $1.1 billion at March 31, 2004 and 2003,  respectively,  and $911.0
million,  $991.0  million  and $722.0  million  at June 30,  2003,  2002 and 2001,
respectively.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Represents
loans which are in foreclosure but as to which foreclosure proceedings have not concluded.
|--- |  | -----------------------------------------------------------------------------------------------------

|(4) |  | Represents
properties  acquired  following a foreclosure sale and still serviced by the Company at
period  end.
|--- |  | ---------------------------------------------------------------------------------------------------------------

|(5) |  | Represents
losses,  net of gains,  on properties  sold through  foreclosed  or other  default
management  activities during the period indicated.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------

|(6) |  | The
percentages  were calculated to reflect the dollar volume of loans  foreclosed or
annualized  losses,  as the case may be,  to the  average  dollar  amount  of  mortgage
loans  serviced  by the  Company  and any  subservicers during the related periods
indicated.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The
Company has historically experienced delinquency rates that are higher than
those prevailing in this industry due to the inclusion of lower credit grade
mortgage loans in the securitization trusts. Delinquent loans (by principal
balance) decreased at March 31, 2004 to $80.7 million from $156.5 million
at June 30, 2003 and from $167.6 million at March 31, 2003. Total
delinquent loans in the Companys portfolio of securitization trusts
(serviced in-house and by others) were $64.9 million and $144.3 million at March
31, 2004 and June 30, 2003, respectively, and were $155.0 million at March 31,
2003. Total delinquent loans in the Companys portfolio of loans serviced
on an interim basis were $15.8 million and $12.2 million at March 31, 2004
and June 30, 2003, respectively, and were $12.6 million at March 31,
2003.

The
delinquency rate at March 31, 2004 was 3.4% compared to 9.0% at June 30,
2003 and 8.2% at March 31, 2003. The delinquency rate at March 31, 2004 declined
from the delinquency rate at June 30, 2003 due to the fact that loans in
the Companys portfolio of mortgage loans in securitization trusts, which
contains the majority of delinquent loans, became a smaller part of the
Companys total servicing portfolio, primarily as a consequence of calls of
securitization trusts in August 2003 and November 2003. A decline in
delinquencies of loans in securitization trusts generally reduces the
Companys servicing advance obligations. The Company expects the
delinquency rate to continue to decline as the Companys portfolio of
mortgage loans in securitization trusts (and the number of delinquent loans in
such trusts) continues to decline and become a smaller component of the
Companys total servicing portfolio.

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During
the nine months ended March 31, 2004, losses on loan liquidations decreased to
$14.8 million from $28.6 million during the comparable nine month period a
year ago primarily due to the decrease in the number of loans liquidated.
Substantially all of the foreclosures and liquidations handled by the Company
occur in connection with the Companys portfolio of mortgage loans in
securitization trusts. The Company expects net losses on loan liquidations to
continue to decline as the Companys portfolio of mortgage loans in
securitization trusts (and the number of foreclosed loans in such trusts)
continues to decline.

Because
foreclosures and credit losses typically occur months or years after a loan is
originated, data relating to delinquencies, foreclosures and credit losses as a
percentage of the current portfolio can understate the risk of future
delinquencies, foreclosures or credit losses.

In
the case of securitizations credit-enhanced by monoline insurance, the
agreements also typically provide that the Company may be terminated as servicer
by the monoline insurance company (or by the trustee with the consent of the
monoline insurance company) upon certain events of default, including the
Companys failure to perform its obligations under the servicing agreement,
the rate of over 90-day delinquent loans (including properties acquired by
foreclosure and not sold) exceeding specified limits, losses on liquidation of
collateral exceeding certain limits, any payment being made by the monoline
insurance company under its policy, and events of bankruptcy or insolvency.
Pursuant to agreements relating to the Companys two 1999 securitization
trusts, the monoline insurer requires the Company to maintain a specified net
worth and level of liquidity in order to be able to continue to service the
loans in those securitization trusts. Previously, the Company did not satisfy
the net worth test and, as a result, the monoline insurer could have terminated
the Company as servicer with respect to those securitization trusts. The
monoline insurer waived the Companys failure to satisfy the net worth test
and none of the servicing rights of the Company were terminated. At March 31,
2004, the Company met the specified net worth and liquidity tests.

The
table below illustrates certain information regarding those securitization
trusts that have exceeded delinquency and loss triggers at March 31, 2004,
December 31, 2003 and June 30, 2003 (dollars in thousands):

|                                                  | March 31,
      2004 | December 31,
      2003 | June 30, 2003
|------------------------------------------------- | -------------------- | ----------------------- | -------------
|Securitization
      trusts:                      |                      |                         |              
|Number                                            |                      | 7                       |              
|Total
      dollar amount of mortgage loans       |                      |                         |              
|serviced
      in securitization trusts           |                      |                         |              
|(in-house
      and subserviced)                  |                      | $320,469                |              
|Securitization
      trusts where the Company may |                      |                         |              
|be
      terminated as servicer:                  |                      |                         |              
|Number                                            |                      | 7                       |              
|Dollar
      amount of mortgage loans serviced    |                      |                         |              
|in
      securitization trusts (in-house and      |                      |                         |              
|subserviced)                                      |                      | $320,469                |              
|Percentage
      of total dollar amount of        |                      |                         |              
|mortgage
      loans serviced in                  |                      |                         |              
|securitization
      trusts (in-house and         |                      |                         |              
|subserviced)                                      |                      | 100.0%                  |              

The
Companys servicing portfolio will continue to be impacted in the future by
the Companys dispositions of its loan production through whole loan sales
and securitizations on a servicing released basis, which has resulted in a
smaller servicing portfolio.

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Critical
Accounting Policies

The
Company retained the residual interests created in all of the $7.0 billion of
securitizations which closed prior to and during the year ended June 30, 2000.
The Company did not retain residual interests created in any of its
securitizations since July 1, 2000. During the three months ended March 31,
2004, the Company did not dispose of any of its loans through a securitization.

The
Company sells its loans in whole loan sale transactions on a cash basis. In
whole loan sale transactions, the buyer acquires all future rights, including
mortgage servicing rights, to the loans, without recourse to the Company except
for standard representations and warranties, including a requirement that
borrowers make their first payment subsequent to the transfer of servicing.
Gains and losses on whole loan sales are recognized when the Company surrenders
control over the loans, generally on the settlement date, based upon the
difference between the proceeds received and the net carrying amount of the
loans.

Accounting
for Securitizations. The Companys loan disposition strategy relies on
a combination of securitization transactions and whole loan sales. The following
discusses certain accounting considerations which arise only in the context of
securitization transactions.

In
a securitization, the Company conveys loans that it has originated, and formerly
purchased, to a special purpose entity (such as a trust) in exchange for cash
proceeds and a residual interest in the trust. The cash proceeds are raised
through an offering of the pass-through certificates or bonds evidencing the
right to receive principal payments and interest on the certificate balance or
on the bonds. The non-cash gain on sale of loans represents the difference
between the portion sold and any retained interests (residual interests) based
on their relative fair values at the date of transfer. The residual interests
represent, over the estimated life of the loans, the present value of the
estimated cash flows. These cash flows are determined by 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, a monoline insurance fee,
if any, and an estimate for credit losses. Each agreement that the Company has
entered into in connection with its securitizations requires the
overcollateralization of the trust that may initially be funded by cash
deposited by the Company. The amount and timing of the cash flows expected to be
released from the securitization trusts considers the impact of the applicable
delinquency and credit loss limits specified in the securitization agreements.

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) credit losses; and (iii) discount rate used to
calculate present value. The future cash flows represent managements best
estimate. Management monitors the performance of the loans, and any changes in
the estimates are reflected in earnings. There can be no assurance of the
accuracy of managements estimates.

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The
Companys retained residual interests 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 its retained residual
interests by analyzing its prepayment, credit loss and discount rate assumptions
in relation to its actual experience and current rates of prepayment and credit
loss prevalent in the industry. Additionally, on a quarterly basis, the Company
evaluates the effects, if any, that increasing or decreasing interest rates
might have on its retained residual interests. The Company may adjust the value
of its retained residual interests or take a charge to earnings related to its
retained residual interests, as appropriate, to reflect a valuation or
write-down of its residual interests based upon the actual performance of the
Companys retained residual interests as compared to the Companys key
assumptions and estimates used to determine fair value. Although management
believes that the assumptions used to estimate the fair values of its retained
residual interests are reasonable, there can be no assurance as to the accuracy
of the assumptions or 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, 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 including, but not limited to, a
declining mortgage interest rate environment.

