<PAGE>
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                                 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 SEPTEMBER 30, 1999
                                       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                       [I.R.S. Employer
       incorporation or organization]                       Identification No.]
</TABLE>

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

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

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

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

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

                              Yes /X/      No / /

AT NOVEMBER 11, 1999, REGISTRANT HAD 31,032,223 SHARES OF COMMON STOCK
OUTSTANDING.

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<PAGE>
                               TABLE OF CONTENTS

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

Item 1 -- Financial Statements

          Condensed Consolidated Balance Sheets at September 30, 1999
          and June 30, 1999...........................................      3

          Condensed Consolidated Statements of Operations for the
          three months ended September 30, 1999 and 1998 (Restated)...      4

          Condensed Consolidated Statements of Cash Flows for the
          three months ended September 30, 1999 and 1998 (Restated)...      5

          Notes to Condensed Consolidated Financial Statements........    6-8

Item 2 -- Management's Discussion and Analysis of Financial Condition
          and Results of Operations...................................   9-35

                         PART II--OTHER INFORMATION

Item 1 -- Legal Proceedings...........................................     36

Item 2 -- Changes in Securities.......................................     36

Item 3 -- Defaults Upon Senior Securities.............................     36

Item 4 -- Submission of Matters to a Vote of Security Holders.........     36

Item 5 -- Other Information...........................................     37

Item 6 -- Exhibits and Reports on Form 8-K............................     37

Signature Page........................................................     38
</TABLE>

                                       2
<PAGE>
                  AAMES FINANCIAL CORPORATION AND SUBSIDIARIES

                      CONDENSED CONSOLIDATED BALANCE SHEET

<TABLE>
<CAPTION>
                                                              SEPTEMBER 30,      JUNE 30,
                                                                  1999             1999
                                                              -------------   --------------
                                                               (UNAUDITED)      (AUDITED)
<S>                                                           <C>             <C>
ASSETS
Cash and cash equivalents...................................  $   5,194,000   $   20,764,000
Loans held for sale, at lower of cost or market.............    384,207,000      559,869,000
Accounts receivable.........................................     76,022,000        56,964,00
Residual interests, at estimated fair market value..........    357,636,000      332,327,000
Mortgage servicing rights, net..............................     22,237,000       20,928,000
Equipment and improvements, net.............................     12,297,000       13,495,000
Prepaid and other...........................................     12,347,000       15,013,000
Income tax refund receivable................................             --        1,737,000
                                                              -------------   --------------
    Total assets............................................  $ 869,940,000   $1,021,097,000
                                                              =============   ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Borrowings..................................................  $ 281,220,000   $  281,220,000
Revolving warehouse and repurchase facilities...............    359,767,000      535,997,000
Accounts payable and accrued expenses.......................     50,742,000       50,505,000
Income taxes payable........................................      9,411,000        7,819,000
                                                              -------------   --------------
    Total liabilities.......................................    701,140,000      875,541,000
                                                              -------------   --------------

Commitments and contingencies...............................             --               --
Stockholders' equity:
  Series A Preferred Stock, par value $.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............     26,704,000       26,704,000
  Series C Convertible Preferred Stock, par value $0.001 per
    share; 107,105,700 and 100,000,000 shares authorized;
    100,046,000 (includes 25,000,000 shares issued in
    October 1999) and 75,046,000 shares outstanding.........     89,475,000       65,475,000
  Common Stock, par value $.001 per share 400,000,000 and
    50,000,000 shares authorized; 30,016,964 and 30,016,964
    shares outstanding......................................         31,000           31,000
  Additional paid-in capital................................    250,118,000      250,116,000
  Retained deficit..........................................   (197,528,000)    (196,770,000)
                                                              -------------   --------------
    Total stockholders' equity..............................    168,800,000      145,556,000
                                                              -------------   --------------
    Total liabilities and stockholders' equity..............  $ 869,940,000   $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
                                                              -----------------------------
                                                              SEPTEMBER 30,   SEPTEMBER 30,
                                                                  1999            1998
                                                              -------------   -------------
                                                                               (RESTATED)
<S>                                                           <C>             <C>
Revenue:
  Gain on sale of loans.....................................   $21,797,000     $24,872,000
  Commissions...............................................    10,316,000       9,988,000
  Loan service..............................................     3,755,000       6,269,000
  Interest income and fees..................................    25,070,000      16,632,000
                                                               -----------     -----------
    Total revenue...........................................    60,938,000      57,761,000
                                                               -----------     -----------
Expenses:
  Compensation..............................................    23,112,000      23,794,000
  Production................................................     8,641,000      10,930,000
  General and administrative................................    14,271,000      13,588,000
  Interest..................................................    13,548,000      12,682,000
                                                               -----------     -----------
    Total expenses..........................................    59,572,000      60,994,000
                                                               -----------     -----------
Income (loss) before income taxes...........................     1,366,000      (3,233,000)
Provision (benefit) for income taxes........................       575,000      (1,077,000)
                                                               -----------     -----------
Net income (loss)...........................................   $   791,000     $(2,156,000)
                                                               ===========     ===========
Net income (loss) per common share:
      Basic.................................................   $     (0.02)    $     (0.07)
                                                               ===========     ===========
      Diluted...............................................   $     (0.02)    $     (0.07)
                                                               ===========     ===========
Dividends per common share..................................   $        --     $      0.03
                                                               ===========     ===========
Weighted average number of common shares outstanding:
      Basic.................................................    31,009,000      30,977,000
                                                               ===========     ===========
      Diluted...............................................    31,009,000      30,977,000
                                                               ===========     ===========
</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>
                                                                   THREE MONTHS ENDED
                                                              -----------------------------
                                                              SEPTEMBER 30,   SEPTEMBER 30,
                                                                  1999            1998
                                                              -------------   -------------
                                                                               (RESTATED)
<S>                                                           <C>             <C>
Operating activities:
  Net income (loss).........................................  $     791,000   $  (2,156,000)
  Adjustments to reconcile net income (loss) to net cash
    provided by (used in) operating activities:
    Depreciation and amortization...........................      1,522,000       1,224,000
    Gain on sale of loans...................................    (21,037,000)    (40,303,000)
    Accretion of residual interests.........................    (13,137,000)     (2,949,000)
    Mortgage servicing rights originated....................     (3,601,000)     (6,195,000)
    Mortgage servicing rights amortized.....................      2,292,000       2,824,000
    Changes in assets and liabilities:
      Loans held for sale originated or purchased...........   (523,524,000)   (725,057,000)
      Proceeds from sale of loans held for sale.............    699,186,000     700,414,000
      Decrease (increase) in:
        Accounts receivable.................................    (19,058,000)     (7,416,000)
        Residual interests..................................      8,864,000      12,363,000
        Prepaid and other...................................      2,666,000       1,144,000
        Income tax refund receivable........................      1,737,000              --
      Increase (decrease) in:
        Accounts payable and accrued expenses...............        237,000       7,958,000
        Income taxes payable................................      1,592,000      (5,378,000)
        6.5% accrued preferred stock dividend...............     (1,541,000)             --
                                                              -------------   -------------
Net cash provided (used in) operating activities............    136,989,000     (63,527,000)
                                                              -------------   -------------
Investing activities:
  Purchases of equipment and improvements...................       (323,000)     (1,319,000)
                                                              -------------   -------------
Net cash used in investing activities.......................       (323,000)     (1,319,000)
                                                              -------------   -------------
Financing activities:
  Net proceeds from convertible preferred stock issuance....     24,000,000              --
  Proceeds from sale of stock or exercise of options........          2,000         235,000
  Proceeds from borrowing...................................             --      20,000,000
  Proceeds from (reductions in) revolving warehouse and
    repurchase facilities...................................   (176,230,000)     38,936,000
  Dividends paid............................................             --      (1,022,000)
  Other.....................................................         (8,000)             --
                                                              -------------   -------------
Net cash provided by (used in) financing activities.........   (152,236,000)     58,149,000
                                                              -------------   -------------
Net decrease in cash and cash equivalents...................    (15,570,000)     (6,697,000)
Cash and cash equivalents at beginning of period............     20,764,000      12,322,000
                                                              -------------   -------------
Cash and cash equivalents at end of period..................  $   5,194,000   $   5,625,000
                                                              =============   =============
</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 months ended September 30,
1999 are not necessarily indicative of the results expected for the full fiscal
year.

