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Table of Contents

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

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FORM 10-Q







|(Mark One)                                             |                                                                                               
|------------------------------------------------------ | ----------------------------------------------------------------------------------------------
|ý                                                      | QUARTERLY REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|                                                       |                                                                                               
|For the
      quarterly period ended December 31, 2002
|or                                                    
|                                                       |                                                                                               
|o                                                      | TRANSITION REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|                                                       |                                                                                               
|For the transition
      period from 
      to        
|                                                      
|COMMISSION FILE NUMBER 0-13660                        
|                                                       |                                                                                               
|                                                      



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


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

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

At February 12, 2003, Registrant had 6,594,157 shares of common
  stock outstanding.

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

|                |  |                                                                                                                                |    | 
|--------------- |  | ------------------------------------------------------------------------------------------------------------------------------ | -- | 
|                |  | PART
        I - FINANCIAL INFORMATION                                                                                         |    | 
|                |  |                                                                                                                                |    | 
|Item 1.         |  | Financial
      Statements                                                                                                     | 2  | 
|                |  |                                                                                                                                |    | 
|                |  | Condensed Consolidated Balance Sheets at December 31, 2002 (Unaudited) and
      June 30, 2002 (Audited)                       | 2  | 
|                |  |                                                                                                                                |    | 
|                |  | Condensed
      Consolidated Income Statements for the three and six months ended December
      31, 2002 and 2001 (Unaudited) | 3  | 
|                |  |                                                                                                                                |    | 
|                |  | Condensed
      Consolidated Statements of Cash Flows for the six months ended December
      31, 2002 and 2001 (Unaudited)    | 4  | 
|                |  |                                                                                                                                |    | 
|                |  | Notes
      to Condensed Consolidated Financial Statements (Unaudited)                                                         | 5  | 
|                |  |                                                                                                                                |    | 
|Item
      2.   |  | Management's
      Discussion and Analysis of Financial Condition and Results of Operations                                    | 8  | 
|                |  |                                                                                                                                |    | 
|Item
      3.   |  | Quantitative
      and Qualitative Disclosures About Market Risk                                                               | 8  | 
|                |  |                                                                                                                                |    | 
|Item
      4.   |  | Controls and Procedures                                                                                                        | 42 | 
|                |  |                                                                                                                                |    | 
|                |  |                                                                                                                                |    | 
|                |  | PART
        II - OTHER
        INFORMATION                                                                                    |    | 
|                |  |                                                                                                                                |    | 
|Item
      1.   |  | Legal Proceedings                                                                                                              | 43 | 
|                |  |                                                                                                                                |    | 
|Item
      2.   |  | Changes in Securities                                                                                                          | 44 | 
|                |  |                                                                                                                                |    | 
|Item
        3. |  | Defaults
      Upon Senior Securities                                                                                          | 44 | 
|                |  |                                                                                                                                |    | 
|Item
        4. |  | Submission
      of Matters to a Vote of Security Holders                                                                      | 44 | 
|                |  |                                                                                                                                |    | 
|Item
        5. |  | Other
      Information                                                                                                        | 45 | 
|                |  |                                                                                                                                |    | 
|Item
      6.   |  | Exhibits
      and Reports on Form 8 K                                                                                         | 45 | 
|                |  |                                                                                                                                |    | 
|                |  | Signature
      Page                                                                                                           | 47 | 
|                |  |                                                                                                                                |    | 
|                |  | Certifications                                                                                                                 | 48 | 



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Table of Contents

Item 1. Financial Statements

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

December 31, 2002(Unaudited)
     June 30, 2002(Audited)**ASSETS**Cash and cash equivalents
     $   13,686,000
        
     $   17,391,000Loans
        held for sale, at lower of cost or market
      
      628,319,000

      
      462,068,000Accounts receivable
     56,408,000
        
     61,276,000Residual
        interests, at estimated fair value
      
      151,756,000

      
      197,297,000Mortgage servicing rights, net
     1,457,000
        
     2,920,000Equipment
        and improvements, net
      
      9,828,000

      
      10,936,000Prepaid and other
     14,779,000
        
     14,710,000Total
        assets
      
      $ 876,233,000

      
      $ 766,598,000**LIABILITIES
          AND STOCKHOLDERS' EQUITY**Borrowings
     $ 200,111,000
        
     $ 263,970,000Revolving
        warehouse and repurchase facilities
      
      543,557,000

      
      383,119,000Accounts payable and accrued expenses
     36,967,000
        
     36,005,000Accrued
        dividends on convertible preferred stock
      
      43,618,000

      
      37,763,000Income taxes payable
     8,571,000
        
     8,556,000Total
        liabilities
      
      832,824,000

      
      729,413,000Commitments and contingenciesStockholders' equity:Series A Preferred Stock, par value $0.001 per share; 500,000 sharesauthorized; none outstanding
     --
        
     --Series B
        Convertible Preferred Stock, par value $0.001 per share;29,704,000
        shares authorized; 26,704,000 shares outstanding
      
      27,000

      
      27,000Series C Convertible Preferred Stock, par value $0.001 per share;61,230,000 shares authorized; 20,178,000 and 20,186,000 sharesoutstanding
     20,000
        
     20,000Series D
        Convertible Preferred Stock; par value $0.001 per share;108,566,000
        shares authorized; 60,019,000 and 60,020,000 sharesoutstanding
      
      60,000

      
      60,000Common Stock, par value $0.001 per share; 400,000,000 shares authorized;6,592,000 and 6,482,000 shares outstanding
     7,000
        
     6,000Additional
        paid-in capital
      
      418,110,000

      
      418,027,000Retained deficit
     (374,815,000
        )
     (380,955,000
        )Total
        stockholders' equity
      
      43,409,000

      
      37,185,000Total liabilities and stockholders' equity
     $ 876,233,000
        
     $ 766,598,000 See accompanying notes
    to condensed consolidated financial statements.


Page 2

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Table of Contents

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


|                                                | Three
      Months Ended
      December 31, | Six
      Months Ended
      December 31,
|----------------------------------------------- | ------------------------------------------- | -----------------------------------------
|                                                |                                             | ******2002**                             
|Revenue:                                        |                                            
|Gain
      on sale of loans                     |                                             | $ 32,527,000                             
|Write-down
      of residual interests          |                                             | (31,923,000                              
|Origination
      fees                          |                                             | 14,315,000                               
|Loan
      servicing                            |                                             | 2,329,000                                
|Debt
      extinguishment income                |                                             | 26,005,000                               
|Interest                                        |                                             | 20,743,000                               
|                                                |                                             |                                          
|Total
      revenue, including                  |                                             |                                          
|write-down
      of residual                    |                                             |                                          
|interests                                       |                                             | 63,996,000                               
|                                                |                                             |                                          
|                                                |                                             |                                          
|Expenses:                                       |                                            
|Personnel                                       |                                             | 35,655,000                               
|Production                                      |                                             | 5,652,000                                
|General
      and administrative                |                                             | 10,919,000                               
|Interest                                        |                                             | 8,122,000                                
|                                                |                                             |                                          
|Total
      expenses                            |                                             | 60,348,000                               
|                                                |                                             |                                          
|Income
      before income taxes                |                                             | 3,648,000                                
|Provision
      for income taxes                |                                             | 1,568,000                                
|                                                |                                             |                                          
|Net
      income                                |                                             | $   2,080,000                            
|                                                |                                             |                                          
|Net
      income (loss) to common stockholders: |                                            
|Basic                                           |                                             | $        47,000                          
|                                                |                                             |                                          
|Diluted                                         |                                             | $        47,000                          
|                                                |                                             |                                          
|Net
      income (loss) per common share:       |                                            
|Basic                                           |                                             | $            0.01                        
|                                                |                                             |                                          
|Diluted                                         |                                             | $            0.01                        
|                                                |                                             |                                          
|Weighted
      average number of shares         |                                            
|outstanding:                                    |                                            
|Basic                                           |                                             | 6,513,000                                
|                                                |                                             |                                          
|Diluted                                         |                                             | 6,513,000                                
|                                                |                                             |                                          
|                                                |                                             |                                          



See accompanying
  notes to condensed consolidated financial statements.

Page 3

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

|                                                                                      | Six
      Months Ended
           December 31,
|------------------------------------------------------------------------------------- | ----------------------------------------------
|                                                                                      |                                               
|Operating
      activities:                                                           |                                               
|Net
      income                                                                      |                                               
|Adjustments
      to reconcile net income to net cash provided by (used in) operating |                                               
|activities:                                                                           |                                               
|Depreciation
      and amortization                                                   |                                               
|Noncash
      gain on sale of loans                                                   |                                               
|Write-down
      of residual interests                                                |                                               
|Accretion
      of residual interests                                                 |                                               
|Debt
      extinguishment income                                                      |                                               
|Mortgage
      servicing rights amortized                                             |                                               
|Changes
      in assets and liabilities:                                              |                                               
|Loans
      held for sale originated                                                  |                                               
|Proceeds
      from sale of loans held for sale                                       |                                               
|Decrease
      (increase) in:                                                         |                                               
|Accounts
      receivable                                                             |                                               
|Residual
      interests                                                              |                                               
|Prepaid
      and other                                                               |                                               
|Increase
      (decrease) in:                                                         |                                               
|Accounts
      payable and accrued expenses                                           |                                               
|Income
      taxes payable                                                            |                                               
|                                                                                      |                                               
|Net cash
      provided by (used in) operating activities                             |                                               
|                                                                                      |                                               
|Investing
      activities:                                                           |                                               
|Purchases
      of equipment and improvements                                         |                                               
|                                                                                      |                                               
|Net cash
      used in investing activities                                           |                                               
|                                                                                      |                                               
|                                                                                      |                                               
|Financing
      activities:                                                           |                                               
|Reduction
      in borrowings:                                                        |                                               
|Mandatory
      sinking fund payment                                                  |                                               
|Other
      principal redemptions                                                     |                                               
|Proceeds
      from issuance of common stock from exercise of options                 |                                               
|Net
      increase (reduction) in revolving warehouse and repurchase                  |                                               
|facilities                                                                            |                                               
|                                                                                      |                                               
|Net cash
      provided by (used in) financing activities                             |                                               
|                                                                                      |                                               
|Net decrease
      in cash and cash equivalents                                       |                                               
|Cash
      and cash equivalents at beginning of period                                |                                               
|                                                                                      |                                               
|Cash
      and cash equivalents at end of period                                      |                                               
|                                                                                      |                                               

See accompanying notes
    to condensed consolidated financial statements.


Page 4

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Table of Contents

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

Note 1: Basis of Presentation

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

The  condensed  consolidated  financial  statements  include  the  accounts  of the Company and all of its
subsidiaries  after  eliminating  all  significant  intercompany  transactions  and reflect  all normal,  recurring
adjustments  which are, in the  opinion of  management,  necessary  to present a fair  statement  of the results of
operations of the Company in conformity  with  accounting  principles  generally  accepted in the United States for
the interim  periods  reported.  The  results of  operations  for the  Company  for the three and six months  ended
December 31, 2002 are not necessarily indicative of the results expected for the full fiscal year.

At  December  31,  2002,  Specialty  Finance  Partners  (SFP),  a  partnership  controlled  by Capital Z
Financial  Services  Fund, II, L.P.,  a Bermuda  partnership  (together  with SFP,  "Capital Z") owned  convertible
preferred  stock  representing  approximately  90.1% of the  Company's  combined  voting  power in the  election of
directors  and  approximately  44.8% of the  combined  voting  power in all  matters  other  than the  election  of
directors.  Representatives or nominees of Capital Z have five of the nine seats on the Board of Directors,  and as
current  members'  terms  expire,  Capital Z has the  continuing  right to  appoint  and elect four  directors  and
nominate one additional  director.  As a result of its  beneficial  ownership and Board  representation,  Capital Z
has, and will continue to have, sufficient power to determine the Company's direction and policies.

Note 2: Residual Forward Sale Facility with Related Party

On August 31,  2000, the Company entered into a Residual Forward Sale Facility (the  Residual  Facility),
amended on September 30, 2002, with Capital Z  Investments, L.P.,  a Bermuda  partnership  (CZI), an affiliate of
Capital Z, the  Company's  largest  shareholder.  Pursuant to the terms of the Residual  Facility,  the Company may
sell up to  $75.0 million  of its residual  interests  for cash in future  securitizations  through the earliest of
(i) March 31,  2003,  (ii) the  full  utilization  of  the  $75.0 million  Residual  Facility  amount,  or  (iii) a
termination  event, as defined in the Residual  Facility.  The sales of the residual interests are without recourse
to the Company. At December 31, 2002, the capacity remaining under the Residual Facility was $4.4 million.

During the three  months  ended  December  31,  2002,  the Company  completed a  securitization  of $315.0
million  of  mortgage  loans and sold the  residual  interest  created  therein to CZI for $8.6  million  under the
Residual  Facility.  During the three months ended  September 30,  2002,  the Company did not dispose of any of its
loans through a securitization  nor did the Company use the Residual  Facility.  At December 31, 2002, the capacity
remaining under the Residual Facility was $4.4 million.

Page 5

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In connection with obtaining the Residual  Facility,  the Company incurred and capitalized $3.3 million of
costs, of which $3.0 million  related to a facility fee paid to CZI. The  capitalized  costs are being amortized to
gain on sale of loans based upon the ratio of the dollar  amount of the  residual  interests  sold to CZI under the
Residual  Facility to the total  Residual  Facility  amount.  During the three  months  ended  December  31,  2002,
amortization of total capitalized  Residual Facility costs charged to gain on sale was $0.4 million,  substantially
all of which related to the facility fee paid to CZI. There was no  amortization of capitalized  Residual  Facility
costs  during the three  months ended  December  31,  2001,  as the Company did not utilize the  Residual  Facility
during that period.  During the six months  ended  December 31, 2002 and 2001,  amortization  of total  capitalized
Residual  Facility  costs  charged  to gain on sale of loans  was $0.6  million  and  $0.2  million,  respectively,
substantially all of which related to the amortization of the facility fee paid to CZI.

Note 3: Subsidiary Guarantors

In
  October 1996, the Company completed an offering of its 9.125% Senior Notes due
  November 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.
  Aames Financial Corporation 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.

Aames Financial  Corporation has guaranteed amounts  outstanding under revolving  warehouse and repurchase
agreements pursuant to which certain of its operating  subsidiaries are the contractual  borrowers.  The guarantees
are full, complete and unconditional.

Note 4: Debt Extinguishment Income

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

Page 6

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Note 5: Per Share Data

The  following  table sets forth  information  regarding  basic and diluted  net income  (loss) per common
share for the three and six months  ended  December  31,  2002 and 2001  (amounts  in  thousands,  except per share
data):

|                                                  | Three
      Months EndedDecember 31, | Six
      Months EndedDecember 31,
|------------------------------------------------- | ------------------------------------ | ----------------------------------
|                                                  | **2002**                             | **2001**                          
|Basic
      net income (loss) per common share:   |                                      |                                   
|Net
      income                                  |                                      | $
        2,080                   
|Less:
      Accrued dividends on Series B, C      |                                     
|and
      D Convertible Preferred Stock           |                                      | (2,033                            
|                                                  |                                      |                                   
|Basic
      net income (loss) to common           |                                     
|stockholders                                      |                                      | $    
        47                  
|                                                  |                                      |                                   
|Basic
      weighted average number of            |                                     
|common
      shares outstanding                   |                                      | 6,513                             
|                                                  |                                      |                                   
|Basic
      net income (loss) per common          |                                     
|share                                             |                                      | $
         0.01                   
|                                                  |                                      |                                   
|                                                  |                                      |                                   
|Diluted
      net income (loss) per common share: |                                     
|Basic
      net income (loss) to common           |                                      |                                   
|stockholders                                      |                                      | $    
        47                  
|Plus:
      Accrued dividends on Series B, C      |                                     
|and
      D Convertible Preferred Stock           |                                      | --                                
|Diluted
      net income (loss) to common         |                                     
|stockholders                                      |                                      | $  
          47                  
|                                                  |                                      |                                   
|Basic
      weighted average number of            |                                     
|common
      shares outstanding                   |                                      | 6,513                             
|Plus
      incremental shares from assumed        |                                     
|conversions
      of:                             |                                     
|Series
      B, C and D Convertible               |                                      |                                   
|Preferred
      Stock                             |                                      | --                                
|                                                  |                                      |                                   
|Diluted
      weighted average number of          |                                      |                                   
|common
      shares outstanding                   |                                      | 6,513                             
|                                                  |                                      |                                   
|Diluted
      net income (loss) per common        |                                      |                                   
|share                                             |                                      | $
         0.01                   
|                                                  |                                      |                                   

Page 7

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During
  the three months ended December 31, 2002, the Company had 5.5% Convertible Subordinated
  Debentures and Series B, C and D Convertible Preferred Stock which, if converted
  into common shares, would result in 87.0 million of additional common shares
  and which could potentially dilute net income (loss) per common share. These
  common shares were not included in the computation of diluted net income per
  common share during the three months ended December 31, 2002 as the conversions
  were not assumed due to their antidilutive effect.