Credit
Losses. In determining the estimate for credit losses on loans securitized,
the Company uses assumptions that it believes are reasonable based on
information from its prior securitizations, the loan-to-value ratios and credit
grades of the loans included in the securitizations, loss and delinquency
information by origination channel, and information available from other market
participants such as investment bankers, credit providers and credit rating
agencies. On a quarterly basis, the Company re-evaluates its credit loss
estimates.

Discount
Rate. In order to determine the fair value of the cash flow from the
residual interests, the Company discounts the cash flows based upon rates
prevalent in the market.

The
following table summarizes certain information about the securitization trusts
in which the Company had retained a residual interest at March 31, 2004 and
June 30, 2003 (dollars in thousands):

|                                                                                     | March 31, 2004 | June 30, 2003
|------------------------------------------------------------------------------------ | -------------- | -------------
|Aggregate principal balances of securitized loans at the time of the securitizations |                | $3,304,181   
|Outstanding
      principal balances of securitized loans                            |                | $   320,469  
|Outstanding principal balances of pass-through certificates or bonds of the          |                |              
|securitization trusts                                                                |                | $   261,409  
|Weighted average coupon rates of:                                                    |                |              
|Securitized
      loans                                                              |                | 10.11        
|Pass-through certificates or bonds                                                   |                | 5.66         

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Certain
historical data and key assumptions and estimates used by the Company in its
March 31, 2004 and June 30, 2003 review of the residual interests
retained by the Company were as follows:

|                                                                                      | March 31,
      2004 | June 30, 2003         
|------------------------------------------------------------------------------------- | -------------------- | ----------------------
|**Prepayments:**                                                                      |                      |                       
|Actual
      weighted average annual prepayment rate, as a percentage of outstanding  |                      |                       
|principal
      balances of securitized loans                                         |                      |                       
|Fixed
      rate loans                                                                |                      | 35.8%                 
|Adjustable
      rate                                                                 |                      | 37.0%                 
|Estimated
      annual prepayment rates, as a percentage of outstanding principal     |                      |                       
|balances
      of securitized loans:                                                  |                      |                       
|Fixed
      rate loans                                                                |                      | 24.3%
        to 57.1%
|Adjustable
      rate loans                                                           |                      | 18.8%
        to 46.8%
|Estimated
      weighted average life of securitized loans                            |                      | 2.0
        years     
|**Credit
      losses:**                                                              |                      |                       
|Actual
      credit losses to date, as a percentage of original principal balances of |                      |                       
|securitized
      loans                                                               |                      | 5.3%                  
|Future
      estimated credit losses, as a percentage of original principal balances  |                      |                       
|of
      securitized loans                                                            |                      | 0.5%                  
|Total
      actual and estimated prospective credit losses, as a percentage of        |                      |                       
|original
      principal balance of securitized loans                                 |                      | 5.8%                  
|Total
      actual credit losses to date and estimated prospective credit losses      |                      |                       
|(dollars
      in thousands)                                                          |                      | $
        190,045     
|**Weighted
      average discount rate**                                              |                      | 13.7%                 

To
estimate the effects of changes in interest rates on the coupon rates of the
adjustable rate mortgage loans, the Company considers current underlying
indices, periodic interest rate caps, lifetime interest rate caps and
contractual interest rate floors. In determining the interest rates for the
floating rate pass-through certificates in the securitization trusts, the
Company uses each certificates specific spread over the one-month LIBOR.

The
total actual and estimated credit losses, as a percentage of original principal
balance of securitized loans in each securitization trust in which the Company
had a retained residual interest, ranged from 4.5% to 7.0% at March 31, 2004 and
3.9% and 9.3% at June 30, 2003. Actual and estimated credit losses vary
between securitization trusts due to differing credit quality, i.e., credit
grade, production channel and other factors considered by the Company when
evaluating credit loss estimates.

The
Company has previously disclosed that if actual credit losses and actual
prepayment trends exceeded the Companys credit loss and prepayment rate
assumptions, it would be required to adjust earnings to reflect changes in its
credit loss and prepayment assumptions. In its regular quarterly review of its
residual interests during the three months ended March 31, 2004, the Company
considered the historical performance of its securitized pools, the recent
prepayment experience of loans in those pools, the credit loss performance of
loans in previously securitized pools, other industry data and economic factors
prevailing in the U.S. economy. During the three months ended March 31, 2004 and
2003, no adjustment to the Companys assumptions (rate of prepayment,
credit loss and discount rate) was deemed warranted.

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Additionally,
  as master servicer of the mortgage loans in the securitization trusts, the Company
  has the right to call the securitization trusts when the remaining balance of
  the mortgage loans sold in the securitization trusts falls below 10.0% of the
  original mortgage loan balance. In August 2003 and November 2003, the Company
  called ten securitization trusts. Moreover, the Company expects six of the seven
  remaining securitization trusts, which had a mortgage loan balance at March 31,
  2004 of $236.3 million, to be callable in calendar year 2004 and expects to
  call these securitization trusts by the end of calendar year 2004. The Company
  might be required to write down the value of the residual interests relating
  to the called securitization trusts.

The
Company closely monitors its residual interests. Should the actual rate of
prepayment and credit loss performance of loans in its securitized pools vary
adversely in relation to the estimates and assumptions used by the Company to
estimate the fair value, the Company will adjust the fair value of the retained
residual interests through a charge to earnings.

Mortgage
Servicing Rights.During the three and nine months ended March 31, 2004 and
2003, all of the Companys loan dispositions were on a servicing released
basis; therefore, the Company did not capitalize mortgage servicing rights
(MSRs). Prior to June 30, 2000, the Company capitalized MSRs based
on an allocation of the carrying amount of the loans securitized on a servicing
retained basis. However, such MSRs were fully amortized at March 31, 2004.

Accounting
for Income Taxes. Taxes are provided on substantially all income and expense
items included in earnings, regardless of the period in which such items are
recognized for tax purposes. The Company uses an asset and liability approach
that requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized in the
Companys financing statements or tax returns. In estimating future tax
consequences, the Company generally considers all expected future events other
than the enactment of changes in the tax law or rates.

Deferred
income tax assets and liabilities are recognized to reflect the future tax
consequences of net operating loss carry forwards and differences between the
tax basis and financial reporting basis of assets and liabilities. The Company
has recognized that it is more likely than not that certain future tax benefits,
primarily net operating loss carry forwards, will be realized as a result of
current and future income. Accordingly, during the three and nine months ended
March 31, 2004, the Company decreased its deferred tax valuation allowance
to recognize higher than previously anticipated net deferred tax assets.









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# Results of
Operations--Three and Nine Months Ended March 31, 2004 and 2003

The
following table sets forth information regarding the components of the
Companys revenue and expenses for the three and nine months ended March
31, 2004 and 2003:

|                                             | Three Months
      Ended
      March 31, | Nine Months
      Ended
      March 31,
|-------------------------------------------- | ---------------------------------------- | ---------------------------------------
|                                             |                                          | **2004**                               
|Revenue:                                     |                                          |                                        
|Gain
      on sale of loans                  |                                          | $ 62,948                               
|Write-down
      of residual interests       |                                          | --                                     
|Origination
      fees                       |                                          | 12,980                                 
|Loan
      servicing                         |                                          | 2,155                                  
|Debt
      extinguishment income             |                                          | --                                     
|Interest                                     |                                          | 17,621                                 
|                                             |                                          |                                        
|Total revenue,
      including write-down of |                                          |                                        
|residual
      interests                     |                                          | 95,704                                 
|                                             |                                          |                                        
|Expenses:                                    |                                          |                                        
|Personnel                                    |                                          | 46,676                                 
|Production                                   |                                          | 10,333                                 
|General
      and administrative             |                                          | 11,375                                 
|Interest                                     |                                          | 6,523                                  
|                                             |                                          |                                        
|Total expenses                               |                                          | 74,907                                 
|                                             |                                          |                                        
|Income before
      provision for income     |                                          |                                        
|taxes                                        |                                          | 20,797                                 
|Provision
      (benefit) for income taxes   |                                          | (93                                    
|                                             |                                          |                                        
|Net income                                   |                                          | $ 20,890                               
|                                             |                                          |                                        

Operating
  revenue is a non-GAAP financial measurement used by the Company that excludes
  from GAAP total revenue the write-downs of residual interests and debt extinguishment
  income. The Company ceased retaining residual interests in securitization transactions
  commencing on January 1, 2000. The Company recorded debt extinguishment income
  during the year ended June 30, 2003 in connection with the redemption and restructuring
  of certain borrowings. The Company believes that operating revenue provides
  users of its consolidated financial statements with more useful comparative
  information concerning its principal business of originating, selling and servicing
  mortgage loans collateralized by single family residences. The following table
  reconciles total revenue in conformity with GAAP to operating revenue as discussed
  herein and elsewhere. See Item 1  Business  Recent Events:

|                                            | Three Months
      EndedMarch 31, | Nine Months
      EndedMarch 31,
|------------------------------------------- | --------------------------------- | --------------------------------
|                                            |                                   | **2004**                        
|GAAP revenue                                |                                   | $95,704                         
|Add: Write-down
      of residual interests |                                   | --                              
|Less: Debt
      extinguishment income      |                                   | --                              
|                                            |                                   |                                 
|Operating
      revenue                     |                                   | $95,704                         
|                                            |                                   |                                 

