<PAGE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

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

                                   FORM 10-Q

(MARK ONE)

<TABLE>
<C>        <S>
   /X/     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
           SECURITIES EXCHANGE ACT OF 1934
</TABLE>

                 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000

                                       OR

<TABLE>
<C>        <S>
   / /     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
           SECURITIES EXCHANGE ACT OF 1934
</TABLE>

        FOR THE TRANSITION PERIOD FROM ______________ TO ______________

                         COMMISSION FILE NUMBER 0-19604

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

                          AAMES FINANCIAL CORPORATION

             (Exact name of registrant as specified in its charter)

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

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

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

                                   NO CHANGES
              (Former name, former address and former fiscal year,
                         if changed since last report)

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

    Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/  No / /

    AT MAY 19, 2000, REGISTRANT HAD 6,212,713 SHARES OF COMMON STOCK
OUTSTANDING.

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
                               TABLE OF CONTENTS

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

Item 1--      Financial Statements
             Condensed Consolidated Balance Sheets at
March 31, 2000 and
             June 30, 1999..................................       3
             Condensed Consolidated Statements of Operations
             for the three and nine months ended March 31,
             2000 and 1999..................................       4
             Condensed Consolidated Statements of Cash Flows
             for the nine months ended March 31, 2000 and
             1999...........................................       5
             Notes to Condensed Consolidated Financial
             Statements.....................................       6
Item 2--      Management's Discussion and Analysis of
              Financial Condition and Results of
              Operations....................................       8

                 PART II--OTHER INFORMATION
Item 1--      Legal Proceedings.............................      40
Item 2--      Changes in Securities.........................      40
Item 3--      Defaults Upon Senior Securities...............      40
Item 4--      Submission of Matters to a Vote of Security
              Holders.......................................      40
Item 5--      Other Information.............................      41
Item 6--      Exhibits and Reports on Form 8-K..............      41
Signature Page..............................................      42
</TABLE>

                                       2
<PAGE>
                  AAMES FINANCIAL CORPORATION AND SUBSIDIARIES
                      CONDENSED CONSOLIDATED BALANCE SHEET

<TABLE>
<CAPTION>
                                                               MARCH 31,        JUNE 30,
                                                                  2000            1999
                                                              ------------   --------------
                                                              (UNAUDITED)      (AUDITED)
<S>                                                           <C>            <C>
                           ASSETS
Cash and cash equivalents...................................  $ 19,396,000   $   20,764,000
Loans held for sale, at lower of cost or market.............   383,282,000      559,869,000
Accounts receivable.........................................    46,470,000       56,964,000
Residual interests, at estimated fair market value..........   297,577,000      332,327,000
Mortgage servicing rights, net..............................    14,325,000       20,928,000
Equipment and improvements, net.............................    10,235,000       13,495,000
Prepaid and other...........................................    14,176,000       15,013,000
Income tax refund receivable................................            --        1,737,000
                                                              ------------   --------------
    Total assets............................................  $785,461,000   $1,021,097,000
                                                              ============   ==============

            LIABILITIES AND STOCKHOLDERS' EQUITY
Borrowings..................................................  $275,470,000   $  281,220,000
Revolving warehouse and repurchase facilities...............   386,165,000      535,997,000
Accounts payable and accrued expenses.......................    58,797,000       50,505,000
Income taxes payable........................................     8,533,000        7,819,000
                                                              ------------   --------------
    Total liabilities.......................................   728,965,000      875,541,000
                                                              ------------   --------------
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 and 100,000,000 shares authorized;
    26,704,000 and 26,704,000 shares outstanding............        27,000           27,000
  Series C Convertible Preferred Stock, par value $0.001 per
    share; 107,105,700 and 100,000,000 shares authorized;
    20,166,000 and 15,009,000 shares outstanding............        20,000           15,000
  Common Stock, par value $0.001 per share 400,000,000 and
    50,000,000 shares authorized; 6,213,000 and 6,203,000
    shares outstanding......................................         6,000            6,000
Additional paid-in capital..................................   367,338,000      342,278,000
Retained deficit............................................  (310,895,000)    (196,770,000)
                                                              ------------   --------------
    Total stockholders' equity..............................    56,496,000      145,556,000
                                                              ------------   --------------
    Total liabilities and stockholders' equity..............  $785,461,000   $1,021,097,000
                                                              ============   ==============
</TABLE>

     See accompanying notes to condensed consolidated financial statements.

                                       3
<PAGE>
                  AAMES FINANCIAL CORPORATION AND SUBSIDIARIES
                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                  (UNAUDITED)

<TABLE>
<CAPTION>
                                           THREE MONTHS ENDED              NINE MONTHS ENDED
                                       ---------------------------   -----------------------------
                                        MARCH 31,      MARCH 31,       MARCH 31,       MARCH 31,
                                           2000           1999           2000            1999
                                       ------------   ------------   -------------   -------------
<S>                                    <C>            <C>            <C>             <C>
Revenue:
  Gain on sale of loans..............  $  9,053,000   $  8,236,000   $  40,403,000   $  36,665,000
  Write-down of residual interests
    and mortgage servicing rights....   (47,300,000)    (8,100,000)    (82,490,000)   (194,551,000)
  Origination fees...................     7,671,000     10,283,000      29,429,000      32,067,000
  Loan servicing.....................     3,958,000      7,559,000      12,133,000      20,675,000
  Interest...........................    24,627,000     18,836,000      72,387,000      45,296,000
                                       ------------   ------------   -------------   -------------
    Total revenue, including
      write-down of residual
      interests and mortgage
      servicing rights...............    (1,991,000)    36,814,000      71,862,000     (59,848,000)
                                       ------------   ------------   -------------   -------------

Expenses:
  Compensation.......................    25,922,000     21,759,000      71,404,000      65,460,000
  Production.........................     5,805,000      9,390,000      21,420,000      30,879,000
  General and administrative.........    14,204,000     11,300,000      45,506,000      38,472,000
  Interest...........................    13,010,000      9,474,000      39,444,000      31,759,000
  Nonrecurring charge-off of
    servicing receivable.............            --     37,044,000              --      37,044,000
                                       ------------   ------------   -------------   -------------
    Total expenses...................    58,941,000     88,967,000     177,774,000     203,614,000
                                       ------------   ------------   -------------   -------------
Loss before income taxes.............   (60,932,000)   (52,153,000)   (105,912,000)   (263,462,000)
Provision (benefit) for income
  taxes..............................       533,000    (16,174,000)      2,458,000     (29,582,000)
                                       ------------   ------------   -------------   -------------
Net loss.............................  $(61,465,000)  $(35,979,000)  $(108,370,000)  $(233,880,000)
                                       ============   ============   =============   =============

Net loss per share:
  Basic..............................  $     (10.25)  $      (5.91)  $      (18.38)  $      (37.84)
                                       ============   ============   =============   =============
  Diluted............................  $     (10.25)  $      (5.91)  $      (18.38)  $      (37.84)
                                       ============   ============   =============   =============
  Dividends per common share.........  $         --   $         --   $          --   $        0.16
                                       ============   ============   =============   =============

Weighted average number shares
  outstanding:
  Basic..............................     6,210,000      6,201,000       6,209,000       6,199,000
                                       ============   ============   =============   =============
  Diluted............................     6,210,000      6,201,000       6,209,000       6,199,000
                                       ============   ============   =============   =============
</TABLE>

     See accompanying notes to condensed consolidated financial statements.

                                       4
<PAGE>
                  AAMES FINANCIAL CORPORATION AND SUBSIDIARIES
                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (UNAUDITED)

<TABLE>
<CAPTION>
                                                                      NINE MONTHS ENDED
                                                              ---------------------------------
                                                                 MARCH 31,         MARCH 31,
                                                                   2000              1999
                                                              ---------------   ---------------
<S>                                                           <C>               <C>
Operating activities:
  Net loss..................................................  $  (108,370,000)  $  (233,880,000)
  Adjustments to reconcile net loss to net cash provided by
    (used in)
    operating activities:
    Depreciation and amortization...........................        4,314,000         4,142,000
    Gain on sale of loans...................................      (34,596,000)      (35,716,000)
    Valuation of residual interests and mortgage servicing
      rights................................................       82,490,000       186,451,000
    Accretion of residual interests.........................      (39,471,000)      (20,563,000)
    Mortgage servicing rights originated....................       (5,175,000)       (6,194,000)
    Mortgage servicing rights amortized.....................        6,778,000         9,109,000
    Mortgage servicing rights charged off...................               --         8,100,000
    Changes in assets and liabilities:
      Loans held for sale originated or purchased...........   (1,551,096,000)   (1,677,024,000)
      Proceeds from sale of loans held for sale.............    1,727,683,000     1,533,166,000
    Decrease (increase) in:
      Accounts receivable...................................       10,494,000        31,416,000
      Residual interests....................................       31,327,000        33,351,000
      Prepaid and other.....................................          836,000         4,066,000
      Income tax refund receivable..........................        1,737,000        (9,850,000)
    Increase (decrease) in:
      Accounts payable and accrued expenses.................        8,292,000        (2,139,000)
      Income taxes payable..................................          715,000       (24,684,000)
    6.5% accrued preferred stock dividend...................       (5,746,000)         (691,000)
                                                              ---------------   ---------------
Net cash provided by (used in) operating activities.........      130,212,000      (200,940,000)
                                                              ---------------   ---------------
Investing activities:
  Purchases of equipment and improvements...................       (1,054,000)       (4,667,000)
                                                              ---------------   ---------------
Net cash used in investing activities.......................       (1,054,000)       (4,667,000)
                                                              ---------------   ---------------
Financing activities:
  Net proceeds from convertible preferred stock issuance....       25,060,000        67,429,000
  Proceeds from exercise of common stock options............            2,000           235,000
  Repayments of borrowings..................................       (5,750,000)       (5,748,000)
  Proceeds from (repayments of) revolving warehouse and
    repurchase facilities...................................     (149,833,000)      143,375,000
  Dividends paid............................................               --        (1,022,000)
  Other, net................................................           (5,000)               --
                                                              ---------------   ---------------
Net cash provided by (used in) financing activities.........     (130,526,000)      204,269,000
                                                              ---------------   ---------------
Net decrease in cash and cash equivalents...................       (1,368,000)       (1,338,000)
Cash and cash equivalents at beginning of period............       20,764,000        12,322,000
                                                              ---------------   ---------------
Cash and cash equivalents at end of period..................  $    19,396,000   $    10,984,000
                                                              ===============   ===============
</TABLE>

     See accompanying notes to condensed consolidated financial statements.

                                       5
<PAGE>
                          AAMES FINANCIAL CORPORATION
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1: BASIS OF PRESENTATION

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

    The 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 for the interim periods reported. The
results of operations for the Company for the three and nine months ended
March 31, 2000 are not necessarily indicative of the results expected for the
full fiscal year.

NOTE 2: SUBSIDIARY GUARANTORS

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

NOTE 3: STOCKHOLDERS' EQUITY

    On August 3, 1999, the Company received $25.0 million of additional capital
(the "Additional Investment") from Specialty Finance Partners ("SFP"), a
partnership controlled by Capital Z Financial Services Fund, II, L.P., a Bermuda
limited partnership ("Capital Z") at which time the Company issued 5,000
additional shares of Series C Convertible Preferred Stock, par value $0.001, for
$5,000 per share. Net proceeds to the Company from the Additional Investment,
after issuance expenses, were $24.8 million.

    On September 24, 1999, the Company effected a 1,000-for-1 stock split to the
then outstanding shares of its Series B Convertible Preferred Stock and
Series C Convertible Preferred Stock. All authorized and outstanding Series B
and Series C Convertible Preferred Stock share amounts in the accompanying
condensed consolidated financial statements have been retroactively restated to
reflect the stock split.

    On October 7, 1999, the Company received $4.2 million of capital from
existing holders of the Company's Common Stock in connection with its rights
offering of up to 6.2 million shares of Series C Convertible Preferred Stock to
stockholders (the "Stockholder Offering"). On October 27, 1999, the Company
received $20.8 million of capital from Capital Z in connection with Capital Z's
standby commitment to purchase up to $25.0 million of unsubscribed shares in the
Stockholder Offering (the "Standby Commitment"). The Company issued an aggregate
of 5.0 million shares of Series C Convertible Preferred Stock in the Stockholder
and pursuant to the Standby Commitment of which net proceeds, after issuance
expenses, were approximately $24.0 million.

    On October 1, 1999, the Company received $1.1 million of capital from
certain members of the Company's management team in the form of cash and
promissory notes and issued 220,000 shares of Series C Convertible Preferred
Stock.

                                       6
<PAGE>
    On April 14, 2000, the Company effected a 1 for 5 reverse stock split of the
outstanding shares of the Company's Common Stock and Series C Convertible
Preferred Stock. Outstanding share information for the Common Stock and
Series C Convertible Preferred Stock and per common share information in the
accompanying condensed consolidated financial statements have been retroactively
restated to reflect the reverse stock split.

    The following table sets forth information regarding net loss per common
share for the three and nine months ended March 31, 2000 and 1999 (unaudited)
(Dollars and weighted average number of shares in thousands):

<TABLE>
<CAPTION>
                                                        THREE MONTHS ENDED     NINE MONTHS ENDED
                                                             MARCH 31,             MARCH 31,
                                                        -------------------   -------------------
                                                          2000       1999       2000       1999
                                                        --------   --------   --------   --------
<S>                                                     <C>        <C>        <C>        <C>
Basic net loss per common share:
  Net loss............................................  $61,465    $35,979    $108,370   $233,880
  Plus: Accrued dividends on Series B and C
    Convertible Preferred Stock.......................    2,166        691       5,746        691
                                                        -------    -------    --------   --------
  Net loss to common stockholders.....................  $63,631    $36,670    $114,116   $234,571
  Weighted average number of common shares
    outstanding.......................................    6,210      6,201       6,209      6,199
                                                        -------    -------    --------   --------
Basic net loss per common share.......................  $ 10.25    $  5.91    $  18.38   $  37.84
                                                        =======    =======    ========   ========
Diluted net loss per common share:
  Net loss to common stockholders.....................  $63,631    $36,670    $114,116   $234,571
  Weighted average number of common shares
    outstanding.......................................    6,210      6,201       6,209      6,199
                                                        =======    =======    ========   ========
Diluted net loss per common share.....................  $ 10.25    $  5.91    $  18.38   $  37.84
                                                        =======    =======    ========   ========
</TABLE>

NOTE 4: RECLASSIFICATIONS

    Certain amounts related to fiscal year 1999 have been reclassified to
conform to the fiscal year 2000 presentation.

NOTE 5: REVOLVING WAREHOUSE AND REPURCHASE FACILITIES

    On February 11, 2000, the Company entered into a $200.0 million revolving
warehouse facility with an investment bank whose prior $90.0 million committed
and $100.0 million uncommitted revolving warehouse facility had recently
expired. The warehouse facility has a 364-day term and is renewable upon
maturity and at the sole discretion of the lender for an additional 364-day
term. Included in the facility is a $35.0 million non-revolving subline that is
secured by substantially all of the Company's previously unencumbered and
pledgeable residual interests. Borrowings under the subline are subject to
scheduled amortization payments. The subline has an initial 364 day term and is
renewable for an additional 364 day term; and thereafter, renewable on a
month-to-month basis for an additional six month period contingent upon, in all
cases, that certain repayment, financial and performance conditions are met. As
part of the transaction, Capital Z, the Company's largest shareholder, agreed to
provide certain credit enhancements to the lender for a portion of the subline.
In connection therewith, the Company agreed to pay Capital Z a $1 million fee.

    On February 25, 2000, the Company entered into an arrangement with the same
investment bank pursuant to which the bank purchased certain servicing related
advances and agreed to undertake the obligation to make a substantial portion of
the Company's advance obligations on its 1999 securitization trusts.

    On April 28, 2000, the Company renewed at $200.0 million a committed
revolving repurchase facility with an investment bank whose prior $300.0
committed facility had expired. Pursuant to the terms of the facility, if
certain financial covenants of that facility are not satisfactorily maintained
by the Company, the facility will expire at October 31, 2000,; otherwise, this
facility expires on April 30, 2001.