During
  the six months ended December 31, 2002, the conversion of the 5.5% Convertible
  Subordinated Debentures into $1.5 million of common shares was not assumed due
  to their antidilutive effect.

Item
  2. Management's Discussion and Analysis of Financial Condition and Results of
  Operations. The following discussion and analysis of the financial condition
  and results of operations of Aames Financial Corporation and its subsidiaries
  (the "Company") should be read in conjunction with the Company's Condensed Consolidated
  Financial Statements included in Item 1 of this Form 10-Q.

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

Special Note Regarding Forward-Looking Information

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,  and,
(f) the  Company's  business and liquidity  strategies.  The  stockholders  of the Company are cautioned not to put
undue reliance on such forward-looking  statements.  Such  forward-looking  statements are not guarantees of future
performance  and involve risks and  uncertainties.  Actual results may differ  materially  from those  projected in
this Report, for the reasons,  among others,  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.
Readers should  carefully  review the factors referred to above and the other documents the Company files from time
to time with the Securities  and Exchange  Commission,  including the Company's  Annual Report on Form 10-K for the
fiscal year ended June 30,  2002, the quarterly  reports on Form 10-Q  filed by the Company during the remainder of
fiscal 2003 and any current reports on Form 8-K filed by the Company.

Page 8

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Recent Events

As previously disclosed, on December 13, 2002, the Company consummated its offer
  to exchange its newly issued 5.5% Convertible Subordinated Debentures due 2012
  for its outstanding 5.5% Convertible Subordinated Debentures due 2006. The Company
  exchanged $49.6 million of the outstanding Existing Debentures that were tendered
  and issued an equal amount of New Debentures. On December 23, 2002, the Company
  redeemed $19.8 million, or 40.0%, of the principal amount outstanding on the
  New Debentures through a scheduled mandatory sinking fund payment. On December
  31, 2002, SFP forgave $25.0 million principal balance of its New Debentures
  due it from the Company. At December 31, 2002, amounts outstanding under the
  Existing Debentures and the New Debentures were $64.4 million and $4.8 million,
  respectively.

In its  regular  quarterly  review of its  retained  residual  interests  during  the three  months  ended
December 31,  2002,  the Company  considered  the  historical  performance  of its  securitized  pools,  the recent
prepayment  experience of loans in those pools,  the credit loss performance of loans in those  securitized  pools,
other industry data and economic factors  prevailing in the U.S.  economy.  As a result of the review,  the Company
increased its credit loss  assumptions,  increased its annual  prepayment rate  assumptions and changed its forward
interest rate curve  assumptions used in estimating the fair value of the retained residual  interests.  The effect
of these  changes in  estimates  resulted in a $31.9  million  write-down  to the carrying  value of the  Company's
residual interests during the three and six months ended December 31, 2002.

During the three  months  ended  December  31,  2002,  the  Company  recorded  net income of  $2.1 million
compared to $1.5 million during the comparable three month period a year ago.

Total  revenue  during the three months ended  December 31, 2002  increased  $9.4 million to $64.0 million
from $54.6 million  during the  comparable  period a year ago. Total revenue during the three months ended December
31, 2002 includes  $26.0  million of debt  extinguishment  income.  The $26.0 million is comprised of $25.0 million
related to SFP's  forgiveness of its holdings of the Company's 5.5%  Convertible  Subordinated  Debentures due 2012
and $1.0 million of debt  extinguishment  income  recognized in connection  with the  Company's  extinguishment  of
$11.5  million of its 9.125%  Senior Notes at a discount from par for $10.5 million of cash during the three months
ended  December 31, 2002.  Total  revenue  during the three  months ended  December 31, 2002 also  includes a $31.9
million write-down to the Company's residual interests.  Excluding the $26.0 million of debt extinguishment  income
and the  $31.9 million  write-down to the residual  interests  during the three months ended December 31, 2002, and
the $17.0 million  residual  interest  write-down  during the three months ended  December 31,  2001, total revenue
decreased  $1.7 million  during the three months ended  December 31,  2002 from total revenue during the comparable
three  month  period in 2001.  The $1.7  million  decrease in total  revenue was  comprised  of  decreases  of $1.1
million,  $0.7 million and $0.6 million in loan  servicing,  origination  fees and interest  income,  respectively,
partially offset by a $0.7 million increase in gain on sale of loans.

Total expenses  during the three months ended  December 31, 2002  increased $8.1 million to  $60.3 million
from $52.2  million  during the three months ended  December  31, 2001.  The increase in expenses  during the three
months ended  December 31, 2002 from expenses  reported  during the comparable  period a year ago was  attributable
primarily to increases of $6.6  million,  $2.2 million and $0.8 million in  personnel,  general and  administrative
and production expenses, respectively, partially offset by a $1.4 million decrease in interest expense.

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During the three months ended  December 31,  2002, the Company  completed a $315.0 million  securitization
of  mortgage  loans  and the  Company  sold  for  $8.6  million  of  cash  the  residual  interest  created  in the
securitization to an affiliate.

On November 22, 2002,  the Company  renewed an existing  $300.0  million  committed  revolving  repurchase
facility with a new maturity date of May 15, 2003.

Subsequent  to the three months ended  December 31, 2002,  the Company  extinguished  an  additional  $3.0
million of the 9.125% Senior Notes at a discount from par.

General

The
  Company is a consumer finance company primarily engaged in the business of originating,
  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 since 1954.

The Company originates loans through its retail and broker production  channels.  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 by the Company,  which include fixed and adjustable  rate loans,  are generally used by
borrowers to consolidate  indebtedness  or to finance other  consumer  needs and, to a lesser  extent,  to purchase
homes.

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

Increasing  the Amount and Value of Its Loan  Production. The Company  intends to increase the size of its overall
originations  while  improving  its value.  The Company's  traditional  retail  branch  network,  the National Loan
Centers,  its traditional  regional broker office network and its broker  telemarketing and Internet  platforms are
all targeted as sources of growth.  In its  traditional  retail branch  network,  the Company intends to drive this
growth by: improving market penetration in its existing markets,  introducing new products,  improving its customer
service levels and branch  efficiencies.  The Company's  traditional  regional  broker office network plans to grow
by:  improving the service levels it offers to its current group of  independent  mortgage  brokers,  continuing to
build new  relationships  with  independent  mortgage  brokers  throughout the country and introducing new products
that meet the needs of brokers'  customer bases. The Company's  National Loan Centers,  which produce loans through
affiliations  with sites on the Internet,  and its growing broker  telemarketing  and Internet channel are planning
to increase their originations by: identifying  additional  non-traditional lead sources,  increasing their product
offerings and expanding their overall operations.  Additionally,  the Company plans to continue using its knowledge
of current  customer needs and the historical  performance of its loans to improve the value of its products to its
retail customers and independent mortgage brokers while maximizing the resale value of its production.

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Reducing  Its Cost of  Production.  The  Company  intends  to  reduce  its cost of  production  by  leveraging  its
investment in its  origination  technology  platform,  increasing the amount of automation in the loan  origination
process and increasing the scale of the  origination  business  driving fixed costs down as a percentage of overall
production  costs.  The Company will also  continue  its  on-going  effort of  identifying  opportunities  for cost
reductions across all levels of the Company's operations.

Maximizing Its  Opportunities  in Loan Servicing.  The Company intends to maximize  opportunities in loan servicing
taking into  consideration the Company's overall  profitability  and liquidity  position.  Retaining loan servicing
generates  servicing  income and related  fees over the life of the loans in the  servicing  portfolio  compared to
receiving  cash up front in  selling  servicing  rights to third  parties in  connection  with whole loan sales and
securitizations.  During the year ending  June 30,  2003, the Company  expects to maximize  profitability  and cash
flow by selling all of its loan production  through whole loan sales and  securitizations  on a servicing  released
basis.  All of the Company's loan  disposition  during the three months ended December 31, 2002 were on a servicing
released basis.  The Company's  total loan servicing  portfolio at December 31, 2002 increased  $166.1 million,  or
7.2%,  to $2.5 billion from the balance of the total  servicing  portfolio at June 30, 2002,  due to an increase in
loans  serviced on an interim  basis,  but declined  $289.9  million,  or 10.5%,  from $2.8 billion at December 31,
2001.  Mortgage loans in  securitization  trusts serviced  in-house  declined  $239.4 million,  or 20.1%, to $952.6
million at December 31, 2002 from $1.2 billion at June 30, 2002,  and declined by $528.9  million,  or 35.7%,  from
$1.5 billion at December 31,  2001 due to existing loan servicing run-off,  in the form of principal  amortization,
prepayments and liquidations.

Maintaining  Adequate  Liquidity  and Access to the Capital  Markets.  The Company  intends to continue to increase
and  diversify  its funding  sources by adding more  warehouse  or  repurchase  facilities,  expanding  its current
funding  relationships  and  identifying  new  funding  sources.  The  Company  intends  to  continue  to fund  its
operations  by disposing of loans for cash in the whole loan market,  monetizing  residual  interests,  selling the
mortgage  servicing  rights  and the  rights  to  prepayment  fees on the  mortgage  loans in its  securitizations,
monetizing advances and developing new sources for working capital.

The strategies discussed above contain  forward-looking  statements.  Such statements are based on current
expectations  and are subject to risks,  uncertainties  and  assumptions,  including those discussed under "Item 7.
Management's  Discussion and Analysis of Financial  Condition and Results of  Operations--Risk  Factors" included in
the  Company's  Annual  Report on Form 10-K for the fiscal year ended  June 30,  2002.  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.

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Loan Origination.  The Company  originates loans through its retail and broker production  channels.  The Company's
retail  channel  produces  loans  through its  traditional  retail  branch  network and through the  National  Loan
Centers,  which  produce loans  primarily  through  affiliations  with sites on the  Internet.  The Company  ceased
purchasing  mortgage  loans in bulk  during the fiscal year ended  June 30,  1999.  The  Company's  broker  channel
produces loans through its  traditional  regional broker office network  (including  purchasing a limited amount of
closed loans from mortgage  brokers on a continuous or "flow"  basis) and by sourcing  loans through  telemarketing
and the Internet.  The Company  generally  underwrites the loans it originates to its underwriting  guidelines and,
to a lesser extent, to the underwriting  guidelines of its investors in the secondary markets,  and appraises every
loan it  originates.  The  underwriting  of a mortgage loan to be originated  by the Company  generally  includes a
review of the completed loan package,  including the loan  application,  a current  appraisal,  a preliminary title
report and a credit report.

The following  table sets forth the number of retail  branches,  National Loan Centers and broker  offices
operated by the Company at December 31, 2002 and 2001:

|                                          | December
      31,
|----------------------------------------- | ------------------
|                                          |                   
|                                          |                   
|Traditional
      retail branches         |                   
|National
      Loan Centers               |                   
|Traditional
      regional broker offices |                   



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



|                                             | Three
      Months Ended
              December 31, | Six Months
      EndedDecember 31,
|-------------------------------------------- | --------------------------------------------------- | ----------------------------------
|                                             |                                                     | **2002**                          
|Retail:                                      |                                                     |                                   
|Traditional
      retail branch network      |                                                     | $   372,542                       
|National
      Loan Centers                  |                                                     | 143,691                           
|                                             |                                                     |                                   
|Total
      retail                           |                                                     | 516,233                           
|                                             |                                                     |                                   
|                                             |                                                    
|Broker:                                      |                                                    
|Traditional
      regional office network(1) |                                                     | 702,928                           
|Telemarketing
      and Internet             |                                                     | 87,574                            
|                                             |                                                     |                                   
|Total
      broker                           |                                                     | 790,502                           
|                                             |                                                     |                                   
|                                             |                                                    
|Total
      production                       |                                                     | $1,306,735                        
|                                             |                                                     |                                   



|(1) |  | Includes
      the purchase of closed loans on a flow basis from correspondents of $1.0
      million and $5.6 million during the three
      months ended December 31, 2002 and 2001, respectively, and $3.7 million
      and $13.6 million during the six months ended
      December 31, 2002 and 2001, respectively.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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Total  Loan  Production.  Total  loan  production  during  the  three  months  ended  December 31,  2002  increased
$337.5 million,  or 34.8% to $1.3 billion from $969.2 million  reported during the three months ended September 30,
2002, and increased  $472.1 million,  or 56.6%,  over the $834.6 million of total loan  production  reported during
the three months  ended  December 31, 2001.  Total loan  production  during the six months ended  December 31, 2002
increased  $718.3  million,  or 46.1%,  to $2.3  billion over the $1.6 billion of total  mortgage  loan  production
reported  during the six months  ended  December 31, 2001.  Total loan  production  during the three and six months
ended  December 31,  2002 increased from the comparable three and six month periods in 2001 due to the continuation
of the favorable  mortgage  interest rate  environment and to the issuance of new uniform  underwriting  guidelines
throughout the Company designed to improve the Company's  competitive  position and to provide greater underwriting
consistency  among the retail and broker  origination  channels.  The overall interest rate environment  during the
three and six months ended  December 31, 2002 was  generally  more  favorable  than during the three and six months
ended December 31, 2001.

In
  the event that a less favorable mortgage interest rate environment evolves during
  calendar year 2003, it could reduce the overall demand for mortgage loans generally
  and demand for the Company's mortgage loan products. While no assurances can
  be made, should that event occur the Company expects to be responsive to such
  changes in market conditions.

Retail  Production.  The  Company's  total  retail  production  was $516.2  million  during the three  months ended
December 31,  2002, an increase of $64.0  million,  or 14.2%,  over the $452.2  million  reported  during the three
months ended  September 30, 2002,  and an increase of $77.9  million,  or 17.8%,  over the $438.3  million of total
retail  production  during the three  months ended  December 31,  2001.  During the six months  ended  December 31,
2002,  total  retail  production  increased  $177.0  million,  or 22.4%,  over the $791.4  million of total  retail
production during the six months ended December 31, 2001.

Traditional Retail Branch Network

The Company's  traditional  retail branch  network  production  was $372.5 million during the three months
ended December 31, 2002, an increase of $50.6  million,  or 15.7%,  over the $321.9  million of traditional  retail
branch  network  production  reported  during the three  months  ended  September  30,  2002,  and an  increase  of
$25.1 million,  or 7.2%, over the $347.4 million  reported during the three months ended December 31, 2001.  During
the six months ended December 31,  2002,  traditional retail branch network production  increased $38.6 million, or
5.9%, to $694.5 million from $655.9 million during the comparable six month period a year ago.

National Loan Centers

Mortgage loan  production  from the  Company's  National Loan Centers,  which  primarily  originate  loans
through  affiliations with certain Internet sites,  increased $13.4 million,  or 10.3% to $143.7 million during the
three months ended  December 31, 2002 from $130.3  million  during the three months ended  September 30, 2002,  and
increased $52.9 million over the $90.8 million of loan  production  reported during the three months ended December
31, 2001.  During the six months ended  December 31,  2002,  mortgage loan production  from the Company's  National
Loan Centers  increased  $138.5  million,  or 102.2%,  to $274.0  million from $135.5 million during the six months
ended  December 31,  2001.  The increase in the National Loan Centers'  production  during the three and six months
ended  December 31, 2002 over their  production  levels during the three and six months ended December 31, 2001 was
due, in part, to the fact that the December 2002 periods'  production  included loan  production from the Company's
second  National  Loan Center that  commenced  operations  in November  2001 and did not  contribute  materially to
production in the 2001 periods.