NOTE 2: RESTATEMENT OF THE RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998

    In December 1998, the Financial Accounting Standards Board ("FASB") issued,
in question and answer format, "A Guide to Implementation of Statement 125 on
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities, Questions and Answers, Second Edition" (the "Special Report").
The Special Report indicates that two methods have arisen in practice for
accounting for credit enhancements relating to securitization. These methods are
the cash-in method and the cash-out method. The cash-in method treats credit
enhancements (pledged loans or cash) as belonging to the Company. As such, these
assets are recorded at their face value as of the time they are received by the
trust. The cash-out method treats credit enhancements as assets owned by the
related securitization trust. As such, these assets are treated as part of the
residual interests and are recorded at a discounted value for the period between
when collected by the trust and released to the Company. The special Report
indicates that if no true market exists for credit enhancement assets, the
cash-out method should be used to measure the fair value of credit enhancements.

    The Company had historically used the cash-in method to account for its
residual interests. However, during the three months ended December 31, 1998,
the Company retroactively changed its practice of measuring and accounting for
residual interests to the cash-out method in response to the FASB's Special
Report and to public comments from the Securities and Exchange Commission
released on December 8, 1998.

    Under the cash-in method previously used by the Company, the assumed
discount period for measuring the present value of the residual interests ended
when the cash flows were received by the securitization trust; and, the initial
deposits to overcollateralization accounts were recorded at face value. Under
the cash-out method now required by the FASB and Securities and Exchange
Commission, the assumed discount period for measuring the present value of the
residual interests ends when cash, including the return of any initial deposits,
is distributed to the Company on an unrestricted basis. The change to the
cash-out method results only in a difference in the timing of revenue
recognition from a securitization and has no effect on the total cash flows of
securitization transactions. While the total amount of revenue recognized over
the term of a securitization is the same under either method, the cash-out
method results in lower initial gains on the sale of loans due to the longer
discount period, and higher subsequent interest revenue resulting from the
impact of discounting cash flows.

                                       6
<PAGE>
                          AAMES FINANCIAL CORPORATION

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 2: RESTATEMENT OF THE RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998
(CONTINUED)

    Accordingly, the Company's condensed consolidated results of operations of
all periods prior to December 31, 1998 as presented herein have been restated to
reflect the cash-out method of accounting and reporting for its residual
interests.

    As used throughout this document, residual interests includes
overcollateralization amounts.

    The restatement resulted in the following changes to financial information
as of and for the three months ended September 30, 1998 (Unaudited. Dollars in
thousands, except per share amounts):

<TABLE>
<CAPTION>
                                                                 THREE MONTHS
                                                                    ENDED
                                                              SEPTEMBER 30, 1998
                                                              ------------------
<S>                                                           <C>
Revenue:
  Previous..................................................        $61,767
  As restated...............................................         57,761
Net income (loss):
  Previous..................................................            448
  As restated...............................................         (2,156)
Earnings (loss) per share:
  Basic:
    Previous................................................           0.01
    As restated.............................................          (0.07)
  Diluted:
    Previous................................................           0.01
    As restated.............................................          (0.07)
Residual interests (end of period):
  Previous..................................................        589,056
  As restated...............................................        521,431
Stockholders' equity (end of period):
  Previous..................................................        345,063
  As restated...............................................        301,107
</TABLE>

NOTE 3: SUBSIDIARY GUARANTORS

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

NOTE 4: STOCKHOLDERS' EQUITY

    On August 3, 1999, the Company received $25.0 million of additional capital
(the "Additional Investment") from a partnership controlled by Capital Z
Financial Services Fund, II, L.P., a Bermuda

                                       7
<PAGE>
                          AAMES FINANCIAL CORPORATION

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 4: STOCKHOLDERS' EQUITY (CONTINUED)

limited partnership ("Capital Z") at which time the Company issued 25,000
additional shares of Series C Convertible Preferred Stock for $1,000 per share.
Net proceeds to the Company from the Additional Investment, after issuance
expenses, was $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 $4,159,266 of capital from existing
holders of the Company's Common Stock in connection with its rights offering of
up to 31,016,964 shares of Series C Convertible Preferred Stock to stockholders
(the "Rights Offering"). On October 27, 1999, the Company received $20,840,734
of capital from Capital Z in connection with Capital Z's standby commitment to
purchase up to $25.0 million unsubscribed shares in the Rights Offering (the
"Standby Commitment"). The Company issued an aggregate of 25.0 million shares of
Series C Convertible Preferred Stock in the Rights Offering and pursuant to the
Standby Commitment of which net proceeds, after issuance expenses, were
approximately $24.0 million. Proceeds from the Rights Offering and the Standby
Commitment are reflected in accounts receivable and stockholders' equity in the
accompanying condensed consolidated balance sheet at September 30, 1999,
pursuant to the FASB's Emerging Issues Task Force ("EITF") Issue No. 85-1.  EITF
85-1 provides guidance on recording capital proceeds as an asset if a binding
agreement exists at a balance sheet date requiring that the capital be infused;
and, if such capital is realized in cash prior to the issuance of the financial
statements.

    The following table sets forth information regarding net income (loss) per
common share for the three months ended September 30, 1999 and 1998 (unaudited):

<TABLE>
<CAPTION>
                                                                 THREE MONTHS ENDED
                                                                    SEPTEMBER 30,
                                                                 1999          1998
                                                              -----------   -----------
                                                                            (RESTATED)
<S>                                                           <C>           <C>
Basic net income (loss) per common share:
  Net income (loss).........................................  $   791,000   $(2,156,000)
  Less: Accrued dividends on Series B and C Convertible
    Preferred Stock.........................................   (1,541,000)           --
                                                              -----------   -----------
  Net income (loss) available to common stockholders........     (750,000)   (2,156,000)
  Weighted average number of common shares outstanding......   31,009,000    30,977,000
                                                              -----------   -----------
Basic net income (loss) per common share....................  $     (0.02)  $     (0.07)
                                                              ===========   ===========

Diluted net income (loss) per common share:
  Net income (loss) available to common stockholders........  $  (750,000)  $(2,156,000)
  Weighted average number of common shares outstanding......   31,009,000    30,977,000
                                                              -----------   -----------
Diluted net income (loss) per common share..................  $     (0.02)  $     (0.07)
                                                              ===========   ===========
</TABLE>

NOTE 5: RECLASSIFICATIONS

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

                                       8
<PAGE>
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 plans to address the Year
2000 problem and (g) the Company's business and liquidity strategies. The
stockholders of the Company are cautioned not to put undue reliance on such
forward-looking statements. Such forward-looking statements are not guarantees
of future performance and involve risks and uncertainties. Actual results may
differ materially from those projected in this Report, for the reasons, among
others, discussed under the captions "--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

    During the three months ended September 30, 1999, the Company recorded net
income of $791,000 compared to a net loss of $2.2 million in the comparable
period a year ago. The first quarter of fiscal 2000 is the Company's first
profitable quarter since June 30, 1998. The Company believes the results for the
September 1999 quarter are an important first step in its turn-around efforts in
response to the global economic crises that existed in early fiscal 1999 and the
continuing effects of those crises on the credit, capital and asset-backed
markets.

    The Company increased its loan production to $523.5 million for the
September 1999 quarter from $516.6 million for the quarter-ended June 30, 1999.
Although loan production for the September 1999 quarter has not yet recovered to
the production levels of $725.1 million for the comparable quarter in the prior
year, $133.3 million of the $201.6 million decrease is due to a decline in
correspondent production, primarily as a result of the Company's previously
announced plans to focus on its core retail and broker production.

    The Company sold $692.7 million of loans during the September 1999 quarter,
compared to $695.8 million of loans sold during the quarter-ended September 30,
1998. The Company's loan dispositions during the September 1999 quarter included
a $400.0 million securitization, its first since the September 1998 quarter, and
whole loan sales totaling $292.6 million, reflecting the Company's strategy of

                                       9
<PAGE>
disposition of loans through a combination of securitizations and whole loan
sales. The Company's loan dispositions during the quarter ended September 30,
1998 included a $650.0 million securitization, and whole loan sales totaling
$45.8 million.