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Revenue

General.
Total revenue during the three months ended March 31, 2004 increased
$30.2 million, or 46.2%, to $95.7 million from $65.5 million during
the comparable three month period a year ago. During the three months ended
March 31, 2004, the Company did not record debt extinguishment income and did
not record a write-down to its residual interests. Total revenue during the
three months ended March 31, 2003 includes $0.1 million of debt extinguishment
income. Excluding debt extinguishment income during the three months ended March
31, 2003, operating revenue during the three months ended March 31, 2004
increased $30.3 million, or 46.3%, to $95.7 million over $65.4 million during
the same three month period a year ago. This increase was primarily attributable
to increases of $27.8 million, $1.0 million, $0.9 million and $0.6 million
in gain on sale of loans, interest income, loan servicing fees and origination
fees, respectively, during the three months ended March 31, 2004 from
amounts reported during the comparable three month period during 2003.

Total
revenue during the nine months ended March 31, 2004 was $255.1 million, an
increase of $58.3 million, or 29.6%, over total revenue of $196.8 million during
the nine months ended March 31, 2003. During the nine months ended March
31, 2004, the Company did not record debt extinguishment income and did not
write down its residual interests. However, total revenue during the nine months
ended March 31, 2003 includes $27.2 million of debt extinguishment income and a
$31.9 million write-down of residual interests. Excluding debt extinguishment
income and the residual interest write-down during the nine months ended
March 31, 2003, operating revenue during the nine months ended March 31,
2004 increased $53.5 million, or 26.5%, to $255.1 million over $201.6 million
during the same nine month period a year ago. This increase was primarily
attributable to increases of $53.9 million and $5.3 million in gain on sale
of loans and origination fees, respectively, partially offset by a decline of
$5.7 million in interest income during the nine months ended March 31, 2004 from
amounts reported during the comparable nine month period during 2003.

Gain
on Sale of Loans. Gain on sale of loans during the three months ended March
31, 2004 increased $27.7 million, or 79.0%, to $62.9 million over
$35.2 million during the three months ended March 31, 2003. The increase in
gain on sale of loans resulted primarily from the $515.3 million, or 41.3%,
increase to $1.8 billion of total loan dispositions during the three months
ended March 31, 2004 over $1.2 billion of total loan dispositions during the
comparable three month period a year ago, and, to a lesser extent to higher gain
on sale rates on loan sales during the quarter ended March 31, 2004
compared to the comparable period a year ago. The increase in loan dispositions
during the March 2004 quarter over loan dispositions during the March 2003
quarter was due primarily to an increase in mortgage loan production during the
March 2004 quarter compared to the March 2003 quarter. During the three months
ended March 31, 2004 and 2003, the Company relied solely on whole loan sales for
cash as its loan disposition strategy based upon the Companys review of
market conditions, profitability and cash flow requirements. The Company
realized generally higher gain on sale rates on whole loan sales during the
three months ended March 31, 2004 compared to the gain on sale rates for whole
loan sales during the comparable three month period a year ago due to generally
more favorable conditions in the whole loan markets during the March 2004
quarter when compared to market conditions during the March 2003 quarter.

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At
and during the three months ended March 31, 2004, the Company had no hedge
instruments in place. During the three months ended March 31, 2003, the Company,
as it has from time to time, entered into forward interest rate swap agreements
designed to mitigate interest rate exposure to mortgage loans in its inventory
and pipeline in anticipation of closing loan disposition transactions during
that period. Gain on sale of loans during the three months ended March 31, 2003
included charges of $0.2 million of derivative related losses which related to
losses on hedge positions that closed during the period.

Gain
  on sale of loans increased $53.9 million, or 54.3%, to $153.1 million during
  the nine months ended March 31, 2004 over $99.2 million of gain on sale of loans
  during the nine months ended March 31, 2003. The increase in gain on sale
  of loans during the nine months ended March 31, 2004 over gain on sale
  of loans during the comparable nine month period a year ago resulted from the
  $1.3 billion increase in total mortgage loan dispositions during the nine months
  ended March 31, 2004 over mortgage loan disposition levels reported during the
  comparable period a year ago, partially offset by slightly lower gain on sale
  rates realized by the Company on whole loan sales during the nine months ended
  March 31, 2004, compared to the gain on sale rates realized on its mix of whole
  loan and securitization dispositions during the comparable nine month period
  a year ago. During the nine months ended March 31, 2004, the Company relied
  solely on whole loan sales for cash as its loan disposition strategy. In comparison,
  during the nine months ended March 31, 2003, the Company relied on a combination
  of a securitization and whole loan sales for cash as its loan disposition strategy
  based on the Companys review of market conditions, profitability and cash
  flow needs and the Companys desire at that time to retain capacity under
  the Residual Forward Sale Facility (Residual Facility) with Capital
  Z Investments, L.P., a Bermuda partnership (CAI), an affiliate of
  Capital Z, the Companys largest stockholder.

Gain
on sale of loans during the nine months ended March 31, 2003 includes $8.7
million of cash proceeds from the sale of residual interests to CZI under the
Residual Facility. In addition, gain on sale of loans during the nine months
ended March 31, 2003 includes $4.1 million of cash proceeds from the sale of
mortgage servicing rights and the rights to prepayment fee income that were sold
to an unaffiliated independent mortgage servicing company related to the
securitization which closed during the period. At and during the nine months
ended March 31, 2004, the Company had no hedge instruments in place. Gain
on sale of loans during the nine months ended March 31, 2003 was reduced by
$10.9 million of hedge losses on closed hedge positions. Finally, gain on sale
of loans during the nine months ended March 31, 2003 was reduced by the
amortization of $0.7 million of costs related to obtaining the Residual
Facility, substantially all of which related to amortization of the remaining
capitalized facility fee paid to CZI. The Residual Facility with CZI expired on
March 31, 2003.

Origination
Fees. Origination fees are primarily comprised of points and other fees,
which include appraisal and credit investigation fees, charged by the Company on
mortgage loans originated by the Companys retail channel, partially offset
by broker compensation, generally referred to as yield spread premium, paid by
the Company to mortgage loan brokers in connection with broker loan production.
Retail points and fees are primarily a function of the volume of mortgage loans
originated by the Company through its retail channel and the points and fees
charged on such loans. Yield spread premiums are generally a function of the
volume of mortgage loans originated by the Company through its broker channel
and fees paid on such loans by the Company to referring brokers net of points
and fees received at origination.

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Origination
fees during the three months ended March 31, 2004 were $13.0 million as compared
to $12.4 million during the three months ended March 31, 2003. The $0.6 million,
or 4.4%, increase in origination fees during the three months ended March 31,
2004 from the amount reported during the comparable three month period during
2003 was attributable primarily to a $6.1 million, or 42.3%, increase in retail
origination fees charged at the time of origination in the retail channel,
partially offset by a $5.5 million, or 245.1%, increase in yield spread premium,
net of points and fees, paid by the broker channel. Retail origination fees
increased $6.1 million to $20.6 million during the three months ended March 31,
2004 over $14.5 million during the comparable three month period a year ago. The
$6.1 million increase in retail origination fees is primarily due to the $192.3
million, or 48.8%, increase in total retail mortgage loan production during the
three months ended March 31, 2004 over total retail mortgage loan production
during the three months ended March 31, 2003. Retail points and fees, expressed
as a percentage of retail volume, during the three months ended March 31,
2004 declined to 3.52% from 3.67% during the three months ended March 31,
2003. As previously reported, the Company has, primarily in response to
competitive factors and, to a lesser extent, recent regulatory changes, reduced
points and fees charged to customers in numerous states and for certain loan
products.

Yield
spread premium, net of points and fees, increased $5.5 million, or 245.1%, to
$7.7 million during the three months ended March 31, 2004 over $2.2 million
during the same three month period a year ago. The $5.5 million increase in
yield spread premium, net of points and fees, is primarily due to the $657.1
million, or 105.6%, increase in total broker mortgage loan production during the
three months ended March 31, 2004 over such production during the three months
ended March 31, 2003. Average yield spread premium, net of points and fees,
expressed as a percentage of total broker production was 0.60%, a 66.7%
increase, over 0.36% during the three months ended March 31, 2003.