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Broker  Production.  The Company's total broker  production  increased $273.6 million,  or 52.9%, to $790.5 million
during the three  months  ended  December  31, 2002 over the $516.9  million of total  broker  production  reported
during the three months ended September 30, 2002, and increased  $394.2 million,  or 99.5%, over the $396.3 million
reported  during the three months ended  December 31,  2001.  During the six months ended December 31, 2002,  total
broker mortgage loan  production  increased  $541.2  million,  or 70.6%, to $1.3 billion from $766.2 million during
the  comparable six month period in 2001. The increase in the Company's  total broker  production  during the three
and six months ended  December  31, 2002 was  attributable  to improved  market  penetration  due to changes in the
Company's  underwriting  guidelines  which improved  product  availability  in the wholesale  channel and increased
utilization by brokers of the Company's broker  telemarketing  and Internet  platform.  In addition,  the Company's
broker production benefited from the continuation of the favorable mortgage interest rate environment.

Traditional Regional Broker Office Network

Mortgage loan  production  from the  traditional  regional  broker office  network during the three months
ended  December 31, 2002 was $702.9  million  which  increased  $237.7  million and $333.8  million over the $465.2
million and  $369.1 million,  respectively,  of traditional  regional broker office network  production  during the
three months ended  September 30, 2002 and December 31, 2001,  respectively.  During the six months ended  December
31, 2002,  mortgage loan  production  through the Company's  traditional  regional  broker office  network was $1.2
billion,  an increase of $452.8 million,  or 63.3%, over the $715.3 million of traditional  regional broker network
production during the comparable six month period in 2001.

Broker Telemarketing and Internet

Broker  mortgage loan  production  through  telemarketing  and the Internet was $87.6  million  during the
three months ended  December 31, 2002, an increase of $35.8  million,  or 69.1%,  over the  $51.8 million  reported
during the three  months  ended  September  30,  2002,  and an increase  of  $60.4 million  over the  $27.2 million
reported during the three months ended December 31, 2001.

During the six months ended December 31, 2002, broker mortgage loan production  through  telemarketing and
the Internet  was $139.4  million,  an increase of $88.5  million over the $50.9  million  reported  during the six
months ended December 31, 2001.

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

In  a  securitization,   the  underlying  securities  are  generally  overcollateralized  by  the  Company
depositing  mortgage  loans with a  principal  balance  exceeding  the  principal  balance of the  securities.  The
upfront  overcollateralization  required in  securitizations  is generally cash flow negative to the Company in the
early years of the  securitization.  The Company has used the Residual  Facility to reduce the  negative  cash flow
aspects of  securitization  and to provide another source of cash to the Company through periodic sales of residual
interests  for cash.  The  Company  completed  a  securitization  and sold for $8.6  million  of cash its  residual
interest  through the Residual  Facility  during the three months ended December 31, 2002. The initial  capacity of
the  Residual  Facility  was $75.0  million and at  December 31,  2002 the  remaining  capacity  under the Residual
Facility was $4.4 million.  As a result,  the Company's  evaluation of loan  disposition  strategies  going forward
will include the negative cash flow considerations  associated with the upfront  overcollateralization  required in
securitizations compared to the positive cash flow considerations of whole loan sales for cash.

The following  table sets forth certain  information  regarding  the Company's  securitizations  and whole
loan sales during the three and six months ended December 31, 2002 and 2001 (in thousands):

|                                       | Three
      Months Ended
           December 31, | Six
      Months Ended
             December 31,
|-------------------------------------- | ------------------------------------------------ | ------------------------------------------------
|                                       |                                                  | **2002**                                        
|Loans
      pooled and sold in         |                                                 
|securitizations                        |                                                  | $   314,958                                     
|Whole
      loan sales                 |                                                  | 860,969                                         
|                                       |                                                  |                                                 
|Total
      loans securitized and sold |                                                  | $1,175,927                                      
|                                       |                                                  |                                                 

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.  If delinquencies or losses exceed certain  established  limits, as applicable,  the
credit-enhancement  aspects  of  the  trust  are  triggered.  In a  securitization  credit-enhanced  by a  monoline
insurance  policy,  any further losses  experienced in excess of the  established  overcollateralization  amount by
holders of the senior  interests  in the related  trust will be paid by the  insurer  under such  policy.  To date,
there have been no claims on any monoline  insurance  policy obtained in any of the Company's  securitizations.  In
a  senior/subordinated  structure,  losses in excess of the  overcollateralization  amount  generally are allocated
first to the holders of the subordinated interests and then to the holders of the senior interests of the trust.

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During the three months ended  December  31,  2002,  total  mortgage  loan  dispositions  increased  $340.7
million to $1.2 billion from $835.2 million of total loan  dispositions  during the three months ended December 31,
2001.  Total  mortgage  loan  dispositions  during the six months ended  December 31,  2002 were $2.1  billion,  an
increase of $515.8 million over the $1.6 billion of total mortgage loan  dispositions  during the comparable period
a year ago. The  Company's  increased  loan  dispositions  during the three and six months ended  December 31, 2002
over the  comparable  periods a year ago are primarily  related to its increased  mortgage loan  production  levels
during the fiscal 2003 periods over mortgage loan production levels during the comparable fiscal 2002 periods.

The
  Company maximizes opportunities in its loan disposition transactions by selling
  its loan production through a combination of securitizations and whole loan
  sales, depending on market conditions, profitability and cash flows. During
  the three months ended December 31, 2002, the Company securitized $315.0 million
  of mortgage loans, an increase of $80.0 million from the $235.0 million of mortgage
  loans securitized during the comparable three month period a year ago. Whole
  loan sales for cash during the three months ended December 31, 2002 were $861.0
  million, an increase of $260.8 million over the $600.2 million of whole loan
  sales during the three months ended December 31, 2001. During the six months
  ended December 31, 2002, the Company securitized $315.0 million of mortgage
  loans compared to $410.0 million during the comparable period a year ago. During
  the six months ended December 31, 2002, the Company continued to be more reliant
  on whole loan sales selling $1.8 billion of mortgage loans in whole loan sales
  for cash compared to $1.2 billion of whole loan sales for cash during the six
  months ended December 31, 2001. The Company relied more heavily upon whole loan
  sales over securitizations as its loan disposition strategy during the three
  and six months ended December 31, 2002 and 2001, due to attractive pricing conditions
  prevailing in the whole loan markets during such periods and, to a lesser extent,
  due to the Company's strategy of retaining capacity in the Residual Facility
  until its expiration in March 2003. Future adverse changes to the current interest
  rate environment or in the current economic climate, as well as, the expected
  full utilization of the Residual Facility during the three months ended March
  31, 2003, could affect the mix in the composition of the Company's strategy
  of selling loans in the form of securitizations or whole loan sales in future
  periods.

Loan Servicing.  The Company's  servicing  portfolio consists of mortgage loans securitized prior to the year ended
June 30,  2000 for which the Company  retained  servicing,  and loans serviced on an interim  basis,  consisting of
loans held for sale and loans  subserviced  for others on an  interim  basis.  Servicing  includes  collecting  and
remitting  loan  payments,  accounting  for principal  and  interest,  contacting  delinquent  borrowers,  managing
borrower defaults and liquidating  foreclosed  properties.  It is the Company's strategy to maximize  opportunities
in loan  servicing.  As a means to  maximize  cash  flow  from  securitizations,  the  Company  sells  for cash the
servicing  rights in  securitizations.  Moreover,  the Company does not retain servicing on loans it sells in whole
loan sale markets.

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The  following  table sets forth  certain  information  regarding  the  Company's  servicing  portfolio at
December 31, 2002 and 2001 and June 30, 2002 (dollars in millions):

|                                                       | December
      31, | June
        30, |     
|------------------------------------------------------ | ------------------ | ---------------- | ----
|                                                       |                    | **2002**         | ****
|Mortgage
      loans serviced                          |                   
|Loans
      in securitization trusts serviced in-house |                    | $     952.6      |     
|Loans
      serviced on an interim basis               |                    | 1,417.0          |     
|                                                       |                    |                  |     
|Serviced
      in-house                                |                    | 2,369.6          |     
|Loans
      in securitization trusts                   |                   
|subserviced
      by others                            |                    | 104.5            |     
|                                                       |                    |                  |     
|Total
      servicing portfolio                        |                    | $   2,474.1      |     
|                                                       |                    |                  |     
|Percentage
      serviced in-house                     |                    | 95.8             | %   
|                                                       |                    |                  |     

The  Company  has not added any new loans to the  servicing  portfolio  (excluding  loans  serviced  on an
interim  basis) since  January 1, 2000 due to the Company's  sale of all of its mortgage  loan  production in whole
loan sales and  securitizations  with servicing  released since that time. The Company's total servicing  portfolio
at December 31, 2002 declined  $289.9 million,  or 10.5%, from  $2.8 billion at December 31, 2001,  reflecting loan
servicing  portfolio  runoff,  in the form of  principal  amortization,  prepayments  and  liquidations  during the
quarter.  The Company's  portfolio of mortgage loans in  securitization  trusts serviced  in-house  declined $528.9
million,  or 35.7%,  to $952.6  million at December 31, 2002 from $1.5  billion at December  31, 2001.  In general,
the  Company's  portfolio  of mortgage  loans in  securitization  trusts may be  adversely  affected by the current
mortgage  interest  rate  environment  which  could  accelerate  prepayment  activity.  This  decline  of  loans in
securitization  trusts serviced  in-house was partially  offset by an increase of $288.4 million to $1.4 billion of
mortgage loans serviced by the Company on an interim basis at  December 31,  2002 from $1.1 billion at December 31,
2001. The increase was due to increased loan production  during the six months ended  December 31,  2002.  Mortgage
loans  serviced on an interim  basis  includes  loans held for sale and loans sold by the Company but  servicing on
such loans has not yet been transferred to new servicers by the buyers.

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

The Company has historically experienced delinquency rates that are higher than
  those prevailing in this industry due to the inclusion of lower credit grade
  mortgage loans in the securitization trusts. Delinquent loans (by principal
  balance) decreased at December 31, 2002 to $191.5 million from $222.1 million
  at June 30, 2002 and $317.9 million at December 31, 2001. The delinquency rate
  at December 31, 2002 was 7.7% compared to 9.6% at June 30, 2002 and 11.5% at
  December 31, 2001. The delinquency rate at December 31, 2002 declined from the
  delinquency rate at June 30, 2002, due to the fact that loans in the Company's
  portfolio of mortgage loans in securitized trusts, which contains the majority
  of deliquent loans, became a smaller part of the Company's total servicing portfiolio.
  A decline in delinquencies generally reduces the Company's servicing advance
  obligations. The Company expects the delinquency rate to continue to decline
  as the Company's portfolio of mortgage loans in securitization trusts (and the
  number of delinquent loans in such trusts) continues to decline and become a
  smaller component of the Company's total servicing portfolio.

Page 17

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Delinquent
  loans in the Company's portfolio of loans in securitization trusts (serviced
  in-house and by others) were $175.3 million, $207.1 million and $286.4 million
  at December 31, 2002, June 30, 2002 and December 31, 2001, respectively. The
  dollar amount of such delinquent loans when expressed as a percentage of the
  Company's portfolio of loans in securitization trusts (serviced in-house and
  by others) was 16.6%, 15.7% and 17.5% at December 31, 2002, June 30, 2002 and
  December 31, 2001, respectively. Delinquent loans in the Company's portfolio
  of loans serviced on an interim basis were $16.2 million, $15.0 million and
  $31.5 million at December 31, 2002, June 30, 2002 and December 31, 2001, respectively.
  The dollar amount of such delinquent loans when expressed as a percentage of
  the Company's portfolio of loans serviced on an interim basis was 1.1%, 1.5%
  and 2.8% at December 31, 2002, June 30, 2002 and December 31, 2001, respectively.

During the six months ended  December 31, 2002,  losses on loan  liquidations  decreased to  $20.0 million
from $35.0 million  during the  comparable  six month period a year ago primarily due to the decrease in the number
of loans  liquidated.  Substantially  all of the  foreclosures  and  liquidations  handled by the Company  occur in
connection  with the  Company's  portfolio of mortgage  loans in  securitization  trusts.  The Company  expects net
losses on loan  liquidations to continue to decline as the Company's  portfolio of mortgage loans in securitization
trusts (and the number of foreclosed loans in such trusts) continues to decline.

Credit  losses  incurred  by the  Company  on  liquidations  of loans were  disproportionately  higher for
correspondent  loans  purchased  in bulk and  included  in the  Company's  earlier  trusts  than  experienced  upon
liquidations of loans  originated in the Company's  retail and broker  production  channels.  During the six months
ended  December 31, 2002,  approximately  30.9% of losses on  liquidation  were from losses on  disposition of real
estate collateral for bulk purchased  correspondent  loans. In turn, bulk purchased  correspondent  loans comprised
approximately  21.1% of the  Company's  servicing  portfolios  when  measured  at July 1,  2002.  The  Company  has
discontinued  the bulk  purchase of  correspondent  loans,  increased  its focus on higher  credit  grade loans and
discontinued  certain  broker  programs.  However,  because  the  Company  has been  selling  its more  recent loan
production in whole loan sales for cash and in  securitizations  on a servicing  released basis, the effects of the
changes in its loan  origination  strategies  have  generally  not  affected  delinquencies  and  losses  caused by
mortgage  loans  remaining in its  securitized  trusts from the old  programs.  The bulk  purchased  portfolio  may
continue to contribute  disproportionately  to loan losses during the current fiscal year. Further,  current market
conditions,  and recent  regulatory  changes in certain  states have  resulted in the  tightening  of  underwriting
guidelines by many 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  believes  that  continuance  of these factors  might  contribute  to the Company's  loan losses during the
current fiscal year.

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

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

|                                                         | At
        or During the
|-------------------------------------------------------- | ------------------------
|
|
|
|                                                         |                         
|                                                         |                         
|Percentage
      of dollar amount of delinquent loans to |                         
|loans
      serviced (period end)(1)(2)(3)(4)            |                         
|One month                                                |                         
|Two months                                               |                         
|Three
      or more months:                              |                         
|Not foreclosed(5)                                        |                         
|Foreclosed(6)                                            |                         
|                                                         |                         
|Total                                                    |                         
|                                                         |                         
|Percentage
      of dollar amount of loans foreclosed    |                         
|during
      the period to servicing portfolio(4)(8)     |                         
|                                                         |                         
|Number
      of loans foreclosed during the period       |                         
|Principal
      amount of foreclosed loans during the    |                         
|period                                                   |                         
|Number
      of loans liquidated during the period       |                         
|Net losses
      on liquidations during the period(7)    |                         
|Percentage
      of annualized losses to servicing       |                         
|portfolio(4)(8)                                          |                         
|Servicing
      portfolio at period end                  |                         



---



|(1) |  | Delinquent
      loans are loans for which more than one payment is due.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|(2) |  | The delinquency and
      foreclosure percentages are calculated on the basis of the total dollar
      amount of mortgage loans serviced by the Company, and any subservicers as
      of the end of the periods indicated.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|(3) |  | At December 31, 2002,
      the dollar volume of loans delinquent more than 90 days in 7 of the Company's
      22 real estate mortgage investment conduit (REMIC) trusts,
      exceeded the permitted limit in the related pooling and servicing agreements.
      All of the aforementioned REMIC trusts plus 8 additional REMIC trusts have
      also exceeded certain loss limits. At December 31, 2002, the unpaid principal
      balance of mortgage loans in the securitization trusts which exceeded the
      permitted delinquency limit was $207.0 million, or 19.6% of the total loans
      serviced (in-house and subserviced) in securitization trusts. At December
      31, 2002, the unpaid principal balance of mortgage loans in the securitization
      trusts where certain loss limits have been exceeded was $708.0 million,
      or 67.0% of the total loans serviced (in-house and subserviced) in securitization
      trusts.
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|(4) |  | The servicing portfolio
      used in the percentage calculations includes loans serviced by the Company
      on an interim basis of $1.4 billion, $1.1 billion, $991.0 million, $722.0
      million and $281.0 million for the periods ended December 31, 2002, December
      31, 2001, June 30, 2002, June 30, 2001 and June 30, 2000, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       















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|(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
      at period end.                                                                                                                                                            
|    |  |                                                                                                                                                                                                                                                                                     
|(7) |  | Represents losses,
      net of gains, on properties sold through foreclosure or other default management
      activities during the period indicated.                                                                                                                             
|    |  |                                                                                                                                                                                                                                                                                     
|(8) |  | The percentages were
      calculated to reflect the dollar volume of loans foreclosed or annualized
      losses, as the case may be, to the average dollar amount of mortgage loans
      serviced by the Company and any subservicers during the related periods
      indicated.