                                       7
<PAGE>
NOTE 6: RECENT EVENT

    On May 19, 2000, the Company entered into a Preferred Stock Purchase
Agreement (the "Stock Purchase Agreement") with SFP, the Company's largest
stockholder, which is controlled by Capital Z, providing for an additional
equity investment (the "Investment") of $50.0 million in the Company. The
Investment is to be made in two stages as follows: (i) on or after May 30, 2000
(the "Initial Closing Date"), the Company will sell 40.0 million shares of
Series C Preferred Stock to SFP for a price per share equal to the lower of
$0.90 per share or the average closing price of the Company's Common Stock for
the five trading days immediately prior to the Initial Closing Date (the
"Price") and issue warrants to purchase an additional 5.0 million shares of
Series C Preferred Stock at the Price; (ii) as soon as practicable after the
Initial Closing Date the Company will sell to SFP additional shares of Series C
Preferred Stock at the Price in a number of shares such that the Investment
totals $50.0 million. The Investment is subject to certain conditions including
(i) the receipt by the Company of an opinion by an independent investment
banking firm that the transaction is fair to the Company, (ii) the receipt by
the Company of waivers of certain financial covenants by its warehouse lenders
and credit enhancers and (iii) no material adverse change in the Company's
financial position prior to the Investment. There can be no assurance that the
conditions will be met or that the Investment will be consummated. If the
Investment is not consummated, or if it is delayed, the Company would be unable
to meet its financial covenants under its existing warehouse or repurchase lines
and would have to cease loan production operations which would negatively impact
profitability and jeopardize the Company's ability to continue to operate as a
going concern.

    As part of the Investment, the Company intends to make a distribution in the
form of a dividend, to the Common stockholders of the Company and the Series C
Preferred stockholders not affiliated with SFP or Capital Z (the "Nonaffiliated
Stockholders"), of nontransferable subscription rights to purchase shares of
Series C Preferred Stock at the Price per share (the "Rights Offering"). The
number of shares offered in the Rights Offering will be in proportion to the
number of shares purchased by SFP in the Investment such that the percentage of
shares held by Nonaffiliated Stockholders (on a fully diluted basis) would not
be affected by the Investment if the Rights Offering is fully subscribed. The
Company intends to complete the Rights Offering on the earliest practicable date
following the Initial Closing Date.

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

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

SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION

    This Report contains statements that constitute "forward-looking statements"
within the meaning of Section 21E of the Securities Exchange Act of 1934 and
Section 27A of the Securities Act of 1933. The words "expect," "estimate,"
"anticipate," "predict," "believe," and similar expressions and variations
thereof are intended to identify forward-looking statements. Such statements
appear in a number of places in this filing and include statements regarding the
intent, belief or current expectations of the Company, its directors or officers
with respect to, among other things (a) market conditions in the securitization,
capital, credit and whole loan markets and their future impact on the Company's
operations, (b) trends affecting the Company's liquidity position, including,
but not limited to, its access to warehouse, working capital and other credit
facilities and its ability to effect securitizations and whole loan sales,
(c) the impact of the various cash savings plans and other restructuring
strategies being considered by the Company, (d) the Company's on-going efforts
in improving its equity position, (e) trends affecting the Company's financial
condition and results of operations, (f) the Company's business and liquidity
strategies. The stockholders of the Company are cautioned not to put undue
reliance on such forward-looking statements. Such forward-looking statements are
not guarantees of future performance and involve risks and uncertainties. Actual
results may differ materially from those projected in this Report, for the
reasons, among others,

                                       8
<PAGE>
discussed under the captions "Recent Developments" and "Risk Factors" and the
other portions of Management's Discussion and Analysis of Financial Condition
and Results of Operations. The Company undertakes no obligation to publicly
revise these forward-looking statements to reflect events or circumstances that
arise after the date hereof. Readers should carefully review the factors
referred to above and the other documents the Company files from time to time
with the Securities and Exchange Commission, including the Company's Annual
Report on Form 10-K and Form 10-K/A for the fiscal year ended June 30, 1999, the
quarterly reports on Form 10-Q filed by the Company during the remainder of
fiscal 2000, and any current reports on Form 8-K filed by the Company.

RECENT DEVELOPMENTS

    The Company lost $61.5 million during the three months ended March 31, 2000.
The $61.5 million loss resulted from the Company's $47.3 million valuation
adjustment to its residual interest assets and a $14.2 million net operating
loss. The $47.3 million valuation adjustment reflects the Company's assessment
of recent credit loss experience in its securitized pools and the impact on such
pools of recent interest rate increases in the market on excess spread. The
$14.2 million net operating loss during the March quarter is attributable
primarily to the Company's reliance on the whole loan sale market as its sole
loan disposition strategy, and the Company's constrained loan production in
March resulting from its reliance on working capital to fund its mortgage loan
production.

    On May 19, 2000, the Company entered into a Stock Purchase Agreement with
SFP, the Company's largest stockholder, which is controlled by Capital Z,
providing for the Investment of $50.0 million in the Company. The Investment is
to be made in two stages as follows: (i) on or after May 30, 2000 (the Initial
Closing Date), the Company will sell 40.0 million shares of Series C Preferred
Stock to SFP for a price per share equal to the lower of $0.90 per share or the
average closing price of the Company's Common Stock for the five trading days
immediately prior to the Initial Closing Date (the Price) and issue warrants to
purchase an additional 5.0 million shares of Series C Preferred Stock at the
Price; (ii) as soon as practicable after the Initial Closing Date the Company
will sell to SFP additional shares of Series C Preferred Stock at the Price in a
number of shares such that the Investment totals $50.0 million. The Investment
is subject to certain conditions including (i) the receipt by the Company of an
opinion by an independent investment banking firm that the transaction is fair
to the Company, (ii) the receipt by the Company of waivers of certain financial
covenants by its warehouse lenders and credit enhancers (described more fully
below) and (iii) no material adverse change in the Company's financial position
prior to the Investment. There can be no assurance that the conditions will be
met or that the Investment will be consummated. If the Investment is not
consummated, or if it is delayed, the Company would be unable to meet its
financial covenants under its existing warehouse or repurchase lines and would
have to cease loan production operations which would negatively impact
profitability and jeopardize the Company's ability to continue to operate as a
going concern.

    As part of the Investment, the Company intends to make a distribution in the
form of a dividend, to the Common stockholders of the Company and the Series C
Preferred stockholders not affiliated with SFP or Capital Z (the Nonaffiliated
Stockholders), of nontransferable subscription rights to purchase shares of
Series C Preferred Stock at the Price per share (the Rights Offering). The
number of shares offered in the Rights Offering will be in proportion to the
number of shares purchased by SFP in the Investment such that the percentage of
shares held by Nonaffiliated Stockholders (on a fully diluted basis) would not
be affected by the Investment if the Rights Offering is fully subscribed. The
Company intends to complete the Rights Offering on the earliest practicable date
following the Initial Closing Date.

    The Company is also negotiating with Capital Z to arrange, with an affiliate
of Capital Z, a facility (the "Residual Facility") pursuant to which the Company
would sell, on a forward flow basis, residual interest assets created from its
securitizations with the servicing retained by the Company on the loans in such
securitization trusts. The Company believes that the Residual Facility would
(i) assist the Company in addressing its longer-term liquidity requirements by
periodically converting residual interest assets into

                                       9
<PAGE>
cash and (ii) strengthen its ability to pursue its business strategy of
disposing of loans through a combination of whole loan sales for cash and
securitizations and (iii) increase its servicing portfolio. The Residual
Facility is subject to completion of negotiations and definitive documentation
and there can be no assurance that the Residual Facility will be consummated.
Given the pending nature of the negotiations and the conditions involved,
investors should not place undue reliance on these discussions.

    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. Due to the $61.5 million loss for the quarter ended
March 31, 2000, the Company failed to meet certain existing financial covenants
under its revolving warehouse and repurchase facilities at March 31, 2000 and
April 30, 2000 and does not expect to meet those covenants at May 31, 2000. The
Company is seeking amendments to these financial covenants from its warehouse
and repurchase lenders to bring itself into compliance. The Company's failure to
meet these financial covenants gives the warehouse and repurchase lenders the
right to declare an event of default and to terminate the warehouse and
repurchase facilities, cease funding loans thereunder and foreclose upon and
sell the loans securing the facilities. An event of default under any one of the
Company's warehouse or repurchase facilities would cross-default the remaining
warehouse and repurchase facilities. Moreover, an acceleration of the
indebtedness under the Company's warehouse or repurchase facilities would result
in a default under the Company's 9.125% Senior Notes dues 2003, the Company's
10.5% Senior Notes due 2002 and the Company's 5.5% Convertible Subordinated
Debentures due 2006 (collectively, the "Corporate Debt"), which would, in turn,
result in an acceleration of such indebtedness. An acceleration of the maturity
of the Corporate Debt would jeopardize the Company's ability to continue to
operate as a going concern. If the Company is unable to obtain amendments to its
warehouse and repurchase facilities, or is unable to meet these financial
covenants going forward, 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 negatively impact profitability and
jeopardize the Company's ability to continue to operate as a going concern.

    Under one of the Company's 1999 securitization trusts, the monoline
insurance company providing credit enhancement requires the Company to maintain
a specified net worth and level of cash liquidity in order to be able to
continue to service the loans in the trust. The Company was not in compliance
with those requirements at March 31, 2000 or April 31, 2000; however, the
Company received notification from the monoline insurer that it was not
exercising its rights to terminate the Company as servicer. Moreover, due to the
$61.5 million loss for the quarter ended March 31, 2000, the Company failed to
meet the net worth test at March 31, 2000, April 30, 2000 and does not expect to
meet the test at May 31, 2000. If the Initial Closing Date occurs after May 31,
2000, the Company will not be in compliance with the monoline insurance
liquidity requirement at May 31, 2000. The Company is seeking amendments to
these financial covenants from the monoline insurer. If the Company is unable to
obtain a waiver from the monoline insurer, it would be unable to satisfy a
condition required by Capital Z to consummate the Investment.

    Through February 29, 2000, the Company used a warehouse facility to fund the
majority of its mortgage loans at closing (the "Concurrent Funding Facility") at
which date the Facility expired and was not renewed. The Company's existing
revolving warehouse and repurchase facilities do not provide for the funding of
mortgage loans at closing; instead, the Company uses working capital to close
mortgage loans. After the mortgage loans are closed, the Company pledges them
under one of its other revolving warehouse or repurchase facilities to replenish
working capital. This has restricted the ability of the Company to fund its
mortgage loan production in March, 2000, which has negatively impacted the
profitability of the Company. The Company is currently seeking a new revolving
warehouse or repurchase facility to fund mortgage loans at closing. However,
unless and until a new facility is obtained, the Company is required to fund
mortgage loans exclusively out of working capital and hold them until such
mortgage loans can be transferred to another facility or sold. If future loan
fundings are reduced due to a

                                       10
<PAGE>
lack of funding or capital alternatives, ongoing operations may be jeopardized,
which would negatively impact profitability and jeopardize the Company's ability
to continue to operate as a going concern.

    On April 28, 2000, the Company renewed a $300.0 million committed facility
and decreased the borrowing limit thereunder by $100.0 million to
$200.0 million. As previously reported, on February 11, 2000, the Company
obtained $35.0 million in additional liquidity secured by certain of its
residual interests and certain other collateral through the renewal of a
$90.0 million committed and $100.0 million uncommitted revolving warehouse
facility which expired on February 9, 2000. The committed warehouse facility was
increased to $200.0 million and included a $35.0 million non-revolving subline,
which the Company drew down on February 11, 2000. Additionally, as part of the
transaction, Capital Z, the Company's largest shareholder, agreed to provide
certain credit enhancements to the lender for a portion of the subline. In
connection therewith, the Company has agreed to pay Capital Z a $1 million fee.
With these recent renewals, the Company has current borrowing capacity under
committed revolving warehouse and repurchase facilities of $615.0 million
(excluding the $35.0 million non-revolving subline). However, as a result of the
Company's recent financial performance, including the prices the Company has
received in recent whole loan sales, all of the Company's warehouse and
repurchase 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.

    On February 25, 2000, the Company entered into a sale transaction with an
investment bank pursuant to which a limited partnership controlled by the
investment bank purchased $17.7 million of certain servicing related advances
for $15.0 million in cash and an interest in the limited partnership. On
February 25, 2000, the Company also entered into an arrangement with the same
investment bank pursuant to which the investment bank has agreed to make a
substantial portion of the Company's advance obligations on its 1999
securitization trusts.

    On April 14, 2000, the Company effected a one for five reverse stock split
of the issued and outstanding shares of Common Stock and Series C Preferred
Stock. The Company undertook the reverse stock split, among other reasons, to
increase the market price of each share of Common Stock. As previously reported,
the Company was notified in writing by the New York Stock Exchange (the "NYSE")
on December 2, 1999 (the "NYSE Notice") that the average price of the Company's
Common Stock was below the NYSE's minimum stock price requirement of $1.00 per
share for the thirty trading-day period ended October 29, 1999. Pursuant to the
NYSE Notice, the Company has six months from the date of the NYSE Notice to
raise the market price of the Common Stock above $1.00 per share in both average
and absolute value or the NYSE will suspend the Company's listing and apply to
the Securities and Exchange Commission ("SEC") for delisting. The closing price
of the Common Stock was not below $1.00 per share between April 14, 2000 and
May 19, 2000. The closing price of the Common Stock on May 19, 2000 was $1.125
per share and the average closing price for the thirty trading-day period ended
May 19, 2000 was $1.86 per share. The NYSE also has a requirement that the
Common Stock maintain a minimum market capitalization of $8.0 million. Based
upon the closing sale price of the Common Stock on May 19, 2000 of $1.125 per
share, the Company's market capitalization was approximately $7.0 million, or
below the NYSE minimum requirement. The Company has not received official
notification from the NYSE about the market capitalization requirement. There
can be no assurance that the price of the Common Stock will remain above $1.00
per share in both average and absolute value or that the Common Stock will not
be delisted by the NYSE. If the Common Stock were delisted by the NYSE, it would
seriously impair the ability of Common stockholders to trade their shares.

    The Company's loan production was $446.7 million during the March 2000
quarter, down from the $580.9 million during the quarter ended December 1999,
but up $45.0 million from production levels during the March 1999 quarter.
Although loan production for the nine months ended March 31, 2000 of
$1.6 billion has not yet recovered to the production levels of $1.7 billion for
the comparable nine month

                                       11
<PAGE>
period in the prior year, core retail and broker production increased
$71.9 million, offset by a $197.7 million decrease in correspondent production
resulting from the Company's previously announced plans to focus on its core
retail and broker production.

    The Company sold $434.9 million and $1.7 billion of loans during the three
and nine months ended March 31, 2000, respectively, compared to $393.9 million
and $1.6 billion of loans sold during the comparable periods for 1999. During
the March 2000 quarter, the Company relied solely on whole loan sales for cash
for loan dispositions. For the nine months ended March 31, 2000, the Company's
loan dispositions included $803.6 million of securitizations and $912.1 million
of whole loan sales, reflecting the Company's strategy of disposition of loans
through a combination of securitizations and whole loan sales. The Company's
loan dispositions during the quarter ended March 31, 1999 consisted entirely of
whole loan sales totaling $393.9 million.

    The Company continues to focus on its core business strategy, which consists
of: (i) continuing to focus on its core loan production units; (ii) increasing
its servicing portfolio and servicing capabilities; and (iii) diversifying its
funding sources to become self-financing (i.e., the ability to obtain sufficient
lines of credit to provide financing for assets created by the Company and the
reduction of reliance on the public equity and debt markets). In particular, the
Company intends to employ the following strategies:

    FOCUS ON CORE LOAN PRODUCTION.  The Company intends to evaluate expansion
opportunities in its retail, including internet, and broker operations by
improving market penetration in existing locations and evaluating other
potential locations and by building new relationships with independent mortgage
brokers, with the goal of increasing market share in these areas. The Company
regularly reviews its loan offerings and introduces new loan products to further
meet the needs of its customers and increase its core loan production volume.

    INCREASE SERVICING PORTFOLIO AND INCREASE MARGINS.  The Company plans to
continue to build the size of its servicing portfolio to provide a stable and
significant source of recurring revenue. The Company expects to increase slowly
the size of its loan servicing portfolio by continuing to increase loan
originations and selling a portion of its loan production through new
securitizations.