Origination
fees during the nine months ended March 31, 2004 were $45.4 million, an increase
of $5.3 million, or 13.2%, over the $40.1 million reported during the nine
months ended March 31, 2003. The increase in origination fee revenue during
the nine months ended March 31, 2004 over origination fee revenue during
the comparable nine month period a year ago is primarily attributable to a $13.2
million increase in points and fees charged at the time of origination in the
retail channel, partially offset by a $7.9 million increase in yield spread
premium, net of points and fees, paid by the broker channel. The increase in
retail points and fees was attributable to the $392.5 million, or 28.8%,
increase in total retail production during the nine months ended March 31,
2004 over total retail production during the comparable nine month period a year
ago. Retail points and fees, expressed as a percentage of retail volume remained
constant at 3.52% during the nine months ended March 31, 2004 and March 31,
2003.

Yield
  spread premium, net of points and fees, paid by the broker channel increased
  $7.9 million, or 89.8%, to $16.7 million during the nine months ended March
  31, 2004 over the $8.8 million of yield spread premium paid during the same
  nine month period a year ago. The increase in the yield spread premium is primarily
  due to the $1.3 billion, or 69.3%, increase in total broker production during
  the 2004 period over total broker production during the comparable period in
  2003, and, to a lesser extent, due to an increase of 10.9% in average yield
  spread premium during the nine months ended March 31, 2004 over the average
  yield spread premium of during the nine months ended March 31, 2003. Average
  yield spread premium, net of points and fees, expressed as a percentage of total
  broker production increased to 0.51% from 0.46% during the nine months ended
  March 31, 2003.

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Loan
Servicing. Loan servicing revenue consists of prepayment fees, late charges
and other fees retained by the Company and servicing fees earned on securitized
pools, reduced by subservicing costs related to servicing advance arrangements
and amortization of the Companys MSRs. See  Critical
Accounting Policies. Loan servicing revenue was $2.2 million during
the three months ended March 31, 2004 compared to $1.3 million during the
comparable three month period in 2003. During the three months ended March 31,
2004, servicing, late and prepayment fees increased $0.2 million from
amounts reported during the comparable three month period a year ago. The
increase was due primarily to the Companys loan servicing unit focusing
its efforts in billing and subsequently collecting ancillary fees on loans in
the securitization trusts. This was coupled with a $0.7 million decline in
subservicing related expenses and MSR amortization expense during the three
months ended March 31, 2004 from the amounts reported during the three months
ended March 31, 2003. During the three months ended March 31, 2004, the Company
did not record any MSR amortization as its MSRs were fully amortized at
September 30, 2003. The Company expects subservicing expense to trend downward
in future periods as the balance of loans subserviced declines.

Loan
servicing revenue during the nine months ended March 31, 2004 remained constant
at $6.3 million during the nine months ended March 31, 2003 due primarily to
declines in servicing, late and prepayment fees aggregating $2.0 million,
partially offset by declines in subservicing related expenses and amortization
of MSRs of $0.2 million and $1.8 million, respectively, during the 2004 period
compared to the same period a year ago. The declines in servicing, late and
prepayment fees during the nine months ended March 31, 2004 from the levels
reported during the nine months ended March 31, 2003 are due to the $592.0
million decrease in the size of the Companys portfolio of mortgage loans
in securitization trusts serviced in-house at March 31, 2004 compared to March
31, 2003, together with a decrease in prepayment fees due to the aging of
mortgage loans in securitization trusts serviced in-house beyond the term of
their prepayment fee. Subservicing related expenses are declining due to the
decrease in the number of loans being subserviced and the portfolio of mortgage
loans in securitization trusts serviced in-house. The Companys MSRs were
fully amortized at September 30, 2003.

During
the three and nine months ended March 31, 2004 and 2003, the Company had in
place an arrangement, entered into during the year ended June 30, 1999, designed
to reduce its servicing advance obligations pursuant to which a loan servicing
company purchased certain advances and agreed to make future advances with
respect to an aggregate $388.0 million ($59.7 million at March 31, 2004) in
principal amount of loans.

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Excluding
loans serviced on an interim basis, the Company has not added any new loans to
the servicing portfolio since January 1, 2000 due to the Companys sale of
its entire mortgage loan production in whole loan sales for cash and
securitizations with servicing released since that time. The Companys
total loan servicing portfolio at March 31, 2004 increased $655.1 million, or
37.6%, to $2.4 billion over $1.7 billion at June 30, 2003, reflecting an
increase in loans serviced on an interim basis, offset by loan servicing
portfolio runoff and by the November Trust Call involving $274.8 million of
mortgage loans during the period. Mortgage loans in securitization trusts
serviced by the Company in-house declined $480.3 million to $260.7 million at
March 31, 2004 from $741.0 million at June 30, 2003. Moreover, subsequent to
March 31, 2004, the Company transferred to the purchasers or their designated
servicers approximately $564.7 million of loans, which represented loans sold in
whole loan sales during the March 2004 quarter but subserviced by the Company at
March 31, 2004 on an interim basis. The Companys servicing portfolio
will continue to be impacted in the future by the Companys dispositions of
its loan production through whole loan sales and securitizations on a servicing
released basis, which has resulted in a smaller servicing portfolio. Future loan
servicing revenue will be negatively impacted by continued run-off in the
Companys portfolio of mortgage loans in securitization trusts due to the
Companys sale of mortgage loans on a servicing released basis. Run-off in
the Companys portfolio of mortgage loans in securitization trusts could be
further exacerbated by the current mortgage interest rate environment which
could accelerate prepayment activity of loans. Finally, the Companys
servicing portfolio and future servicing revenue will be adversely effected if
the Company calls any of the remaining securitization trusts.

Debt
Extinguishment Income. The Company did not record any debt extinguishment income
during the three and nine months ended March 31, 2004.

As
previously reported, during the three months ended March 31, 2003, the Company
recorded $0.1 million of debt extinguishment income related to the
extinguishment of $3.0 million of its Senior Notes at a discount from par for
$2.9 million of cash.

As
also previously disclosed, during the nine months ended March 31, 2003, debt
extinguishment income was $27.2 million comprised of $25.0 million related to
SFPs forgiveness of its holdings of 2012 Debentures and $2.2 million of
debt extinguishment income recognized in connection with the Companys
extinguishment of $22.1 million of its Senior Notes at a discount from par for
$19.9 million of cash.

Interest
Income. Interest income includes interest on loans held for sale, discount
accretion income related to the Companys residual interests and interest
on short-term overnight investments. Interest income during the three months
ended March 31, 2004 increased by $1.0 million, or 6.0%, to $17.6 million from
$16.6 million during the three months ended March 31, 2003. Interest income
decreased by $5.7 million, or 10.2%, to $50.2 million during the nine months
ended March 31, 2004 from $55.9 million during the nine months ended March
31, 2003. The increase in interest income during the three months ended March
31, 2004 from the amounts reported during the comparable three month period a
year ago was primarily due to a $4.6 million increase in interest income on
loans held for sale during the three months ended March 31, 2004 over such
interest income levels reported during the comparable period a year ago,
partially offset by a decline of $3.6 million in discount accretion income
recognized on the Companys residual interests. The increase in interest
income on loans held for sale during the three months ended March 31, 2004
over the amount reported during the comparable period a year ago is attributable
to higher outstanding balances of loans held for sale despite such loans having
lower weighted average coupon rates during the three months ended March 31, 2004
when compared to such balances and coupon rates during the same period a year
ago. The Companys residual interests were at lower balances during the
three months ended March 31, 2004 when compared to residual interest levels
during the same three month period a year ago.

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The
$5.7 million decrease in interest income during the nine months ended March 31,
2004 from the interest income amount reported during the comparable nine month
period a year ago was primarily due to a $9.9 million decline in discount
accretion income recognized on the Companys residual interests. The
Companys residual interests were at lower balances during the nine months
ended March 31, 2004 when compared to residual interest levels during the same
nine month period a year ago. Partially offsetting the decrease in discount
accretion income during the nine months ended March 31, 2004 from the amount
reported during the same period a year ago was an increase of $4.2 million in
interest income on loans held for sale during the nine months ended
March 31, 2004 over such interest income levels reported during the
comparable period a year ago. The increase in interest income on loans held for
sale during the nine months ended March 31, 2004 over the amount reported
during the comparable period a year ago is attributable to higher outstanding
balances of loans held for sale despite such loans having lower weighted average
coupon rates during the nine months ended March 31, 2004 when compared to such
balances and coupon rates during the same period a year ago.