Critical Accounting Policies

The Company retained the residual  interests created in all of the $7.0 billion of  securitizations  which
closed prior to and during the year ended June 30, 2000.

The Company did not retain  residual  interests  created in any of the $585.0  million and $1.2 billion of
securitizations  which closed  during the years ended June 30, 2002 and 2001,  respectively,  as all such  residual
interests  were sold for cash under the Residual  Facility.  During the three months ended  December 31,  2002, the
Company  completed a $315.0  million  securitization  of  mortgage  loans and sold for cash the  residual  interest
created therein to CZI under the Residual Facility.

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

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

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

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The Company  determines  the present value of the cash flows at the time each  securitization  transaction
closes  using  certain  estimates  made by  management  at the time the loans are sold.  These  estimates  include:
(i) future rate of prepayment;  (ii) credit  losses; and  (iii) discount  rate used to calculate present value. The
future cash flows represent  management's best estimate.  Management monitors the performance of the loans, and any
changes in the  estimates  are  reflected  in earnings.  There can be no assurance of the accuracy of  management's
estimates.

The Company's  retained  residual  interests are recorded at estimated fair value and are marked to market
through a charge  (or  credit) to  earnings.  On a  quarterly  basis,  the  Company  reviews  the fair value of its
retained residual  interests by analyzing its prepayment,  credit loss and discount rate assumptions in relation to
its actual experience and current rates of prepayment and credit loss prevalent in the industry.  Additionally,  on
a quarterly basis, the Company  evaluates the effects,  if any, that increasing or decreasing  interest rates might
have on its retained residual  interests.  The Company may adjust the value of its retained  residual  interests or
take a charge to earnings,  as  appropriate,  to reflect a valuation or write-down of its residual  interests based
upon the actual  performance  of the  Company's  retained  residual  interests  as  compared to the  Company's  key
assumptions and estimates used to determine fair value.  Although  management believes that the assumptions used to
estimate the fair values of its retained  residual  interests are  reasonable,  there can be no assurance as to the
accuracy of the assumptions or estimates.

Rate of Prepayment.  The estimated life of the  securitized  loans depends on the assumed  annual  prepayment  rate
which is a function of estimated  voluntary  (full and partial) and  involuntary  (liquidations)  prepayments.  The
prepayment rate represents  management's  expectations of future  prepayment rates based on prior and expected loan
performance,  the type of loans in the relevant  pool (fixed or  adjustable  rate),  the  production  channel which
produced the loan, prevailing interest rates, the presence of prepayment  penalties,  the loan-to-value ratios, the
credit grades of the loans  included in the  securitization  and other industry data. The rate of prepayment may be
affected by a variety of economic and other factors  including,  but not limited to, a declining  mortgage interest
rate environment.

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

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

The following table summarizes certain  information about the  securitization  trusts in which the Company
had retained a residual interest at December 31, 2002 and June 30, 2001 (dollars in thousands):

|                                                                                           | December
        31, 2002 | June30,
        2002
|------------------------------------------------------------------------------------------ | ------------------------- | --------------------
|                                                                                           |                           |                     
|Aggregate
      principal balances of securitized loans at the time of the securitizations |                           | $7,016,205          
|Outstanding
      principal balances of securitized loans                                  |                           | $1,057,058          
|Outstanding
      principal balances of pass-through certificates or bonds of the          |                          
|securitization
      trusts                                                                |                           | $   896,759         
|Weighted
      average coupon rates of:                                                    |                          
|Securitized
      loans                                                                    |                           | 10.21
      %       
|Pass-through
      certificates or bonds                                                   |                           | 5.49
      %        



Certain
  historical data and key assumptions and estimates used by the Company in its
  December 31, 2002 and June 30, 2002 review of the residual interests retained
  by the Company were the following:



|                                                                                      | December
      31, 2002 | June 30,
      2002     
|------------------------------------------------------------------------------------- | ----------------------- | ------------------------
|Prepayments:                                                                          |                         |                         
|Actual
      weighted average annual prepayment rate, as a percentage of outstanding  |                        
|principal
      balances of securitized loans                                         |                        
|Fixed
      rate loans                                                                |                         | 29.9
        %          
|Adjustable
      rate loans                                                           |                         | 33.1
        %          
|Estimated
      annual prepayment rates, as a percentage of outstanding principal     |                        
|balances
      of securitized loans:                                                  |                        
|Fixed
      rate loans                                                                |                         | 13.0
        % to 41.7 %
|Adjustable
      rate loans                                                           |                         | 17.0
        % to 52.0 %
|Estimated
      weighted average life of securitized loans                            |                         | 2.2
        years       
|Credit
      losses:                                                                  |                        
|Actual
      credit losses to date, as a percentage of original principal balances of |                        
|securitized
      loans                                                               |                         | 5.0
        %           
|Future
      estimated credit losses, as a percentage of original principal balances  |                        
|of
      securitized loans                                                            |                         | 0.8
        %           
|Total
      actual and estimated prospective credit losses, as a percentage of        |                        
|original
      principal balance of securitized loans                                 |                         | 5.8
        %           
|Total
      actual credit losses to date and estimated prospective credit losses      |                        
|(dollars
      in thousands)                                                          |                         | $
        403,833       
|Weighted
      average discount rate                                                  |                         | 13.4
        %          

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

The total  actual  and  estimated  credit  losses,  as a  percentage  of  original  principal  balance  of
securitized loans in each  securitization  trust,  ranged from 2.0% to 9.5% at December 31,  2002 and compared to a
range of from 2.0% to 9.3% at  June 30,  2002.  Actual and  estimated  credit  losses vary  between  securitization
trusts due to differing credit quality,  i.e.,  credit grade,  production  channel and other factors  considered by
the Company when evaluating credit loss estimates.

The Company has previously  disclosed that if actual credit losses and actual  prepayment  trends exceeded
the Company's  credit loss and  prepayment  rate  assumptions,  it would be required to adjust  earnings to reflect
changes in its credit loss and prepayment  assumptions.  In its regular quarterly review of its residual  interests
during the three  months  ended  December 31,  2002,  the Company  considered  the  historical  performance  of its
securitized  pools, the recent prepayment  experience of loans in those pools, the credit loss performance of loans
in previously  securitized pools,  other industry data and economic factors  prevailing in the U.S. economy.  While
the Company's  credit losses on loan  liquidations  declined during the three months ended  December 31,  2002, the
Company  experienced  higher than expected loss severity on loan  liquidations.  Therefore,  the Company  increased
its credit loss assumptions used to estimate the fair value of the retained  residual  interests.  During the three
months  ended  December 31,  2002,  the  Company  experienced  higher  than  planned  prepayment  activity  in  its
securitization  trusts  due to the  low  mortgage  interest  rate  environment  prevailing  in the  United  States.
Accordingly,  the Company has changed its annual  prepayment rate  assumptions used in estimating the fair value of
the  retained  residual  interests.  The  Company  also  adjusted  the  underlying  forward  interest  rate  curves
assumptions  used to estimate the fair value of the retained  residual  interests.  The effect of these  changes in
estimates  resulted in a $31.9 million  write-down to the carrying value of the Company's residual interests during
the three and six months ended December 31, 2002.

During the three months  ended  December 31,  2001,  the Company  experienced  higher than  expected  loss
severity in loan liquidations.  Additionally,  the outstanding  balances of loans in various degrees of delinquency
were higher than  anticipated at December 31, 2001. In light of the actual credit loss  experience  incurred in the
liquidation  of certain  mortgage  loans in the  securitization  trusts and other factors  considered,  the Company
increased  its credit loss  assumptions  used to estimate the fair value of its residual  interests.  The effect of
these changes in estimates  resulted in a $17.0 million  write-down to the carrying value of the Company's residual
interests  during the three  months  ended  December 31,  2001.  During the six months  ended  December  31,  2001,
write-downs to the Company's residual assets were $27.0 million.

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

During the three and six months ended  December 31,  2002 and 2001, all of the Company's loan dispositions
were on a servicing released basis; therefore, the Company did not capitalize any mortgage servicing rights.

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Prior to June 30, 2000, the Company  capitalized  mortgage  servicing rights based on an allocation of the
carrying amount of the loans  securitized on a servicing  retained basis.  Mortgage  servicing rights are amortized
in proportion to and over the period of estimated future servicing income.

The Company  periodically  reviews its mortgage  servicing rights for impairment,  based on estimated fair
value.  The Company  determines  fair value  based on the  present  value of  estimated  future net cash flows.  In
estimating future net cash flows, the Company  determines future servicing  revenues less future servicing expenses
over the expected life of the loans.  Servicing  revenues  include  contractual  servicing fees and other ancillary
income such as  prepayment  and late fees.  Servicing  expenses  consist of direct  servicing  costs and  allocated
indirect  expenses  relating to the servicing  operations.  Servicing  expenses include an estimate for the cost to
carry advances to the securitization  trusts,  based on the amount of advances which have been made,  advances that
are  expected  to be made and the period of time that the  advances  are  expected to be  outstanding.  The Company
uses a 15% discount rate to calculate the present value of the  estimated  future net cash flows.  At  December 31,
2002 and 2001, there were no valuation allowances on mortgage servicing rights.

The Company sold to an  independent,  third party loan servicer for cash the MSRs on the loans included in
the  $315.0 million  securitization  transaction  which closed  during the three and six months ended  December 31,
2002. Accordingly, no MSR was capitalized by the Company during the three and six months ended December 31, 2002.

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Results of Operations - Three and Six Months Ended December 31, 2002 and 2001

The  following  table sets forth  information  regarding  the  components  of the  Company's  revenue  and
expenses for the three and six months ended December 31, 2002 and 2001 (dollars in thousands):

|                                             | Three
      Months EndedDecember 31, | Six Months
      EndedDecember 31,
|-------------------------------------------- | ------------------------------------ | ----------------------------------
|                                             |                                      | **2002**                          
|Revenue:                                     |                                     
|Gain
      on sale of loans                  |                                      | $ 32,527                          
|Write-down
      of residual interests       |                                      | (31,923                           
|Origination
      fees                       |                                      | 14,315                            
|Loan
      servicing                         |                                      | 2,329                             
|Debt
      extinguishment income             |                                      | 26,005                            
|Interest                                     |                                      | 20,743                            
|                                             |                                      |                                   
|                                             |                                     
|Total
      revenue, including write-down of |                                     
|residual
      interests                     |                                      | 63,996                            
|                                             |                                      |                                   
|                                             |                                     
|Expenses:                                    |                                     
|Personnel                                    |                                      | 35,655                            
|Production                                   |                                      | 5,652                             
|General
      and administrative             |                                      | 10,919                            
|Interest                                     |                                      | 8,122                             
|                                             |                                      |                                   
|                                             |                                     
|Total
      expenses                         |                                      | 60,348                            
|                                             |                                      |                                   
|                                             |                                     
|Income
      before provision for income     |                                     
|taxes                                        |                                      | 3,648                             
|Provision
      for income taxes             |                                      | 1,568                             
|                                             |                                      |                                   
|                                             |                                     
|Net
      income                             |                                      | $   2,080                         
|                                             |                                      |                                   

Revenue

General.  Total revenue  during the three months ended December 31, 2002 increased  $9.4 million  to  $64.0 million
from  $54.6 million  during the  comparable  three  month  period a year ago.  The  increase  in total  revenue was
primarily  due to $26.0  million of debt  extinguishment  income.  The $26.0  million is comprised of $25.0 million
related to SFP's  forgiveness of $25.0 million of the Company's 5.5% Convertible  Subordinated  Debentures due 2012
and $1.0 million of debt  extinguishment  income recognized in connection with the Company's  extinguishment,  at a
discount  from par, of $11.5  million of its 9.125%  Senior Notes for $10.5 million of cash during the three months
ended  December 31,  2002.  Total revenue  during the three months ended  December 31,  2002 also  benefited from a
$0.7 million  increase in gain on sale of loans over amounts  reported during the comparable 2001 periods which was
more than offset by decreases of $1.1 million,  $0.7 million and $0.6 million in loan servicing,  origination  fees
and interest income,  respectively.  Total revenue during the three months ended December 31,  2002 also includes a
$31.9 million  write-down  to the  Company's  retained  residual  interests.  Excluding  the $26.0  million of debt
extinguishment  income and the $31.9 million  write-down to the retained residual interests during the three months
ended  December  31,  2002,  and the $17.0  million  residual  interest  write-down  during the three  months ended
December 31,  2001,  total  revenue  during the three months ended  December 31,  2002  decreased  $1.7 million  to
$69.9 million from $71.6 million of total revenue during the same three month period a year ago.

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Total  revenue  during the six  months  ended  December 31,  2002 was $131.4  million  compared  to $107.7
million  during the six months ended  December 31,  2001.  The $23.7 million  increase in total revenue  during the
six months ended  December 31,  2002 over total revenue  during the  comparable  six month period a year ago is due
primarily to higher gain on sale of loans and debt  extinguishment  income,  partially  offset by the write-down to
the residual  interest coupled with decreases in interest income,  loan servicing and origination  fees.  Excluding
the $31.9 million  write-down to the residual  interests  and the $27.1 million of debt  forgiveness  income during
the six months ended December 31, 2002 and the $27.0 million  write-down to the residual  interests  during the six
months ended  December 31, 2001,  total  revenue  increased  $1.5 million to $136.2  million  during the six months
ended December 31, 2002 over $134.7 million of total revenue during the same period a year ago.

Gain on Sale of Loans.  Gain on sale of loans during the three months  ended  December 31, 2002 was $32.5  million,
an increase of $0.7 million over the $31.8  million  gain on sale of loans  reported  during the three months ended
December 31, 2001. The increase in gain on sale of loans resulted from the $340.7  million,  or 40.8%,  increase in
total loan  dispositions  during the three months ended December 31, 2002 over total loan  dispositions  during the
same period in 2001,  partially  offset by lower gain rates  recognized  by the Company in its whole loan sales for
cash during the three  months ended  December  31, 2002 when  compared to gain on sale rates during the same period
in 2001.  During the three  months  ended  December  31, 2002 and 2001,  the  Company  relied on a  combination  of
securitizations  and whole loan sales for cash as its loan  disposition  strategy,  based upon the Company's review
of market conditions,  profitability and cash flow  requirements.  During the three months ended December 31, 2002,
of the $1.2 billion of total loan  dispositions,  $315.0 million and $860.9 million of mortgage loans were disposed
of in securitizations  and whole loan sales for cash,  respectively.  In comparison,  during the three months ended
December 31, 2001,  of the $835.2  million of total loan  dispositions  by the Company,  $235.0  million and $600.2
million of mortgage loans were disposed in securitizations and whole loan sales for cash, respectively.