    CONTINUE TO DIVERSIFY FUNDING SOURCES AND BECOME SELF-FINANCING.  The
Company intends to continue to expand and diversify its funding sources by
adding additional warehouse or repurchase facilities, disposing of a portion of
its loan production for cash in the whole loan market, and developing new
sources for working capital.

    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 "Risk Factors."
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.

GENERAL

    The Company is a consumer finance company primarily engaged, through its
subsidiaries, in the business of originating, purchasing, selling, and servicing
home equity mortgage loans secured by single family residences. Upon its
formation in 1991, the Company acquired Aames Home Loan, a home equity lender
founded in 1954. In August 1996, the Company acquired 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 (including the former One Stop) now operate under the
name "Aames Home Loan."

                                       12
<PAGE>
    The Company's principal market is borrowers whose financing needs are not
being met by traditional mortgage lenders for a variety of reasons, including
the need for specialized loan products or credit histories that may limit such
borrowers' access to credit. The Company believes these borrowers continue to
represent an underserved niche of the home equity loan market and present an
opportunity to earn a superior return for the risk assumed. The residential
mortgage loans originated and purchased by the Company, which include fixed and
adjustable rate loans, are generally used by borrowers to consolidate
indebtedness or to finance other consumer needs, and to a lesser extent, to
purchase homes.

    LOAN ORIGINATION.  The Company originates and purchases loans nationally
through three production channels-retail, broker and correspondent. In recent
quarters, the Company has emphasized its core retail and broker loan production
channels and decreased its reliance on correspondent purchases. The Company
underwrites and appraises every loan it originates and generally reviews
appraisals and re-underwrites all loans it purchases.

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

<TABLE>
<CAPTION>
                                                   THREE MONTHS ENDED       NINE MONTHS ENDED
                                                        MARCH 31,               MARCH 31,
                                                   -------------------   -----------------------
                                                     2000       1999        2000         1999
                                                   --------   --------   ----------   ----------
                                                                  (IN THOUSANDS)
<S>                                                <C>        <C>        <C>          <C>
  Broker Network.................................  $261,573   $226,420   $  959,111   $  866,713(1)
  Retail.........................................   179,792    156,059      561,582      582,173
  Correspondent..................................     5,355     19,270       30,403      228,138
                                                   --------   --------   ----------   ----------
Total............................................  $446,720   $401,749   $1,551,096   $1,677,024
                                                   ========   ========   ==========   ==========
</TABLE>

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

(1) Includes $14.4 million of commercial loans.

    Total loan production during the three months ended March 31, 2000 of $446.7
million was down $134.2 million, or 23.1%, from the $580.9 million reported
during the quarter ended December 31, 1999. When compared to the Company's
December 1999 quarter production by channel, production in its broker, retail
and correspondent channel's during the March 2000 quarter was down $104.4
million, $22.8 million and $7.0 million, respectively. Retail and broker
production has been negatively impacted by the Company's increased pricing in
response to a rising interest rate environment and changes in underwriting
designed to improve credit quality. Additionally, since February 29, 2000, the
Company has been funding mortgage loans at closing out of working capital. This
limitation constrained the Company's ability to fund loan production during the
March 2000 quarter. See "Liquidity and Capital Resources - Warehouse and
Repurchase Facilities." Finally, and to a lesser extent, the Company has
historically experienced a seasonal slowdown in its production levels during the
first calendar quarter.

    Total loan production for the three months ended March 31, 2000 was $446.7
million, up $45.0 million, or 11.2%, from the $401.7 million of loan production
reported for the quarter ended March 31, 1999. Loan origination volume from the
Company's broker channel increased to $261.6 million during the March 2000
quarter, up $35.2 million, or 15.5% from the $226.4 million in production
reported during the comparable 1999 quarter. During the three months ended
March 31, 2000, the Company's retail channel production increased $23.7 million,
or 15.2%, to $179.8 million from $156.1 million during the comparable period a
year ago. Correspondent production during the March 2000 quarter declined $13.9
million to $5.4 million from $19.3 million during the March 1999 quarter. As
previously disclosed, origination volumes during the March 1999 quarter were
constrained by limited warehouse capacity existing during the first half of that
quarter.

    Total loan production for the nine months ended March 31, 2000 was $1.6
billion, a decrease of $125.9 million, or 7.5%, from the $1.7 billion reported
in the comparable nine month period a year ago.

                                       13
<PAGE>
Correspondent production decreased $197.7 million during the nine months ended
March 31, 2000 to $30.4 million from $228.1 million in the comparable nine month
period a year ago reflecting the Company's previously reported decision to
decrease its reliance on this production channel. While the Company's broker
loan production was up $92.4 million during the nine months ended March 31, 2000
from levels during the comparable 1999 period, retail production declined $20.6
million for the period and continues to be negatively affected by a rising
interest rate environment, increased pricing and decreased demand in response
thereto and underwriting changes designed to improve credit quality. The Company
expects current market conditions to continue which could adversely impact the
Company's future loan production levels.

    In the later part of the quarter ended December 31, 1999, the Company
commenced originating loans through the internet, through an affiliation with
certain internet lending sites. Loans originated through this retail production
channel during the quarter ended March 31, 2000 increased to $8.3 million, up
$2.2 million or 36.1% from the $6.1 million during the quarter ended
December 31, 1999. Loan production originated through the internet during the
nine months ended March 31, 2000 was $14.4 million.

    In an effort to augment its core retail and broker production, the Company
hired certain of the retail and broker loan production employees, and acquired
certain assets including loans in process, of another sub-prime mortgage lender
during the March 2000 quarter.

    The following table sets forth the number of retail branch and broker
offices operated by the Company at March 31, 2000 and 1999:

<TABLE>
<CAPTION>
                                                                   MARCH 31,
                                                              -------------------
                                                                2000       1999
                                                              --------   --------
<S>                                                           <C>        <C>
Retail branch offices.......................................    101        101
Broker offices..............................................      7         44
</TABLE>

    The decline between March 31, 2000 and 1999 in the number of broker offices
reflects the Company's decision, as part of cost reduction efforts, to close
unprofitable branches and to regionalize its back office operations including
the underwriting, loan processing and appraisal review functions while
maintaining its national network of loan officers dealing with individual loan
brokers within its markets across the country.

    LOAN SECURITIZATIONS AND SALES.  As a fundamental part of its business and
financing strategy, the Company sells its loans to third party investors in the
secondary market as market conditions allow. The Company maximizes opportunities
in its loan disposition transactions by disposing of its loan production through
a combination of securitizations and whole loan sales, depending on market
conditions, profitability and cash flows. 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 securitizations transactions is attributable to the
excess servicing spread and mortgage servicing rights associated with retaining
a residual interest and the servicing on the mortgage loans in the
securitization, respectively, net of transactional costs. Generally, in a
securitization, the underlying securities are over-collateralized by the Company
depositing a combination of mortgage loans with a principal balance exceeding
the principal balance of the securities, and cash into the securitization, which
requires a cash outflow. 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.

                                       14
<PAGE>
    The following table sets forth certain information regarding the Company's
securitizations and whole loan sales during the three and nine months ended
March 31, 2000 and 1999 (in thousands):

<TABLE>
<CAPTION>
                                                   THREE MONTHS ENDED       NINE MONTHS ENDED
                                                        MARCH 31,               MARCH 31,
                                                   -------------------   -----------------------
                                                     2000       1999        2000         1999
                                                   --------   --------   ----------   ----------
<S>                                                <C>        <C>        <C>          <C>
Loans pooled and sold in securitizations.........  $     --   $     --   $  803,557   $  650,000
Whole loan sales.................................   434,854    393,914      912,072      940,138
                                                   --------   --------   ----------   ----------
  Total loans securitized and sold...............  $434,854   $393,914   $1,715,629   $1,590,138
                                                   ========   ========   ==========   ==========
</TABLE>

    During the three months ended March 31, 2000, based upon its review of
market conditions, profitability and the cash flow needs of the Company, the
Company determined to dispose of its loan production solely through whole loan
sales for cash. The Company's loan dispositions during the nine months ended
March 31, 2000 reflected the Company's business strategy of a combination of
securitizations and whole loan sales. The Company is evaluating market and other
conditions and has not yet determined whether or not it will complete a
securitization during the quarter ended June 30, 2000. During the three and six
months ended March 31, 1999, the Company determined to rely solely on whole loan
sales for cash based on its review of market conditions that occurred in early
fiscal 1999 rendering the asset-backed market inaccessible to, or impractical
for, the Company's loan disposition activities. During the nine months ended
March 31, 1999, the Company completed one $650.0 million securitization
transaction, which occurred in the September 1998 quarter.

    LOAN SERVICING. The Company retains the servicing on the loans it
securitizes. However, the Company generally does not retain servicing on loans
it sells in whole loan sales. The Company believes that the business of loan
servicing provides a more consistent revenue stream and is less cyclical than
the business of loan origination and disposition. The following table sets forth
certain information regarding the Company's servicing portfolio at March 31,
2000 and 1999 and June 30, 1999 (in thousands):

<TABLE>
<CAPTION>
                                                MARCH 31,                JUNE 30,
                                        --------------------------      ----------
                                           2000            1999            1999
                                        ----------      ----------      ----------
<S>                                     <C>             <C>             <C>
Servicing portfolio...............      $3,684,000(1)   $4,045,000(2)   $3,841,000(3)
Serviced in-house.................       3,386,000(1)    4,045,000(2)    3,428,000(3)
</TABLE>

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

(1) Includes $139.1 million of loans subserviced for others by the Company on an
    interim basis.

(2) Includes $193.9 million of loans subserviced for others by the Company on an
    interim basis.

(3) Includes $84.0 million of loans subserviced for others by the Company on an
    interim basis.

    The Company's loan servicing portfolio at March 31, 2000 decreased to
$3.7 billion from $3.8 billion reported at June 30, 1999, and $4.0 billion
reported at March 31, 1999, reflecting loan servicing portfolio run-off during
the respective periods partially offset by the Company's $803.6 million of
securitizations during the nine and twelve months ended March 31, 2000. The
growth of the Company's servicing portfolio will be impacted by the Company's
business strategy of loan dispositions through whole loan sales with servicing
released as well as securitizations which will result in lower growth than
historical periods when the Company predominately sold its loan production in
securitizations. Should prepayments be faster in future periods, such portfolio
run off could lead to a smaller servicing portfolio in spite of securitization
activity. See "Risk Factors."

                                       15
<PAGE>
    The delinquency rate at March 31, 2000 declined to 14.2% from 14.5% at
December 31, 1999 and 15.7% at June 30, 1999. The decline in delinquencies is
due primarily to the Company's strategy of increasing early collection
intervention efforts on one payment delinquencies within applicable grace
payment periods. A decline in delinquencies generally reduces the Company's
servicing advance obligations. The Company has historically experienced
delinquency rates that are higher than those prevailing in this industry due to
its origination of lower credit grade loans. As previously reported, in more
recent quarters the Company has discontinued its bulk purchase of correspondent
loans, increased its focus on higher credit grade loans and discontinued certain
broker programs which the Company believes will cause delinquencies in the
Company's servicing portfolio to decrease in the future. The Company's sale of a
portion of its loan production in the whole loan market on a servicing released
basis will diminish growth of the servicing portfolio. A slow growing or
declining portfolio could cause delinquency rates to rise. See "Results of
Operations--Revenue."

    At March 31, 2000, of the Company's $3.7 billion servicing portfolio, 91.9%
was serviced in-house compared to 100% of the Company's $4.0 billion servicing
portfolio serviced in-house at March 31, 1999. During the quarter ended
June 30, 1999, in order to reduce its servicing advance obligations, the Company
entered into an arrangement with a loan servicing company whereby that servicing
company purchased certain cumulative advances and agreed to make future
servicing advances with respect to an aggregate of $388.0 million
($297.5 million at March 31, 2000) in principal amount of loans.

CERTAIN ACCOUNTING CONSIDERATIONS

    ACCOUNTING FOR SECURITIZATIONS.  The Company's loan disposition strategy
relies on a combination of securitization transactions and whole loan sales. See
"General--Loan Securitization and 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 or
purchased to a separate entity (such as a trust or trust estate) in exchange for
cash proceeds and an interest in the loans securitized represented by the
non-cash gain on sale of loans. The cash proceeds are raised through an offering
of the pass-through certificates or bonds evidencing the right to receive
principal payments on the securitized loans and the interest rate on the
certificate balance or on the bonds. The non-cash gain on sale of loans
represents the difference between the proceeds (including premiums) from the
sale, net of related transaction costs, and the allocated carrying amount of the
loans sold. The allocated carrying amount is determined by allocating the
original cost basis amount of loans (including premiums paid on loans purchased)
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 future 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 (currently .50%),
a monoline insurance fee, if any, and an estimate for loan losses. In quarters
where the Company engaged in a securitization transaction, net gains or losses
in valuation of residual interests and mortgage servicing rights include the
recognition of a gain or loss which represents the initial difference between
the allocated carrying amount and the fair market value of the residual
interests at the date of sale. Each agreement that the Company has entered into
in connection with its securitizations requires either the overcollateralization
of the trust or the establishment of a reserve account that may initially be
funded by cash deposited by the Company.

    The Company determines the present value of the cash flows at the time each
securitization transaction closes using certain estimates made by management at
the time the loans are sold. These estimates include: (i) future rate of
prepayment; (ii) discount rate used to calculate present value; and
(iii) credit losses on loans sold. 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.

                                       16
<PAGE>
    The 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 the residual interests by analyzing current
interest rates, and its prepayment, discount rate and loss assumptions in
relation to its actual experience and current rates of prepayment and loss
prevalent in the industry. As a result of this review, the Company may adjust or
take a charge to earnings to reflect the valuation of its residual interests. In
its regular quarterly review of its residual interests during the three months
ended March 31, 2000, the Company considered the historical performance of its
securitized loan pools, the recent prepayment experience of those pools, the
credit performance of previously securitized loans and other industry data and
determined that a $47.3 million write-down of its residual interest assets was
warranted. Of the $47.3 million adjustment, approximately $35.0 million related
to its credit loss assumptions. During the three months ended March 31, 2000 and
in response to rising interest rates in the money markets, the Company further
adjusted its residual interest assets to primarily reflect interest rate
increases and the differences between the pass through rates in the securitized
pools and the loans in the pools. Results for the nine months ended March 31,
2000 also include the previously reported $30.2 million residual interest
adjustment recorded during the December 1999 quarter. See "Credit Losses" below.

        RATE OF PREPAYMENT.  The estimated life of the securitized loans depends
    on the assumed annual prepayment rate which is a function of estimated
    voluntary (full and partial) and involuntary (liquidations) prepayments. The
    prepayment rate represents management's expectations of future prepayment
    rates based on prior and expected loan performance, the type of loans in the
    relevant pool (fixed or adjustable rate), the production channel which
    produced the loan, prevailing interest rates, the presence of prepayment
    penalties, the loan-to-value ratios and the credit grades of the loans
    included in the securitization and other industry data. The rate of
    prepayment may be affected by a variety of economic and other factors. For
    the quarters up to and including September 30, 1998, prepayment rates used
    by the Company were held constant, i.e. flat, over the life of the pool. The
    estimates used by the Company for the quarters up to and including
    September 30, 1998 were flat prepayment rates ranging from 26% for fixed to
    30.5% for adjustable and hybrid loan products. These rates represented a
    weighted average loan life of approximately 2.6 to 3.8 years. During the
    quarter ended December 31, 1998, the Company changed its estimate of
    prepayment rates from a flat prepayment rate to a vectored rate, which more
    closely approximates the performance of the securitized loans. The new
    vectored prepayment rates peak at approximately 29% for fixed and
    approximately 42% to 57% for adjustable rate loans. These revised prepayment
    rates resulted in a weighted average life of approximately 2.9 years.

        As previously reported, during the three months ended December 31, 1999,
    the Company evaluated actual prepayment trends of mortgage loans in its
    securitized pools. The Company changed and adjusted its estimate of
    prepayment rates to peak at approximately 27% for fixed rate mortgage loans
    and approximately 39% to 53% for adjustable rate mortgage loans. These
    revised prepayment rates result in a weighted average life of approximately
    3.2 years. The impact of the change in prepayment speed assumptions amounted
    to a favorable adjustment of approximately $21.1 million to the Company's
    residual assets during the three months ended December 31, 1999. During the
    three months ended March 31, 2000, the Company's evaluation of its
    prepayment rate assumptions considered recent prepayment experience of its
    securitized pools and determined that no adjustment of its prepayment
    assumption was warranted.