    By completing the securitization of servicing retained mortgage loans during
the most recent quarter, the Company also increased its servicing portfolio, net
of run-off, by $29.0 million from the prior quarter to $3.9 billion, the first
increase since the quarter ended September 30, 1998, when the portfolio stood at
$4.4 billion.

    The Company also increased its borrowing capacity to fund its loan
originations by adding an additional $250.0 million revolving repurchase
facility in October 1999, increasing its committed warehouse capacity from
$590.0 million to $840.0 million.

    The Company also completed the final phase of its recapitalization through
the successful completion of the Rights Offering to its stockholders for
$4.2 million and the Standby Commitment from Capital Z for $20.8 million.

    Effective October 25, 1999, the Board of Directors appointed A. Jay Meyerson
as the Company's Chief Executive Officer replacing Mani A. Sadeghi, a director
of the Company, who was serving as the Company's Chief Executive Officer on an
interim basis. Mr. Meyerson was also appointed to the Board of Directors,
effective November 1, 1999, to replace George W. Coombe who resigned.

    The Company believes that these efforts will enable it to resume its growth
strategy. This growth strategy 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 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. However, no assurance as
to the Company's ability to accomplish this goal can be given.

    INCREASE SERVICING PORTFOLIO; INCREASE MARGINS AND DEVELOP SUBSERVICING
CAPABILITIES. The Company plans to continue to build the size of its servicing
portfolio to provide a stable and significant source of recurring revenue. At
September 30, 1999, the Company's servicing portfolio was $3.9 billion. The
Company expects to increase the size of its loan servicing portfolio by
continuing to increase loan originations and purchases, completing new
securitizations and subservicing on behalf of third parties. However, no
assurance as to the Company's ability to accomplish this goal can be given.

    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. However, no assurance as to the Company's ability
to accomplish this goal can be given.

    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.

                                       10
<PAGE>
GENERAL

    The Company is a consumer finance company primarily engaged, through its
subsidiaries, in the business of originating, purchasing, selling, and servicing
home equity mortgage loans secured by single family residences. Upon its
formation in 1991, the Company acquired Aames Home Loan, a home equity lender
founded in 1954. In August 1996, the Company acquired One Stop Mortgage, Inc.
("One Stop") which originates mortgage loans primarily through a broker network.
The Company has substantially completed consolidating its loan production
channels into one company and the retail and broker production channels
(including One Stop) now operate under the name "Aames Home Loan."

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

    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
                                                          SEPTEMBER 30,
                                                   ---------------------------
                                                       1999           1998
                                                   ------------   ------------
<S>                                                <C>            <C>
Loans originated and purchased:
  Broker Network.................................  $331,546,000   $350,801,000(1)
  Retail.........................................   179,216,000    228,177,000
  Correspondent..................................    12,762,000    146,079,000
                                                   ------------   ------------
    Total........................................  $523,524,000   $725,057,000
                                                   ============   ============
</TABLE>

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

(1) Includes $14.4 million of commercial loans.

    Total loan production for the three months ended September 30, 1999 was
$523.5 million, up $6.9 million, or 1.3%, from the $516.6 million reported for
the quarter ended June 30, 1999. Loan origination from the Company's core retail
and broker channels increased to $510.8 million during the September 1999
quarter, up $7.5 million, or 1.5%, from the $503.3 million reported for the
three months ended June 30, 1999. Correspondent production during the three
months ended September 30, 1999 was approximately $12.8 million as compared to
$13.3 million during the quarter ended June 30, 1999.

    Total origination for the three months ended September 30, 1999 of
$523.5 million was down $201.6 million from loan origination levels reported for
the three months ended September 30, 1998. Of the $201.6 million decline,
$133.3 million resulted from the decrease in correspondent production to
$12.8 million during the September 1999 quarter from $146.1 million in the
comparable quarter a year ago. This decline reflects the Company's previously
reported decision to decrease its reliance on this channel for loan production.
The Company's core retail and broker channels had loan origination volume of
$510.8 million for the September 1999 quarter compared to $579.0 million in the
comparable quarter a

                                       11
<PAGE>
year ago. This decline in production volume is due to a number of factors
including the closure of unprofitable branches and increased pricing and other
underwriting changes in response to adverse conditions in the mortgage refinance
market. The Company expects such adverse market conditions to continue which
could adversely impact the Company's future loan production.

    The following table sets forth the number of retail branch and broker
offices operated by the Company at September 30, 1999 and 1998:

<TABLE>
<CAPTION>
                                                                   SEPTEMBER 30,
                                                              -----------------------
                                                                1999           1998
                                                              --------       --------
<S>                                                           <C>            <C>
Retail branch offices.......................................    102            109
Broker offices..............................................     35             51
</TABLE>

    The decline in the number of retail branches reflects the Company's cost
saving efforts in closing smaller, less productive centralized retail channel
branch offices. The decline in the number of broker offices reflects the
Company's decision, as part of its 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. During the three months ended
September 30, 1998 and the preceding quarters, the Company had historically and
primarily relied upon securitizations for its loan dispositions. During the
three quarters ended June 30, 1999, the asset-backed market remained weak, and
inaccessible to, or impracticable for, the Company. Therefore, the Company
relied solely upon whole loan sales for cash during that period. The Company's
loan dispositions during the three months ended September 30, 1999 reflected a
combination of securitizations and whole loan sales. The following table sets
forth certain information regarding the Company's securitizations and whole loan
sales during the three months ended September 30, 1999 and 1998:

<TABLE>
<CAPTION>
                                                       THREE MONTHS ENDED
                                                          SEPTEMBER 30,
                                                   ---------------------------
                                                       1999           1998
                                                   ------------   ------------
<S>                                                <C>            <C>
Loans pooled and sold in securitizations.........  $400,065,000   $649,999,000
Whole loan sales.................................   292,601,000     45,766,000
                                                   ------------   ------------
      Total loans securitized and sold...........  $692,666,000   $695,765,000
                                                   ============   ============
</TABLE>

    LOAN SERVICING.  The Company retains the servicing on the loans it
originates or purchases and securitizes. In April 1999, the Company entered into
a subservicing arrangement with a loan servicing company with respect to
$388.0 million in principal of loans (at September 30, 1999, $375.0 million)
primarily to reduce the burden on its cash resources used under its obligation
to advance interest on delinquent loans in its servicing portfolio.

                                       12
<PAGE>
    The following table sets forth certain information regarding the Company's
servicing portfolio at September 30, 1999 and 1998:

<TABLE>
<CAPTION>
                                                         SEPTEMBER 30,
                                                   --------------------------
                                                      1999            1998
                                                   ----------      ----------
                                                         (IN THOUSANDS)
<S>                                                <C>             <C>
Servicing portfolio..............................  $3,870,000(1)   $4,441,000(2)
Serviced in-house................................   3,495,000(1)    4,387,000(2)
</TABLE>

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

(1) Includes $188.0 million of loans subserviced for others by the Company on an
    interim basis.

(2) Includes $35.4 million of loans subserviced for others by the Company on an
    interim basis.

CERTAIN ACCOUNTING CONSIDERATIONS

    NEW ACCOUNTING DEVELOPMENT.  In December 1998, the FASB issued, in question
and answer format, "A Guide to Implementation of Statement 125 on Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,
Questions and Answers, Second Edition" (the "Special Report"). The Special
Report indicates that two methods have arisen in practice for accounting for
credit enhancements relating to securitization. These methods are the cash-in
method and the cash-out method. The cash-in method treats credit enhancements
(pledged loans or cash) as belonging to the Company. As such, these assets are
recorded at their face value as of the time they are received by the trust. The
cash-out method treats credit enhancements as assets owned by the related
securitization trust. As such, these assets are treated as part of the residual
interests and are recorded at a discounted value for the period between when
collected by the trust and released to the Company. The Special Report indicates
that if no true market exists for credit enhancement assets, the cash-out method
should be used to measure the fair value of credit enhancements.

    The Company has historically used the cash-in method to account for its
residual interests. However, during the three months ended December 31, 1998,
the Company retroactively changed its practice of measuring and accounting for
its residual interests to the cash-out method in response to the FASB's Special
Report and to public comments from the Securities and Exchange Commission
released on December 8, 1998.