Included  in gain on sale of loans  during the three  months  ended  December  31,  2002 was $8.6  million
realized  by the  Company  on  its  sale  to an  affiliate  for  cash  of  the  residual  interest  created  in the
securitization  during the period.  During the three months ended  December 31, 2001,  the Company did not sell any
residual  interests to its  affiliate.  During the three months ended  December 31, 2002 and 2001,  gain on sale of
loans includes $4.1 million and $3.1 million,  respectively,  of cash proceeds from the sale of mortgage  servicing
rights and the rights to the prepayment fee income sold to unaffiliated  independent  mortgage servicing  companies
related to the  securitization  which  closed  during the  periods.  Gain on sale of loans  during the three months
ended  December 31,  2002 was reduced by  amortization  of  capitalized  costs  related to  obtaining  the Residual
Facility of $0.4 million  substantially  all of which related to the  amortization of the facility fee paid to CZI.
At December 31,  2002,  remaining  capitalized  costs related to the Residual Facility left to be amortized against
gain on sale of loans was $0.2 million, substantially all of which related to the facility fee paid to CZI.

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During the three  months  ended  December 31,  2002 and 2001,  the  Company,  as it has from time to time,
entered  into  forward  interest  rate swap  agreements  designed to  mitigate  interest  rate  exposure to certain
mortgage loans in its inventory and pipeline in anticipation of closing loan  disposition  transactions  during the
period.  Gain on sale of loans during the three months ended  December 31,  2002  included  charges of $2.8 million
of  derivative  related  losses and was comprised of $1.8 million of losses on hedge  positions  that closed during
the period and $1.0  million of hedge losses to mark open hedge  positions at December 31, 2002 to their  estimated
fair  value.  Gain on sale of loans  during the three  months  ended  December  31, 2001  included  charges of $1.3
million of derivative  related  losses and was comprised of $0.5 million of losses on hedge  positions  that closed
during the period and $0.8  million of hedge  losses to mark open hedge  positions  at  December 31,  2001 to their
estimated fair value.

Gain on sale of loans  increased  $8.5 million,  or 15.3%,  to $64.1  million  during the six months ended
December 31, 2002 from $55.6 million  during the six months ended  December 31, 2001.  The increase in gain on sale
of loans during the six months ended  December 31, 2002 over gain on sale of loans during the  comparable six month
period a year ago  resulted  from the $515.8  million  increase  in total loan  dispositions  during the six months
ended December 31, 2002 over loan dispositions  levels reported during the comparable period a year ago,  partially
offset by the lower gain on sale rates  realized  by the  Company on whole loan sales  during the six months  ended
December 31,  2002 compared to the gain on sale rates for whole loan sales during the  comparable  six month period
a year ago.  During  the six  months  ended  December  2002 and  2001,  the  Company  relied  on a  combination  of
securitizations  and whole loan sales for cash as its loan  disposition  strategy based on the Company's  review of
market  conditions,  profitability  and cash flow  needs and the  Company's  desire  to retain  capacity  under the
Residual  Facility.  Whole loan sales for cash increased  $610.8 million,  or 52.2%, to $1.8 billion during the six
months ended  December 31, 2002 from $1.2 billion  during the  comparable  six month period a year ago. The Company
continued to rely on the Residual  Facility  during the six months ended  December 31, 2002, but to a lesser extent
than during the comparable six month period a year ago. Loan  securitizations  declined $95.0 million, or 23.2%, to
$315.0  million  during the six months ended December 31, 2002 from $410.0 million during the comparable six months
period in 2001.

Gain on sale of loans during the six months ended  December  31, 2002 and 2001  includes  $8.6 million and
$17.5 million,  respectively,  of cash proceeds from the sale of residual  interests to an affiliate.  In addition,
gain on sale of loans  during the six months  ended  December  31,  2002 and 2001  includes  $4.1  million and $5.4
million of cash proceeds from the sale of mortgage  servicing  rights and the rights to prepayment  fee income that
were sold to unaffiliated  independent mortgage servicing companies related to securitizations  which closed during
the  periods.  Gain on sale of loans  during the six months  ended  December 31, 2002 and 2001 was reduced by $10.7
million  and $2.9  million of hedge  losses,  respectively.  Finally,  gain on sale of loans  during the six months
ended  December  31, 2002 and 2001 was reduced by the  amortization  of costs  related to  obtaining  the  Residual
Facility of $0.6 million and $0.2 million,  respectively,  substantially  all of which related to  amortization  of
remaining capitalized facility fee paid to CZI.

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Origination  Fees.  Origination  fees are  primarily  comprised  of points and other fees charged by the Company on
mortgage loans  originated by the Company's  retail channel,  partially  offset by broker  compensation,  generally
referred to as yield spread  premium,  paid by the Company to mortgage loan brokers in connection  with broker loan
production.  Retail  points and fees are  primarily a function of the volume of mortgage  loans  originated  by the
Company  through its retail  channel and the points  charged on such loans.  Yield spread  premiums are generally a
function of the volume of  mortgage  loans  originated  by the  Company  through  its broker  channel and the yield
spread  premium  paid on such loans by the  Company to brokers.  Origination  fees  during the three  months  ended
December 31, 2002  declined to $14.3 million from $15.0  million  during the three months ended  December 31, 2001.
The $0.7 million,  or 4.7%,  decrease in origination  fees during the three months ended December 31, 2002 from the
amount  reported  during the  comparable  three  month  period a year ago is  attributable  to an increase in yield
spread  premiums  paid in the  broker  channel  due to the  $394.2  million,  or 99.5%,  increase  in  broker  loan
production  during the quarter  ended  December 31,  2002,  partially  offset by a $1.7 million  increase in retail
points and fees.

Retail  points and fees were $17.8 million and $16.1  million  during the three months ended  December 31,
2002 and 2001,  respectively.  The $1.7  million  increase in retail  points and fees during the three months ended
December 31,  2002 over the amount during the comparable  three month period in 2001 was  attributable to the $77.9
million,  or 17.8%,  increase in total retail production during the 2002 period over total retail production during
the  comparable  2001 period.  However,  retail points and fees,  expressed as a percentage of volume  decreased to
3.45% from 3.67% during the three months ended December 31,  2002 and 2001,  respectively,  due to a decline in the
average  points and fees charged by the retail  channel.  As  previously  reported,  the Company has,  primarily in
response to  competitive  factors and, to a lesser extent,  due to recent  regulatory  changes,  reduced points and
fees charged to customers in numerous  states and for certain  loan  products.  The Company  expects to continue to
reduce points and fees charged in certain  states in response to pending  legislation  and  regulation  restricting
points and fees in certain states.

Yield spread  premium,  net of points and fees,  was $4.0 million and $1.2 million during the three months
ended  December 31,  2002 and 2001,  respectively.  The $2.8 million  increase in yield spread  premium  during the
three months ended  December 31, 2002 over yield spread  premium during the three months ended December 31, 2001 is
attributable  primarily  to the $394.2  million,  or 99.5%,  increase in total  broker  production  during the 2002
period over total broker production  during the 2001 period and, to a lesser extent,  due to an increase in average
yield spread  premium paid during the December 2002 quarter  compared to the December  2001  quarter.  Yield spread
premium, net of points and fees,  expressed as a percentage of total broker production,  was 0.51% and 0.30% during
the three months ended December 31, 2002 and 2001, respectively.

Origination  fees during the six months  ended  December  31, 2002 was $27.7  million,  a decrease of $1.2
million,  or 4.2%,  from the $28.9 million  reported during the six months ended December 31, 2001. The decrease in
origination  fee revenue during the six months ended December 31, 2002 from levels  reported  during the comparable
six month period a year ago is  primarily  attributable  to an increase in yield spread  premium paid by the broker
channel,  partially  offset by an increase in the points and fees charged at the time of  origination in the retail
channel.  Yield spread premium,  net of points and fees, paid by the broker channel  increased $4.8 million to $6.5
million  during the six months ended  December 31, 2002,  from $1.7 million of yield spread premium paid during the
same six month  period a year  ago.  The  increase  is  primarily  attributable  to the  increase  in total  broker
production of $541.2 million,  or 70.6%,  during the six months ended December 31, 2002 to $1.3 billion from $766.2
million  during the six months  ended  December 31,  2001 and,  to a lesser  extent,  due to an increase in average
yield spread  premium paid during the 2002 period over the 2001  period.  The increase in yield spread  premium was
partially  offset by a $3.6 million  increase to $33.5 million during the six months ended  December 31,  2002 from
$29.9  million  during  the  comparable  six month  period a year ago in  points  and fees  charged  at the time of
origination  by the  retail  channel.  The  increase  in retail  points  and fees was  attributable  to the  $177.0
million,  or 22.4%,  increase in total retail  production  during the six months ended December 31, 2002 over total
retail production  during the comparable 2001 period.  However,  retail points and fees,  expressed as a percentage
of volume decreased to 3.46% from 3.77% during the six months ended December 31,  2002 and 2001, respectively,  due
to competitive factors and recent regulatory changes.

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Yield spread premium,  net of points and fees,  paid by the broker channel  increased $4.8 million to $6.5
million  during the six months ended  December  31, 2002 from $1.7 million of yield spread  premium paid during the
same six month  period a year ago.  The  increase  in the yield  spread  premium  is  primarily  due to the  $541.2
million,  or 70.6%,  increase in total broker production during the 2002 period over total broker production during
the same period in 2001,  and, to a lesser  extent,  due to an increase in average yield spread  premium during the
six months ended  December 31,  2002 over the average yield spread premium during the six months ended December 31,
2001.  Yield spread  premium,  expressed as a percentage of total broker  production was 0.50% and 0.22% during the
six months ended December 31, 2002 and 2001, respectively.

Loan Servicing.  Loan servicing  revenue  consists of prepayment  fees, late charges and other fees retained by the
Company and  servicing  fees earned on  securitized  pools,  reduced by  subservicing  costs  related to  servicing
advance  arrangements  and amortization of the Company's MSRs. See "Critical  Accounting  Policies." Loan servicing
revenue was  $2.3 million  during the three  months  ended  December  31, 2002, a decline of $1.1 million from $3.4
million  during the  comparable  three month  period in 2001.  During the three  months  ended  December  31, 2002,
servicing,  late and prepayment fees declined  $1.7 million from amounts reported during the comparable three month
period a year ago.  The decline  was due  primarily  to the $528.9  million  decrease in the size of the  Company's
portfolio  of  mortgage  loans in  securitization  trusts  serviced  in-house  at  December  31,  2002  compared to
December 31,  2001,  together  with a  decrease  in  prepayment  fees due to the  aging  of loans in the  servicing
portfolio  beyond the term of their  prepayment  fee.  This was partially  offset by a $0.2 million  decline in MSR
amortization  expense during the three months ended  December 31,  2002 from the amount  reported  during the three
months  ended  December  31,  2001.  In  addition,   subservicing  expenses  and  related  resolution,  set-up  and
reperformance  expenses during the three months ended December 31, 2002 were  $0.1 million,  down $0.4 million from
the  $0.5 million of such expenses during the three months ended December 31, 2001. The  subservicing  expenses are
a  result  of  certain  arrangements  previously  entered  into by the  Company  designed  to  reduce  its  advance
obligations.  In the first  arrangement,  a loan servicing  company  purchased  certain advances and agreed to make
future  advances  with respect to an aggregate  $388.0 million  ($104.5 million  at December 31, 2002) in principal
amount of loans.  The loan  servicing  revenue in the quarter ended December 31, 2001 was also affected by a second
arrangement,  that has since  matured,  in which an  investment  bank  purchased  certain  advances  and  agreed to
undertake the obligation to make a substantial  portion,  but not all, of the Company's advance  obligations on its
securitization  trusts.  The  Company  expects  subservicing  expense to trend  downward  in future  periods as the
balance of loans  subserviced  declines.  The Company also expects MSR  amortization to decline as the portfolio of
mortgage loans in securitization trusts serviced in-house decreases.

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Loan  servicing  revenue  during the six months  ended  December 31, 2002  decreased  $1.3 million to $5.1
million from $6.4 million  during the six months ended  December 31, 2001 due  primarily to declines in  servicing,
late and prepayment fees  aggregating $2.9 million,  partially offset by declines in subservicing  related expenses
and  amortization  of mortgage  servicing  rights of $1.1 million and $0.5 million,  respectively.  The declines in
servicing,  late and prepayment  fees during the six months ended December 31, 2002 from the levels reported during
the six  months  ended  December  31,  2001 are due to the $528.9  million  decrease  in the size of the  Company's
portfolio of mortgage loans in  securitization  trusts serviced  in-house at December 31, 2002 compared to December
31, 2001,  together with a decrease in prepayment fees due to the aging of mortgage loans in securitization  trusts
serviced  in-house beyond the term of their prepayment fee.  Subservicing  related expenses and mortgage  servicing
amortization  are  declining  due to the  decrease in the number of loans being  subserviced  and the  portfolio of
mortgage loans in securitization trusts serviced in-house, respectively.

The  Company  has not added any new loans to the  servicing  portfolio  (excluding  loans  serviced  on an
interim  basis) since  January 1, 2000 due to the Company's  sale of all of its mortgage  loan  production in whole
loan  sales  for  cash  and   securitizations   with  servicing  released  since  that  time.   Mortgage  loans  in
securitization  trusts serviced by the Company  in-house  declined $528.9 million to $952.6 million at December 31,
2002 from $1.5 billion at December 31, 2001.  The  Company's  total loan  servicing  portfolio at December 31, 2002
decreased $289.9 million,  or 10.5%, to $2.5 billion from $2.8 billion at December 31, 2001,  reflecting the $528.9
million  runoff in  mortgage  loans in  securitization  trusts,  and loan  dispositions,  partially  offset by loan
production  during the intervening  year. The Company's loan  production,  which is included in the total servicing
portfolio,  is serviced by the Company until the loans are sold.  The Company's  servicing  portfolio will continue
to be impacted in the future by the  Company's  dispositions  of its loan  production  through whole loan sales and
securitizations  on a servicing released basis,  which has resulted in a smaller servicing  portfolio.  Future loan
servicing  revenue will be  negatively  impacted by  continuing  declines in the size of the  portfolio of mortgage
loans in  securitization  trusts,  and in  prepayment  fees due to the aging of loans in the  portfolio of mortgage
loans in  securitization  trusts past the term of any prepayment  fees on loans,  and, to a lesser  extent,  by the
costs associated with the  arrangements the Company entered into to reduce servicing  advances on mortgage loans in
securitization trusts.

Interest Income.  Interest income includes  interest on loans held for sale,  discount  accretion income associated
with the Company's  residual  interests and interest on short-term  overnight  investments.  Interest income during
the three months ended December 31, 2002 decreased by $0.6 million to  $20.7 million  from $21.3 million during the
three months ended  December 31, 2001.  Interest  income  decreased by $4.3 million to $39.4 million during the six
months ended  December 31,  2002 from $43.7 million  during the six months ended  December 31, 2001.  The decreases
in interest  income during the three and six months ended  December 31, 2002 from the amounts  reported  during the
comparable  three and six month periods a year ago was primarily due to declines of $3.6 million  and $7.6 million,
respectively,  in accretion to the Company's  residual  interests.  The Company's  residual interests were at lower
balances during the three and six months ended  December 31,  2002 when compared to residual interest levels during
the same three and six month periods a year ago.  Partially  offsetting  the  decreases in accretion  income during
the three and six months  ended  December 31, 2002 from  amounts  reported  during the same periods a year ago were
increases  of $3.0  million  and $3.3  million in  interest  income on loans held for sale during the three and six
months ended  December 31,  2002 over such interest  income levels  reported  during the comparable  periods a year
ago,  respectively.  The  increase in interest  income on loans held for sale during the three and six months ended
December 31,  2002 over the amounts  reported a year ago is  attributable to higher  outstanding  balances of loans
held for sale despite such loans having lower  weighted  average coupon rates during the three and six months ended
December 31, 2002 when compared to such balances and coupon rates during the same period a year ago.