Expenses

General.
Total expenses during the three months ended March 31, 2004 were $74.9 million
compared to $57.9 million during the three months ended March 31, 2003. The
$17.0 million, or 29.4%, increase in total expenses during the three months
ended March 31, 2004 over total expenses during the comparable period in 2003
was attributable to increases of $14.8 million, $3.5 million and $0.4 million in
personnel expense, production and general and administrative expense,
respectively, partially offset by a decline of $1.7 million in interest expense.

Total
expenses during the nine months ended March 31, 2004 were $206.4 million
compared to $175.1 million during the nine months ended March 31, 2003. The
$31.3 million, or 17.9%, increase in total expenses during the nine months ended
March 31, 2004 over total expenses during the comparable period a year ago was
attributable to increases of $28.8 million, $7.5 million and $3.5 million in
personnel, production and general and administrative expenses, respectively,
partially offset by a decline of $8.4 million in interest expense.

Personnel.
Personnel expense includes salaries, payroll taxes and medical and other
employee benefits. Personnel expense also includes commissions that are related
to the Companys loan origination volume, as retail and broker account
executives earn incentives on funded loans. Total personnel expense during the
three months ended March 31, 2004 increased $14.8 million, or 46.3%, to $46.7
million from $31.9 million during the three months ended March 31, 2003. The
increase was comprised primarily of a $9.0 million increase in commission
compensation earned by retail and broker account executives during the three
months ended March 31, 2004 over the same period a year ago due to the
$849.4 million, or 83.5%, increase in total production during the three months
ended March 31, 2004 over total production during the three months ended
March 31, 2003. In addition, the increase was due to $3.8 million of
increased salaries resulting from increased staffing levels, predominantly in
loan production personnel, during the three months ended March 31, 2004 over
staffing levels during the comparable three month period a year ago. Incentive
compensation related to senior and other management increased $0.5 million
during the three months ended March 31, 2004 over the three months ended March
31, 2003. Finally, payroll taxes, medical and other benefit costs increased $1.5
million during the three months ended March 31, 2004 over such expense
amounts incurred during the three months ended March 31, 2003.

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Personnel
  expense during the nine months ended March 31, 2004 was $127.6 million, an increase
  of $28.8 million, or 29.1%, over $98.8 million during the nine months ended
  March 31, 2003. Salaries, commissions, bonuses and incentives increased $25.6
  million, or 30.4%, during the nine months ended March 31, 2004 over the
  amounts reported during the nine months ended March 31, 2003. The increase
  was comprised primarily of commission compensation earned by retail and broker
  account executives of $17.3 million during the nine months ended March 31, 2004
  over the comparable nine month period in 2003 due to the $1.7 billion, or 52.6%,
  increase in total production during the 2004 period over total production during
  the 2003 period. In addition, the increase was due to $7.1 million of increased
  salaries resulting from increased staffing levels, predominantly in loan production
  personnel, during the nine months ended March 31, 2004 over the same period
  in 2003 caused by growth in the Companys retail branch network and, to
  a lesser extent, to other employee head count growth. Incentive compensation
  related to senior and other management increased $1.2 million during the nine
  months ended March 31, 2004 over the nine months ended March 31, 2003.
  Finally, the increase in personnel expense during the nine months ended March
  31, 2004 over the amount reported during the comparable nine month period a
  year ago is attributable to $3.2 million of increased health, medical, other
  benefit costs and incentive compensation awards to other employees.

Production.
Production expense, primarily advertising, outside appraisal costs, travel and
entertainment, and credit reporting fees increased $3.5 million, or 51.5%, to
$10.3 million during the three months ended March 31, 2004 over $6.8 million
during the three months ended March 31, 2003. Production expense during the
nine months ended March 31, 2004 increased $7.5 million, or 40.3%, to $26.1
million over $18.6 million during the comparable nine month period a year ago.
The increases in production expense during the three and nine months ended March
31, 2004 from the comparable three and nine month periods a year ago is due
primarily to increased advertising, appraisal and credit reporting expenses
relative to the Companys $849.4 million, or 83.5%, and $1.7 billion, or
52.6%, increases in loan origination volumes during the three and nine months
ended March 31, 2004, over those during the comparable three and nine month
periods a year ago, respectively. Production expense expressed as a percentage
of total loan origination volume decreased to 0.6% for the three months ended
March 31, 2004 compared to 0.7% during the three months ended March 31,
2003. The decrease is attributable to the $849.4 million, or 83.5%, increase in
total loan production during the three months ended March 31, 2004 over the
levels reported during the same period a year ago, partially offset by the
increase in production expense during the three months ended March 31, 2004 over
those reported during the comparable three month period a year ago. Production
expense expressed as a percentage of total loan origination volume during the
nine months ended March 31, 2004 was 0.5% compared to 0.6% during the
comparable nine month period in 2003.

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General
and Administrative. General and administrative expenses increased $0.4
million, or 3.8%, to $11.4 million and $3.5 million, or 11.6%, to $33.7 million
during the three and nine months ended March 31, 2004, respectively, from
$11.0 million and $30.2 million during the three and nine months ended
March 31, 2003, respectively. The increase during the three months ended
March 31, 2004 over the comparable three month period a year ago was
primarily attributable to increases in legal, insurance, occupancy and
communication expenses, partially offset by a decline in professional expenses.
The increase in general and administrative expenses during the nine months ended
March 31, 2004 over the comparable nine month period a year ago was
primarily due to increases in occupancy, communication, insurance and
professional expenses, partially offset by a decline in legal expenses.

Interest
Expense. Interest expense decreased $1.7 million, or 20.4%, and $8.4
million, or 30.7%, to $6.5 million and $19.0 million during the three and nine
months ended March 31, 2004, respectively, from $8.2 million and $27.4 million
during the three and nine months ended March 31, 2003, respectively. The
decrease in interest expense during the three and nine months ended March 31,
2004 from levels reported during the comparable three and nine month periods a
year ago resulted primarily from lower interest rates associated with the
Companys revolving warehouse and repurchase facilities used to fund the
origination of mortgage loans prior to their disposition despite increased
average borrowings in the 2004 periods. To a lesser extent, the decrease in
interest expense resulted from the full redemption of the Companys Senior
Notes and a $49.6 million decrease in the 2006 Debentures by the Company during
the year ended June 30, 2003. The Companys revolving warehouse and
repurchase agreements bear interest rates that are indexed to the one-month
LIBOR which, during the three and nine months ended March 31, 2004, declined
from levels during the three and nine months ended March 31, 2003. While
the Companys interest costs on its revolving warehouse and repurchase
facilities trended down during the three and nine months ended March 31, 2004
from the comparable three and nine month periods a year ago, such interest
expense is expected to increase in future periods due to the Companys
continued reliance on external revolving financing arrangements to fund mortgage
loan production and expected continued upward pressure on one month LIBOR in
coming quarters. Interest expense also includes the amortization of capitalized
financing costs incurred on revolving committed warehouse facilities entered
into by the Company. Amortization of capitalized financing costs related to such
facilities was $1.2 million and $3.8 million during the three and nine months
ended March 31, 2004, respectively, compared to $1.2 million and $3.5
million during the three and nine months ended March 31, 2003, respectively.

As
a result of extinguishing the remaining $127.9 million of Senior Notes, which
had a fixed 9.125% coupon rate, with the $74.1 million Financing Facility which
bears interest at one-month LIBOR plus 2.75%, together with the reduction of the
Financing Facility to $18.3 million at March 31, 2004, the redemption of
the remaining $4.8 million of 2012 Debentures and the $49.6 million decrease in
the 2006 Debentures, which have a fixed 5.5% coupon rate, during the year ended
June 30, 2003, the Company expects that interest expense on its nonrevolving
indebtedness will be lower in fiscal 2004 compared to fiscal 2003.

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Income
Taxes. During the three months ended March 31, 2004, the Company recorded an
income tax benefit of $0.1 million comprised of a $2.8 million federal benefit
related to net operating loss carryforwards and a $2.7 million state provision
which related to various state tax obligations. During the nine months ended
March 31, 2004, the Company recorded an income tax benefit of $18.1 million. The
Company has determined it is more likely than not that certain future tax
benefits, primarily net operating loss carryforwards, will be realized as a
result of future income. Therefore, during the three and nine months ended March
31, 2004, the deferred tax valuation allowance was decreased to recognize higher
than previously anticipated net deferred tax assets. During the three and nine
months ended March 31, 2004, the Companys effective tax rates were (0.4%)
and (37.1%), respectively. The variance in the effective rate from the federal
statutory rate is due the to the recognition of deferred tax assets resulting
from net operating loss carryforwards. During the three and nine months ended
March 31, 2003, the Company recorded income tax provisions of $0.9 million and
$3.1 million, respectively, which related primarily to taxes on excess inclusion
income on the Companys REMIC trusts and, to a lesser extent, to
miscellaneous state tax obligations. Such tax provisions reflect effective tax
rates of 11.9% and 14.2% for the three and nine months ended March 31, 2003.

