---

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

___________

FORM 10-Q

(Mark One)



|[ X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|---- | ---------------------------------------------------------------------------------------

For the quarterly period ended December 31, 2000

or



|[ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|--- | ----------------------------------------------------------------------------------------

For the transition period from _________________to ________________________

COMMISSION FILE NUMBER 0-19604

___________

AAMES FINANCIAL CORPORATION



|DELAWARE                                                       | 95-4340340                          
|-------------------------------------------------------------- | ------------------------------------
|(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.)

350 SOUTH GRAND AVENUE, LOS ANGELES, CA 90071-3459

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

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

___________

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

At January 31, 2001, Registrant had 6,256,934 shares of common stock outstanding.



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TABLE OF CONTENTS





|Item No.                     |                                                                                                                           | Page No.
|---------------------------- | ------------------------------------------------------------------------------------------------------------------------- | --------
|PART I-FINANCIAL INFORMATION
|Item 1-                      | Financial Statements                                                                                                      |         
|                             | Condensed Consolidated Balance Sheets at December 31, 2000 (Unaudited) and June 30, 2000 (Audited)                        | 3       
|                             | Condensed Consolidated Statements of Operations for the six months ended December 31, 2000 and 1999 (Unaudited)           | 4       
|                             | Condensed Consolidated Statements of Cash Flows for the three and six months ended December 31, 2000 and 1999 (Unaudited) | 5       
|                             | Notes to Condensed Consolidated Financial Statements (Unaudited)                                                          | 6       
|Item 2-                      | Management's Discussion and Analysis of Financial Condition and Results of Operations                                     | 7       
|                            
|PART II-OTHER INFORMATION   
|Item 1-                      | Legal Proceedings                                                                                                         | 31      
|Item 2-                      | Changes in Securities                                                                                                     | 31      
|Item 3-                      | Defaults Upon Senior Securities                                                                                           | 31      
|Item 4-                      | Submission of Matters to a Vote of Security Holders                                                                       | 31      
|Item 5-                      | Other Information                                                                                                         | 32      
|Item 6-                      | Exhibits and Reports on Form 8-K                                                                                          | 32      
|Signature Page               | 33                                                                                                                       

2



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Item 1. Financial Statements

AAMES FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET





|                                                | December 31,2000                                                                                                                                             | June 30,2000            
|----------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------
|                                                | (Unaudited)                                                                                                                                                  | (Audited)               
|ASSETS                                         
|Cash and cash equivalents                       | $ 21,440,000                                                                                                                                                 | $ 10,179,000            
|Loans held for sale, at lower of cost or market | 231,699,000                                                                                                                                                  | 398,921,000             
|Accounts receivable                             | 74,475,000                                                                                                                                                   | 52,713,000              
|Residual interests, at estimated fair value     | 279,900,000                                                                                                                                                  | 290,956,000             
|Mortgage servicing rights, net                  | 9,082,000                                                                                                                                                    | 12,346,000              
|Equipment and improvements, net                 | 11,667,000                                                                                                                                                   | 10,522,000              
|Prepaid and other                               | 11,879,000                                                                                                                                                   | 14,727,000              
|                                                |                                                                                                                                                              |                         
|                                                | Total assets                                                                                                                                                 | $ 640,142,000
==========
|                                                |                                                                                                                                                              |                         
|LIABILITIES AND STOCKHOLDERS' EQUITY           
|Borrowings                                      | $ 275,465,000                                                                                                                                                | $ 275,470,000           
|Revolving warehouse and repurchase facilities   | 209,434,000                                                                                                                                                  | 375,015,000             
|Accounts payable and accrued expenses           | 61,584,000                                                                                                                                                   | 56,985,000              
|Income taxes payable                            | 8,042,000                                                                                                                                                    | 8,416,000               
|                                                |                                                                                                                                                              |                         
|                                                | Total liabilities                                                                                                                                            | 554,525,000             
|                                                |                                                                                                                                                              |                         
|Commitments and contingencies                   |                                                                                                                                                              |                         
|Stockholders' equity:                           |                                                                                                                                                              |                         
|                                                | Series A Preferred Stock, par value $0.001 per share; 500,000 shares authorized; none outstanding                                                            | -                       
|                                                | Series B Convertible Preferred Stock, par value $0.001 per share; 29,704,000 shares authorized; 26,704,000 shares outstanding                                | 27,000                  
|                                                | Series C Convertible Preferred Stock, par value $0.001 per share; 61,230,000 and 107,123,000 shares authorized; 20,336,000 and 60,976,000 shares outstanding | 20,000                  
|                                                | Series D Convertible Preferred Stock; par value $0.001 per share; 108,566,000 shares authorized; 59,412,000 and -0- shares outstanding                       | 59,000                  
|                                                | Common Stock, par value $0.001 per share; 400,000,000 shares authorized; 6,256,000 and 6,235,000 shares outstanding                                          | 6,000                   
|Additional paid-in capital                      | 417,485,000                                                                                                                                                  | 401,652,000             
|Retained deficit                                | (331,980,000)                                                                                                                                                | (327,268,000)           
|                                                |                                                                                                                                                              |                         
|Total stockholders' equity                      | 85,617,000                                                                                                                                                   | 74,478,000              
|                                                |                                                                                                                                                              |                         
|Total liabilities and stockholders' equity      | $ 640,142,000
==========                                                                                                                                     | $ 790,364,000
==========

See accompanying notes to condensed consolidated financial statements.