    Under the cash-in method previously used by the Company, the assumed
discount period for measuring the present value of the residual interests ended
when the cash flows were received by the securitization trust; and, the initial
deposits to overcollateralization accounts were recorded at face value. Under
the cash-out method now required by the FASB and Securities and Exchange
Commission, the assumed discount period for measuring the present value of the
residual interests ends when cash, including the return of any initial deposits,
is distributed to the Company on an unrestricted basis. The change to the
cash-out method results only in a difference in the timing of revenue
recognition from a securitization and has no effect on the total cash flows of
securitization transactions. While the total amount of revenue recognized over
the term of a securitization is the same under either method, the cash-out
method results in lower initial gains on the sale of loans due to the longer
discount period, and higher subsequent interest income resulting from the impact
of discounting cash flows.

                                       13
<PAGE>
    Accordingly, the Company's condensed consolidated results of operations for
all periods prior to the quarter ended December 31, 1998 as presented herein
have been restated to reflect the cash-out method of accounting and reporting
for its residual interests. The restatement resulted in the following changes to
financial information as of and for the three months ended September 30, 1998
(Unaudited. Dollars in thousands, except per share amounts):

<TABLE>
<CAPTION>
                                                            THREE MONTHS ENDED
                                                            SEPTEMBER 30, 1998
                                                            ------------------
<S>                                                         <C>
Revenue:
  Previous................................................       $61,767
  As restated.............................................        57,761
Net income (loss):
  Previous................................................           448
  As restated.............................................        (2,156)
Earnings (loss) per share:
  Basic:
    Previous..............................................          0.01
    As restated...........................................         (0.07)
  Diluted:
    Previous..............................................          0.01
    As restated...........................................         (0.07)
Residual interests (end of period):
  Previous................................................       589,056
  As restated.............................................       521,431
Stockholders' equity (end of period):
  Previous................................................       345,063
  As restated.............................................       301,107
</TABLE>

    ACCOUNTING FOR SECURITIZATIONS.  The Company's loan disposition strategy
relies on a combination of securitization transactions and whole loan sales. The
Company sold $292.6 million of loans in whole loan sales and $400.0 million in a
securitization during the September 1999 quarter. During the three months ended
September 30, 1998, the Company sold $45.8 million and $650.0 million in whole
loan sales and securitizations, respectively. 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 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. Additionally, increases or decreases in valuation
of the residual interests are

                                       14
<PAGE>
also recognized as net gains or losses. 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.

        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 constant 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 result in a weighted average life of approximately 2.9 years.

        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. For the quarters ended
    December 31, 1998, the Company 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, credit grades of the loans included in the current securitizations
    and other industry data. For the quarters up to and including September 30,
    1998, the Company used a prospective cumulative loan loss estimate of
    approximately 1.4% of the balance of the loans in the securitization pools
    as an appropriate estimate to determine fair value. As market conditions
    deteriorated in the quarter ended December 31, 1998, the Company refined its
    estimate of credit losses by expanding the factors it considers in
    developing its credit loss estimates to include loss and delinquency
    information by channel, credit grade and product, and information available
    from other market participants such as investment bankers, credit providers
    and credit agencies. Accordingly, the Company increased its prospective
    cumulative loan loss estimate which currently is 2.4% of the balance of the
    loans in the securitization pools. The recent increase in losses on
    liquidations principally reflects losses in the portfolio of lower credit
    grade correspondent loans purchased in bulk sales, together with the
    Company's efforts to improve its liquidity by accelerating delinquent loan
    loss

                                       15
<PAGE>
    resolution through early disposition of REO and acceptance of less than full
    principal payoffs in certain cases. The Company has also incurred losses
    during the three months ended September 30, 1999 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.

        The Company believes its efforts in early problem credit intervention
    result in higher loss trends in the near term, but do not increase the
    absolute level of losses. The Company closely monitors its residual
    interests and should higher losses continue, it will incorporate this factor
    into its normal quarterly valuation of its residual interests.

    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 its
prepayment, discount rate and loss assumptions in relation to its actual
experience and current rates of prepayment and loss prevalent in the industry
and may adjust or take a charge to earnings through an adjustment to net gain or
loss on valuation of residual interests. In its regular quarterly review of its
residual interests, 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 no adjustment of its assumptions (rate of prepayment, discount
rate and credit loss) was warranted.

    Additionally, upon sale or securitization of servicing retained mortgages,
the Company capitalizes the fair value of mortgage servicing rights ("MSRs")
assets separate from the loan. The Company determines fair value based on the
present value of estimated net future cash flows related to servicing income.
The 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.

    In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." 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. The
Company has not determined the impact that adoption of their standard will have
on its future consolidated financial statements.

                                       16
<PAGE>
RESULTS OF OPERATIONS--THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998

    The following table sets forth information regarding the components of the
Company's revenue and expenses for the three months ended September 30, 1999 and
1998:

<TABLE>
<CAPTION>
                                                        THREE MONTHS ENDED
                                                           SEPTEMBER 30,
                                                     -------------------------
                                                        1999          1998
                                                     -----------   -----------
                                                                   (RESTATED)
<S>                                                  <C>           <C>
Revenue:
  Gain on sale of loans............................  $21,797,000   $24,872,000
  Commissions......................................   10,316,000     9,988,000
  Loan service.....................................    3,755,000     6,269,000
  Interest income and fees.........................   25,070,000    16,632,000
                                                     -----------   -----------
Total revenue......................................   60,938,000    57,761,000
                                                     -----------   -----------
Expenses:
  Compensation.....................................   23,112,000    23,794,000
  Production.......................................    8,641,000    10,930,000
  General and administrative.......................   14,271,000    13,588,000
  Interest.........................................   13,548,000    12,682,000
                                                     -----------   -----------
Total expenses.....................................   59,572,000    60,994,000
                                                     -----------   -----------
Income (loss) before income taxes..................    1,366,000    (3,233,000)
Provision (benefit) for income taxes...............      575,000    (1,077,000)
                                                     -----------   -----------
Net income (loss)..................................  $   791,000   $(2,156,000)
                                                     ===========   ===========
</TABLE>

REVENUE

    Total revenue for the three months ended September 30, 1999 was
$60.9 million, up modestly from $57.8 million for the three months ended
September 30, 1998. During the three months ended September 30, 1999, the
Company executed a $400.0 million securitization and sold $292.6 million of
loans in whole loan sales. In the comparable quarter a year ago, the Company
consummated a $650.0 million securitization and sold $45.8 million in whole loan
sales. The increase in whole loan sales reflects the Company's intention to
dispose a portion of its loan production for cash in the whole loan market in
its efforts to diversify its funding sources. See "--General."

    Gain on sale for the three months ended September 30, 1999 was
$21.8 million, a $3.1 million decline from the $24.9 million gain on sale
reported in the comparable period a year ago. Included in gain on sale for the
quarter ended September 30, 1998 is the hedge loss of $15.3 million, comprised
of a $10.7 million realized loss and a valuation charge recorded for contracts
which subsequently expired in December 1998. During the three months ended
September 30, 1998, the Company, as it had historically, hedged its fixed rate
pipeline by purchasing hedges against U.S. Treasury securities. Changes in
Treasury rates were generally reflected in the pass-through rates of the fixed
portion of the Company's securitizations. However, unsettled market conditions
during the quarter ended September 30, 1998 resulted in a $15.3 million loss on
the Company's hedge position without an equivalent benefit from reductions in
the pass-through rate paid on certificates sold in the fixed rate portion of
that quarter's securitization. During the three months ended September 30, 1999,
the Company had no hedge positions in place. Gain on sale for the quarter ended
September 30, 1999 reflects gains recorded on substantially the same volume of
loans sold compared to the quarter ended September 30, 1998 ($692.6 million
compared to $695.7 million); however, the gain on sale for the quarter ended
September 30, 1999 reflects the lower gain on sale recorded on loans sold in
whole loan sales and smaller gains recorded on the loan securitization compared
to the gain recorded on the securitization during the quarter ended
September 30, 1998. The gain on sale

                                       17
<PAGE>
for the securitization in the quarter ended September 30, 1999 was lower than
historical gains due to, among other things, market conditions at the time of
the securitization and the Company's adoption of the revised assumptions during
the quarter ended December 31, 1998.