        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. For the quarters up to and including
    September 30, 1998, the Company used the weighted average interest rates of
    the loans included in the pool as the best estimate available as an
    appropriate discount rate to determine fair value. As the market
    deteriorated in the quarter ended December 31, 1998, it became apparent that
    a change in discount rate would be required in order for the estimate of
    fair value to be consistent with market conditions. Since the quarter
    commencing with the quarter ended December 31, 1998,

                                       17
<PAGE>
    the Company has used a discount rate of 15% to reflect current market
    conditions and the appropriate rate of return given the inherent risk of the
    related asset.

        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 securitization, loss
    and delinquency information by origination channel, and information
    available from other market participants such as investment bankers, credit
    providers and credit agencies. On a quarterly basis, the Company
    re-evaluates its estimate for credit losses.

        The Company incurred losses on liquidations of $25.4 million and
    $14.8 million during the three months ended March 31, 2000 and 1999,
    respectively. The Company incurred losses on liquidations of $67.3 million
    for the nine months ended March 31, 2000 compared to losses of
    $35.4 million for the nine months ended March 31, 1999. The increase in
    losses on liquidations principally reflects losses in the portfolio of lower
    credit grade correspondent loans purchased in bulk sales and broker loans
    originated through programs which have been discontinued, together with the
    Company's efforts to improve its liquidity by accelerating delinquent loan
    loss resolution through early disposition of REO and acceptance of less than
    full principal payoffs in certain cases and other loss mitigation steps. As
    previously disclosed, the Company has also incurred losses on mortgage loans
    having lower than average balances and secured by properties having low
    appraised values. Although such loans were originated by correspondents and
    brokers with whom the Company has since ceased doing business, the Company
    may incur continued losses on these loans. While the Company has eliminated
    its bulk purchase program, the seasoning of the lower grade bulk portfolio
    may continue to contribute to increased losses over time. The Company
    believes that its practice of early disposition of REO and accepting short
    principal payoffs in certain cases is more cost effective than incurring
    longer-term, and generally higher costs (including interest advances in the
    securitizations) associated with extended REO holding periods or with
    migration of delinquent loans through the foreclosure process. Moreover, the
    Company believes its efforts in early problem credit intervention result in
    higher loss trends in the near term, but decrease the absolute level of
    losses.

        The Company previously disclosed that if actual losses exceeded
    management's assumptions, the Company would be required to take a charge to
    earnings. In light of recent higher than expected losses on liquidations and
    based upon management's assessment of the aforementioned factors considered
    in developing its credit loss estimate, during the three months ended
    March 31, 2000 the Company adjusted its prospective cumulative loss estimate
    to 4.1% of the remaining balance of loans in its securitized pools. The
    change in the credit loss estimate resulted in a $35.0 million write-down to
    the Company's residual interest assets during the three months ended
    March 31, 2000. The Company closely monitors its residual interests and
    should higher loss levels continue, it will incorporate this factor into its
    normal quarterly valuation of its residual interests.

        As previously reported, during the three months ended December 31, 1999,
    the Company adjusted its prospective cumulative loss estimate in light of
    higher than expected credit loss experience existing at that time. The
    change in the credit loss estimate resulted in a $51.3 million unfavorable
    adjustment (partially offset by a $21.1 million favorable valuation
    adjustment to the prepayment speed assumptions) to the Company's residual
    interest assets during the December 31, 1999 quarter. The increase in the
    prospective cumulative estimate was primarily related to then current credit
    loss experience related to loans purchased in bulk transactions from
    correspondents during fiscal years 1996 and 1997, and loans acquired through
    certain brokers during the same period. As previously reported, the Company
    has eliminated its bulk purchase program; however, the seasoning of the
    lower credit grade bulk portfolio may continue to contribute to an increase
    in losses over time.

    Additionally, upon sale or securitization of servicing retained mortgages,
the Company capitalizes the fair value of MSRs assets separate from the loan.
The Company determines fair value based on the present

                                       18
<PAGE>
value of estimated net future cash flows related to servicing income. The
Company uses an interest rate of 15% to discount these cash flows. The
capitalized cost basis allocated to the servicing rights is amortized over the
period of estimated net future servicing fee income. The Company periodically
reviews the valuation of capitalized servicing rights. This review is performed
on a disaggregated basis for the predominant risk characteristics of the
underlying loans which are loan type and origination date. During the three
months ended March 31, 2000, management determined that no adjustment of its
assumptions underlying the valuation of the Company's MSR's was necessary.
Results for the nine months ended March 31, 2000 include the previously reported
$5.0 million charge to income in the December 1999 quarter for the Company's
adjustment of its MSR's reflecting management's estimate of the effects of
increased costs associated with the Company's increased early intervention
efforts in servicing delinquencies in the portfolio.

    NEW PRONOUNCEMENTS.  In June 1998, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133,
'Accounting for Derivative Instruments and Hedging Activities.' ("SFAS 133") In
July 1999, the FASB issued SFAS 137 which deferred the effective date of
SFAS 133 to fiscal years beginning after June 15, 2000. SFAS No. 133 requires
companies to record derivatives on the balance sheet as assets and liabilities,
measured at fair value. Gains and losses resulting from changes in the values of
those derivatives would be accounted for in earnings. Depending on the use of
the derivative and the satisfaction of other requirements, special hedge
accounting may apply. At and during the nine months ended March 31, 2000, the
Company had no freestanding derivative instruments in place and believes it had
no material amounts of embedded derivative instruments as defined by SFAS
No. 133. Based upon the Company's analysis of the applicability of SFAS
No. 133, which the Company is continuing to formalize, the adoption of this
standard is not expected to have a materially adverse effect on the Company's
consolidated financial statements.

RESULTS OF OPERATIONS--THREE AND NINE MONTHS ENDED MARCH 31, 2000 AND 1999

    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,
2000 and 1999 (in thousands):

<TABLE>
<CAPTION>
                                                     THREE MONTHS ENDED      NINE MONTHS ENDED
                                                          MARCH 31,              MARCH 31,
                                                     -------------------   ---------------------
                                                       2000       1999       2000        1999
                                                     --------   --------   ---------   ---------
<S>                                                  <C>        <C>        <C>         <C>
Revenue:
  Gain on sale of loans............................  $  9,053   $  8,236   $  40,403   $  36,665
  Write-down of residual interests and mortgage
    servicing rights...............................   (47,300)    (8,100)    (82,490)   (194,551)
  Origination fees.................................     7,671     10,283      29,429      32,067
  Loan servicing...................................     3,958      7,559      12,133      20,675
  Interest income..................................    24,627     18,836      72,387      45,296
                                                     --------   --------   ---------   ---------
Total revenue, including write-down................    (1,991)    36,814      71,862     (59,848)
                                                     --------   --------   ---------   ---------
Expenses:
  Compensation.....................................    25,922     21,759      71,404      65,460
  Production.......................................     5,805      9,390      21,420      30,879
  General and administrative.......................    14,204     11,300      45,506      38,472
  Interest.........................................    13,010      9,474      39,444      31,759
  Nonrecurring servicing receivable................        --     37,044          --      37,044
                                                     --------   --------   ---------   ---------
Total expenses.....................................    58,941     88,967     177,774     203,614
                                                     --------   --------   ---------   ---------
Loss before income taxes...........................   (60,932)   (52,153)   (105,912)   (263,462)
Provision (benefit) for income taxes...............       533    (16,174)      2,458     (29,582)
                                                     --------   --------   ---------   ---------
Net loss...........................................  $(61,465)  $(35,979)  $(108,370)  $(233,880)
                                                     ========   ========   =========   =========
</TABLE>

                                       19
<PAGE>
REVENUE

    Total revenue for the three months ended March 31, 2000 was $(2.0) million
as compared to $36.8 million reported in the comparable three month period in
1999. Total revenue for the nine months ended March 31, 2000 was $71.9 million,
up $131.7 million from the $(59.8) million for the nine months ended March 31,
1999. Included in total revenues for the three and nine months ended March 31,
2000 is a $47.3 million write-down of the Company's residual interests resulting
primarily from the Company's regular quarterly evaluation of the carrying values
of such residual assets which indicated that a valuation adjustment of
approximately $35.0 million was warranted due to the credit loss experience of
loans in its securitized trusts. In response to rising interest rates in the
money markets, the Company further adjusted its residual interest assets
downward to primarily reflect interest rate increases and the differences
between the pass through rates in the securitized pools and the loans in the
pools. Also included in total revenues for the nine months ended March 31, 2000
is the previously reported $35.2 million write-down of the Company's residual
interests and MSR's taken during the quarter ended December 31, 1999. See
"Certain Accounting Considerations--Accounting for Securitizations--Credit
Losses." As previously reported, included in total revenues for the three and
nine months ended March 31, 1999 was a nonrecurring charge in the amount of
$37.0 million and an $8.1 million valuation adjustment to the Company's MSR's.
Also included in total revenues for the nine months ended March 31, 1999 is a
$191.6 million write-down of the Company's residual interests charged against
income during the three months ended December 31, 1998.

    Gain on sale for the three months ended March 31, 2000 was $9.1 million, an
$817,000 increase from the $8.2 million gain on sale reported during the
comparable three month period a year ago. Gain on sale for the three months
ended March 31, 2000 and 1999 reflects the Company's sole reliance on whole loan
sales for cash in those periods as its loan disposition strategy. The Company
determined to dispose of its loan production solely through whole loan sales
during the quarter ended March 31, 2000 based upon its review of market
conditions, profitability and cash flow needs of the Company. During the three
months ended March 31, 2000, the Company disposed of $434.9 million of loans in
whole loan sale transactions, up $41.0 million from the $393.9 million of whole
loan sales consummated during the comparable period a year earlier. The gains on
sale recognized during the three months ended March 31, 2000 were generally
higher than gains recognized during the comparable three month period in 1999.
This is attributable to the increased volume of loans sold in the March 2000
quarter over that in the March 1999 quarter and to generally better market
conditions prevailing during the March 2000 quarter compared to the same period
a year ago. Furthermore, gains on whole loan sales during the March 1999 quarter
were negatively impacted by the Company's need to dispose of loans on an
expedited basis during the first half of the quarter to free up limited
warehouse capacity existing at that time. Gain on sale for the nine months ended
March 31, 2000 was $40.4 million, a $3.7 million increase from the
$36.7 million gain on sale reported in the comparable nine month period in 1999.
During the nine months ended March 31, 2000, the Company securitized
$803.6 million of loans and sold $912.0 million of loans in whole loan sales.
During the comparable nine month period in 1999, the Company securitized
$650.0 million of loans and sold $940.1 million of loans in whole loan sales.
The gain on sale for the securitizations in the nine months ended March 31, 2000
were lower than historical gains due to, among other things, market conditions
at the time of the securitizations and the Company's adoption of revised gain
related assumptions during the December 31, 1998 quarter. As previously
reported, gain on sale for the nine months ended March 31, 1999 was adversely
affected by a $13.5 million hedge loss recorded in the period. As of and during
the nine months ended March 31, 2000, the Company had no hedge positions in
place.

    Origination fee revenue during the three months ended March 31, 2000 was
$7.7 million, down $2.6 million, or 25.4% from $10.3 million during the three
months ended March 31, 1999. Origination fee revenue is primarily comprised of
points charged on mortgage loans originated by the Company and, to a lesser
extent, other fees charged in the loan origination process. Origination fee
revenue in the form of points is primarily a function of the volume of mortgage
loans originated by the Company through its retail channel, the credit grade of
the loans originated and the weighted average points charged on such loans.

                                       20
<PAGE>
The decrease in origination fee revenue during the March 2000 quarter occurred
despite an increase in retail loan production during the period, reflecting
recent changes in the Company's pricing strategies that place a higher emphasis
on coupon rates rather than points at origination and a focus on higher credit-
quality borrowers. Deferred origination fee revenue recognized during the period
is attributable to the mix in the composition of loans being either securitized
or sold in whole loan sales in excess of the loans originated during the same
periods. The recognition or deferral of deferred origination fee revenue during
a period coincides with the recognition or deferral of deferred compensation
expense during the same period. See "Expenses--Compensation." Origination fee
revenue for the three months ended March 31, 2000 is net of $181,000 of
origination fee revenue deferred to future periods. Origination fee revenue for
the three months ended March 31, 1999 includes $21,000 of deferred origination
fee revenue recognized during the period relating to prior periods' loan
production. Net of the effects of the recognition or deferral of deferred
origination fee revenue, during the three months ended March 31, 2000
origination fee revenue decreased $2.4 million to $7.9 million from
$10.3 million during the comparable period a year ago.

    Origination fee revenue during the nine months ended March 31, 2000 was
$29.4 million, down $2.6 million, or 8.2% from $32.1 million during the nine
months ended March 31, 1999. Origination fee revenue for the nine months ended
March 31, 2000 includes $2.0 million of deferred origination fee revenue
recognized during the period relating to prior periods' loan production.
Origination fee revenue for the nine months ended March 31, 1999 is net of
$1.8 million of origination fees deferred to future periods. Net of the effects
of recognition or deferral of deferred origination fee revenue, during the nine
months ended March 31, 2000 origination fee revenue decreased $6.4 million to
$27.4 million from $33.8 million during the comparable period a year ago
reflecting the decrease in the Company's loan production volumes in its retail
units, and the recent changes in the Company's pricing strategies discussed
above.

                                       21
<PAGE>
    Loan service revenue consists of prepayment fees, late charges and other
fees retained by the Company, and servicing fees earned on securitized pools,
reduced by the subservicing costs and amortization of the Company's MSRs. Loan
service revenue decreased to $4.0 million in the three months ended March 31,
2000 from $7.6 million during the three months ended March 31, 1999. Loan
service revenue decreased to $12.1 million during the nine months ended
March 31, 2000 from $20.7 million during the comparable nine month period in
1999. During the quarter ended June 30, 1999, the Company entered into three
arrangements in order to reduce its servicing advance obligations. In the first
arrangement, a loan servicing company purchased certain servicing related
advances and agreed to make future servicing advances with respect to an
aggregate of $388.0 million ($297.5 million at March 31, 2000) in principal
amount of loans. In the second arrangement, an investment bank purchased certain
servicing related advances from the Company. In the third arrangement, the
Company and the same investment bank entered into a transaction pursuant to
which the investment bank undertook the obligation to make a substantial portion
of the Company's advance obligations on its pre-1999 securitization trusts. On
February 25, 2000, the Company entered into two additional arrangements with the
same investment bank pursuant to which the investment bank purchased certain
servicing related advances and agreed to undertake the obligation to make a
substantial portion of the Company's advance obligations on its 1999
securitization trusts. The decrease in loan service revenue during the three and
nine months ended March 31, 2000 from the comparable periods in 1999 was due
primarily to expenses incurred in the periods for those arrangements, which were
not in place a year ago. To a lesser extent, the decrease is due to the decline
in prepayment fee income and in the balance of loans serviced by the Company
during the current periods when compared to the 1999 periods. See "General--Loan
Servicing."

    During the nine months ended March 31, 2000, losses on liquidations of loans
increased to $67.3 million from $35.4 million in the comparable prior year
period primarily due to the seasoning of the lower credit grade loans purchased
in bulk and included in the Company's earlier trusts. See "Certain Accounting
Considerations--Accounting for Securitizations--Credit Losses." Further, the
adverse market conditions that have existed since the fall of 1998 have resulted
in the tightening in underwriting guidelines by purchasers of whole loans and
the insolvency of several large subprime home equity lenders. These factors have
had the effect of decreasing the availability of credit to delinquent lower
credit grade borrowers who in the past had avoided default by refinancing.
Included in the Company's results for the three and nine months ended March 31,
2000 are $35.0 million and $65.2 million, respectively, of charges to income
reflecting the Company's evaluation of the trends in credit losses and their
impact on the residual interest asset. See "Certain Accounting
Considerations--Accounting for Securitizations--Credit Losses."