The
investment in the Company by Capital Z during the year ended
June 30, 1999 resulted in a change in control for income tax purposes
thereby potentially limiting future net operating loss and certain other future
deductions for losses prior to February 1999.

Financial
Condition

Loans
Held for Sale. The Companys portfolio of loans held for sale increased
to $797.1 million at March 31, 2004 from $401.0 million at
June 30, 2003 due primarily to total loan originations exceeding total loan
dispositions during the nine months ended March 31, 2004.

Advances
and Other Receivables. Advances and other receivables are comprised of
interest and servicing advances; servicing and miscellaneous fees; cash due from
the securitization trusts; and accrued interest receivable and other
miscellaneous receivables. The level of servicing advances, in any given period,
is dependent upon portfolio delinquencies, the level of REO and loans in the
process of foreclosure, and the timing and remittance of cash collections on
mortgage loans in the securitization trusts. The Company funds advances on a
recurring basis not otherwise covered by financing arrangements and recovers
those advances on a periodic basis.

Advances
and other receivables decreased $19.2 million to $22.1 million at
March 31, 2004 from $41.3 million at June 30, 2003. The decrease
is primarily attributable to decreases of $23.4 million and $0.3 million in
interest and servicing advances and servicing and miscellaneous fees receivable,
respectively, partially offset by increases of $4.5 million in accrued interest
and other receivables.

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The
$23.4 million decrease in servicing and interest advances to the
securitization trusts at March 31, 2004 from June 30, 2003 is
comprised of $13.0 million of advances made by the Company in its role of
servicer of the mortgage loans in the securitization trusts, net of $21.4
million of recoveries of such advances during the nine months ended
March 31, 2004. In addition, the decrease is also attributable to servicing
and advance recoveries of $15.0 million received during the nine months ended
March 31, 2004 from the Companys pool calls. The $0.3 million decline
in servicing and miscellaneous fees receivable at March 31, 2004 from
June 30, 2003 is due primarily to declining servicing and late fees earned
by the Company as a consequence of the decrease in its portfolio of mortgage
loans in securitization trusts during the nine months ended March 31, 2004. The
$4.5 million increase in accrued interest receivable and other receivables
at March 31, 2004 when compared to the balance at June 30, 2003 is due
primarily to a $4.3 million increase in amounts due from counterparties on
whole loan sales and other transactions, coupled with a $0.2 million increase in
accrued interest receivable at March 31, 2004.

The
Company periodically evaluates its accounts receivable for realizability and
charges income for amounts deemed uncollectible.

Residual
Interests. Residual interests decreased to $48.5 million at March 31,
2004 from $129.2 million at June 30, 2003, reflecting $85.1 million of
cash received from the securitization trusts, of which $61.8 million related to
securitization trust calls, partially offset by $4.4 million of residual
interest discount accretion during the nine months ended March 31, 2004.

Equipment
and Improvements, net. Equipment and improvements, net, increased to
$9.0 million at March 31, 2004 from $8.9 million at June 30,
2003, which reflected the capitalization of new equipment and improvement
acquisitions which outpaced depreciation and amortization during the nine months
ended March 31, 2004.

Prepaid
and Other Assets. Prepaid and other assets decreased $1.6 million to
$16.1 million at March 31, 2004 from $17.7 million at June 30,
2003. The decrease was attributable primarily to the receipt by the Company of
$2.5 million of licensing, permit and performance bond deposits during the nine
months ended March 31, 2004. Included in prepaids and other assets at
June 30, 2003 were $0.2 million of MSRs which were fully amortized at March
31, 2004. During the nine months ended March 31, 2004, the Company did not
capitalize any MSRs as all of the Companys $4.7 billion of total loan
dispositions during the period were whole loan sales for cash with servicing
released.

Borrowings.
As previously reported, on June 30, 2003, the Company borrowed $74.1 million
through the Financing Facility and redeemed $127.9 million principal balance of
its Senior Notes. Borrowings, which totaled $82.7 million at March 31, 2004, was
comprised of $64.4 million outstanding under the Companys 2006 Debentures
and $18.3 million outstanding under the Financing Facility. In comparison,
amounts outstanding under the 2006 Debentures and the Financing Facility were
$64.4 million and $74.1 million, respectively, or a total of $138.5 million, at
June 30, 2003. The $55.8 million decline in borrowings at March 31, 2004 from
June 30, 2003, represents the Companys payments on the Financing Facility
during the nine months ended March 31, 2004.

Revolving
Warehouse Facilities. Amounts outstanding under revolving warehouse and
repurchase facilities increased to $699.6 million at March 31, 2004 from
$343.7 million at June 30, 2003 as the result of the increase in loans
held for sale due to loan originations during the nine months ended March 31,
2004, partially offset by the Companys loan dispositions during the
period. Proceeds from whole loan sales and securitizations are used first to
reduce balances outstanding under the Companys revolving warehouse and
repurchase facilities, and then used to satisfy corporate operating
requirements.

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Liquidity
and Capital Resources

The
Companys operations require continued access to short-term and long-term
sources of cash. The Companys primary operating cash requirements include:
(i) the funding of 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) ongoing
administrative, operating, and tax expenses, (iv) interest and principal
payments and liquidity requirements under the Companys revolving warehouse
and repurchase facilities, and other existing indebtedness, (v) advances in
connection with the Companys servicing portfolio, and (vi)
overcollateralization requirements in connection with securitizations.

The
Companys primary sources of liquidity are expected to be (i) fundings
under revolving warehouse and repurchase facilities, (ii) securitization and
sale of mortgage loans and related servicing rights and (iii) monetization of
the overcollateralization in the Companys portfolio of mortgage loans in
securitization trusts. As previously reported, at June 30, 2003, the Company
monetized its residual interests and its servicing advances through the
Financing Facility.

Warehouse
and Repurchase Facilities. The Company generally relies on revolving
warehouse and repurchase facilities to finance the origination or purchase of
mortgage loans prior to securitization or sale. At March 31, 2004, the Company
had total revolving warehouse and repurchase facilities in the amount of $1.2
billion, of which $1.1 billion and $100.0 million were committed and
uncommitted, respectively. At March 31, 2004, amounts outstanding under the
facilities were $699.6 million. Of the $1.2 billion of revolving warehouse and
repurchase facilities available to the Company at March 31, 2004, $300.0
million, $200.0 million, $200.0 million, $300.0 million and $200.0 million
mature on July 30, 2004, August 27, 2004, September 30, 2004, October 30,
2004 and November 30, 2004, respectively.

Certain
of the Companys warehouse and repurchase facility lenders advance less
than 100% of the principal balance of the mortgage loans, requiring the Company
to use working capital to fund the remaining portion of the principal balance of
the mortgage loans.

All
of the Companys revolving warehouse and repurchase facilities contain
provisions requiring the Company to meet certain periodic financial covenants,
including, among other things, minimum liquidity, stockholders equity,
leverage, and net income levels. If the Company is unable to meet these
financial covenants going forward, or is unable to obtain subsequent amendments
or waivers, if required, or for any other reason is unable to maintain existing
warehouse or repurchase lines or renew them when they expire, it would have to
cease loan production operations which would jeopardize the Companys
ability to continue to operate as a going concern.

The
Securitization and Sale of Mortgage Loans. The Companys ability to
sell loans originated by it in the secondary market through securitizations and
whole loan sales is necessary to generate cash proceeds to pay down its
warehouse and repurchase facilities and fund new mortgage loan originations. 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
operations.

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During
the nine months ended March 31, 2004, the Company sold all of its $4.7 billion
of loan dispositions in whole loan sales for cash and did not dispose of any of
its loans through securitizations. Of the Companys $3.3 billion of loan
dispositions during the nine months ended March 31, 2003, $3.0 billion and
$315.0 million were sold in whole loan sales for cash and securitized,
respectively. The gain on sale recognized by the Company on securitizations and
whole loan sales is affected by, among other things, market conditions at the
time of the loan disposition, and the Companys assumptions used in
securitizations. See Results of OperationsRevenue.

In
connection with securitization transactions, the Company is generally 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 senior interests in order to increase
overcollateralization to specified maximums. Overcollateralization requirements
for certain pools increase up to approximately twice the level otherwise
required when the delinquency rates or realized losses for those pools exceed
the specified limit. At March 31, 2004, an additional $28.2 million of
overcollateralization was required to be maintained due to the level of
delinquency rates and realized losses of mortgage loans being in excess of
specified delinquency rates and realized losses in certain securitization
trusts. At March 31, 2004, the Company was required to maintain
overcollateralization amounts of $59.1 million, which included the $28.2
million, of which $59.1 million was maintained.