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Expenses

General.  Total  expenses  during the three months ended  December  31, 2002 were $60.3  million  compared to $52.2
million  during the three months ended December 31, 2001.  The $8.1 million  increase in total expenses  during the
three months ended December 31, 2002 over total expenses during the comparable  period in 2001 was  attributable to
increases  of $6.6  million,  $2.2  million and $0.7  million in  personnel  expense,  general  and  administrative
expense,  and  production  expense,  respectively,  partially  offset  by a decline  of $1.4  million  in  interest
expense.  Total expenses  during the six months ended  December 31, 2002 increased  $13.1 million to $117.2 million
from $104.1 million  during the six months ended  December 31, 2001. The increase in total expenses  during the six
months ended December 31, 2002 over total  expenses  during the same six month period in 2001 was  attributable  to
increases  of  $11.9  million,  $2.6  million,  and  $2.2  million  in  personnel,   production,  and  general  and
administrative expenses, respectively, partially offset by a decline of $3.6 million in interest expense.

Personnel.  Personnel  expense  includes  salaries,  payroll  taxes  and  medical  and  other  employee  benefits.
Personnel expense also includes  commissions that are generally  related to the Company's loan origination  volume,
as retail and broker  account  executives  earn  incentives on funded  loans.  Personnel  expense  during the three
months ended  December 31, 2002 increased  $6.6 million,  or 22.7%,  to $35.7 million from $29.1 million during the
three months ended December 31, 2001.  The increase was comprised  primarily of commission  compensation  earned by
retail and broker  account  executives  of $4.0  million  during the December  2002 quarter over the December  2001
quarter  due to the $472.1  million  increase  in retail  and  broker  production  during  the three  months  ended
December 31, 2002 over such production during the three months ended December 31,  2001. Additionally, the increase
was due to $1.9 million of increased  salaries  attributable to the increased staffing levels in the Company during
the three  months  ended  December 31,  2002 over the three months  ended  December 31,  2001 due  primarily to the
acquisition  of the Company's  second  National Loan Center and, to a lesser  extent,  to other employee head count
growth.  Incentive  compensation  expense  relative to other senior  management  decreased  $0.2 million during the
three months ended December 31, 2002 from the comparable  period a year ago.  Finally,  payroll taxes,  medical and
other  benefit  costs  increased  $0.9 million  during the three  months  ended  December 31, 2002 over the expense
amount incurred during the three months ended December 31, 2001.

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Personnel  expense  during the six months  ended  December  31, 2002 was $66.9  million  compared to $55.0
million  during the six months ended December 31, 2001.  Salaries,  commissions,  bonuses and incentives  increased
$11.9 million,  or 21.6%,  during the six months ended December 31, 2002 over the amounts  reported  during the six
months ended December 31, 2001. The increase was comprised  primarily of commission  compensation  earned by retail
and broker  account  executives of $5.8 million during the six months ended  December 31,  2002 over the comparable
six month period in 2001 due to the $718.3 million,  or 46.1%,  increase in production  during the 2002 period over
production  during the 2001  period.  In addition,  the  increase  was due to $4.4  million of  increased  salaries
resulting  from  increased  staffing  levels during the six months ended  December 31, 2002 over the same period in
2001 due  primarily to the impact on head count caused by the  acquisition  of the Company's  second  National Loan
Center  and,  to a lesser  extent,  to other  employee  head count  growth.  To a lesser  extent,  the  increase in
personnel  expense  during the six months ended  December 31, 2002 over the amount  reported  during the comparable
six month period a year ago is attributable to $1.7 million of increased health,  medical,  other benefit costs and
incentive compensation awards to other employees.

Production.  Production expense,  primarily  advertising,  unreimbursed  appraisal costs, travel and entertainment,
and  unreimbursed  credit  reporting  fees  increased  $0.8 million to $5.7  million  during the three months ended
December 31, 2002 from $4.9 million  during the three months ended  December 31, 2001.  Production  expense for the
six months ended  December 31,  2002  increased $2.6 million to $11.8 million over $9.2 million during the same six
month period during 2001.  The increase in production  expense  during the three and six months ended  December 31,
2002  from the  comparable  three  and six  month  periods a year ago is due  primarily  to  increased  advertising
expenses  relative to the  Company's  increased  loan  origination  volumes  during the three and six months  ended
December  31,  2002 over  those  during  the  comparable  periods a year ago.  Production  expense  expressed  as a
percentage  of total loan  origination  volume  declined  to 0.4% for the three  months  ended  December  31,  2002
compared to 0.6% during the three  months  ended  December  31,  2001.  The decline is  attributable  to the $472.1
million,  or 56.6%,  increase in total loan  production  during the three months ended  December 31,  2002 over the
levels reported during the same period a year ago,  partially  offset by the increase in production  expense during
the three months ended  December 31,  2002 over those reported during the comparable three month period a year ago.
Production  expense  expressed  as a  percentage  of total loan  origination  volume  during  the six months  ended
December  31, 2002  decreased  to 0.5%,  compared  to 0.6%  during the  comparable  six month  period in 2001.  The
decline is attributable to the $718.3 million,  or 46.1%,  increase in total loan production  during the six months
ended  December 31,  2002 over the levels  reported  during  the same  period a year ago,  partially  offset by the
increase in  production  expense  during the six months  ended  December 31,  2002 over those  reported  during the
comparable six month period a year ago.

General and  Administrative.  General and  administrative  expenses  increased  $2.2  million to $10.9  million and
$21.6 million during both the three and six months ended  December 31,  2002,  respectively,  from $8.7 million and
$19.4  million  during the three and six months  ended  December 31, 2001,  respectively.  The increase  during the
three months ended December 31, 2002 from the comparable  three month period a year ago was primarily  attributable
to increases  in  professional,  legal and  depreciation  expenses,  partially  offset a decline in  occupancy  and
communication  expenses.  The increase  during the six months ended December 31, 2002 from the comparable six month
period in 2001 was  primarily  due to  increases  in  professional  and legal  expenses,  offset  by  decreases  in
occupancy and  communication  expenses.  General and  administrative  expenses also  includes the  amortization  of
capitalized   financing  costs  for  revolving  committed  warehouse   facilities  entered  into  by  the  Company.
Amortization  expense  related to such facilities was $0.9 million and $1.8 million during the three and six months
ended  December 31, 2002,  respectively,  compared to $1.2 million and $2.4 million during the three and six months
ended December 31, 2001, respectively.

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Interest  Expense.  Interest expense  decreased $1.4 million and $3.6 million during the three and six months ended
December 31, 2002, to $8.1 million and $16.9  million from $9.5 million and $20.5 million  during the three and six
months ended  December 31,  2001,  respectively.  The decrease in interest  expense during the three and six months
ended  December 31,  2002 from interest expense levels reported during the comparable three and six month periods a
year ago resulted from lower  pricing  under the  Company's  revolving  warehouse  and  repurchase  facilities  due
primarily  to declines in the  one-month  LIBOR  during the three and six months  ended  December  31, 2002 despite
increased  average  borrowings  during the three and six months ended  December  31, 2002 over  average  borrowings
during the comparable  periods a year ago to fund the  origination of mortgage loans prior to their  securitization
or sale in the secondary  market.  Interest  expense is expected to increase in future periods due to the Company's
continued  reliance on  external  financing  arrangements  to fund its loan  production  operations  and  potential
increases in the general interest rate environment during calendar 2003.

Income  Taxes.  During  the three and six  months  ended  December  31,  2002,  the  Company  recorded  income  tax
provisions of $1.6 million and $2.2 million,  respectively,  which related  primarily to taxes on excess  inclusion
income on the Company's REMIC trusts and, to a lesser extent,  to  miscellaneous  state tax  obligations.  Such tax
provisions  reflect  effective  tax rates of 43.0% and 15.4% for the three and six months ended  December 31, 2002,
respectively.  The  Company's  regular  taxable  income is projected to be lower than its excess  inclusion  income
primarily due to utilization of net operating loss  carryforwards  as well as partial  reversal of the deferred tax
asset  related to its  residual  interest  valuation  adjustments,  among  other  items.  Accordingly,  the Company
provides for current taxes on its excess  inclusion  income as the excess  inclusion tax is payable  unless current
taxable  income  exceeds the excess  inclusion  amounts.  During the three and six months ended  December 31, 2001,
the  Company  recorded  income tax  provisions  of $0.9  million  and $1.4  million,  respectively,  which  reflect
effective  tax rates of 35.7% and 38.9%,  respectively.  The  provisions  for income taxes during the three and six
months ended  December  31, 2001  related  primarily to taxes on excess  inclusion  income on the  Company's  REMIC
trusts and, to a lesser extent, to other miscellaneous state tax obligations.

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

Financial Condition

Loans Held for Sale.  The Company's  portfolio of loans held for sale  increased to $628.3  million at December 31,
2002 from  $462.1 million at June 30,  2002 due primarily to loan originations  exceeding loan dispositions  during
the six months ended December 31, 2002.

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Accounts  Receivable.  Accounts  receivable are comprised of advances to the securitization  trusts;  servicing and
late fees;  amounts due from CZI under the  Residual  Facility,  if  applicable;  cash due from the  securitization
trusts; and accrued interest  receivable and other miscellaneous  receivables.  At December 31, 2002, there were no
amounts due to the Company from CZI under the Residual Facility.

Accounts receivable  decreased to $56.4 million at December 31, 2002 from $61.3 million at June 30,  2002.
The decrease is  primarily  attributable  to  decreases of $7.4 million and $0.6 million in interest and  servicing
advances and servicing and late fees receivable,  respectively,  partially offset by an increase of $3.1 million in
accrued interest and other receivables.

The  $7.4 million   decrease  in  servicing  and  interest  advances  to  the  securitization   trusts  at
December 31,  2002 from June 30,  2002 is comprised of $19.4 million of advances made by the Company in its role of
servicer of the mortgage loans in the  securitization  trusts,  net of $26.8 million of recoveries of such advances
during the six months ended December 31, 2002. The level of servicing  advances,  in any given period, is dependent
upon  portfolio  delinquencies,  the level of REO and loans in the  process  of  foreclosure,  and the  timing  and
remittance  of cash  collections  on mortgage  loans in the  securitization  trusts.  The  $0.6 million  decline in
servicing  and late fees  receivable  at  December  31,  2002 from  June 30,  2002 is due  primarily  to  declining
servicing and late fees earned by the Company as a consequence  of the decrease in its portfolio of mortgage  loans
in  securitization  trusts  serviced  in-house  during the six months ended  December 31,  2002.  The  $3.1 million
increase in accrued  interest  receivable  and other  receivables at December 31, 2002 when compared to the balance
at June 30,  2002 is due  primarily to a  $2.1 million  increase in amounts due from  counterparties  on whole loan
sale and other  transactions  coupled with a $1.0 million increase in accrued  interest  receivable at December 31,
2002.

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

Residual  Interests.  Residual  interests  decreased to $151.8 million at December 31, 2002 from  $197.3 million at
June 30,  2002,  reflecting a write-off of $31.9  million,  $23.3 million of cash received from the  securitization
trusts, partially offset by $9.7 million of accretion during the six months ended December 31, 2002.

Mortgage  Servicing  Rights,  net. MSRs, net,  decreased to $1.5 million at December 31, 2002 from  $2.9 million at
June 30,  2002 reflecting  amortization of $1.4 million  during the six months ended December 31, 2002.  During the
six months ended  December 31, 2002,  the Company did not  capitalize any MSRs as all of the Company's $1.2 billion
of total loan dispositions were with servicing released.

Equipment and Improvements,  net.  Equipment and improvements,  net, decreased to $9.8 million at December 31, 2002
from  $10.9 million  at June 30,  2002 due to depreciation  and amortization  outpacing the  capitalization  of new
equipment and improvement acquisitions during the six months ended December 31, 2002.

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Prepaid  and Other  Assets.  Prepaid  and other  assets  increased  to  $14.8 million  at  December  31,  2002 from
$14.7 million  at June 30,  2002, due to capitalized  costs incurred for financing and other  arrangements  entered
into by the Company having exceeded amortization of such items during the six months ended December 31, 2002.

Borrowings.  Borrowings  were $200.1  million at December  31, 2002  compared to $264.0  million at June 30,  2002.
The $63.9  million  decline  during the six months  ended  December  31, 2002 was  comprised  of (i) the  Company's
purchase and  extinguishment  of $19.1 million face amount of its 9.125% Senior Notes due 2003,  (ii) the Company's
$19.8 million  mandatory sinking fund payment on its 5.5% Convertible  Subordinated  Debentures due 2012, and (iii)
SFP's  forgiveness of $25.0 million of 5.5% Convertible  Subordinated  Debentures due 2012 which it held subsequent
to the Company's payment of the mandatory sinking fund payment.

Revolving  Warehouse   Facilities.   Amounts  outstanding  under  revolving  warehouse  and  repurchase  facilities
increased  to $543.6  million at December  31,  2002 from $383.1  million at  June 30,  2002  primarily  due to the
increase in loans held for sale due to loan originations  during the six months ended December 31, 2002,  partially
offset by the  Company's  loan  dispositions  during the  period,  and,  to a lesser  extent,  as the result of the
Company's  increased  reliance  on  its  revolving  warehouse  facilities.  Proceeds  from  whole  loan  sales  and
securitizations  are used  first to  reduce  balances  outstanding  under the  Company's  revolving  warehouse  and
repurchase facilities, and then used to satisfy corporate operating requirements.

Income  taxes  payable.   Income  taxes  payable  remained  substantially  unchanged  at  December  31,  2002  from
$8.6 million  at June 30,  2002  reflecting  the net activity  caused by the  provision  for income taxes offset by
income tax remittances recorded during the six months ended December 31, 2002.

Liquidity and Capital Resources

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

The Company's primary sources of liquidity are expected to be (i) fundings  under revolving  warehouse and
repurchase   facilities,   (ii) securitization   and  sale  of  mortgage  loans  and  related   servicing   rights,
(iii) monetization  of residual  interests and  (iv) monetization  of the Company's  advances to the securitization
trusts.  The Company  historically had access to working capital financing  facilities and the issuance of debt and
equity securities to finance its operating cash requirements;  however, due to the Company's operating  performance
in the three most recent  fiscal  years,  the Company  does not expect  access to those  capital  resources  in the
foreseeable future.

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The Company had cash and cash equivalents of approximately $13.7 million at December 31, 2002.

Warehouse
  and Repurchase Facilities. The Company generally relies on revolving warehouse
  and repurchase facilities to originate mortgage loans and hold them prior to
  securitization or sale. At December 31, 2002, the Company had committed revolving
  warehouse and repurchase facilities in the amount of $900.0 million. Of the
  $900.0 million of committed revolving warehouse and repurchase facilities available
  to the Company at December 31, 2002, $300.0 million, $300.0 million and $300.0
  million expire on March 20, 2003, May 15, 2003 and July 30, 2003, respectively.
  Generally, the Company's revolving warehouse and repurchase agreements have
  364-day terms. However, because the Company's 9.125% Senior Notes are due November
  1, 2003, the Company does not expect the facility providers to renew their facilities
  beyond October 2003 unless and until the Company either extinguishes or refinances
  the 9.125% Senior Notes. The Company is currently pursuing alternative approaches
  to refinancing its 9.125% Senior Notes. No assurances can be made that the Company
  will be successful in its efforts.

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

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

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.  Funded  warehouse  indebtedness  is not included in the  indebtedness
limitations.  Securitization obligations are generally not included in the indebtedness limitations.  The Company's
revolving  warehouse and repurchase  facilities  also contain limits on the Company's  ability to incur  additional
indebtedness.  Further,  until the  Company  receives  investment  grade  ratings  for the notes  issued  under the
Indenture,  the amount of assets allocable to  post-September 1996  securitizations which the Company may pledge to
secure debt is limited by the Indenture to 75% of the  difference  between such  post-September 1996  residuals and
servicing  advances and  $225.0 million.  This could  restrict the Company's  ability to borrow to provide  working
capital as needed in the future.

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

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During the six months  ended  December 31, 2002,  the Company  disposed of $315.0  million of its mortgage
loans  through  securitizations  and sold $1.8  billion of mortgage  loans in whole loan sales,  compared to $410.0
million of mortgage loans  securitized  and $1.2 billion of mortgage loans sold in whole loan sales,  respectively,
during the comparable  period a year ago. The gain on sale recognized by the Company on  securitizations  and whole
loan sales is affected by, among other  things,  market  conditions  at the time of the loan  disposition,  and the
Company's assumptions used in securitizations. See Results of Operations - Revenue.