                                       21
<PAGE>
    The following table sets forth delinquency, foreclosure, and loss
information of the Company's servicing portfolio at and for the periods
indicated:

<TABLE>
<CAPTION>
                                            MARCH 31,                  YEAR ENDED JUNE 30,
                                     -----------------------   ------------------------------------
                                        2000         1999         1999         1998         1997
                                     ----------   ----------   ----------   ----------   ----------
                                                         (DOLLARS IN THOUSANDS)
<S>                                  <C>          <C>          <C>          <C>          <C>
Percentage of dollar amount of
  delinquent loans to loans
  serviced (period end)
  (1)(2)(3)(4)
One month..........................         1.8%         3.0%         2.4%         3.8%         4.3%
Two months.........................         0.8%         1.0%         1.0%         1.3%         1.9%

Three or more months:
Not foreclosed(4)(5)...............         9.5%        10.5%        10.3%         9.0%         8.1%
Foreclosed(6)......................         2.1%         1.9%         2.0%         1.5%         1.0%
                                     ----------   ----------   ----------   ----------   ----------
  Total............................        14.2%        16.4%        15.7%        15.6%        15.3%
                                     ==========   ==========   ==========   ==========   ==========
Percentage of dollar amount of
  loans foreclosed during the
  period to servicing
  portfolio(4)(8)..................         2.8%         2.3%         2.9%         2.0%         1.5%
Number of loans foreclosed during
  the period(6)....................       1,454        1,284        1,680        1,125          560
Principal amount of foreclosed
  loans during the period..........  $  106,161   $   93,896   $  122,445   $   84,613   $   48,029
Net losses on liquidations during
  the period(7)....................  $   67,291   $   35,439   $   51,730   $   26,488   $    5,470
Percentage of annualized losses to
  servicing portfolio(4)(8)........         2.3%         1.1%         1.2%         0.7%         0.2%
Servicing portfolio at period
  end..............................  $3,684,000   $4,045,000   $3,841,000   $4,147,000   $3,174,000
</TABLE>

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

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

(2) The delinquency and foreclosure percentages are calculated on the basis of
    the total dollar amount of mortgage loans serviced by the Company, and any
    subservicers as of the end of the periods indicated.

(3) At March 31, 2000, the dollar volume of loans delinquent more than 90 days
    in twelve of the Company's REMIC trusts, exceeded the permitted limit in the
    related pooling and servicing agreements. Four of the aforementioned REMIC
    trusts plus two additional REMIC trusts have also exceeded certain loss
    limits. See "--Certain Accounting Considerations" and "--Risk Factors".

(4) The servicing portfolio used in the percentage calculations includes loans
    subserviced for others by the Company on an interim basis of $139.1 million,
    $193.9 million, $84.0 million, $82.0 million and $-0- for the periods ended
    March 31, 2000, March 31, 1999, June 30, 1999, June 30, 1998 and June 30,
    1997, respectively.

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

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

(7) Represents losses, net of gains, on foreclosed properties sold during the
    period indicated.

(8) The percentages for periods subsequent to June 30, 1998 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.

                                       22
<PAGE>
    Interest income includes interest on loans held for sale, interest on
short-term overnight investments and accretion income associated with the
Company's residual interests. Interest income during the three months ended
March 31, 2000 increased $5.8 million to $24.6 million from $18.8 million during
the three months ended March 31, 1999. During the nine months ended March 31,
2000, interest income was $72.4 million, up $27.1 million, from $45.3 million
reported during the comparable period a year ago. Interest income increased
during the three and nine months ended March 31, 2000 over the comparable 1999
periods due primarily to higher accretion on Company's residual interests due to
a higher level of residuals recorded as a consequence of securitization activity
in the 2000 periods that was absent a year ago, and use of a higher discount
rate during the nine months ended March 31, 2000 over the comparable period in
1999. To a lesser extent, the increase in interest income is attributable to
weighted average interest rates on higher balances of loans held for sale during
the three and nine months ended March 31, 2000 when compared to such rates and
balances during the comparable periods in 1999.

EXPENSES

    Compensation expense during the three months ended March 31, 2000 increased
$4.2 million, or 19.1%, to $25.9 million from $21.8 million during the three
months ended March 31, 1999. This increase was primarily due to $2.6 million of
non-recurring severance costs incurred in the quarter ended March 31, 2000, and,
to a lesser extent, incentive compensation, bonus awards, and hiring certain
employees during the quarter ended March 31, 2000. Compensation expense for the
three months ended March 31, 2000 and March 31, 1999 includes $163,000 and
$866,000, respectively, of deferred direct compensation costs associated with
loans originated in prior periods that were disposed of in whole loan sales
consummated during the quarter. Net of the effects of the recognition or the
deferral of direct compensatory costs, compensation expense during the quarter
ended March 31, 2000 increased $4.9 million to $25.8 million from $20.9 million
during the comparable period a year ago.

    Compensation expense during the nine months ended March 31, 2000 increased
$5.9 million, or 9.1%, to $71.4 million from $65.5 million during the nine
months ended March 31, 1999. Compensation expense for the nine months ended
March 31, 2000 includes $3.2 million of deferred direct compensation costs
associated with loans originated in prior periods that were disposed of in
either whole loans sales or in the securitization consummated during the period,
and also includes $3.6 million of nonrecurring severance costs. Compensation
expense for the nine months ended March 31, 1999 is net of $618,000 of direct
compensation income associated with loans originations which were deferred to
future periods pending disposition of the loans in either whole loans sales or
securitizations. Net of the effects of the recognition or the deferral of direct
compensatory costs, compensation expense for the nine months ended March 31,
2000 increased $2.1 million to $68.2 million from $66.1 million during the
comparable period from a year ago. This increase is attributable to the
nonrecurring severance costs and, to a lesser extent, incentive compensation,
bonus awards, and hiring certain employees during the quarter ended March 31,
2000.

    Production expense, primarily advertising, outside appraisal costs, travel
and entertainment, and credit reporting fees is generally related to the
Company's loan origination volume. Production expense during the three months
ended March 31, 2000 decreased $3.6 million, or 38.2%, to $5.8 million from $9.4
million during the three months ended March 31, 1999. During the nine months
ended March 31, 2000, production expense decreased $9.5 million, or 30.6% to
$21.4 million from $30.9 million during the comparable period in 1999. The
decreases in production expense during the three and nine months ended
March 31, 2000 from the comparable periods in 1999 is due primarily to the
Company's cost reduction efforts, which include closing smaller, less productive
retail branch offices, and reducing its advertising expenses by improving the
efficiency and penetration of its advertising strategies. Additionally, in
December 1999, in an effort to further reduce production costs, the Company
commenced the practice of having prospective borrowers pay for appraisal costs
prior to incurrence of the appraisal expense during the loan origination process
whenever possible. Prior thereto, the Company did not charge customers for
appraisals unless and until their loans closed, and absorbed as a production
expense appraisal costs incurred for loan

                                       23
<PAGE>
applications where the prospective applicants' loans were not closed and funded.
Production expense expressed as a percentage of total loan origination volume
for the three months ended March 31, 2000 was 1.3% compared to 2.3% during the
comparable three month period in 1999. The decrease in the percentage reflects
the decline in production expense during the March 2000 quarter from the 1999
quarter despite a $45.0 million increase in total loan production between the
two periods. Production expense expressed as a percentage of total loan
origination volume for the nine months ended March 31, 2000 decreased to 1.4%
from 1.8% during the comparable nine month period in 1999, because the 30.6%
decline in production expense more than offset the 7.5% decline in total
origination volume for the nine months ended March 31, 2000 from the same period
in the previous year.

    General and administrative expenses increased $2.9 million and $7.0 million
to $14.2 million and $45.5 million during the three and nine months ended
March 31, 2000 from $11.3 million and $38.5 million during the comparable three
and nine month periods in 1999. The increases were primarily attributable to the
Company's decision to utilize outside professional advisors on specific
operational projects, primarily to support the two servicing advance facilities
the Company put in place to reduce its servicing advance obligations, and
miscellaneous operational charges taken by the Company, partially offset by
declines in the Company's communication and miscellaneous expenses. As
previously reported, at December 31, 1999, the Company reviewed its accounts
receivable consisting of servicing advances made by the Company in connection
with its securitized pools and valued such receivables to reflect their fair
market value at December 31, 1999. This valuation resulted in a write-down in
the amount of $2.0 million and was recorded in the quarter ended December 31,
1999. As part of the Company's on-going costs savings program, it ceased
activities in certain branches that were deemed unprofitable by management or as
part of the regionalization of branches in the broker network. The office space
for some of the closed branches remains subject to operating leases that
management is attempting to sublease or terminate. The Company is also
attempting to sublet significant space at its headquarter office located at 350
South Grand Avenue in downtown Los Angeles. If the Company agrees to sublease
such space at lease rates significantly less than existing base lease terms or
if the lease commitments are bought out as a consequence of a negotiated lease
termination, the Company could incur a significant one-time charge.

    Interest expense increased $3.5 million and $7.7 million to $13.0 million
and $39.4 million for the three and nine months ended March 31, 2000,
respectively, from $9.5 million and $31.8 million for the comparable three and
nine month periods in 1999, respectively. The increase in interest expense in
the three and nine months ended March 31, 2000 from levels reported in the
comparable 1999 periods resulted primarily from increased borrowings at higher
interest rates under various revolving warehouse and repurchase facilities to
fund the origination and purchase of mortgage loans prior to their
securitization or sale in the secondary market. Interest expense is expected to
increase in future periods due to the Company's continued reliance on external
financing arrangements to fund its operations.

INCOME TAXES

    During the three and nine months ended March 31, 2000, the Company recorded
an income tax provision of $533,000 and $2.5 million, respectively, and such
provisions relate exclusively to the Company's estimated tax on excess inclusion
income on its REMIC trusts. During the three and nine months ended March 31,
1999, the Company recorded estimated tax benefits of $16.2 million and $29.6
million, respectively, which were net of tax valuation adjustments recorded to
account for estimated non-realizable deferred tax assets. The investment in the
Company by Capital Z resulted in a change in control for income tax purposes
thereby limiting future net operating loss and certain other future deductions.

                                       24
<PAGE>
FINANCIAL CONDITION

    LOANS HELD FOR SALE.  The Company's portfolio of loans held for sale
decreased to $383.3 million at March 31, 2000 from $559.9 million at June 30,
1999. The decline is due to the Company's $803.6 million of securitizations and
$912.0 million of whole loan sales in the secondary markets during the nine
months ended March 31, 2000, partially offset by the Company's loan production
during the period.

    ACCOUNTS RECEIVABLE.  Accounts receivable, representing servicing fees and
advances and other receivables, decreased to $46.5 million at March 31, 2000
from $57.0 million at June 30, 1999. Included in accounts receivable at
June 30, 1999 was $25.0 million of estimated proceeds from the Additional
Investment which were subsequently received by the Company in August 1999. The
level of servicing related advances, in any given period, is dependent upon
portfolio delinquencies, the levels of REO and loans in the process of
foreclosure and the timing of cash collections. Net of the $25.0 million of
estimated proceeds from the additional investment, the increase in the Company's
accounts receivable since June 30, 1999 is primarily attributable to advances on
delinquent loans in the two securitization trusts closed during the nine months
ended March 31, 2000 and continued advances on seriously delinquent loans offset
partially by the sale of certain servicing advances during the March 2000
quarter.

    RESIDUAL INTERESTS.  Residual interests decreased to $297.6 million at
March 31, 2000 from $332.3 million at June 30, 1999 reflecting residual
interests recognized in the Company's securitizations in the nine months ended
March 31, 2000, plus accretion during the same period, net of the $47.3 million
and $30.2 million residual asset write-downs during the quarters ended
March 31, 2000 and December 31, 1999, respectively.

    MORTGAGE SERVICING RIGHTS, NET.  Mortgage servicing rights, net, decreased
to $14.3 million at March 31, 2000 from $20.9 million at June 30, 1999
reflecting the capitalization of mortgage servicing rights on securitizations
during the nine months ended March 31, 2000, net of amortization during the
period and the $5.0 million write-down during the three months ended
December 31, 1999.

    EQUIPMENT AND IMPROVEMENTS, NET.  Equipment and improvements, net, decreased
to $10.2 million at March 31, 2000 from $13.5 million at June 30, 1999 due to
depreciation and amortization outpacing equipment and improvement acquisitions
during the nine months ended March 31, 2000.

    PREPAID AND OTHER ASSETS.  Prepaid and other assets declined to $14.2
million at March 31, 2000 from $15.0 million at June 30, 1999. The $1.7 million
of income tax refunds receivable at June 30, 1999 were realized in cash during
the three months ended September 30, 1999.

    BORROWINGS.  Amounts outstanding under borrowings at March 31, 2000
decreased to $275.5 million from the $281.2 million outstanding at June 30, 1999
and reflects the Company's $5.8 million scheduled sinking fund payment on its
10.5% Senior Notes during the March 2000 quarter.

    REVOLVING WAREHOUSE FACILITIES.  Amounts outstanding under revolving
warehouse and repurchase facilities decreased to $386.2 million at March 31,
2000 from $536.0 million at June 30, 1999, primarily as the result of the
decrease in loans held for sale due to whole loan sales and the securitizations
during the nine months ended March 31, 2000, partially offset by the Company's
loan production during the period. Proceeds from whole loan sales and
securitizations are used to reduce balances outstanding under the Company's
revolving warehouse and repurchase facilities.

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)
overcollateralization or reserve requirements in

                                       25
<PAGE>
connection with the securitization, (iv) ongoing administrative, operating, and
tax expenses, (v) interest and principal payments under the Company's warehouse
and repurchase credit facilities and other existing indebtedness, (vi) advances
in connection with the Company's servicing portfolio and (vii) costs associated
with realigning the Company's core production units.

    The Company has historically financed its operating cash requirements
primarily through: (i) warehouse and repurchase facilities, (ii) working capital
financing facilities, (iii) the securitization and sale of mortgage loans, and
(iv) the issuance of debt and equity securities.

    WAREHOUSE AND REPURCHASE FACILITIES.  The Company generally relies on
warehouse and repurchase facilities to originate and purchase mortgage loans and
hold them prior to securitization or sale. At March 31, 2000, the Company had
committed revolving warehouse and repurchase facilities in the amount of $715.0
million (excluding the $35.0 million non-revolving subline described more fully
below). During the quarter ended March 31, 2000, the $150.0 million Concurrent
Funding Facility expired and was not renewed. During the March 31, 2000 quarter,
the Company renewed the $90.0 million committed and $100.0 million uncommitted
revolving warehouse facility which expired and increased the committed borrowing
limit under the facility to $200.0 million, less any outstanding amounts under
the non-revolving subline.

    Of the $715.0 million of committed revolving warehouse and repurchase
facilities available to the Company at March 31, 2000, $250.0 million and $165.0
million expire on October 29, 2000 and February 11, 2001, respectively.
Subsequent to March 31, 2000, the remaining $300.0 million committed repurchase
facility expired. The Company renewed the $300.0 million committed repurchase
facility on April 28, 2000 and decreased the borrowing limit thereunder by
$100.0 million to $200.0 million. If certain financial covenants imposed by the
bank are not satisfactorily maintained by the Company through October 31, 2000
or otherwise amended as discussed more fully below, the facility will expire at
that time; otherwise, this facility expires on April 30, 2001. With these recent
renewals, the Company has current borrowing capacity under committed revolving
warehouse and repurchase facilities of $615.0 million (excluding the
$35.0 million non-revolving subline). However, as a result of the Company's
recent financial performance, including the prices the Company has received in
recent whole loan sales, all of the Company's warehouse and repurchase 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.

    Until the expiration of the Concurrent Funding Facility on February 29,
2000, the Company used its Concurrent Funding Facility to fund the majority of
its mortgage loans at closing. The Company is not permitted to use its other
revolving warehouse and repurchase facilities to fund mortgage loans at closing;
instead, the Company uses working capital to close mortgage loans. After the
mortgage loans are closed, the Company pledges them under one of its other
revolving warehouse or repurchase facilities to replenish working capital. This
restricted the ability of the Company to fund its mortgage loan production in
March, 2000, which has negatively impacted the profitability of the Company. The
Company is currently seeking a new revolving warehouse or repurchase facility to
fund mortgage loans at closing. However, unless and until a new facility is
negotiated, the Company is required to fund mortgage loans exclusively out of
working capital, and hold them until such mortgage loans can be transferred to
another facility or sold to SFP. If future loan fundings are reduced due to a
lack of funding or capital alternatives, ongoing operations may be jeopardized,
which would negatively impact profitability and jeopardize the Company's ability
to continue to operate as a going concern.