    Commission revenue for the three months ended September 30, 1999 was
$10.3 million up 3% from the $10.0 million reported in the three months ended
September 30, 1998. Included in commission revenue during the three months ended
September 30, 1999 and 1998 was $1.7 million and $264,000, respectively, of
deferred commission revenue relating to prior period loan origination. The
deferred commission revenue recognized during the quarters was due to the mix of
the composition of loans being either securitized or sold in whole loan sales in
excess of such loans originated during the same periods. For the quarter ended
September 1999, commissions, net of the deferred amount recognized was
$8.6 million compared to $9.7 million for the comparable period a year ago.
Commission revenue is primarily a function of the volume of mortgage loans
originated by the Company through its retail loan office network, the credit
grade of the loans originated and the weighted average commission rate charged
on such loans. The decline in commission revenue during the three months ended
September 30, 1999 from commission revenue reported in the September 1998
quarter is primarily due to decreased loan production levels reported in the
Company's retail units. Commission revenue earned in future periods could be
reduced by recent changes in the Company's pricing strategies that place a
higher emphasis on coupon rates rather than commissions at origination.

    The Company's loan servicing portfolio at September 30, 1999 decreased to
$3.9 billion from $4.4 billion at September 30, 1998 reflecting the Company's
reliance on whole loan sales with servicing released from September 1998 until
consummation of the $400.0 million securitization in the September 1999 quarter.
The Company's loan servicing portfolio at September 30, 1999 increased
$29.0 million, or .7% from the $3.8 billion reported at June 30, 1999,
reflecting the Company's $400.0 million securitization during the quarter, net
of loan servicing portfolio run-off during the period.

    At September 30, 1999, of the Company's $3.9 billion servicing portfolio,
90.3% was serviced in-house compared to 98.7% of the Company's $4.4 billion
servicing portfolio serviced in-house at September 30, 1998. In April 1999, the
Company entered into a subservicing arrangement with a loan servicing company
with respect to an aggregate of $388.0 million in principal amount of loans. The
loan servicing company agreed to make future servicing advances on those loans.
The Company entered into the subservicing arrangement primarily to reduce the
burden of making servicing advances on those loans. In June 1999, 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. The growth of the Company's servicing portfolio will be
impacted by the Company's sales of whole loans on a servicing released basis
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 a return to securitization. Nevertheless, 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
purchasing. See "Risk Factors."

    Loan service revenue decreased to $3.8 million in the three months ended
September 30, 1999 from $6.3 million during the three months ended
September 30, 1998. 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 amortization of the Company's MSRs. The
decrease in loan service revenues during the three months ended September 30,
1999 from the comparable period in 1998 was due primarily to expenses incurred
in the September 1999 quarter for subservicing arrangements and monthly
servicing advances being handled by third parties that were not in place a year
ago. To a lesser extent, the decrease is due to the decline in the balance of
loans serviced by the Company during the current quarter when compared to the
1998 quarter.

                                       18
<PAGE>
    The delinquency rate at September 30, 1999 was 14.9% compared to 15.6% at
September 30, 1998. 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. At the close of calendar year 1996, the Company
started to focus more on higher credit grade loans which the Company believes
will cause delinquencies in the Company's servicing portfolio to decrease in the
future. The Company's sale of loans in the whole loan market on a servicing
released basis diminishes growth of the servicing portfolio. The seasoning of
the old portfolio with slow or no growth in the portfolio could cause
delinquency rates to rise.

    During the quarter ended September 30, 1999, REO losses increased to
$19.5 million from $8.6 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. 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.
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. The Company closely monitors its residual interests and should high
losses continue, it will incorporate this factor into its normal quarterly
valuation of its residual interests.

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

<TABLE>
<CAPTION>
                                                     YEAR ENDED                THREE MONTHS ENDED
                                                      JUNE 30,                    SEPTEMBER 30,
                                         ----------------------------------   ---------------------
                                            1999        1998        1997        1999        1998
                                         ----------   ---------   ---------   ---------   ---------
                                                     (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..............................         2.4%        3.8%        4.3%        2.1%        3.9%
Two months.............................         1.0%        1.3%        1.9%        0.9%        1.3%
Three or more months:
Not foreclosed (4)(5)..................        10.3%        9.0%        8.1%        9.9%        8.8%
Foreclosed (6).........................         2.0%        1.5%        1.0%        2.0%        1.6%
                                         ----------   ---------   ---------   ---------   ---------
  Total................................        15.7%       15.6%       15.3%       14.9%       15.6%
                                         ==========   =========   =========   =========   =========
Percentage of dollar amount of loans
  foreclosed during the period to
  servicing portfolio(4)(8)............         2.9%        2.0%        1.5%        0.9%        0.6%
Number of loans foreclosed during the
  period(6)............................       1,680       1,125         560         478         346
Principal amount of foreclosed loans
  during the period....................  $  122,445      84,613      48,029      33,877      25,731
Net losses on liquidations during the
  period(7)............................  $   51,730      26,488       5,470      19,479       8,627
Percentage of annualized losses to
  servicing portfolio(4)(8)............         1.2%        0.7%        0.2%        2.0%        0.8%
Servicing portfolio at period end......  $3,841,300   4,147,000   3,174,000   3,870,000   4,441,000
</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.

                                       19
<PAGE>
(3) At September 30, 1999, the dollar volume of loans delinquent more than
    90 days in 11 of the Company's REMIC trusts, exceeded the permitted limit in
    the related pooling and servicing agreements. Four of those 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 $84 million,
    $82 million, $-0-, $188 million, and $35 million for the periods ended
    June 30, 1999, June 30, 1998, June 30, 1997, September 30, 1999, and,
    September 30, 1998, 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.

    Interest income and fees during the three months ended September 30, 1999
increased to $25.1 million, up $8.5 million, or 50.7% from $16.6 million during
the comparable three month period in 1998. Interest income and fees includes
interest income on loans held for sale, accretion income associated with the
Company's residual interests and fees and other income such as closing,
appraisal, underwriting and other fees. Interest income increased during the
current quarter from a year ago due primarily to increased accretion on the
Company's residual interests due, in part, to the use of a higher discount rate
in the September 1999 quarter offset by decreases in other fees and interest
income earned on loans held for sale. The decrease in other fees during the
three months ended September 30, 1999 was directly related to that quarter's
lower production volumes when compared to the September 1998 quarter. The
decline in interest income on loans held for sale was due to the timing of the
Company's sales and securitizations during the September 1999 quarter resulting
in interest being earned on smaller amounts of loans held by the Company during
the period from origination of the loans until the date sold by the Company.

EXPENSES

    Total expenses for the three months ended September 30, 1999 were
$59.6 million, down $1.4 million from $61.0 million during the comparable period
in 1998. The overall decline is primarily attributable to decreases in
compensation and production expenses in the September 1999 quarter brought about
by production declines, and to cost reductions achieved from the Company's cost
savings plan, partially offset by increases in general and administrative and
interest expense.

    Compensation expense declined $682,000 from $23.8 million during the quarter
ended September 30, 1998 to $23.1 million during the three months ended
September 30, 1999. Compensation expense for the three months ended
September 30, 1999 includes $1.0 million of nonrecurring severance costs, and
also includes $2.3 million, compared to $333,000 during the quarter ended
September 30, 1998, of deferred direct compensation costs on loans originated in
prior periods that were disposed of in either whole loan sales or the
securitization during the current quarter. Compensation expense for the three
months ended September 30, 1999, net of nonrecurring severance costs and the
recognition of the deferred costs in the aggregate amount of $3.3 million, was
$19.8 million, or a $4.8 million decline from the comparable amount a year ago.
This decrease was primarily due to the Company's reduction in force which
occurred in February 1999, a decrease in compensation incentives due to the
decline in the Company's loan origination volumes in the current quarter when
compared to the 1998 quarter and a reduction in incentive compensation due to
the Company's results of operations. Despite the decline in compensation expense
in the 1999 quarter from the comparable period a year ago, compensation expense
expressed as a percentage of loan origination volume for the three months ended
September 30, 1999 was 4.4%, compared to 3.3% for the comparable quarter a year
ago. The increase in this percentage during the three months ended
September 30, 1999 from the level in the September 1998 quarter is due
principally to the decline in loan origination volume between the two periods.