3



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AAMES FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)



|                                            | Three Months EndedDecember 31,                                                          | Six Months EndedDecember 31,
|------------------------------------------- | --------------------------------------------------------------------------------------- | ----------------------------
|                                            | 2000                                                                                    | 1999                        
|Revenue:                                    |                                                                                         |                             
|                                            | Gain on sale of loans                                                                   | $ 18,708,000                
|                                            | Write-down of residual interests and mortgage servicing rights                          | -                           
|                                            | Origination fees                                                                        | 12,415,000                  
|                                            | Loan servicing                                                                          | 4,210,000                   
|                                            | Interest                                                                                | 21,681,000                  
|                                            |                                                                                         |                             
|                                            | Total revenue, including write-down of residual interests and mortgage servicing rights | 57,014,000                  
|                                            |                                                                                         |                             
|Expenses:                                   |                                                                                         |                             
|                                            | Compensation                                                                            | 24,703,000                  
|                                            | Production                                                                              | 4,554,000                   
|                                            | General and administrative                                                              | 12,641,000                  
|                                            | Interest                                                                                | 13,580,000                  
|                                            |                                                                                         |                             
|                                            | Total expenses                                                                          | 55,478,000                  
|                                            |                                                                                         |                             
|Income (loss) before income taxes           | 1,536,000                                                                               | (46,345,000)                
|Provision for income taxes                  | 525,000                                                                                 | 1,350,000                   
|                                            |                                                                                         |                             
|Net income (loss)                           | $ 1,011,000
========                                                                    | $(47,695,000)
==========    
|                                            |                                                                                         |                             
|Net loss per common share:                  |                                                                                         |                             
|                                            | Basic                                                                                   | $ (0.36)
=====              
|                                            | Diluted                                                                                 | $ (0.36)
=====              
|                                            |                                                                                         |                             
|Weighted average number shares outstanding: |                                                                                         |                             
|                                            | Basic                                                                                   | 6,211,000
=======           
|                                            | Diluted                                                                                 | 6,211,000
=======           

See accompanying notes to condensed consolidated financial statements.

4



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



|                                                     | Six Months EndedDecember 31,                                                            
|---------------------------------------------------- | ----------------------------------------------------------------------------------------
|                                                     | 2000                                                                                    
|Operating activities:                                |                                                                                         
|                                                     | Net income (loss)                                                                       
|                                                     | Adjustments to reconcile net income (loss) to net cash provided by operating activities:
|                                                     | Depreciation and amortization                                                           
|                                                     | Gain on sale of loans                                                                   
|                                                     | Valuation of residual interests and mortgage servicing rights                           
|                                                     | Accretion of residual interests                                                         
|                                                     | Mortgage servicing rights originated                                                    
|                                                     | Mortgage servicing rights amortized                                                     
|                                                     | Changes in assets and liabilities:                                                      
|                                                     | Loans held for sale originated or purchased                                             
|                                                     | Proceeds from sale of loans held for sale                                               
|                                                     | Decrease (increase) in:                                                                 
|                                                     | Accounts receivable                                                                     
|                                                     | Residual interests                                                                      
|                                                     | Prepaid and other                                                                       
|                                                     | Income tax refund receivable                                                            
|                                                     | Increase (decrease) in:                                                                 
|                                                     | Accounts payable and accrued expenses                                                   
|                                                     | Income taxes payable                                                                    
|                                                     |                                                                                         
|Net cash provided by operating activities            | 164,623,000                                                                             
|                                                     |                                                                                         
|Investing activities:                                |                                                                                         
|                                                     | Purchases of equipment and improvements                                                 
|                                                     |                                                                                         
|Net cash used in investing activities                | (3,628,000)                                                                             
|                                                     |                                                                                         
|Financing activities:                                |                                                                                         
|                                                     | Net proceeds from convertible preferred stock issuance                                  
|                                                     | Proceeds from exercise of common stock options                                          
|                                                     | Proceeds from (reductions in) borrowings                                                
|                                                     | Reductions in revolving warehouse and repurchase facilities                             
|                                                     | Other, net                                                                              
|                                                     |                                                                                         
|Net cash used in financing activities                | (149,734,000)                                                                           
|                                                     |                                                                                         
|Net increase (decrease) in cash and cash equivalents | 11,261,000                                                                              
|Cash and cash equivalents at beginning of period     | 10,179,000                                                                              
|                                                     |                                                                                         
|Cash and cash equivalents at end of period           | $ 21,440,000
=========                                                                  

See accompanying notes to condensed consolidated financial statements.

5



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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 Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted.