    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. Due to the $61.5 million loss for the quarter ended
March 31, 2000, the Company failed to meet certain existing financial covenants
under its revolving warehouse and repurchase facilities at March 31, 2000 and
April 30, 2000 and does not expect to meet

                                       26
<PAGE>
those covenants at May 31, 2000. The Company is seeking amendments to these
financial covenants from its warehouse and repurchase lenders to bring itself
into compliance. The Company's failure to meet these financial covenants gives
the warehouse and repurchase lenders the right to declare an event of default
and to terminate the warehouse and repurchase facilities, cease funding loans
thereunder and foreclose upon and sell the loans securing the facilities. An
event of default under any one of the Company's warehouse or repurchase
facilities would cross-default the remaining warehouse and repurchase
facilities. Moreover, an acceleration of the indebtedness under the Company's
warehouse or repurchase facilities would result in a default under the Corporate
Debt, which would, in turn, result in an acceleration of such indebtedness. An
acceleration of the maturity of the Corporate Debt would jeopardize the
Company's ability to continue to operate as a going concern. If the Company is
unable to obtain amendments to its warehouse and repurchase facilities, or is
unable to meet these financial covenants going forward, 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
negatively impact profitability and jeopardize the Company's ability to continue
to operate as a going concern.

    WORKING CAPITAL FINANCING FACILITIES.  The Company has historically relied
on working capital lines to help it fund its servicing advance obligations. In
April 1999, the Company reduced its servicing advance obligations by engaging a
loan servicing company to subservice two of the Company's securitization trusts,
pursuant to which, the loan service company assumed the obligations to make all
future advances on those two trusts. The Company also sold to the loan servicing
company the outstanding servicing advances on those two trusts for approximately
$13.0 million. In June 1999, in order to further reduce its servicing advance
obligations, the Company entered into an arrangement with an investment bank
pursuant to which the bank purchased certain cumulative advances and undertook
the obligation to make a substantial portion of the Company's advance
obligations on its pre-1999 securitization trusts. On February 25, 2000, the
Company entered into an arrangement with the same investment bank pursuant to
which the bank purchased certain additional cumulative advances and agreed to
undertake the obligation to make a substantial portion of the Company's advance
obligations on its existing 1999 securitization trusts.

    The Company also requires working capital to originate mortgage loans.
Historically, the Company has had access to warehouse and repurchase facilities
which advanced up to 100% of the principal balance of the mortgage loans to the
Company. However, as a result of the difficult current market conditions which
began in the quarter ended December 31, 1998, and the Company's recent financial
performance, including the prices the Company has received in recent whole loan
sales, all of the Company's warehouse and repurchase 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. The Company also requires working capital to fund mortgage
loans at closing. See "Liquidity and Capital Resources--Warehouse and Repurchase
Facilities."

    On February 11, 2000, the Company secured $35.0 million in working capital
secured by certain of its residual interests and certain other collateral
through the renewal of a $90.0 million committed warehouse line which expired on
February 9, 2000. The committed warehouse line was increased to $200.0 million
and included a $35.0 million non-revolving subline, which the Company drew down
on February 11, 2000. As part of the transaction, Capital Z, the Company's
largest shareholder, agreed to provide certain credit enhancements to the lender
for a portion of the subline. In connection therewith, the Company agreed to pay
Capital Z a $1 million fee.

    Under the terms of the Company's Indenture dated October 21, 1996 with
respect to its 9.125% Senior Notes due 2003, the Company's ability to incur
certain additional indebtedness, including residual financing, is limited to two
times stockholders' equity. Warehouse indebtedness is generally not included in
the indebtedness limitations. As a result of the loss for the quarter ended
December 31, 1999, the Company is restricted from incurring additional
indebtedness as defined in the Indenture. The Company's repurchase and warehouse
facilities also contain limits on the Company's ability to incur additional
indebtedness. Further, until the Company receives investment grade ratings for
the notes issued under the

                                       27
<PAGE>
Indenture, the amount of assets allocable to post-September 1996 securitizations
which the Company may pledge to secure debt is limited by the Indenture to 75%
of the difference between such post-September 1996 residuals and servicing
advances and $225.0 million. The Company pledged certain residuals to secure the
subline. Under the terms of the subline, the Company is required to pledge
additional residual interests in an amount equal to $10.0 million in order to
maintain the scheduled amortization and maturity of the subline. The Company
does not anticipate having additional residual interests available to finance in
the near term. This could restrict the Company's ability to borrow to provide
working capital as needed in the future.

    THE SECURITIZATION AND SALE OF MORTGAGE LOANS.  The Company's ability to
sell loans originated and purchased 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 originations and
purchases. The ability of the Company to sell loans in the secondary market on
acceptable terms is essential for the continuation of the Company's loan
origination and purchase operations. See "Risk Factors--A Prolonged Interruption
or Reduction in the Secondary Market Would Hurt Our Financial Performance."

    The Company securitized $803.6 million of loans held for sale during the
nine months ended March 31, 2000 compared to $650.0 million of loans in the
comparable period a year ago. The gain on sale recognized on securitizations
during the nine months ended March 31, 2000 was lower than historical gains due,
among other things, to market conditions at the time of the securitizations, and
the Company's adoption of the revised assumptions during the quarter ended
December 31, 1998. See "Certain Accounting Considerations--Accounting for
Securitizations." 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. As of March 31, 2000, the Company was required to
maintain an additional $64.8 million in overcollateralization amounts as a
result of the level of its delinquency rates and realized losses above that
which would have been required to be maintained if the applicable delinquency
rates and realized losses had been below the specified limit. Of this amount, at
March 31, 2000, $30.7 million remains to be added to the overcollateralization
amounts from future spread income on the loans held by these trusts.

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

    During the three and nine months ended March 31, 2000, the Company sold
loans for cash in whole loan sales with servicing released of $434.9 million and
$912.0 million, respectively, compared to $393.9 million and $940.1 million
during the three and nine months ended March 31, 1999, respectively. The Company
currently has in place two forward commitments for whole loan sales. One of the
commitments expires on May 16, 2000 and has a minimum and maximum commitment
amount of $500.0 million and $1.5 billion, respectively, against which
approximately $320.1 million of loans had been sold at March 31, 2000. The other
commitment expires on November 30, 2000 and has a minimum and maximum commitment
amount of $300.0 and $600.0 million, respectively, against which approximately
$326.7 million of loans had been sold at March 31, 2000.

                                       28
<PAGE>
    THE ISSUANCE OF DEBT AND EQUITY SECURITIES.  The Company has historically
funded negative cash flow primarily from the sale of its equity and debt
securities. However, current market conditions have restricted the Company's
ability to access its traditional equity and debt sources.

    On May 19, 2000 the Company entered into an agreement with SFP, the
Company's lead stockholder which is controlled by Capital Z, for the sale of
$50.0 million of the Company's Series C Convertible Preferred Stock for the
lesser of $0.90 per share, or the average market trading price for the five days
prior to the Initial Closing, plus the issuance of warrants to purchase an
additional 5 million shares of Series C Convertible Preferred Stock at the same
price.

    The Company also announced that it will offer to all holders of its Common
Stock and Series C Convertible Preferred Stock other than SFP, and its
affiliates, the right to purchase additional shares of Series C Preferred Stock
at the same price as SFP.

    The Company has previously raised $127.9 million through the sale of
preferred stock in several phases to Capital Z and its designees, certain
members of the Company's management and holders of the Company's common stock.
The Company raised $76.8 million in February 1999, $25.0 million in August 1999
and $25.0 million ($4.2 million in the Rights Offering and $20.8 million
pursuant to the Standby Commitment) in October 1999 which was accrued at
September 30, 1999. In October 1999, the Company also issued $1.1 million of
preferred stock to certain management investors. In connection with the sale of
stock to Capital Z, 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 December 1991, July 1993, June 1995 and October 1996, the Company
effected public offerings and in April 1998 effected a private placement of its
common stock with net proceeds to the Company aggregating $217.0 million. In the
private placement, the Company also issued warrants to purchase an aggregate
additional 1.3 million shares (as adjusted) of the Company's common stock at an
exercise price of $38.35 (as adjusted), subject to customary anti-dilution
provisions. The warrants are exercisable only upon a change in control of the
Company and expire in April 2001. In March 1995, the Company completed an
offering of its 10.5% Senior Notes due 2002 with net proceeds to the Company of
$22.2 million. In February 1996, the Company completed an offering of its 5.5%
Convertible Subordinated Debentures due 2006 with net proceeds to the Company of
$112.0 million. In October 1996, the Company completed an offering of its 9.125%
Senior Notes due 2003 with net proceeds to the Company of $145.0 million. Under
the agreements relating to these debt issuances, the Company is required to
comply with various operating and financial covenants including covenants which
may restrict the Company's ability to pay certain distributions, including
dividends. At March 31, 2000, the Company did not have the ability to pay such
distributions and does not expect to have the ability to pay dividends for the
foreseeable future.

    The Company's primary sources of liquidity are expected to be fundings under
revolving warehouse and repurchase facilities and whole loan sales and the
monetization of the Company's servicing advances. See "Liquidity and Capital
Resources." In addition, the Company is in negotiations with an affiliate of
Capital Z for a facility which will allow the Company to sell up to
$75.0 million residual assets created in securitizations over the next
24 months. If the Company's access to warehouse lines, working capital or the
securitization or whole loan markets is restricted, or cash savings are not
realized through the implementation of the Company's cost reduction efforts, the
Company may have to seek additional equity. Further, if available at all, the
type, timing and terms of financing selected by the Company will be dependent
upon the Company's cash needs, the availability of other financing sources,
limitations under debt covenants and the prevailing conditions in the financial
markets. There can be no assurance that any such sources will be available to
the Company at any given time or that favorable terms will be available. As a
result of the limitations described above, the Company may be restricted in the
amount of loans that it will be able to produce and sell. This would negatively
impact profitability and jeopardize the Company's ability to continue to operate
as a going concern.

                                       29
<PAGE>
RISK MANAGEMENT

    The Company is currently re-evaluating its current hedging policy, and at
March 31, 2000 had no hedge transactions in place. While the Company monitors
the interest rate environment and has employed fixed rate hedging strategies in
the past, there can be no assurance that the earnings of the Company would not
be adversely affected during any period of unexpected changes in interest rates
or prepayment rates.

FINANCIAL INSTRUMENTS AND OFF-BALANCE SHEET ACTIVITIES

    SALE OF LOANS--SECURITIZATIONS AND WHOLE LOAN SALES--INTEREST RATE
RISK.  The most significant variable in the determination of gain on sale in a
securitization is the spread between the weighted average coupon on the
securitized loans and the pass-through interest rate. In the interim period
between loan origination or purchase and securitization or sale of such loans,
the Company is exposed to interest rate risk. The majority of loans are
securitized or sold within 90 days of origination or purchase. However, a
portion of the loans are held for sale or securitization for as long as 12
months (or longer in very limited circumstances) prior to securitization or
sale. If interest rates rise during the period that the mortgage loans are held,
for securitized loans 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, and reduce the Company's related gain on sale upon
securitization. For loans sold in whole loan sales, if interest rates rise while
the loans are held, the gain on sale recognized by the Company may be reduced.

    In the past, the Company mitigated exposure to rising interest rates through
swap agreements with third parties that sell United States Treasury securities
not yet purchased and the purchase of Treasury Put Options. Hedge gains or
losses are initially deferred and subsequently included in gain on sale upon
completion of the securitization or whole loan sale. These hedging activities
help mitigate the risk of absolute movements in interest rates but they do not
mitigate the risk of a widening in the spreads between pass-through certificates
and U.S. Treasury securities with comparable maturities. At March 31, 2000 and
during the three and nine months then ended, the Company did not have any hedge
transactions in place. Accordingly, during the three and nine months ended
March 31, 2000, there were no hedge losses in gain on sale. At September 30,
1998, the Company had outstanding notional balances of Treasury swap agreements
in the amount of $85 million. This position, which was terminated by the Company
on December 31, 1998, had a market value at September 30, 1998 of $80 million.
The Company recorded the related hedge loss at September 30, 1998 for the $4.6
million shortfall in the gain on sale for that period. The Company had a similar
swap agreement in the notional amount of $250.0 million which expired on
September 30, 1998 and had a market value at June 30, 1998 of $248 million. Due
to market conditions in the quarter ended September 30, 1998, this position
deteriorated to a loss of $10.7 million which was recorded in gain on sale
during the three months ended September 30, 1998. The Company also had LIBOR cap
contracts outstanding at September 30, 1998 in the notional amount of $7.2
million. These positions were valued at par at September 30, 1998 as their
contractual cap (strike price) exceeded the LIBOR market rate at September 30,
1998. The September 30, 1998 position expired December 23, 1998. These
instruments had no negative risk above the original premiums paid in cash.

    RESIDUAL INTERESTS AND MSRS.  The Company had residual interests of $297.6
million and $332.3 million at March 31, 2000 and June 30, 1999, respectively.
The Company also had MSRs at March 31, 2000 and June 30, 1999 in the amount of
$14.3 million and $20.9 million, respectively. Both of these instruments are
recorded at amounts that approximate estimated fair value at March 31, 2000 and
June 30, 1999. Residual interests decreased during the nine months ended
March 31, 2000 from June 30, 1999 reflecting the $77.5 million write-down offset
by residual interests recognized on the Company's securitizations and accretion
during the period.

    The Company's MSR's decreased during the nine months ended March 31, 2000
reflecting MSR's recognized on the Company's securitizations offset by MSR
amortization and a $5.0 million write-down

                                       30
<PAGE>
during the period. See "Certain Accounting Considerations--Accounting for
Securitizations". The Company values these assets based on the present value of
future revenue streams net of expenses using various assumptions. The discount
rate used to calculate the present value of the residual interests and MSRs was
15.0% both at March 31, 2000 and June 30, 1999. The weighted average life used
for valuations at March 31, 2000 and June 30, 1999 was 3.2 years and 2.9 years,
respectively.

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

    FAIR VALUE OF FINANCIAL INSTRUMENTS.  The Company's financial instruments
recorded at contractual amounts that approximate market or fair value primarily
consist of loans held for sale, accounts receivables and revolving warehouse and
repurchase facilities which are short term in nature and/or generally bear
market rates of interest, thus, the carrying amounts of these instruments are
reasonable estimates of their fair values. The carrying amount of the Company's
borrowings approximate fair value when valued using available 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.

    The Company is a party to financial instruments with off-balance sheet
credit risk in the normal course of business, including commitments to extend
credit to borrowers. The Company has a first or second lien position on all of
its loans, and the combined loan-to-value ratio ("CLTV") permitted by the
Company's mortgage underwriting guidelines generally may not exceed 90%. In some
cases, the Company originates loans up to 97% CLTV that are insured down to
approximately 67% with mortgage insurance. The CLTV represents the combined
first and second mortgage balances as a percentage of the appraised value of the
mortgaged property at the time of origination, with the appraised value
determined by an appraiser with appropriate professional designations. A title
insurance policy is required for all loans.

    WAREHOUSING EXPOSURE.  The Company utilizes warehouse and repurchase
financing facilities to facilitate the holding of mortgage loans prior to
securitization or sale. At March 31, 2000, the Company had total committed
revolving warehouse and repurchase facilities available in the amount of
$715.0 million, subsequently reduced to $615.0 million (both amounts excluding
the $35.0 million subline) and the balance outstanding related to these
facilities was $386.2 million. See "Liquidity and Capital Resources--Warehouse
and Repurchase Facilities." At June 30, 1999, the Company had total committed
revolving warehouse and repurchase facilities available of $590.0 million and
the balance outstanding related to those facilities was $536.0 million.
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 either securitized 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.

RISK FACTORS

    IF OUTSIDE SOURCES OF CASH ARE NOT SUFFICIENT, OUR ABILITY TO MAKE AND
SERVICE LOANS WILL BE IMPAIRED AND OUR REVENUES WILL SUFFER.