In  connection  with  securitization  transactions,  the Company is generally  required to provide  credit
enhancements in the form of  overcollateralization  amounts or reserve  accounts.  In addition,  during the life of
the related  securitization  trusts, the Company subordinates a portion of the excess cash flow otherwise due it to
the rights of holders of senior  interests  as a credit  enhancement  to support the sale of the senior  interests.
The terms of the  securitization  trusts  generally  require  that all excess  cash flow  otherwise  payable to the
Company  during the early  months of the  trusts be used to  increase  the cash  reserve  accounts  or to repay the
senior  interests  in  order  to  increase  overcollateralization  to  specified  maximums.   Overcollateralization
requirements  for  certain  pools  increase  up to  approximately  twice  the  level  otherwise  required  when the
delinquency  rates or realized  losses for those pools  exceed the  specified  limit.  At December  31,  2002,  the
Company was required to maintain  overcollateralization  amounts of  $173.9 million,  of which  $160.3 million  was
maintained.  The remaining $13.4 million is required to be added to the  overcollateralization  amounts from future
spread income from the loans in the securitization trusts. Of the $173.9 million of  overcollateralization  amounts
required at December 31, 2002,  $43.8 million is required to be maintained  due to the level of  delinquency  rates
and  realized  losses of mortgage  loans being in excess of  specified  delinquency  rates and  realized  losses in
certain securitization trusts.

Pursuant to agreements  relating to the Company's two 1999  securitization  trusts, the monoline insurance
company  providing  credit  enhancement  requires  the  Company  to  maintain  a  specified  net worth and level of
liquidity in order to be able to continue to service the loans in the trusts. As previously  reported,  the Company
currently  does not satisfy the specified net worth test, and as a result,  the monoline  insurer can terminate the
Company as servicer.  The monoline  insurer has to date waived the Company's  failure to satisfy the net worth test
and to terminate the Company as servicer with respect to those securitization trusts.

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

Residual  Forward Sale Facility.  At December 31,  2002, the capacity  remaining  under the Residual  Facility with
CZI, an affiliate of Capital Z, the Company's largest  shareholder,  was $4.4 million.  Original capacity under the
Residual Facility was $75.0 million.

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In connection with obtaining the Residual Facility,  the Company incurred and capitalized  $3.3 million of
costs, of which  $3.0 million  related to a facility fee paid to CZI. The capitalized  costs are being amortized to
gain on sale of loans based upon the ratio of the dollar  amount of the  residual  interests  sold to CZI under the
Residual  Facility to the total  Residual  Facility  amount.  During the three months ended  December 31, 2002, the
Company sold the residual  created in the  securitization  which closed  during the period for $8.6 million of cash
to CZI under the Residual  Facility.  During the three and six months ended  December  31,  2002,  amortization  of
total  capitalized  Residual  Facility  costs  charged to gain on sale of loans was $0.4 million and $0.6  million,
respectively,  substantially all of which related to the facility fee paid to CZI. At December 31,  2002, the total
unamortized  capitalized Residual Facility costs remaining to be amortized were $0.2 million,  substantially all of
which  related to the facility  fee, and are  included in prepaid and other  assets in the  accompanying  condensed
consolidated  balance sheet. If the Residual  Facility expires with remaining  capacity  available or if it were to
be terminated  prior to its full usage,  any remaining  unamortized  fees would be charged to gain on sale of loans
at such times.

Monetization
  of Advances to the Securitization Trusts. In the past, in order to reduce
  its interest and servicing advance obligations, the Company entered into arrangements
  with a buyer pursuant to which the buyer purchased certain cumulative advances
  and undertook the obligation to make a substantial portion, but not all, of
  the Company's advance obligations on its securitization trusts. In the future,
  the Company may enter into similar arrangements as a means to further reduce
  its advance obligations or to monetize advance receivables.

*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.

As previously  reported,  on February 12, 2002,  the Company  completed its rights  offering to its Common
Stockholders.  The Company  sold 637,000  shares of Series D  Convertible  Preferred  Stock at a price of $0.85 per
share and raised approximately $542,000 in the offering.

The Company has previously  raised  $179.7 million  through the sale of preferred stock in several phases,
consisting  of $170.8  million to Capital Z and its  designees,  $4.7 million  to certain  members of the Company's
management  and  $4.7 million  to holders of the  Company's  common  stock.  Capital Z  invested  $75.0 million  in
February 1999,  $25.0 million  in  August 1999,  $20.8 million  pursuant to their  standby  commitment  in a rights
offering in  October 1999,  $34.7 million  in June 2000,  and  $15.3 million  in July 2000. The Company also issued
$2.9 million  of preferred  stock to certain  management  investors in October 1999, and  $1.3 million of preferred
stock to certain  current and former  management  investors,  and  consultants  to the Company in August 2000.  The
Company raised  $4.2 million  from the sale of Series C  Convertible  Preferred  Stock to common  stockholders in a
rights offering in October,  1999 and $0.5 million from the sale of Series C Convertible  Preferred Stock to common
stockholders  in a rights  offering in February 2002. The Company also issued  warrants to affiliates and employees
of an affiliate of Capital Z to purchase an aggregate  of 500,000  shares of the  Company's  common stock for $5.00
per share in February 1999, and warrants to purchase  5.0 million  shares of Series D  Convertible  Preferred Stock
at $0.85 per share in July 2001.

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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 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. In December 2002, the Company
  completed a tender offer pursuant to which $49.6 million of 5.5% Convertible
  Subordinated Debentures due 2006 were tendered and an equal amount of 5.5% Convertible
  Subordinated Debentures due 2012 were issued. Subsequently in December 2002,
  the $49.6 million of New Debentures were reduced by $19.8 million and $25.0
  million through a mandatory sinking fund redemption and the forgiveness by SFP,
  respectively, leaving $4.8 million of New Debentures outstanding. At December
  31, 2002, there were $64.4 million of Existing Debentures outstanding. 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 December 31, 2002, the Company did not have the ability to pay such distributions
  and does not expect to have the ability to pay dividends for the foreseeable
  future.

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

Risk Management

During
  the three months ended December 31, 2002, the Company, as it has from time to
  time, entered into agreements to hedge interest rate risk exposure to its loans
  held for sale. At December 31, 2002, the Company had notional amounts of $225.0
  million of forward interest rate swap agreements in place to hedge exposure
  to its loans held for sale and pipeline of  loans. The following table
  summarizes certain information regarding the interest rate swap agreements:

|At December
      31, 2002                    
|----------------------------------------------
|**Notional
        Amount
        in (000's)**
|                                              
|                                              
|$  75,000                                     
|50,000                                        
|50,000                                        
|50,000                                        
|                                              
|$225,000                                      
|                                              

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Gain on sale of loans during the three months ended  December 31, 2002 and 2001  includes  charges of $2.8
million and $1.3 million,  respectively,  related to the Company's hedging  activities.  Of the $2.8 million charge
during the three months ended  December 31,  2002, $1.8 million  related to losses on closed forward  interest rate
swap  agreements and $1.0 million  related to the Company's  mark to the estimated  fair value of forward  interest
rate swap  agreements  open at  December  31,  2002.  Of the $1.3  million  charge  during the three  months  ended
December 31,  2001,  $0.5 million  related to losses on closed  forward  interest  rate swap  agreements,  and $0.8
million  related to the Company's mark to the estimated fair value of forward  interest rate swap  agreements  open
at December 31, 2001. Gain on sale of loans for the six months ended  December 31,  2002 and 2001 includes  charges
of $10.7  million  and $2.9  million,  respectively,  related to the  Company's  hedging  activities.  Of the $10.7
million  charge during the six months ended  December 31,  2002,  $8.9 million  related to losses on closed forward
interest  rate swap  agreements  and $1.8 million  related to the  Company's  mark to the  estimated  fair value of
forward  interest  rate swap  agreements  open at  December 31,  2002.  Of the $2.9 million  charge  during the six
months ended  December 31,  2001, $2.1 million related to losses on closed forward  interest rate swap  agreements,
and $0.8  million  related  to the  Company's  mark to the  estimated  fair  value of  forward  interest  rate swap
agreements  open at  December 31,  2001. The Company  continually  monitors the interest rate  environment  and its
hedging  strategies.  However,  there can be no assurance  that the earnings of the Company  would not be adversely
affected  during any period of unexpected  changes in interest  rates or  prepayment  rates,  including  additional
charges to earnings on the  Company's  existing  forward  interest  rate swap  agreements or charges to earnings on
future derivative contracts into which the Company may enter.

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

Sale  of   Loans - Securitizations   and  Whole  Loan  Sales--Interest  Rate  Risk.  A  significant  variable  in  the
determination  of gain on sale in a  securitization  is the  spread  between  the  weighted  average  coupon on the
securitized  loans and the  pass-through  interest rate. In the interim period between loan origination or purchase
and  securitization  of such loans,  the Company is exposed to interest rate risk. The majority of loans are either
sold or securitized  within 90 days of  origination or purchase.  However,  a portion of the loans is held for sale
or securitization  for as long as 12 months (or longer, in very limited  circumstances)  prior to securitization or
sale. If interest  rates rise during the period that the mortgage  loans are held,  the spread between the weighted
average  interest rate on the loans to be securitized and the  pass-through  interest rates on the securities to be
sold (the latter having increased as a result of market rate movements)  would narrow.  Upon  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.  From time to time,
the Company  mitigates  exposure to rising interest rates through the use of forward  interest rate swap agreements
or other hedging  activities.  These hedging  activities  help mitigate the risk of absolute  movements in interest
rates.

Rate  sensitive  assets and  liabilities.  At December 31, 2002,  the Company's  $628.3 million  inventory of loans
held for sale was  comprised of  $257.9 million  and  $370.4 million  of fixed and variable  rate  mortgage  loans,
respectively,  which had weighted  average  interest rates of 8.08% and 8.12%,  respectively.  The weighted average
interest  rate on the  Company's  total  inventory  of loans  held for sale was  8.10% at  December  31,  2002.  In
comparison,  at June 30,  2002 the  Company's  $462.1 million  inventory  of loans held for sale was  comprised  of
$207.5 million  and  $254.6 million  of fixed and variable rate mortgage  loans,  respectively,  which had weighted
average  interest  rates of 8.83% and 9.09%,  respectively.  The weighted  average  interest  rate on the Company's
total inventory of loans held for sale was 8.93% at June 30, 2002.

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At December 31, 2002, the Company had aggregate  outstanding  funded  indebtedness of  $743.7 million,  of
which  $200.1 million  and $543.6 million bore fixed and variable  interest  rates,  respectively.  At December 31,
2002, the weighted average interest rate on the Company's  $543.6 million  of outstanding  revolving  warehouse and
repurchase  facilities was 2.46%. All of the Company's revolving  warehouse and repurchase  facilities were indexed
to one-month  LIBOR which,  at December 31, 2002, was 1.38%.  The weighted  average  interest rate on the Company's
$200.1 million  of outstanding  fixed rate  borrowings  was 7.87% at December 31, 2002. In comparison,  at June 30,
2002 the weighted  average interest rate on the Company's  $383.1 million  of outstanding  revolving  warehouse and
repurchase  facilities was 2.90%. At June 30,  2002, the one-month LIBOR was 1.84%.  The weighted  average interest
rate on the Company's $264.0 million of outstanding fixed rate borrowings was 7.56% at June 30, 2002.

Residual Interests and MSRs. The Company had residual  interests of $151.8 million  and $197.3 million  outstanding
at December 31, 2002 and June 30,  2002,  respectively.  The Company also had MSRs outstanding at December 31, 2002
and June 30,  2002 in the amount of $1.5 million  and  $2.9 million,  respectively.  Both of these  instruments are
recorded at estimated  fair value at December 31, 2002 and June 30,  2002. The Company values these assets based on
the present  value of future  revenues  net of expenses  using  various  assumptions.  The  discount  rates used to
calculate the present  value of the residual  interests  and MSRs were 13.4% and 15.0%,  respectively,  at December
31, 2002.  The discount rate used to calculate  the present value of the residual  interests and MSRs was 13.4% and
15.0%,  respectively,  at June 30, 2002. The weighted average life of the mortgage loans used for valuation was 2.2
years at December 31, 2002 and 3.7 years at June 30, 2002.

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

Fair Value of Financial  Instruments.  The Company's  financial  instruments  recorded at contractual  amounts that
approximate market or fair value primarily consist of loans held for sale,  accounts  receivable,  forward interest
rate swap  agreements,  and revolving  warehouse  and  repurchase  facilities.  Accounts  receivable  and revolving
warehouse  and  repurchase  facilities  are short term in nature or generally  bear market  rates of interest.  The
carrying  amounts of these  instruments  are  reasonable  estimates of their fair  values.  Loans held for sale are
carried at the lower of  aggregate  cost or market.  The fair value of forward  interest  rate swap  agreements  is
based on quoted market prices from a financial counterparty.

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.

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Warehousing  Exposure.  The Company  utilizes  revolving  warehouse and  repurchase  facilities  to facilitate  the
holding of mortgage loans prior to  securitization  or sale in the whole loan markets.  At  December 31,  2002, the
Company  had  total  committed  revolving  warehouse  and  repurchase   facilities   available  in  the  amount  of
$900.0 million and the total amounts  outstanding on these facilities was $543.6 million.  Revolving  warehouse and
repurchase  facilities  are  typically  for a term of one  year  or  less  and  are  designated  to fund  mortgages
originated  within  specified  underwriting  guidelines.  The majority of the assets remain in the facilities for a
period of up to 90 days at which  point they are  securitized  and/or  sold to  institutional  investors.  As these
amounts are short term in nature and/or generally bear market rates of interest,  the contractual  amounts of these
instruments are reasonable estimates of their fair values.

Item
  4. Controls and Procedures. Within
  the 90 days prior to the date of filing this quarterly report on Form 10-Q,
  the Company carried out an evaluation, under the supervision and with the participation
  of the Company's Disclosure Committee and management, including the Chief Executive
  Officer and Chief Financial Officer, of the effectiveness of the design and
  operation of the Company's disclosure controls and procedures pursuant to Exchange
  Act Rule 15d-14. Based upon that evaluation, the Disclosure Committee, Chief
  Executive Officer and Chief Financial Officer concluded that the Company's disclosure
  controls and procedures are effective in timely alerting them to material information
  relating to the Company (including its consolidated subsidiaries) required to
  be included in reports the Company files with the SEC pursuant to the Securities
  Exchange Act of 1934. Subsequent to the date of that evaluation, there have
  been no significant changes in the Company's internal controls or in other factors
  that could significantly affect the internal controls.

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PART
  II--OTHER INFORMATION

Item 1. Legal Proceedings

Aames  Financial  Corporation  (the Company) and certain of its  subsidiaries  were defendants in Fowler
et. al. v.  Aames  Financial  Corporation  and  Aames  Funding  Corporation,  a  putative  class  action  filed  on
approximately  May 11,  2001, in U.S.  District Court of California,  case  2:01cv04330.  On February 10, 2003, the
court  approved  a  settlement  between  the  parties  regarding  this  litigation,  in which  Aames  did not admit
liability.  The Company  believes that the terms of this  settlement did not have a material  adverse effect on its
consolidated financial position and results of operations.

The Company and certain of its  subsidiaries  are defendants in Aslami  et. al. v.  Aames Home Loan, Aames
Financial  Corporation,  et. al.,  a putative class action filed on  approximately  April 11,  2000, in Los Angeles
County Superior Court, case No. BC228027.  Plaintiffs,  former customers, filed this action on behalf of themselves
and all persons who applied for or obtained loans from the Company during the prior four years.  Plaintiffs  allege
various state law claims premised their  contention  that the Company  routinely  "upcharges"  third party fees and
underdiscloses  annual percentage  rates. On April 26,  2002,  Plaintiffs filed a third amended complaint  limiting
the purported class to California  borrowers and asserting  claims based upon the payment of a yield spread premium
to their broker.  Plaintiffs  contend that such yield spread premium payments  constitute  kickbacks and/or illegal
referrals  under  California law and/or that the Company  failed to properly  disclose the nature of a yield spread
premium.  Plaintiffs  seek  certification  of the  class,  damages  consisting  of fees paid to  mortgage  brokers,
statutory treble damages,  attorneys' fees and costs,  restitution,  disgorgement of improperly  collected charges,
punitive damages and injunctive  relief.  The Company has answered the amended  complaint,  again asserting various
affirmative defenses. The parties are presently engaged in mediation.  No trial has been set.