In
the Companys securitizations structured as a real estate mortgage
investment conduit (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 cash flows are received and applicable reserve or
overcollateralization requirements are met.

Monetization
  of Overcollateralization in the Companys Portfolio of Mortgage Loan in
  Securitization Trusts. The Company had retained residual interests in seven
  securitization trusts which had overcollateralization balances of $59.1 million
  at March 31, 2004. The Company expects six of the remaining seven securitization
  trusts, with overcollateralization balances of $44.6 million at March 31, 2004,
  to be callable in calendar year 2004, and expects to call them by the end of
  calendar year 2004.

Other
sources of cash previously used by the Company to fund its operations included
the monetization of residual interests and servicing advances and debt and
equity securities.

Monetization
of Residual Interests. As previously reported, on June 30, 2003 the Company
borrowed $74.1 million ($18.3 million at March 31, 2004) through the Financing
Facility of which $49.2 million ($9.3 million at March 31, 2004) was secured by
its residual interests.

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Monetization
of Servicing Advances. The Company pledged certain of its existing servicing
advances to collateralize $24.9 million ($9.0 million at March 31, 2004) of the
Financing Facility. Future servicing advances related to certain of the
Companys securitization trusts will also collateralize the Financing
Facility unless and until it is fully repaid.

The
Issuance of Debt and Equity Securities. Since February 1999, the Company has
raised $180.2 million through the sale of preferred stock in several
phases, consisting of $170.8 million to Capital Z and its designees,
$4.7 million to certain members of the Companys management and
$4.7 million to holders of the Companys common stock. The Company
also issued warrants to affiliates and employees of an affiliate of Capital Z to
purchase an aggregate of 500,000 shares of the Companys common stock for
$5.00 per share in February 1999, and warrants to purchase 5.0 million
shares of Series D Convertible Preferred Stock at $0.85 per share in July
2001.

On
June 30, 2003, the Company borrowed $74.1 million pursuant to the Financing
Facility due December 31, 2004 and redeemed its Senior Notes through a $53.8
million cash remittance. Under the Financing Facility, 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. The Company received a waiver from the lender permitting
the Company to pay dividends, as declared, on its preferred stock accrued
through March 31, 2004.

The
Company had cash and cash equivalents of approximately $17.1 million at
March 31, 2004.

If
the Companys access to warehouse lines, working capital or the
securitization or whole loan markets is restricted, the Company may have to seek
additional equity. There can be no assurance that sufficient sources of
liquidity will be available to the Company at any given time or that favorable
terms will be available. If the Company is unable to maintain sufficient
liquidity, the Company would be restricted in the amount of loans that it will
be able to produce and sell which would negatively impact profitability and
jeopardize the Companys ability to continue to operate as a going concern.

Risk
Management

At
and during the three and nine months ended March 31, 2004, the Company had no
hedge instruments in place. During the three months ended March 31, 2003, as it
has from time to time, entered into agreements to hedge its interest rate risk
exposure to its loans held for sale. Gain on sale of loans during the three
months ended March 31, 2003 includes a charge of $0.2 million related to the
Companys hedging activities, all of which related to losses on closed
forward interest rate swap agreements. Gain on sale of loans during the nine
months ended March 31, 2003 included charges of $10.9 million related to
the Companys hedging activities. The Company continually monitors the
interest rate environment and its hedging strategies. However, 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,
including charges to earnings on future derivative contracts into which the
Company may enter.

39

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Rate
Sensitive Derivative Financial Instruments, Rate Sensitive Assets and
Liabilities and Off-Balance SheetActivities

Sale
of LoansSecuritizations and Whole Loan SalesInterest Rate Risk.
A 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 either sold or securitized within
90 days of origination or purchase. However, a portion of the loans is held
for sale or securitization for as long as 12 months (or longer, in very
limited circumstances) prior to securitization or sale. 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
increased as a result of market rate movements) would narrow. Upon sale or
securitization, this would result in a reduction of the Companys related
gain on sale. From time to time, the Company mitigates exposure to rising
interest rates through the use of forward interest rate swap agreements or other
hedging activities. These hedging activities help mitigate the risk of absolute
movements in interest rates.

Rate
sensitive assets and liabilities. At March 31, 2004, the Companys
$797.1 million inventory of loans held for sale was comprised of
$221.5 million and $575.6 million of fixed and variable rate mortgage
loans, respectively, which had weighted average interest rates of 8.10% and
7.03%, respectively. The weighted average interest rate on the Companys
total inventory of loans held for sale was 7.57% at March 31, 2004. In
comparison, at June 30, 2003 the Companys $401.0 million
inventory of loans held for sale was comprised of $165.8 million and
$235.2 million of fixed and variable rate mortgage loans, respectively,
which had weighted average interest rates of 7.79% and 7.65%, respectively. The
weighted average interest rate on the Companys total inventory of loans
held for sale was 7.72% at June 30, 2003.

At
March 31, 2004, the Company had aggregate outstanding funded indebtedness of
$782.4 million, of which $718.0 million and $64.4 million bore
variable and fixed interest rates, respectively. At March 31, 2004, the weighted
average variable interest rate on the Companys $717.9 million of
outstanding revolving warehouse and repurchase facilities and the Financing
Facility was 2.28%. All of the Companys revolving warehouse and repurchase
facilities and the Financing Facility were indexed to one-month LIBOR which, at
March 31, 2004, was 1.09%. The weighted average interest rate on the
Companys $64.4 million of outstanding fixed rate borrowings was 5.5%
at March 31, 2004 and at June 30, 2003. At June 30, 2003 the weighted
average interest rate on the Companys $417.8 million of outstanding
revolving warehouse and repurchase facilities and the Financing Facility was
2.52%. At June 30, 2003, the one-month LIBOR was 1.12%.

Residual
Interests and MSRs. The Company had residual interests of $48.5 million
and $129.2 million outstanding at March 31, 2004 and June 30, 2003,
respectively. The Company had no MSRs outstanding at March 31, 2004 and $0.2
million at June 30, 2003. Residual interests were recorded at estimated fair
value. The Company estimates the fair value of its residual interests based on
the present value of estimated future cash flows using various assumptions. The
weighted average discount rate used to calculate the present value of the
residual interests were 13.7% and 13.5% at March 31, 2004 and June 30,
2003, respectively. The weighted average life of the mortgage loans used for
valuation was 2.0 years at March 31, 2004 and 1.9 years at June 30,
2003.

40

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The
residual interests are subject to actual prepayment or credit loss risk in
excess of assumptions used in valuation. Ultimate cash flows realized from these
assets would be reduced should actual prepayments or credit losses exceed
assumptions used in the valuation. Conversely, cash flows realized would be
greater should actual prepayments or credit losses be below expectations.

Fair
Value of Financial Instruments.The Company uses various methods and
assumptions when estimating the fair value of financial instruments. Cash and
cash equivalents are based on the carrying amount which is a reasonable estimate
of the fair value. Loans held for sale are based on current investor yield
requirements. Advances and other receivables are generally short term in nature,
therefore the carrying value approximates fair value. Residual interests and
mortgage servicing rights are based on the present value of expected future cash
flows using assumptions based on the Companys historical experience,
industry information and estimated rates of future prepayment and credit loss.
Borrowings are based on the carrying amount when such amount is a reasonable
estimate of fair value or on quoted market prices. Amounts outstanding under
revolving warehouse and repurchase facilities are short term in nature and
generally bear market rates of interest and, therefore, are based on the
carrying amount which is a reasonable estimate of fair value. Forward interest
rate swap agreements are based on quoted market prices.

Credit
Risk. The Company is exposed to on-balance sheet credit risk related to its
loans held for sale and residual interests. The Company is exposed to
off-balance sheet credit risk related to loans which the Company has committed
to originate or purchase.

Warehousing
Exposure. The Company utilizes revolving warehouse and repurchase facilities
to facilitate the holding of mortgage loans prior to securitization or sale in
the whole loan markets. At March 31, 2004, the Company had total revolving
warehouse and repurchase facilities available in the amount of $1.2 billion, of
which $1.1 billion and $100.0 million was committed and uncommitted,
respectively, and the total amount outstanding on these facilities was $699.6
million. Revolving warehouse and repurchase facilities are typically for a term
of one year or less and are designated to fund mortgages originated within
specified underwriting guidelines. The majority of the assets remain in the
facilities for a period of up to 90 days at which point they are
securitized and/or sold to institutional investors. As these amounts are short
term in nature and/or generally bear market rates of interest, the contractual
amounts of these instruments are reasonable estimates of their fair values.