    We operate on a negative cash flow basis, which means our cash expenditures
exceed our cash earnings. Therefore, we need continued access to short- and
long-term external sources of cash to fund our operations.

                                       31
<PAGE>
    Our primary uses of cash include:

    - mortgage loan originations and purchases before their securitization or
      sale in the secondary market;

    - fees, expenses and hedging costs, if any, incurred for the securitization
      of loans;

    - cash reserve accounts or overcollateralization required in the
      securitization of loans;

    - tax payments generally due on recognition of non-cash gain on sale
      recorded in the securitizations;

    - ongoing administrative and other operating expenses;

    - interest and principal payments under our credit facilities and other
      existing indebtedness;

    - cash advances made on delinquent loans included in our loan servicing
      portfolio; and

    - costs of expanding our loan production units.

    Our primary sources of cash are expected to be warehouse and repurchase
facilities, transactions by which we monetize our servicing advance receivables,
securitizations and whole loan sales.

    Our primary and potential sources of cash as described in the paragraph
above should be sufficient to fund our cash requirements through at least the
next 12 months, assuming the Company successfully closes a new warehouse
facility which provides for concurrent funding and receives additional equity
capital. If available at all, the type, timing and terms of financing selected
by us will be dependent upon our cash needs, the availability of other financing
sources, limitations under debt covenants and the prevailing conditions in the
financial markets. However, we are not sure that these sources of cash will be
available when needed. Even if the sources of cash are available, the providers
of cash may impose terms that are not favorable to us. As a result of the
limitations described above, we may be restricted in the amount of loans that we
will be able to produce and sell.

    IF WE ARE UNABLE TO MAINTAIN ADEQUATE FINANCING SOURCES, OUR ABILITY TO MAKE
MORTGAGE LOANS WILL BE IMPAIRED AND OUR REVENUES WILL SUFFER.

    We use cash draws under credit facilities, referred to as revolving
warehouse and repurchase facilities, to fund new originations and purchases of
mortgage loans before securitization or sale. We currently have three committed
lines with aggregate borrowing capacity of $615.0 million (excluding the $35.0
million subline). All of our revolving warehouse and repurchase facilities
require us to maintain certain liquidity and net worth levels, place
restrictions on our ability to borrow money, and require us to report a profit
during certain quarters. Due to our $61.5 million net loss for the quarter ended
March 31, 2000, we did not meet some of those requirements at March 31, 2000 or
April 30, 2000 and we do not expect to meet those requirements at May 31, 2000.
We are seeking to reduce these requirements so that we may meet them. Our
failure to meet these requirements gives the warehouse and repurchase providers
the right to declare an event of default under the revolving facilities, stop
funding loans and foreclose in our loans financed under the facilities. If a
warehouse lender declared an event of default, it would cause an event of
default under our other warehouse and repurchase facilities and our corporate
debt. This would have a material adverse effect on our financial position and
results of operations and jeopardize our ability to continue to operate as a
going concern.

    The facility which the Company used to fund the majority of its mortgage
loans at closing expired on February 29, 2000. We are currently in the process
of replacing that facility. The remaining existing facilities expire between
October 2000 and April 2001 and no assurances can be given that we will be able
to extend or replace these facilities at the times they mature. We recently
entered into a transaction pursuant to which we sold certain accounts receivable
representing servicing advances we had previously made and engaged an investment
bank to make a substantial portion of future servicing advances on substantially
all of the loans in our servicing portfolio. As servicer of the loans we
securitize, we are

                                       32
<PAGE>
required to advance, or loan, to the trusts delinquent interest. In addition, as
servicer, we advance to the trusts foreclosure related expenses, and certain tax
and insurance remittances relating to loans serviced. To the extent that we are
unable to maintain existing credit facilities, arrange new warehouse, repurchase
or other credit facilities or obtain additional commitments to sell whole loans
for cash, we may have to curtail making loans. This would have a material
adverse effect on our financial position and results of operations and
jeopardize our ability to continue to operate as a going concern.

    OUR LOANS ARE SUBJECT TO HIGHER RISKS OF DELINQUENCY AND LOSS THAN THOSE
MADE BY CONVENTIONAL MORTGAGE SOURCES.

    Loans made to borrowers in the lower credit grades have historically
resulted in a higher risk of delinquency and loss than loans made to borrowers
who use conventional mortgage sources. We believe that the underwriting criteria
and collection methods we use permit us to mitigate the higher risks inherent in
loans made to these borrowers. However, we cannot be sure that those criteria or
methods will protect us against those risks.

    All of our loans are collateralized by residential property. The value of
the property collateralizing our loans may not be sufficient to cover the
principal amount of the loans in the event of liquidation. Losses not covered by
the underlying properties could have a material adverse effect on our results of
operations and financial condition. In addition, historical loss rates affect
the assumptions used by us in computing our non-cash gain on sale. If actual
losses exceed those assumptions, we may be required to take a charge to
earnings.

    Adjustable rate loans account for a substantial portion of the mortgage
loans that we originate or purchase. Credit-impaired borrowers may encounter
financial difficulties as a result of increases in the interest rate over the
life of the loan. Substantially all of the adjustable rate mortgages include a
teaser rate, i.e., an initial interest rate significantly below the fully
indexed interest rate at origination. Loans with an initial adjustment date six
months after funding are underwritten at the indexed rate as of the first
adjustment date, and loans with an initial adjustment date two or three years
after funding are underwritten at the teaser rate. As a result, borrowers will
face interest rate increases on their adjustable rate loan, even in a stable
interest rate environment.

    OUR RIGHT TO SERVICE LOANS MAY BE TERMINATED BECAUSE OF THE HIGH
DELINQUENCIES AND LOSSES ON THE LOANS IN OUR SERVICING PORTFOLIO OR OUR
LIQUIDITY OR NET WORTH POSITION.

    If, at any measuring date, the delinquencies or losses with respect to any
of our securitization trusts credit-enhanced by monoline insurance were to
exceed the delinquency or loss limits applicable to that trust, our rights to
service the loans in the affected trust may be terminated.

    A substantial majority of our servicing portfolio consists of loans
securitized by us and sold to real estate mortgage investment conduits or owner
trusts in securitization transactions. Generally, the agreement entered into in
connection with these securitizations contains specified limits on
delinquencies, which means loans past due 90, or in some cases past due 60, days
or more, and losses that may be incurred in each trust. Losses occur when the
cash we receive from the sale of foreclosed properties, less sales expenses, is
less than the principal balances of the loans previously secured by those
properties and related interest and servicing advances. See below.

    A majority of our securitization transactions were credit-enhanced by an
insurance policy issued by a monoline insurance company. That insurance policy
protects the securitization investor against certain losses. The monoline
insurance company can terminate us as servicer if delinquencies or losses are
over a specified limit. Additionally, the agreements entered into in connection
with our 1999 securitizations provide that our rights and obligations to service
the loans will periodically cease unless renewed by the monoline insurance
carrier for successive periods.

                                       33
<PAGE>
    At March 31, 2000, the dollar volume of loans delinquent more than 90 days
in twelve of our securitization trusts formed during the period from
December 1994 to March 1997 and during December 1997 and March 1998, exceeded
the permitted limit in the related securitization agreements.

    We have implemented various plans to lower the delinquency rates in our
future trusts, including diversifying the loans we originate and purchase to
include higher credit grade loans. The delinquency rate at March 31, 2000 was
14.2% and at June 30, 1999 was 15.7%.

    Four of the twelve trusts referred to above, plus two additional trusts,
which represent in the aggregate 28.1% of the dollar volume of our servicing
portfolio, exceeded loss limits at March 31, 2000. The limit that has been
exceeded provides that losses may not exceed 1.25% of the prior year pool
balances in the relevant securitization trusts on a rolling 12 month basis.

    Although the monoline insurance company has the right to terminate servicing
with respect to the 1999 securitization trusts and the trusts that exceed the
delinquency and loss limits, no servicing rights have been terminated and we
believe that it is unlikely that we will be terminated as servicer. We cannot be
sure, however, that our servicing rights with respect to the mortgage loans in
such trusts, or any other trusts which exceed the specified delinquency or loss
limits in future periods, will not be terminated.

    Under one of our securitization trusts, the monoline insurer requires that
we maintain a specific level of minimum net worth and cash in order for us to
continue servicing loans in that trust. We did not meet those requirements at
March 31, 2000 or April 30, 2000. We received a notice from the monoline insurer
which indicated it was not currently exercising its right to terminate us as
servicer on this trust. Due to our $61.5 million loss during the March 2000
quarter, we did not meet the minimum net worth test at March 31, 2000, or
April 30, 2000 and we do not expect to meet that test at May 31, 2000. If we are
unable to close the $50.0 million capital transaction with Capital Z by May 31,
2000, we will not be in compliance with the minimum cash requirement at that
time. We are seeking amendments to these requirements imposed by the monoline
insurer. If we are unable to obtain amendments from the monoline insurer, we
would be unable to satisfy a condition required by Capital Z to bring closure to
the $50.0 million investment by Capital Z.

    HIGH DELINQUENCIES ON THE LOANS IN OUR SERVICING PORTFOLIO MAY HURT OUR CASH
FLOWS.

    As servicer of the loans we securitize, we are required to advance, or loan,
to the trusts delinquent interest. In addition, as servicer, we advance to the
trusts foreclosure related expenses, and certain tax and insurance remittances
relating to loans serviced. We recently entered into a transaction pursuant to
which we sold certain accounts receivable representing servicing advances we had
previously made and engaged an investment bank to make a substantial portion of
future servicing advances on substantially all of the loans in our servicing
portfolio.

    High delinquency rates hurt our cash flows. When delinquency rates exceed
the limit specified in the securitization agreement, our right to receive cash
from the trust is delayed. When delinquency rates exceed the specified amount,
we are required to use the cash flows from the trust to make accelerated
payments of principal on the certificates or bonds issued by the trust. These
accelerated payments increase the overcollateralization levels. The
overcollateralization level represents the amount that the principal balance of
the loans in the trust exceeds the principal balance of the certificates or
bonds issued by the trust. We do not receive distributions from the trust until
after the required overcollateralization levels are met. Generally, provisions
in the securitization agreements have the effect of requiring the
overcollateralization amount to be increased up to approximately twice the level
otherwise required when the delinquency rates do not exceed the specified limit.
As of March 31, 2000, we were required to maintain an additional $64.8 million
in overcollateralization amounts as a result of the level of the delinquency
rates above that which would have been required to be maintained if the
applicable delinquency rates had been below the specified limit. Of this amount,
at March 31, 2000, $30.7 million remains to be added to the
overcollateralization amounts from future spread income on the loans held by
these trusts.

                                       34
<PAGE>
    High delinquency rates also negatively affect our cash flows because we act
as servicer of the loans in the trust. As the servicer, we are required to use
our cash to advance to the trust past due interest.

    HIGH DELINQUENCIES AND LOSSES MAY HURT OUR EARNINGS.

    Higher delinquency and loss levels may also affect our reported earnings. We
apply certain assumptions with respect to expected losses on loans in a
securitization trust to determine the amount of non-cash gain on sale that we
record at the closing of a securitization transaction. If actual losses exceed
those assumptions, we may be required to take a charge to earnings. The charge
to earnings would result in an adjustment to the carrying value of the residual
interests recorded on our balance sheet.

    FASTER THAN EXPECTED PREPAYMENT RATES ON OUR LOANS WILL HURT EARNINGS.

    If actual prepayments occur more quickly than was projected at the time
loans were sold, the carrying value of the residual interests may have to be
adjusted through a charge to earnings in the period of adjustment. The rate of
prepayment of loans may be affected by a variety of economic and other factors.
We estimate prepayment rates based on our expectations of future prepayment
rates, which are based, in part, on the historic performance of our loans and
other considerations.

    OUR OPERATIONS MAY BE HURT BY A SUBSTANTIAL AND SUSTAINED INCREASE OR
DECREASE IN INTEREST RATES.

    A substantial and sustained increase in long-term interest rates could,
among other things:

    - decrease the demand for consumer credit;

    - adversely affect our ability to make loans; and

    - reduce the average size of loans we underwrite.

    A substantial and sustained increase in short-term interest rates could,
among other things,

    - increase our borrowing costs, most of which are tied to those rates; and

    - reduce the gains recorded by us upon the securitization and sale of loans.

    A significant decline in long-term or short-term interest rates could
increase the level of loan prepayments. An increase in prepayments would
decrease the size of, and servicing income from, our servicing portfolio. Our
expectations as to prepayment are used to determine the amount of non-cash gain
on sale recorded at the closing of a securitization transaction. An increase in
prepayment rates could result in a charge to earnings if the rate is faster than
originally expected.

    IN AN INCREASING INTEREST RATE ENVIRONMENT, OUR EARNINGS COULD SUFFER
BECAUSE OF ADJUSTABLE RATE LOANS THAT WE SECURITIZED.

    The value of our residual interests created as a result of the
securitization of adjustable rate mortgage loans is subject to so-called basis
risk. Basis risk arises when the adjustable rate mortgage loans in a
securitization trust, including those with a fixed initial rate, bear interest
based on an index or adjustment period that is different from the certificates
or bonds issued by the trust. In the absence of effective hedging or loss
mitigation strategies, in a period of increasing interest rates, the value of
the residual interests could be adversely affected because the interest rates on
the certificates or bonds issued by a securitization trust could adjust faster
than the interest rates on our adjustable rate mortgage loans in the trust.
Adjustable rate mortgage loans are typically subject to periodic and lifetime
interest rate caps, which limit the amount an adjustable rate mortgage loan's
interest rate can change during any given period. In a period of rapidly
increasing interest rates, the value of the residual interests could be
adversely affected in the absence of effective hedging strategies because the
interest rates on the certificates or bonds issued by a securitization trust
could increase without limitation by caps, while the interest rates on our
adjustable rate mortgage loans would be so limited.

                                       35
<PAGE>
    A PROLONGED INTERRUPTION OR REDUCTION IN THE SECONDARY MARKET WOULD HURT OUR
FINANCIAL PERFORMANCE.

    We must be able to sell loans we make in the securitization and whole loan
market to generate cash proceeds to pay down our warehouse and repurchase
facilities and fund new loans. Our ability to sell loans in the securitization
and whole loan markets on acceptable terms is essential for the continuation of
our loan origination and purchase operations. The value of and market for our
loans are dependent upon a number of factors, including general economic
conditions, interest rates and governmental regulations. Adverse changes in
these factors may affect our ability to securitize or sell whole loans for
acceptable prices within a reasonable period of time.

    To facilitate the sale of certificates or bonds issued by the securitization
trust, we must obtain investment grade ratings for the certificates or bonds. To
obtain those credit ratings, we credit-enhance the securitization trust. The
overcollateralization amount is one form of credit enhancement. Additionally, we
either obtain an insurance policy to protect holders of the certificates or
bonds against certain losses, or sell subordinated interests in the
securitization program.

    Our financial position and results of operations would be materially
affected if investors were unwilling to purchase interests in our securitization
trusts or monoline insurance companies were unwilling to provide financial
guarantee insurance for the certificates or bonds sold. Other accounting, tax or
regulatory changes could also adversely affect our securitization program.

    We rely on institutional purchasers, such as investment banks, financial
institutions and other mortgage lenders, to purchase our loans in the whole loan
market. We cannot be sure that the purchasers will be willing to purchase loans
on satisfactory terms or that the market for such loans will continue. Our
results of operations and financial condition could be materially adversely
affected if we could not successfully identify whole loan purchasers or
negotiate favorable terms for loan purchases.

    IF WE ARE UNABLE TO SELL A SIGNIFICANT PORTION OF OUR LOANS ON AT LEAST A
QUARTERLY BASIS, OUR EARNINGS WOULD BE SIGNIFICANTLY AFFECTED.

    Any delay in the sale of a significant portion of our loan production beyond
a quarter-end would postpone the recognition of gain on sale related to such
loans until their sale and would likely result in losses for the quarter. Our
loan disposition strategy calls for substantially all of our production to be
sold in the secondary market within 90 days of origination. However, market and
other considerations, including the conformity of loan pools to monoline
insurance company and rating agency requirements, could affect the timing of the
sale transactions.

    CHANGES IN THE VOLUME AND COST OF OUR BROKER LOANS MAY DECREASE OUR LOAN
PRODUCTION.