Wilmington Trust Company, as successor indenture trustee with respect to the
  Company's 9.125% Senior Notes brought an action against the Company seeking
  to prevent the Company from consummating its offer to exchange all outstanding
  5.5% Convertible Subordinated Debentures due 2006 for newly issued 4.0% Convertible
  Subordinated Debentures due 2012. On June 10, 2002, the Supreme Court of the
  State of New York heard oral arguments relating to Wilmington Trust Company's
  request for an order preliminarily enjoining the Company from proceeding with
  the Exchange Offer. On July 1, 2002, the court denied Wilmington Trust Company's
  request. On July 12, 2002, the Company filed a motion to dismiss Wilmington
  Trust Company's complaint. On August 1, 2002, Wilmington Trust Company filed
  an amended complaint seeking a declaratory judgment that if the Company were
  to proceed with the Exchange Offer an event of default would exist under the
  indenture governing the 9.125% Senior Notes. On August 14, 2002, the Company
  filed a motion to dismiss the amended complaint and request a declaratory judgment
  that the Exchange Offer would not constitute an event of default under the indenture
  governing the 9.125% Senior Notes.  On August 14, 2002, the Company filed
  a motion to dismiss the amended complaint and requested declaratory judgment
  that the Exchange Offer would not constitute an event of default under the indenture
  governing the 9.125% Senior Notes. In a decision dated October 25, 2002, the
  Supreme Court of the State of New York granted the Company's motion to dismiss
  Wilmington Trust Company's amended complaint and issued a declaratory judgment
  in favor of the Company that the Exchange Offer, if consummated, would not (i)
  violate the terms of the indenture governing the 9.125% Senior Notes, or give
  rise to an event of default thereunder, or (ii) constitute a breach of an implied
  covenant of good faith and fair dealing. On November 21, 2002, Wilmington Trust
  Company filed a notice of appeal from the declaratory judgment. On February
  7, 2003, the Company filed a brief in opposition to Wilmington Trust Company's
  appeal.

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The Company cannot predict the ultimate outcome of these matters. The Company
  intends to vigorously defend these actions; however, the Company believes that
  an unfavorable outcome of one or both of the above cases could have a material
  adverse effect on the Company's consolidated financial position and results
  of operations.

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



|Item
      2. Changes in Securities - 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 (the Meeting)
      on November 21, 2002.  
|                                                                                                                 
|(b)       The
      following four Series B Directors were elected at the meeting to serve one
      year terms: 
|                                                                                                                 
|                                                                                                                 
|                                                                                                                 
|The
      following Class II Common Stock Directors were elected at the Meeting to
      serve a three-year term:
|                                                                                                                 
|                                                                                                                 
|                                                                                                                 
|                                                                                                                 
|                                                                                                                 

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|The
      following Directors continued in office after the Meeting:
|--------------------------------------------------------------------
|                                                                    
|                                                                    
|                                                                    
|(c)                                                                 

|                                        |     
|--------------------------------------- | ----
|
|**Matter**                              | ****
|                                        |     
|Election
      of Series B Directors:   |     
|Daniel
      C. Lieber                  |     
|Mani
      A. Sadeghi                   |     
|Robert
      A. Spass                   |     
|Joseph
      R. Tomei                   |     
|                                        |     
|Election
      of Class II Common Stock |     
|Directors:                              |     
|Dr.
      Jenne K. Britell              |     
|Stephen
      E.Wall                    |     
|                                        |     
|Ratification
      of                   |     
|Independent
      Accountants           |     



|Item
      5. Other Information - None        
|----------------------------------------------
|                                              
|Item
      6. Exhibits and Reports on Form 8-K
|                                              
|(a)                                           
|                                              
|(b)                                           
|                                              
|                                              
|                                              
|                                              
|                                              

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| |                                                                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On October 8, 2002,
      the Company filed a Form 8-K (dated August 31, 2002) reporting delinquency
      and loss statistics in the loan servicing portfolio of Aames Capital Corporation.                                                                                                                    
| |                                                                                                                                                                                                                                                                                                                 
| | On October 25, 2002,
      the Company filed a Form 8-K (dated October 24, 2002) reporting that the
      expiration date of its Exchange Offer had been extended to 5:00 p.m., New
      York City time, on Friday, November 8, 2002.                                                                          
| |                                                                                                                                                                                                                                                                                                                 
| | On November 8, 2002,
      the Company filed a Form 8-K (dated November 7, 2002) reporting that the
      expiration date of its Exchange Offer had been extended to 5:00 p.m., New
      York City time, on Friday, November 22, 2002.                                                                         
| |                                                                                                                                                                                                                                                                                                                 
| | On November 18, 2002,
      the Company filed a Form 8-K (dated November 14, 2002) reporting results
      for the quarter ended September 30, 2002.                                                                                                                                                            
| |                                                                                                                                                                                                                                                                                                                 
| | On November 21, 2002,
      the Company filed a Form 8-K (dated November 21, 2002) disclosing the presentation
      materials for the Companys 2002 Annual Stockholder Meeting.                                                                                                                               
| |                                                                                                                                                                                                                                                                                                                 
| | On November 22, 2002,
      the Company filed a Form 8-K (dated November 22, 2002) reporting that the
      expiration date of its Exchange Offer had been extended to 5:00 p.m., New
      York City time, on Tuesday, December 3, 2002.                                                                       
| |                                                                                                                                                                                                                                                                                                                 
| | On November 27, 2002,
      the Company filed a Form 8-K (dated November 27, 2002) reporting that the
      Company had amended the terms of its Exchange Offer and that the expiration
      date of its Exchange Offer had been extended to 5:00 p.m., New York City
      time, on Friday, December 13, 2002.
| |                                                                                                                                                                                                                                                                                                                 
| | On December 17, 2002,
      the Company filed a Form 8-K (dated December 17, 2002) reporting that the
      expiration and completion of its Exchange Offer.                                                                                                                                                    
| |                                                                                                                                                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                 











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**AAMES
  FINANCIAL CORPORATION**


**SIGNATURES**

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





|                              |  | AAMES FINANCIAL CORPORATION                   
|----------------------------- |  | ----------------------------------------------
|                              |  |                                               
|Date: February
      14, 2003 |  |                                               
|                              |  |                                               
|                              |  | /s/ Ronald J. Nicolas,
      Jr.              
|                              |  |                                               
|                              |  | Ronald J. Nicolas,
      Jr.                  
|                              |  | *Executive Vice
      President - Finance and*
|                              |  | *Chief Financial
      Officer*               

























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**CERTIFICATIONS**

|I, A.
      Jay Meyerson, certify that:
|---------------------------------------
|                                       
|1.                                     
|                                       
|2.                                     
|                                       
|3.                                     
|                                       
|4.                                     
|                                       
|                                       
|                                       
|                                       
|                                       
|                                       
|                                       
|5.                                     
|                                       
|                                       
|                                       

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|   | b)                                                                                                                                                                                                                                                                                                                                                                                                                     | any fraud,
      whether or not material, that involves management or other employees who
      have a significant role in the registrant's internal controls; and
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                                                   
|6. | The registrant's
      other certifying officer and I have indicated in this quarterly report whether
      or not there were significant changes in internal controls or in other factors
      that could significantly affect internal controls subsequent to the date
      of our most recent evaluation, including any corrective actions with regard
      to significant deficiencies and material weaknesses.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                                                   



|Date:
        February 14, 2003 |  |                                    
|------------------------------- |  | -----------------------------------
|                                |  |                                    
|                                |  |                                    
|                                |  | /s/ A. Jay Meyerson                
|                                |  |                                    
|                                |  | A. Jay Meyerson                    
|                                |  | Chief Executive Officer            
|                                |  | (Principal Executive
      Officer)



|                                               |                                                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                        
|---------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|I, Ronald
      J. Nicolas, Jr., certify that:
|                                               |                                                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                        
|1.                                             | I have
      reviewed this quarterly report on Form 10-Q of Aames Financial Corporation;                                                                                                                                                                                                                                                                    
|                                               |                                                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                        
|2.                                             | Based
      on my knowledge, this quarterly report does not contain any untrue statement
      of a material fact or omit to state a material fact necessary to make the
      statements made, in light of the circumstances under which such statements
      were made, not misleading with respect to the period covered by this quarterly
      report;
|                                               |                                                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                        
|3.                                             | Based
      on my knowledge, the financial statements, and other financial information
      included in this quarterly report, fairly present in all material respects
      the financial condition, results of operations and cash flows of the registrant
      as of, and for, the periods presented in this quarterly report;                         
|                                               |                                                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                        
|4.                                             | The registrant's
      other certifying officer and I are responsible for establishing and maintaining
      disclosure controls and procedures (as defined in Exchange Act Rules 13a-14
      and 15d-14) for the registrant and we have:                                                                                                                  
|                                               |                                                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                        
|                                               | a)                                                                                                                                                                                                                                                                                                                                                           | designed such disclosure
      controls and procedures to ensure that material information relating to
      the registrant, including its consolidated subsidiaries, is made known to
      us by others within those entities, particularly during the period in which
      this quarterly report is being prepared;





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|   | b)                                                                                                                                                                                                                                                                                                                                                                                                                     | evaluated
      the effectiveness of the registrant's disclosure controls and procedures
      as of a date within 90 days prior to the filing date of this quarterly report
      (the "Evaluation Date"); and                                                                                                       
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                                                                                                                                                                                                       
|   | c)                                                                                                                                                                                                                                                                                                                                                                                                                     | presented in this
      quarterly report our conclusions about the effectiveness of the disclosure
      controls and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                                                                                                                                                                                                       
|5. | The registrant's
      other certifying officer and I have disclosed, based on our most recent
      evaluation, to the registrant's auditors and the audit committee of registrant's
      board of directors (or persons performing the equivalent function):                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                                                                                                                                                                                                       
|   | a)                                                                                                                                                                                                                                                                                                                                                                                                                     | all significant deficiencies
      in the design or operation of internal controls which could adversely affect
      the registrant's ability to record, process, summarize and report financial
      data and have identified for the registrant's auditors any material weaknesses
      in internal controls; and
|   |                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                                                                                                                                                                                                       
|   | b)                                                                                                                                                                                                                                                                                                                                                                                                                     | any fraud, whether or not material, that involves management
      or other employees who have a significant role in the registrant's internal
      controls; and                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                                                                                                                                                                                                       
|6. | The registrant's other certifying officer and
      I have indicated in this quarterly report whether or not there were significant
      changes in internal controls or in other factors that could significantly
      affect internal controls subsequent to the date of our most recent evaluation,
      including any corrective actions with regard to significant deficiencies
      and material weaknesses.



|Date:
        February 14, 2003 |  |                                    
|------------------------------- |  | -----------------------------------
|                                |  |                                    
|                                |  |                                    
|                                |  | /s/ Ronald J. Nicolas,
      Jr.   
|                                |  |                                    
|                                |  | Ronald J. Nicolas,
      Jr.       
|                                |  | Chief Financial Officer            
|                                |  | (Principal Financial
      Officer)



---

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**EXHIBIT INDEX** **Exhibit
          No.**.
      
      **Description
        of Exhibit**3.1
      
      Certificate of Incorporation
        of Registrant, as amended (1)3.2
      
      Bylaws of Registrant,
        as amended (2)4.1
      
      Specimen certificate
        evidencing Common Stock of Registrant (1)4.2
      
      Specimen certificate
        evidencing Series B Convertible Preferred Stock of Registrant (1)4.3
      
      Certificate of Designations
        for Series B Convertible Preferred Stock of Registrant, as amended (3)4.4
      
      Specimen certificate
        evidencing Series C Convertible Preferred Stock of Registrant (1)4.5
      
      Certificate of Designations
        for Series C Convertible Preferred Stock of Registrant, as amended (3)4.6
      
      Specimen certificate
        evidencing Series D Convertible Preferred Stock of Registrant (1)4.7
      
      Certificate of Designations
        for Series D Convertible Preferred Stock of Registrant, as amended (3)4.8(a)
      
      Rights Agreement,
        dated as of June 21, 1996 between Registrant and Wells Fargo Bank, as
        rights agent (4)4.8(b)
      
      Amendment to Rights
        Agreement, dated as of April 27, 1998 (5)4.8(c)
      
      Amendment to Rights
        Agreement, dated as of December 23, 1998 (6)4.10
      
      Indenture, dated
        as of February 26, 1996, between Registrant and The Chase Manhattan Bank,
        N.A., relating to
        Registrant's 5.5% Convertible Subordinated Debentures due 2006 (7)4.11(a)
      
      First Supplemental
        Indenture, dated as of October 21, 1996, between Registrant, The Chase
        Manhattan Bank and
        certain wholly owned subsidiaries of Registrant, relating to Registrant's
        9.125% Senior Notes due 2003 (7)4.11(b)
      
      Second Supplemental
        Indenture, dated as of February 10, 1999, between Registrant, The Chase
        Manhattan Bank and
        certain wholly owned subsidiaries of Registrant, relating to Registrant's
        9.125% Senior Notes due 2003 (8)4.12
      
      Indenture, dated
        as of December 13, 2002, between Registrant and Wells Fargo Bank Minnesota,
        N.A., relating to
        Registrant's 5.5% Convertible Subordinated Debentures due 2012 (9)10.31(b)
      
      Amendment
        No. 2 to the Amended and Restated Master Loan and Security Agreement,
        dated as of November 22, 2002,
        between Aames Capital Corporation, Aames Funding Corporation and Morgan
        Stanley Mortgage Capital, Inc.10.31(c)
      
      Amendment
        No. 4 to the Amended and Restated Master Loan and Security Agreement,
        dated as of February 12, 2003,
        between Aames Capital Corporation, Aames Funding Corporation and Morgan
        Stanley Mortgage Capital, Inc.11
      
      Computation
        of Net Income (Loss) Per Common Share    (1)
      
      Incorporated
        by reference from Registrants Annual Report on Form 10-K for the year
        ended June 30, 2000 and filed with the Commission on September 28, 2000(2)
      
      Incorporated by
        reference from Registrant's Annual Report on Form 10-K for the year ended
        June 30, 1999 and filed with the Commission on September 3, 1999(3)
      
      Included in Exhibit
        3.1








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|(4) |  | Incorporated
      by reference from Registrant's Registration Statement on Form 8-A, file
      no. 33-13660, filed with the Commission on July 12, 1996                             
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |  |                                                                                                                                                                                       
|(5) |  | Incorporated by reference
      from Registrant's Amendment No. 1 to the Registration Statement on Form 8-A
      dated as of, and filed with the Commission on, April 27, 1998       
|    |  |                                                                                                                                                                                       
|(6) |  | Incorporated by reference
      from Registrant's Current Report on Form 8-K dated as of December 23,
      1998 and filed with the Commission on December 31, 1999                   
|    |  |                                                                                                                                                                                       
|(7) |  | Incorporated by reference
      from Registrant's Quarterly Report on Form 10-Q for the quarter ended
      March 31, 1996 and filed with the Commission on July 3, 1996              
|    |  |                                                                                                                                                                                       
|(8) |  | Incorporated by reference
      from Registrant's Quarterly Report on Form 10-Q for the quarter ended
      December 31, 1998 and filed with the Commission on February 22,
      1999
|    |  |                                                                                                                                                                                       
|(9) |  | Incorporated by reference
      from Registrants Amendment No. 1 to the Registration Statement on
      Form T-3, file no. 022-28600, filed December 12, 2002                        
|    |  |                                                                                                                                                                                       
|    |  |                                                                                                                                                                                       
|    |  |