                                       20
<PAGE>
    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 decreased $2.3 million to
$8.6 million during the three months ended September 30, 1999 from
$10.9 million during the comparable three month period a year ago. The decrease
in production expense during the three months ended September 30, 1999 from the
three months ended September 30, 1998 is due primarily to the Company closing
smaller, less productive centralized retail channel branch offices and
transferring other branches to its decentralized retail channel which has lower
advertising costs. As part of its cost reduction efforts, the Company has been
exploring ways to improve the efficiency and penetration of its advertising
strategies and will continue to closely monitor this expense component.
Production expense expressed as a percentage of total loan origination for the
three months ended September 30, 1999 and 1998 was 1.6% and 1.5%, respectively.
The increase in the percentage of production costs to total loan origination
volume for the three months ended September 30, 1999 from the similar percentage
in the comparable 1998 period is due principally to the decline between periods
in the level of loan originations.

    General and administrative expenses increased 5.0%, or $683,000, to
$14.3 million from $13.6 million during the three months ended September 30,
1999 and 1998, respectively. The increase was primarily the result of the
Company's decision to use outside professional advisors on specific projects
which is expected to decline in the future. The increase in professional costs
during the three months ended September 30, 1999 from the comparable quarter a
year ago was $1.1 million. Communication expense, primarily telephone costs, for
the three months ended September 30, 1999 was down $650,000 from the same
quarter a year ago due to cost saving efforts implemented by the Company.
Occupancy costs for the three months ended September 30, 1999 increased $209,000
from the same period a year ago. As part of the Company's on-going costs savings
program, it ceased activities in certain retail and broker 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
such office space is subleased at lease rates 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 during the three months ended September 30, 1999 was
$13.5 million, an increase of $866,000 from the $12.7 million reported during
the comparable period a year ago. This increase in the September 1999 quarter
over the September 1998 quarter was primarily the result of increased borrowings
at higher 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 to fund its operations.

INCOME TAXES

    During the three months ended September 30, 1999 and 1998, the Company
recorded an income tax provision (benefit) of $575,000 and $(1.1) million,
respectively. The tax provision (benefit) for the three months ended
September 30, 1999 and 1998 reflect effective tax rates of 42.0% and (33.0%),
respectively. The September 1999 quarter provision for taxes relates to the
Company's estimate for taxes on excess inclusion income on its REMIC trusts. The
September 1998 quarter tax benefit is due to the net operating loss incurred
during that period and is net of a tax valuation adjustment to account for
estimated nonrealizable 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.

                                       21
<PAGE>
FINANCIAL CONDITION

    LOANS HELD FOR SALE.  The Company's portfolio of loans held for sale
decreased to $384.2 million at September 30, 1999 from $559.9 million at
June 30, 1999. The decline is due to the Company's $400.0 million securitization
in August 1999 and whole loan sales in the secondary markets in the amount of
$292.6 million during the quarter ended September 1999, offset by the Company's
loan production during the period.

    ACCOUNTS RECEIVABLE.  Accounts receivable, representing servicing fees and
advances and other receivables, increased to $76.0 million at September 30, 1999
from $57.0 million at June 30, 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. At
September 30, 1999, accounts receivable includes $25.0 million of estimated
proceeds due from the Rights Offering and the Standby Commitment both of which
closed during October 1999. At June 30, 1999, accounts receivable included
$25.0 million of estimated proceeds due from the Additional Investment which
closed in August 1999.

    RESIDUAL INTERESTS.  Residual interests increased to $357.6 million at
September 30, 1999 from $332.3 million at June 30, 1999 reflecting the non-cash
gain recognized on the Company's securitization in the quarter ended September,
plus accretion during the quarter.

    MORTGAGE SERVICING RIGHTS, NET.  Mortgage servicing rights, net, increased
to $22.2 million at September 30, 1999 from $20.9 million at June 30, 1999
reflecting the capitalization of mortgage servicing rights on the securitization
during the quarter ended September 30, 1999, net of amortization during the
quarter.

    EQUIPMENT AND IMPROVEMENTS, NET.  Equipment and improvements, net, decreased
to $12.3 million at September 30, 1999 from $13.5 million at June 30, 1999 due
to depreciation and amortization outpacing current period equipment and
improvement acquisitions.

    PREPAID AND OTHER ASSETS.  Prepaid and other assets declined to
$12.3 million at September 30, 1999 to $16.8 million, which includes the income
tax refund receivable, at June 30, 1999.

    BORROWINGS.  Amounts outstanding under borrowings at September 30, 1999
remained unchanged from the $281.2 million outstanding at June 30, 1999.

    REVOLVING WAREHOUSE FACILITIES.  Amounts outstanding under revolving
warehouse and repurchase facilities decreased to $359.8 million at
September 30, 1999 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
securitization during the quarter. 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 the funding of: (i) mortgage loan originations and purchases prior to
their securitization and sale, (ii) fees, expenses and hedging costs, if any,
incurred in connection with the securitization and sale of loans, (iii) cash
reserve accounts or overcollateralization requirements in connection with the
securitization and sale of mortgage loans, (iv) tax payments due on recognition
of non-cash gain on sale other than in a debt-for-tax securitization structure,
(v) ongoing administrative and other operating expenses, (vi) interest and
principal payments under the Company's warehouse credit facilities and other
existing indebtedness, (vii) advances in connection with the Company's servicing
portfolio and (viii) costs associated with expanding the Company's core
production units.

                                       22
<PAGE>
    The Company has historically financed its operating cash requirements
primarily through: (i) warehouse and repurchase facilities and working capital
lines of credit, (ii) the securitization and sale of mortgage loans, and
(iii) the issuance of debt and equity securities.

    WAREHOUSE, REPURCHASE AND WORKING CAPITAL FACILITIES.  Prior to the global
economic crises that existed in early fiscal 1999, the Company retained access
to warehouse and other credit facilities with borrowing limits aggregating in
excess of $1.0 billion. However, during the September 1998 quarter, changes in
advance rates imposed by lenders effectively limited the Company to a single
$300.0 million committed warehouse line until the initial investment by Capital
Z on February 10, 1999. The Company replaced that line, which expired on April
8, 1999, with new committed revolving warehouse and repurchase facilities in the
amount of $390.0 million, and an uncommitted warehouse line of $100.0 million
obtained on February 10, 1999 and a committed repurchase line in the amount of
$200.0 million obtained in April 1999. Of the $590.0 million of committed
facilities available at September 30, 1999, $90 million expires on February 9,
2000, $300.0 million expires on March 31, 2000 and the remaining $200.0 million
expires on April 7, 2000. In October 1999, the Company added an additional
$250.0 million committed revolving repurchase facility which expires on
October 29, 2000.

    During the quarter-ended September 30, 1999, two of the Company's revolving
warehouse and repurchase lines required the Company to have cash and cash
equivalents on and after October 1, 1999 of $15.0 million. During the quarter
ended September 30, 1999, these two facilities were amended to extend the
requirements to October 31, 1999. The Company complied with these requirements
by consummating the Rights Offering and the Standby Commitment. 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 and net earnings
levels. If the Company is unable to meet these tests or for any other reason is
unable to maintain existing warehouse or repurchase lines, it would have to
cease loan production operations which would negatively impact profitability and
jeopardize the Company's ability to continue to operate as a going concern.

    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. Further, 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 million. In June 1999, 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. As a result of this arrangement, the Company received
approximately $50.0 million for certain servicing advances carried on its books.
Part of these proceeds were used to pay off a working capital line which was
terminated in the quarter ended June 1999. The Company has no existing working
capital lines available. Working capital for the Company's needs is provided
through cash on hand, including the cash raised in the Rights Offering and from
the Standby Committment.

    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 not included in the
indebtedness limitations. The Company's new repurchase and warehouse facilities
contain similar limits on the Company's ability to incur additional
indebtedness. Further, until the Company receives investment grade ratings for
the notes issued under the Indenture, the amount of residual and servicing
advance financing the Company may incur on such assets allocable to
post-September 1996 securitizations is limited to 75% of the difference between
such post-September 1996 residuals and servicing advances and $225.0 million.