    We depend on independent mortgage brokers for the origination and purchase
of our broker loans, which constitute a significant portion of our loan
production. Our future results of operations and financial condition may be
vulnerable to changes in the volume and cost of our broker loans resulting from,
among other things, competition from other lenders and purchasers of such loans.
These independent mortgage brokers negotiate with multiple lenders for each
prospective borrower. We compete with these lenders for the independent brokers'
business on pricing, service, loan fees, costs and other factors. Our
competitors also seek to establish relationships with such brokers, who are not
obligated by contract or otherwise to do business with us.

    OUR COMPETITORS IN THE MORTGAGE BANKING MARKET ARE OFTEN LARGER AND HAVE
GREATER FINANCIAL RESOURCES THAN WE DO, WHICH WILL MAKE IT DIFFICULT FOR US TO
SUCCESSFULLY COMPETE.

    We face intense competition in the business of originating, purchasing and
selling mortgage loans. Competition among industry participants can take many
forms, including convenience in obtaining a loan, customer service, marketing
and distribution channels, amount and term of the loan, loan origination fees
and interest rates. Many of our competitors are substantially larger and have
considerably greater financial, technical and marketing resources than we do.
Our competitors in the industry include other consumer

                                       36
<PAGE>
finance companies, mortgage banking companies, commercial banks, investment
banks, credit unions, thrift institutions, credit card issuers and insurance
companies. In the future, we may also face competition from government-sponsored
entities, such as FNMA and FHLMC. These government-sponsored entities may enter
the subprime mortgage market and target potential customers in our highest
credit grades, who constitute a significant portion of our customer base.

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

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

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

    Our broker program depends largely on independent mortgage bankers and
brokers and other financial institutions for the purchases of new loans. Our
competitors also seek to establish relationships with the same sources.

    BECAUSE A SIGNIFICANT AMOUNT OF THE LOANS WE SERVICE ARE IN CALIFORNIA AND
FLORIDA, OUR OPERATIONS COULD BE HURT BY ECONOMIC DOWNTURNS OR NATURAL DISASTERS
IN THOSE STATES.

    At March 31, 2000, 20.8% and 11.8% of the loans we serviced were
collateralized by residential properties located in California and Florida,
respectively. Because of these concentrations, our financial position and
results of operations have been and are expected to continue to be influenced by
general trends in the California and Florida economies and their residential
real estate markets. Residential real estate market declines may adversely
affect the values of the properties collateralizing loans. If the principal
balances of our loans, together with any primary financing on the mortgaged
properties, equal or exceed the value of the mortgaged properties, we could
incur higher losses on sales of properties collateralizing foreclosed loans.
California historically has been vulnerable to certain natural disaster risks,
such as earthquakes and erosion-caused mudslides. Florida historically has been
vulnerable to certain other natural disasters, such as tropical storms and
hurricanes. Such natural disasters are not typically covered by the standard
hazard insurance policies maintained by borrowers. Uninsured disasters may
adversely impact our ability to recover losses on properties affected by such
disasters and adversely impact our results of operations.

    THE RISKS ASSOCIATED WITH OUR BUSINESS BECOME MORE ACUTE IN ANY ECONOMIC
SLOWDOWN OR RECESSION.

    Periods of economic slowdown or recession may be accompanied by decreased
demand for consumer credit and declining real estate values. Any material
decline in real estate values reduces the ability of borrowers to use home
equity to support borrowings. Material declines in real estate values also
weakens collateral coverage and increases the possibility of a loss in the event
of liquidation. Further, delinquencies, foreclosures and losses generally
increase during economic slowdowns or recessions. Because of our focus on
credit-impaired borrowers, the actual rates of delinquencies, foreclosures and
losses on such loans could be higher than those generally experienced in the
mortgage lending industry. In addition, in an

                                       37
<PAGE>
economic slowdown or recession, our servicing costs may increase. Any sustained
period of increased delinquencies, foreclosure, losses or increased costs could
adversely affect our ability to securitize or sell loans in the secondary market
and could increase the cost of these transactions.

    EVEN AFTER WE SELL OUR LOANS, WE REMAIN SUBJECT TO RISKS FROM DELINQUENCIES
AND LOSSES ON THE LOANS WE SERVICE.

    Although we sell substantially all the mortgage loans which we originate or
purchase, we retain some degree of credit risk on substantially all loans sold
where we continue to service those loans. During the period of time that loans
are held before sale, we are subject to the various business risks associated
with the lending business including the risk of borrower default, the risk of
foreclosure and the risk that a rapid increase in interest rates would result in
a decline in the value of loans to potential purchasers. Cash flows from the
securitization trust are represented by the interest rate earned on the loans in
the trust over the amount of interest paid by the trust to the holders of the
certificates or bonds issued by the trust, plus certain monoline and servicing
fees. The agreements governing our securitization program require us to
credit-enhance the securitization trust by either establishing deposit accounts
or building overcollateralization levels. Deposit accounts are established by
maintaining a portion of the excess cash flows in a trust deposit account.
Overcollateralization levels are built up by applying these excess cash flows to
reduce the principal balances of the certificates or bonds issued by the trust.
Those amounts are available to fund losses realized on loans held by such trust.
We continue to be subject to the risks of default and foreclosure following
securitization and the sale of loans to the extent excess cash flows are
required to be maintained in the deposit account or applied to build up
overcollateralization, as opposed to being distributed to us.

    When borrowers are delinquent in making monthly payments on loans included
in a securitization trust, as servicer of the loans in the trust, we are
required to advance interest payments with respect to such delinquent loans.
These advances require funding from our capital resources, but have priority of
repayment from collections or recoveries on the loans in the related pool in the
succeeding month. In connection with our whole loan sales, we may be obligated
in certain instances to buy back mortgage loans if the borrower defaults on the
first payment of principal and interest due.

    WE MAY BE REQUIRED TO REPURCHASE LOANS OR INDEMNIFY INVESTORS IF WE BREACH
REPRESENTATIONS AND WARRANTIES.

    In the ordinary course of our business, we are subject to claims made
against us by borrowers arising from, among other things, losses that are
claimed to have been incurred as a result of alleged breaches of fiduciary
obligations, misrepresentations, errors and omissions of our employees and
officers, incomplete documentation and failures to comply with various laws and
regulations applicable to our business. In addition, agreements governing our
securitization program and whole loan sales require us to commit to repurchase
or replace loans which do not conform to our representations and warranties at
the time of sale. We believe that liability with respect to any currently
asserted claims or legal actions is not likely to be material to our financial
position or results of operations. However, any claims asserted in the future
may result in expenses or liabilities which could have a material adverse effect
on our financial position and results of operations.

    IF WE ARE UNABLE TO COMPLY WITH MORTGAGE BANKING RULES AND REGULATIONS, OUR
ABILITY TO MAKE MORTGAGE LOANS MAY BE RESTRICTED.

    Our operations are subject to extensive regulation, supervision and
licensing by federal, state and local governmental authorities and are subject
to various laws, regulations and judicial and administrative decisions imposing
requirements and restrictions on part or all of our operations. Failure to
comply with these requirements can lead to loss of approved status, certain
rights of rescission for mortgage loans, class action lawsuits and
administrative enforcement action. Our consumer lending activities are subject
to various federal laws and regulations. We are also subject to the rules and
regulations of, and examinations by, state regulatory authorities with respect
to originating, processing, underwriting, selling, securitizing and servicing
loans. These rules and regulations, among other things, impose licensing
obligations on us, establish eligibility criteria for mortgage loans, prohibit
discrimination, govern inspections and appraisals

                                       38
<PAGE>
of properties and credit reports on loan applicants, regulate collection,
foreclosure and claims handling, investment and interest payments on escrow
balances and payment features, mandate certain disclosures and notices to
borrowers and, in some cases, fix maximum interest rates, fees and mortgage loan
amounts. Because our business is highly regulated, the laws, rules and
regulations applicable to us are subject to regular modification and change.
There are currently proposed various laws, rules and regulations which, if
adopted, could negatively impact us.

    CHANGES IN THE MORTGAGE INTEREST DEDUCTION COULD HURT OUR FINANCIAL
PERFORMANCE.

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

    WE WILL BE UNABLE TO PAY DIVIDENDS ON OUR CAPITAL STOCK FOR THE FORESEEABLE
FUTURE.

    The indentures governing certain of our outstanding indebtedness as well as
our other credit agreements limit our ability to pay cash dividends on our
capital stock. Under the most restrictive of these limitations, we will be
prevented from paying cash dividends on our capital stock for the foreseeable
future.

    THE CONCENTRATED OWNERSHIP OF OUR VOTING STOCK BY OUR CONTROLLING
STOCKHOLDER MAY HAVE AN ADVERSE EFFECT ON YOUR ABILITY TO INFLUENCE THE
DIRECTION WE WILL TAKE.

    At May 18, 2000, Capital Z beneficially owned senior preferred stock
representing 46.2% of our combined voting power in the election of directors and
76.2% of the combined voting in all matters other than the election of
directors. The percentage of beneficial ownership of Capital Z could change as a
result of the Investment, depending upon the Price and the number of shares of
Series C Preferred Stock subscribed to by Nonaffiliated Stockholders in the
Rights Offering. Representatives or nominees of Capital Z have five seats on our
nine person 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 our direction and policies.

                                       39
<PAGE>
PART II--OTHER INFORMATION

Item 1. Legal Proceedings--None

Item 2. Changes in Securities--None

Item 3. Defaults upon Senior Securities--None

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

(a) The Company held its 1999 Annual Meeting of Stockholders (the "Meeting") on
    March 3, 2000.

(b) The following Series B Directors were elected at the Meeting to serve one
    year terms:

    Steven M. Gluckstern
    Adam M. Mizel
    Mani A. Sadeghi
    David A. Spuria

    The following Class II Common Stock directors were elected at the Meeting to
serve three-year terms:

    Georges C. St. Laurent, Jr.
    Cary H. Thompson

    The following directors continued in office after Meeting:

    A. Jay Meyerson
    David H. Elliot
    Eric C. Rahe

(c) At the Meeting, stockholders voted on (1) the amendment of the Company's
    Certificate of Incorporation to effect a one-for-five reverse stock split of
    the shares of the Company's Common Stock (the "Reverse Common Stock Split
    Proposal"); (2) the amendment of the Company's Certificate of Incorporation
    to effect a one-for-five reverse stock split of the shares of the Company's
    Series C Convertible Preferred Stock (the "Reverse Series C Preferred Stock
    Proposal"); (3) an amendment to the Company's Certificate of Incorporation
    to enable stockholders to act by written consent as permitted by Delaware
    law (the "Stockholder Action by Written Consent Proposal"); (4) the election
    of four Series B Directors (5) the election of two Class II Common Stock
    Directors; (6) the

                                       40
<PAGE>
    ratification of the appointment of Ernst & Young LLP as the Company's
    independent accountants for the fiscal year ended June 30, 2000. The results
    of the voting were as follows:

<TABLE>
<CAPTION>
                                                          VOTES                               BROKER
MATTER                                     VOTES FOR     AGAINST    WITHHELD   ABSTENTIONS   NON-VOTES
------                                    -----------   ---------   --------   -----------   ---------
<S>                                       <C>           <C>         <C>        <C>           <C>
Reverse Common Stock Split Proposal
  (All Stockholders)....................  149,217,328   1,758,552        --      131,706          --
Reverse Common Stock Split Proposal
  (Class Vote--Common Stockholders).....   24,283,958   1,679,359        --      125,774          --
Reverse Series C Preferred Stock Split
  Proposal (All Stockholders)...........  149,323,693   2,604,612        --      179,281          --
Reverse Series C Preferred Stock Split
  Proposal (Class Vote--All Preferred
  Stockholders).........................  124,930,415      80,348        --        7,732          --
Reverse Series C Preferred Stock Split
  Proposal (Class Vote--Series C
  Preferred Stock)......................   98,226,415      80,348        --        7,732          --
Stockholder Action by Written Consent
  Proposal (All Stockholders)...........  130,880,353   1,010,991        --      257,536          --
Series B Directors
  Steven M. Gluckstern..................   26,704,000          --        --           --          --
  Mani A. Sadeghi.......................   26,704,000          --        --           --          --
  Adam M. Mizel.........................   26,704,000          --        --           --          --
  David A. Spuria.......................   26,704,000          --        --           --          --
Class II Common Stock Directors
  Georges C. St. Laurent, Jr. ..........   51,970,819          --   822,273           --          --
  Cary H. Thompson......................   51,970,269          --   822,823           --          --
Auditors................................  150,648,670     325,466        --      133,451          --
</TABLE>

Item 5. Other Information--None

Item 6. Exhibits and Reports on Form 8-K

(c) Exhibits: See Exhibit Index

(d) During the quarter ended March 31, 2000, the Company filed (i) a Current
    Report on Form 8-K on January 14, 2000 (earliest event reported October 29,
    1999), reporting information under Item 5 regarding the consummation of one
    of the Company's warehouse lines and the amendment of two other warehouse
    lines; (ii) a Current Report on Form 8-K on February 16, 2000 (earliest
    event reported February 14, 2000), reporting information under Item 5
    regarding the Company's financial results for the second fiscal quarter;
    (iii) a Current Report on Form 8-K on March 14, 2000 (earliest event
    reported March 6, 2000), reporting information under Item 5 regarding the
    results of the Company's annual meeting; (iv) a Current Report on Form 8-K
    on March 14, 2000 (earliest event reported February 25, 2000), reporting
    information under Item 5 regarding the sale of some of the Company's
    servicing advance receivables.

                                       41
<PAGE>
                          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.

<TABLE>
<S>                                                    <C>  <C>
                                                       AAMES FINANCIAL CORPORATION

                                                       By:             /s/ JOSEPH R. TOMEI
                                                            -----------------------------------------
                                                                         Joseph R. Tomei
                                                              EXECUTIVE VICE PRESIDENT--FINANCE AND
Date: May 22, 2000                                            CHIEF FINANCIAL AND ACCOUNTING OFFICER
</TABLE>

                                       42
<PAGE>
                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT NO.             DESCRIPTION OF EXHIBIT
-----------             ----------------------
<C>                     <S>
       3.1              Certificate of Incorporation of Registrant, as amended.

       4.1(a)           Specimen certificate evidencing Common Stock of Registrant.

       4.1(b)           Specimen certificate evidencing Series C Convertible
                        Preferred Stock of Registrant.

      10.26(a)          Second Amended and Restated Master Repurchase Agreement
                        Governing Purchases and Sales of Mortgage Loans, dated as of
                        April 28, 2000, between Aames Capital Corporation,
                        Registrant's wholly owned subsidiary ("ACC") and Lehman
                        Commercial Paper, Inc.

      10.26(b)          Guaranty, dated as of April 28, 2000, between Registrant and
                        Lehman Commercial Paper, Inc., with respect to
                        Exhibit 10.26(a).

      10.27(a)          Warehouse Loan and Security Agreement, dated as of
                        February 10, 2000, between ACC and Greenwich Capital
                        Financial Products, Inc.

      10.27(b)          Guaranty, dated as of February 10, 2000, between Registrant
                        and Greenwich Capital Financial Products, Inc., with respect
                        to Exhibit 10.27(a).

      10.27(c)          Amendment No. 1 to Guaranty, dated as of April 28, 2000,
                        between Registrant and Greenwich Capital Financial
                        Products, Inc., with respect to Exhibit 10.27(b).

      10.32(a)          Amendment No. 1 to Limited Partnership Agreement, dated as
                        of February 24, 2000, by and among ACC, Random Properties
                        Acquisition Corp. IV, Greenwich Capital Derivatives, Inc.

      10.33             Historical Advance Purchase Agreement between ACC and
                        Steamboat Financial Partnership, L.P., dated as of
                        February 24, 2000.

      10.37(b)          Amendment No. 2 to the Master Loan and Security Agreement,
                        dated as of April 4, 2000, between ACC and Morgan Stanley
                        Dean Witter Mortgage Capital, Inc., formerly Morgan Stanley
                        Mortgage Capital, Inc.

      11                Computation of Per Share Loss.

      27                Financial Disclosure Schedule
</TABLE>

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

(1) Incorporated by reference from Registrant's Current Report on Form 8-K dated
    January 14, 2000.

                                       43