41

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Item
  4. Controls and Procedures. At the end of the period covered
  by this report on Form 10-Q, the Company carried out an evaluation, under the
  supervision and with the participation of the Companys Disclosure Committee
  and management, including the Chief Executive Officer and Chief Financial Officer,
  of the effectiveness of the design and operation of the Companys disclosure
  controls and procedures pursuant to Exchange Act Rule 15d-15. Based upon that
  evaluation, the Chief Executive Officer and Chief Financial Officer concluded
  that the Companys disclosure controls and procedures are effective in
  timely alerting them to material information relating to the Company (including
  its consolidated subsidiaries) required to be included in reports the Company
  files with the SEC pursuant to the Securities Exchange Act of 1934. Subsequent
  to the date of that evaluation, there have been no significant changes in the
  Companys internal controls or in other factors that could significantly
  affect the internal controls.





















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PART IIOTHER
INFORMATION

Item 1.
  Legal Proceedings

On
  April 27, 2004, the Company received a civil investigative demand, or CID, from
  the Federal Trade Commission, or the FTC, that, although not alleging any wrongdoing,
  sought documents and data relating to the Company's business and lending practices.
  The CID was issued pursuant to an April 8, 2004 resolution of the FTC authorizing
  non-public investigations of various unnamed subprime lenders and loan brokers
  to determine whether there have been violations of certain consumer protection
  laws. The Company intends to cooperate fully with the FTC in this investigation.
  Because the investigation is at an early stage, the Company cannot predict the
  outcome of the investigation and its effect, if any, on the Company's business.

The Company becomes involved, from time to time, in a variety of mortgage lending related claims and other matters incidental to its business. In the opinion of the Company, the resolution of any of these pending incidental matters is not expected to have a material adverse effect on its consolidated financial position and results of operations.

Item 2.
  Changes in Securities and Use of Proceeds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:
See Exhibit Index
|--- |  | ---------------------------

|(b) |  | The
Company filed the following Current Reports on Form 8-K during the quarter ended March
31, 2004:
|--- |  | ----------------------------------------------------------------------------------------------------

| |  | On January
22, 2004,  the Company filed a Form 8-K (dated  November 30, 2003)  reporting
delinquency  and  loss statistics in the loan servicing  portfolio of Aames Capital
Corporation,  a wholly owned subsidiary  of the Company.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | On February
2, 2004,  the  Company  filed a Form 8-K (dated  February  2, 2004)  reporting
presentation  materials for the ABS West 2004 conference.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------

| |  | On February
2, 2004,  the Company  filed a Form 8-K (dated  February 2, 2004)  reporting  results for
the  quarter ended December 31, 2003.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------

| |  | On February
23, 2004,  the Company  filed a Form 8-K (dated  February  20, 2004)  announcing  the
proposed  REIT conversion and concurrent public offering.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | On March
4, 2004, the Company filed a Form 8-K (dated  December 31, 2003)  reporting  delinquency
and loss  statistics in the loan servicing portfolio of Aames Capital Corporation.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  | On March
4, 2004, the Company filed a Form 8-K (dated  January 31, 2004)  reporting  delinquency
and loss  statistics in the loan servicing portfolio of Aames Capital Corporation.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | On March
26, 2004,  the Company filed a Form 8-K (dated March 23, 2004)  announcing  the
declaration of a  cash  dividend  payable to holders of preferred  stock for the quarter
ended March 31, 2004 and filing of  registration  statements  on Forms  S-4 and S-11 in
connection  with the  proposed  REIT  conversion  and  concurrent public offering.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



















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# 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: May 21,
      2004 |     |                                                                                                       
|                         | By: |                                                                                                       
|                         |     | /s/Ronald J. Nicolas,
      Jr.                                                                       
|                         |     | Ronald J. Nicolas,
      Jr.
      Executive Vice President--Finance and
      Chief Financial Officer
|                         |     |                                                                                                       













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EXHIBIT INDEX

|3.1 |  | Amended
and Restated Certificate of Incorporation of Registrant, as amended (1)
|--- |  | -------------------------------------------------------------------------------

|3.2 |  | Bylaws
of Registrant, as amended (2)
|--- |  | ------------------------------------

|4.1 |  | Specimen
certificate evidencing Common Stock of Registrant (3)
|--- |  | --------------------------------------------------------------

|4.2 |  | Specimen
certificate evidencing Series B Convertible Preferred Stock of Registrant (3)
|--- |  | --------------------------------------------------------------------------------------

|4.3 |  | Certificate
of Designations for Series B Convertible Preferred Stock of Registrant, as amended (1)
|--- |  | --------------------------------------------------------------------------------------------------

|4.4 |  | Specimen
certificate evidencing Series C Convertible Preferred Stock of Registrant (3)
|--- |  | --------------------------------------------------------------------------------------

|4.5 |  | Certificate
of Designations for Series C Convertible Preferred Stock of Registrant, as amended (1)
|--- |  | --------------------------------------------------------------------------------------------------

|4.6 |  | Specimen
certificate evidencing Series D Convertible Preferred Stock of Registrant (3)
|--- |  | --------------------------------------------------------------------------------------

|4.7 |  | Certificate
of Designations for Series D Convertible Preferred Stock of Registrant, as amended (1)
|--- |  | --------------------------------------------------------------------------------------------------

|4.8 |  | Certificate
of Designations for Series E Preferred Stock of Registrant (1)
|--- |  | --------------------------------------------------------------------------

|4.10 |  | Indenture,
dated as of February 26, 1996, between Registrant and The Chase Manhattan Bank, N.A.,
relating to  Registrant's 5.5% Convertible Subordinated Debentures due 2006 (4)
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.31(c) |  | Amendment No. 1 dated as of December 24, 2004 to
      the Second Amended and Restated Master Loan and Security Agreement, dated
      as of August 29, 2004, between Aames Capital Corporation, Aames Funding
      Corporation and Morgan Stanley Mortgage Capital, Inc.
|-------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.31(d) |  | Amendment No. 2 dated as of January 22, 2004 to the
      Exhibit 10.31(c)
|-------- |  | --------------------------------------------------------------------------

|10.32(f) |  | Second Amendment dated as of March 16, 2004, to the
      Amended and Restated Master Repurchase Agreement Governing Purchases and
      Sales of Mortgage Loans, dated as of July 30, 2003, between Lehman Brothers
      Bank, FSB and Aames Capital Corporation
|-------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.33(h) |  | Amendment No. 10, dated as of March 4, 2004, with
      respect the Warehouse Loan and Security Agreement, dated as of February
      10, 2000 as Amended and Restated to and including March 21, 2002, by and
      between Aames Capital Corporation, Aames Funding Corporation and Greenwich
      Capital Financial Products, Inc.
|-------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.33(i) |  | Amendment No. 11, dated as of March 24, 2004, with
      respect the Warehouse Loan and Security Agreement, dated as of February
      10, 2000 as Amended and Restated to and including March 21, 2002, by and
      between Aames Capital Corporation, Aames Funding Corporation and Greenwich
      Capital Financial Products, Inc.
|-------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.33(j) |  | Amendment No. 1 to the guaranty dated as of June
      30, 2003, made by Aames Financial Corporation in favor of Greenwich Capital
      Financial Products, Inc.
|-------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.35(e) |  | Amendment No. 1 to the Corporate Guaranty by Aames
      Financial, amending the Corporate Guaranty dated December 1, 2003
|-------- |  | --------------------------------------------------------------------------------------------------------------------------

|10.38 |  | Aames Financial Corporation Executive Severance Plan,
      Amended and Restated as of September 18, 2003
|----- |  | ---------------------------------------------------------------------------------------------------------

|11 |  | Computation of Basic and Diluted Net Income per Common
      Share
|-- |  | ------------------------------------------------------------------

|31.1 |  | Certification of A. Jay Meyerson pursuant to Section
      302 of the Sarbanes-Oxley Act of 2002
|---- |  | ------------------------------------------------------------------------------------------------

|31.2 |  | Certification of Ronald J. Nicolas, Jr. pursuant to
      Section 302 of the Sarbanes-Oxley Act of 2002
|---- |  | -------------------------------------------------------------------------------------------------------

|32 |  | Certification pursuant to Section 906 of the Sarbanes-Oxley
      Act of 2002
|-- |  | -----------------------------------------------------------------------------

_________________



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|(1) |  | Incorporated
by  reference  from  the  Registrant's  registration  statement  on Form  S-8,  file
number  333-108915, filed September 18, 2003
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Incorporated
by reference from Registrant's  Annual Report on Form 10-K for the year ended June 30,
1999,  filed with the Commission on September 3, 1999
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Incorporated
by reference from the  Registrant's  Form 10-K for the year ended June 30, 2000,  filed
with  the Commission on September 28, 2000
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | Incorporated
by reference from Registrant's Quarterly Report on Form 10-Q for the quarter  ended March
31, 1996 and filed with the Commission on July 3, 1996
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------