                                       23
<PAGE>
    THE SECURITIZATION AND SALE OF MORTGAGE LOANS.  The Company securitized
$400.0 million and $650.0 million during the quarter ended September 30, 1999
and September 30, 1998, respectively. The gain on sale recognized in the quarter
ended September 30, 1999 was lower than historical gains due, among other
things, to market conditions at the time of the securitization, 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 completed
during these periods, the Company was required to provide credit enhancements in
the form of overcollateralization amounts or reserve accounts. In addition,
during the life of the related securitization trusts, the Company subordinates a
portion of the excess cash flow otherwise due it to the rights of holders of
senior interests as a credit enhancement to support the sale of the senior
interests. The terms of the securitization trusts generally required 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 for
those pools exceed the specified limit. As of September 30, 1999, the Company
was required to maintain an additional $70.6 million in overcollateralization
amounts as a result of the level of its delinquency rates above that which would
have been required to be maintained if the applicable delinquency rates had been
below the specified limit. Of this amount, at September 30, 1999, $26.9 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 related service fees are
collected and applicable reserve or overcollateralization requirements are met.

    The Company sold loans for cash in whole loan sales with servicing released
of $292.6 million and $45.8 million during the three months ended September 30,
1999 and 1998, respectively. The Company's ability to sell loans originated and
purchased by it in the secondary market is necessary to generate cash proceeds
to pay down its warehouse 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 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. 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 6.3 million shares (as
adjusted) of the Company's common stock at an exercise price of $7.67 (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
September 30, 1999, under the most restrictive of such covenants, the Company
had no

                                       24
<PAGE>
money available for the payment of such distributions and does not expect to
have the ability to pay dividends for the foreseeable future.

    The Company has 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 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 2.5 million shares of the Company's common
stock for $1.00 per share.

    The Company's primary sources of liquidity are expected to be fundings under
warehouse and repurchase facilities, whole loan sales and the monetization of
the Company's servicing advances and residual interests. The Company's primary
and potential sources of liquidity as described above (assuming access to
working capital financing, access to securitization and whole loan markets, and
the achievement of cost savings through the implementation of the cash savings
plans which by no means can be assured) are expected to be sufficient to fund
the Company's liquidity requirements through at least the next 12 months if the
Company's future operations are consistent with management's current growth
expectations. If the Company's access to warehouse lines, working capital or the
securitization or whole loan markets is restricted, or the cash savings are not
realized, 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 dispose
of.

YEAR 2000 COMPLIANCE AND TECHNOLOGICAL ENHANCEMENT

    Readers are cautioned that forward-looking statements contained in this Year
2000 disclosure should be read in conjunction with the Company's disclosures
under the heading, "Special Note on Forward-looking Statements," beginning on
page 9 above. Readers should understand that the dates on which the Company
believes the Year 2000 project will be completed are based upon management's
best estimates, which were derived utilizing numerous assumptions of future
events, including the availability of certain resources, third-party
modification plans and other factors. However, there can be no guarantee that
these estimates will be achieved, or that there will not be a delay in, or
increased costs associated with, the implementation of the Company's Year 2000
Compliance Project. A delay in specific factors that might cause differences
between the estimates and actual results include, but are not limited to, the
availability and cost of personnel trained in corrections by third parties and
suppliers, the ability to implement interfaces between the new systems and the
systems not being replaced, and similar uncertainties. Due to the general
uncertainty inherent in the Year 2000 problem, resulting in part from the
uncertainty of the Year 2000 readiness of third parties and the inter-connection
of national and international businesses, the Company cannot ensure its ability
to timely and cost effectively resolve problems associated with the Year 2000
issue that may affect its operations and business, or expose it to third party
liability.

    The Company's Year 2000 compliance program consists of four
phases--inventory, risk assessment process, corrective action and testing. The
Company has completed the inventory phase which included the identification of
all computer hardware and software, electronic data exchanges, operating
systems, communications systems and non-information items. As a corollary to the
inventory phase, the Company has made inquiries of its significant vendors as to
their Year 2000 readiness. The Company has also completed the risk assessment
process of assigning risk factors to each system used by the Company to
determine the priority and resource allocation of its Year 2000 efforts. In
addition, the Company has

                                       25
<PAGE>
completed the corrective action and testing phases with respect to mission
critical systems. The Company will complete any remaining testing and compliance
by the end of 1999.

    COSTS TO ADDRESS THE COMPANY'S YEAR 2000 ISSUES.  The Company has completed
the conversion of its major in-house computer systems to vendor-supported
systems. These conversions were planned to upgrade and improve functionality
rather than as a result of Year 2000 issues. Other than costs associated with
the conversion of these in house systems which have been completed, the Company
anticipates that costs relating to Year 2000 issues will not be material since
the Company primarily relies on third party software for its primary information
technology systems and does not require significant internal reprogramming
resources to change program codes.

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

    Another Year 2000 risk relates to the Company's two vendor supported loan
origination systems for its different production channels. In the event of Year
2000 issues with respect to the software used with either such system, the
Company's ability to originate loans would be diminished and may result in
reduced loan production until the problem is resolved. The Company intends to
rely on the vendors' assurances and Company testing to minimize the risk of
non-compliance of these systems.

    CONTINGENCY PLAN.  The Company has no reason to believe that its most
significant systems will not be Year 2000 compliant. If testing indicates any of
the systems are not compliant, the Company will implement its contingency plan.

RISK MANAGEMENT

    The Company is currently re-evaluating its current hedging policy, and at
September 30, 1999 had no hedge transactions in place. While the Company
monitors the interest rate environment and has employed fixed rate hedging
strategies, there can be no assurance that the earnings of the Company would not
be adversely affected during any period of unexpected changes in interest rates
or prepayment rates.

FINANCIAL INSTRUMENTS AND OFF-BALANCE SHEET ACTIVITIES

    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 of such loans, the
Company is exposed to interest rate risk. The majority of loans are securitized
within 90 days of origination or purchase. However, a portion of the loans are
held for sale or securitization for as long as 12 months (or longer in very
limited circumstances) prior to securitization or sale. If interest rates rise
during the period that the mortgage loans are held, the spread between the
weighted average interest rate on the loans to be securitized and the
pass-through interest rates on the securities to be sold (the latter having
increased as a result of market rate movements) would narrow. Upon
securitization, this would result in a reduction of the Company's related gain
on sale. The Company is also exposed to rising interest rates for loans
originated or purchased which are held pending sale in the whole loan market. 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.

                                       26
<PAGE>
    At September 30, 1999, the Company did not have any hedge transactions in
place. 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 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.
During the three months ended September 30, 1999, there were no hedge losses in
gain on sale.

    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
$357.6 million and $332.3 million outstanding at September 30, 1999 and
June 30, 1999, respectively. The Company also had MSRs outstanding at
September 30, 1999 and June 30, 1999 in the amount of $22.2 million and
$20.9 million, respectively. Both of these instruments are valued at market at
September 30, 1999 and June 30, 1999. 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 September 30, 1999 and June 30,
1999. The weighted average life used for valuations at September 30, 1999 and
June 30, 1999 was 2.86 years.

    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 trade receivables, accounts payable and trade receivables sold under
agreements to repurchase. As these amounts are short term in nature and/or
generally bear market rates of interest, the carrying amounts of these
instruments are reasonable estimates of their fair values. The carrying amount
of the Company's long-term debt 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. These financial instruments
include commitments to extend credit to borrowers and commitments to purchase
loans from correspondents. 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, 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. As both September 30, 1999 and June 30,

                                       27
<PAGE>
1999, the Company had total warehouse and repurchase facilities available in the
amount of $590 million; the total outstanding related to these facilities was
$359.8 million and $536.0 million at September 30, 1999 and June 30, 1999,
respectively. Warehouse and repurchase facilities are typically for a term of
one year or less and are designated to fund mortgages originated within
specified underwriting guidelines. The majority of the assets remain in the
facilities for a period of up to 90 days at which point they are securitized and
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.

    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,
and/or residual interests, 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, but only if our future operations are consistent with our
current growth expectations. 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 dispose of.

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

    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.

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<PAGE>
    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.

    At September 30, 1999, the dollar volume of loans delinquent more than
90 days in 11 of our securitization trusts formed in December 1992, during the
period from March 1995 to March 1997 and in December 1997 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 September 30, 1999
was 14.9% and at June 30, 1999 was 15.6%.

    Four of the ten trusts referred to above, which represent in the aggregate
14.6% of the dollar volume of our servicing portfolio, exceeded loss limits at
September 30, 1999. The limit that has been exceeded provides that losses may
not exceed a certain threshold, which ranges from .50% to .77% of the original
pool balances in the relevant securitization trusts, on a rolling 12 month
basis. During the three months ended September 30, 1999, one additional trust
exceeded the delinquency level and one of the four trusts that exceeded its loss
limit was cured.

    Although the monoline insurance company has the right to terminate servicing
with respect to 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.

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

    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 September 30, 1999, we were required to maintain an additional
$70.6 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 September 30, 1999, $26.9 million remains to be added to the
overcollateralization amounts from future spread income on the loans held by
these trusts.

    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.

                                       29
<PAGE>
    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 strips recorded on our balance sheet.

    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. 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. Although these loans are
underwritten at the indexed rate as of the first adjustment date,
credit-impaired borrowers may encounter financial difficulties as a result of
increases in the interest rate over the life of the loan.

    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 warehouse and
repurchase facilities, to fund new originations and purchases of mortgage loans
before securitization or sale. We currently have four committed lines with
aggregate borrowing capacity of $840.0 million and one $100.0 million
uncommitted warehouse line. Our existing facilities expire between February 2000
and October 2000 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
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 BUSINESS OPERATIONS MAY BE INTERRUPTED IF WE EXPERIENCE UNEXPECTED YEAR
2000 PROBLEMS.

    Many existing computer systems and software products do not properly
recognize dates after December 31, 1999. This Year 2000 problem could result in
data corruption, system failures or disruptions of operations. We are subject to
potential Year 2000 problem affecting our products and services, our internal
systems and the systems of third parties on whom we rely. As part of our overall
systems enhancement program, we are using both internal and external resources
to identify, correct, reprogram or

                                       30
<PAGE>
replace, and test our systems for Year 2000 compliance. It is anticipated that
all of our Year 2000 compliance efforts will be completed on time. We use
third-party equipment, software and content that may not be Year 2000 compliant.
Although we have received assurances from third parties that they are Year 2000
compliant, we generally do not independently verify their Year 2000 compliance.
If third parties on whom we rely are not Year 2000 compliant, our business could
be adversely affected later this year.

    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 significant decline in long-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.

    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.

    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, including fixed initial rate,
mortgage loans in a securitization trust 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 would
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.

    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

                                       31
<PAGE>
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 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

                                       32
<PAGE>
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 correspondent and broker programs depend 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 September 30, 1999, 21.0% and 11.3% 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 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.

                                       33
<PAGE>
    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 and private investors arising from, among other things,
losses that are claimed to have been incurred as a result of alleged breaches of
fiduciary obligations, misrepresentations, errors and omissions of 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 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

                                       34
<PAGE>
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 October 27, 1999, Capital Z beneficially owned senior preferred stock
representing 46.3% of our combined voting power in the election of directors and
76.6% of the combined voting in all matters other than the election of
directors. Representatives or nominees of Capital Z have five seats on our nine
person Board of Directors, and Capital Z has the continuing right to appoint
four directors as current members' terms expire. 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.

                                       35
<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 annual meeting of stockholders on September 13, 1999
      which meeting was adjourned to September 24, 1999.

(b)   The following directors were elected at the annual meeting to serve
      one-year terms:

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

      The following director was elected at the annual meeting to serve a
      three-year term:

      Eric C. Rahe

      The following directors continued in office after the annual meeting:

      George W. Coombe (resigned from the Board effective November 1, 1999)
      Neil B. Kornswiet
      Georges C. St. Laurent
      Cary H. Thompson

(c)   At the annual meeting, stockholders voted on (1) the amendment of the
      Company's Certificate of Incorporation to increase the Company's
      authorized common stock by 350,000,000 shares to an aggregate of
      400,000,000 shares ("Common Stock Proposal"); (2) the amendment of the
      Company's Certificate of Incorporation to increase the Company's authorize
      preferred stock by 199,000,000 shares to 200,000,000 shares ("Preferred
      Stock Proposal"); (3) an amendment to the Company's Certificate of
      Incorporation with respect to the Series B Convertible Preferred Stock and
      Series C Convertible Preferred Stock to change to September 30, 1999 the
      date by which the amendments to the Certificate of Incorporation for the
      increase in the authorized common stock and authorized preferred stock
      were required to be approved to avoid an increase in the dividend rate on
      such series from 6.5% to 15% ("Preferred Stock Amendment Proposal");
      (4) the amendment to the Company's Certificate of Incorporation to effect
      a 1,000-for-1 forward stock split of the Company's Series B Convertible
      Preferred Stock and Series C Convertible Preferred Stock outstanding as of
      Septmber 13, 1999 ("Stock Split"); (5) the election of five Series B
      Directors (6) the election of one Class III Common Stock Director;
      (7) the ratification of the

                                       36
<PAGE>
      appointment of Ernst & Young LLP as the Company's independent accountants
      for the fiscal year ended June 30, 1999. The results of the voting were as
      follows:

<TABLE>
<CAPTION>
                                                                                                  BROKER
                                                             VOTES                                 NON-
         MATTER                               VOTES FOR     AGAINST    WITHHELD    ABSTENTIONS    VOTES
         ------                              -----------   ---------   ---------   -----------   --------
         <S>                                 <C>           <C>         <C>         <C>           <C>
         Common Stock Proposal (All
           Stockholders)...................   93,093,077   2,128,833          --     221,018        --
         Common Stock Proposal (Class
           Vote--Common Stockholders)......   16,343,777   2,128,833          --     221,018        --
         Preferred Stock Proposal (All
           Stockholders)...................   89,596,534   1,737,217          --     217,708        --
         Preferred Stock Proposal (Class
           Vote--Preferred Stockholders)...   76,750,000          --          --          --        --
         Preferred Stock Amendment Proposal
           (All Stockholders)..............   89,645,782   1,556,983          --     348,694        --
         Preferred Stock Amendment Proposal
           (Class Vote--Preferred
           Stockholders)...................   76,750,000          --          --          --        --
         Stock Split (All Stockholders)....   89,416,650   1,838,704          --     296,105        --
         Stock Split (Class Vote--Preferred
           Stockholders)...................   76,750,000          --          --          --        --
         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 III Common Stock Director
           (Eric C. Rahe)..................  104,196,425          --   1,085,460          --        --
         1999 Stock Option Plan............   88,762,858   2,462,365          --     326,236        --
         Auditors..........................  104,463,122     622,062          --     196,701        --
</TABLE>

Item 5. Other Information--None

Item 6. Exhibits and Reports on Form 8-K

(a)   Exhibits: See Exhibit Index

(b)   During the quarter ended September 30, 1999, the Company filed (i) a
      Current Report on Form 8-K on July 8, 1999 (earliest event reported
      July 1, 1999), reporting information under Item 5 with respect to a
      financing facility based on servicing advances; (ii) a Current Report on
      Form 8-K on August 31, 1999 (earliest event reported August 26, 1999),
      reporting information under Item 5 with respect to the notification of the
      Company's rights offering; (iii) a Current Report on Form 8-K on
      September 10, 1999 (earliest event reported September 3, 1999), reporting
      information under Item 5 with respect to the Company's fiscal year-end
      results.

                                       37
<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/ DAVID A. SKLAR
                                                            -----------------------------------------
                                                            David A. Sklar
                                                            Executive Vice President-Finance and
Date: November 15, 1999                                     Chief Financial and Accounting Officer
</TABLE>

                                       38
<PAGE>
                                 EXHIBIT INDEX

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

 10.26       (e)        Third Amendment to Amended and Restated Master Repurchase
                        Agreement Governing Purchase and Sales of Mortgage Loans,
                        dated as of November 1, 1999, between Aames Capital
                        Corporation and Lehman Commercial Paper, Inc.

 10.27       (f)        Amendment No. 2 to Guaranty, dated as of September 1, 1999,
                        between Aames Financial Corporation and Greenwich Capital
                        Financial Products, Inc.

 10.28       (d)        Second Amendment to Master Repurchase Agreement and
                        Guaranty, dated as of September 27, 1999, between Aames
                        Capital Corporation, the Company and Bank of America, N.A.

 11                     Computation of Per Share Earnings

 27.1                   Financial Disclosure Schedule
</TABLE>

                                       39