The condensed consolidated financial statements include the accounts of the Company and all of its subsidiaries after eliminating all significant intercompany transactions and reflect all normal, recurring adjustments which are, in the
opinion of management, necessary to present a fair statement of the results of operations of the Company in conformity with generally accepted accounting principles 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, 2000 are not necessarily indicative of the results expected for the full fiscal year.

At December 31, 2000, Specialty Finance Partners ("SFP"), a partnership controlled by Capital Z Financial Services Fund, II, L.P., a Bermuda partnership (together with SFP, "Capital Z") beneficially owned preferred stock
representing approximately 47.2% of the Company's combined voting power in the election of directors and approximately 91.4% 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: Subsidiary Guarantors

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

Note 3: Stockholders' Equity

On June 10, 2000 and in the first of a two-phase $50.0 million investment by Capital Z, the Company issued 40.8 million shares of Series C Convertible Preferred Stock, par value $0.001 per share (the
"Series C Stock"), for $0.85 per share to Capital Z and received $34.7 million, and issued warrants to Capital Z to purchase 5.0 million shares of the Series C Stock at $0.85 per share. Net proceeds to the Company, after issuance
expenses, were $34.3 million.

Subsequently, in the second phase which occurred on July 12, 2000, the Company issued 18.0 million of Series D Convertible Preferred Stock, par value $0.001 per share (the "Series D Stock"), to Capital Z for $0.85
per share, its stated value, and received $15.3 million. Net proceeds, after issuance expenses, were $14.5 million. At the same time, Capital Z exchanged the 40.8 million shares of Series C Stock and the warrants to purchase 5.0 
million shares of Series C Stock received in the first phase for an equal number of shares and warrants to purchase Series D Stock.

6



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Note 4: Per Share Data

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





|                                   | Three Months Ended
December 31,                                          | Six Months Ended December 31,
|---------------------------------- | ------------------------------------------------------------------------ | -----------------------------
|                                   | 2000                                                                     | 1999                         
|Basic net loss per common share:   |                                                                          |                              
|                                   | Net income (loss)                                                        | $ 1,011                      
|                                   | Less: Accrued dividends on Series B, C and D Convertible Preferred Stock | (3,254)                      
|                                   | Basic net loss to common stockholders                                    | $ (2,243)                    
|                                   | Basic weighted average number of common shares outstanding               | 6,211                        
|                                   |                                                                          |                              
|                                   | Basic net loss per common share                                          | $ (0.36)
=====               
|                                   |                                                                          |                              
|Diluted net loss per common share: |                                                                          |                              
|                                   | Diluted net loss to common stockholders                                  | $ (2,243)                    
|                                   | Diluted weighted average number of common shares outstanding             | 6,211                        
|                                   |                                                                          |                              
|Diluted net loss per common share  | $ (0.36)
======                                                          | $ (8.01)
======              



Note 5: Reclassifications

Certain amounts related to fiscal year 2000 have been reclassified to conform to the fiscal year 2001 presentation.

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

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

Special Note Regarding Forward-Looking Information

This Report contains statements that constitute "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934 and Section 27A of the Securities Act of 1933. The words "expect,"
"estimate," "anticipate," "predict," "believe," and similar expressions and variations thereof are intended to identify forward-looking statements. Such statements appear in a number of places in this filing and include statements regarding the intent,
belief or current expectations of the Company, its directors or officers with respect to, among other things (a) market conditions in the securitization, capital, credit and whole loan markets and their future impact on the Company's operations,
(b) trends affecting the Company's liquidity position, including, but not limited to, its access to warehouse, working capital and other credit facilities and its ability to effect securitizations and whole loan sales, (c) the impact of the
various cash savings plans and other restructuring strategies being considered by the Company, (d) the Company's on-going efforts in improving its equity position, (e) trends affecting the Company's financial condition and results of operations,
(f) the Company's business and liquidity strategies. The stockholders of the Company are cautioned not to put undue reliance on such forward-looking statements. Such forward-looking statements are not guarantees of future performance and involve
risks and uncertainties. Actual results may differ materially from those projected in this Report, for the reasons, among others, 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, 2000, the quarterly reports on Form 10-Q filed by the Company during the remainder of fiscal 2001, and any current reports on Form 8-K filed by the Company.

7



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Recent Events

During the three months ended December 31, 2000, the Company recorded net income of $1.0 million compared to a loss of $47.7 million in the comparable period a year ago. Included in the net loss during the quarter ended December
31, 1999 was a $35.2 million write-down of residual interests and mortgage servicing rights. Excluding the $35.2 million write-down, the Company reported a net operating loss of $12.5 million.

As previously reported, on December 19, 2000, the Company completed a securitization of $471.5 million of mortgage loans and sold its residual interest to Capital Z Investments, L.P., a Bermuda partnership ("CZI") an affiliate of
Capital Z Financial Services Fund II, L.P., a Bermuda partnership through the Residual Forward Sale Facility with CZI (the "Residual Facility") for cash. Although the Company has historically retained the servicing on the loans it securitizes, the
Company sold its servicing rights and the rights to prepayment fees under the securitization because the price paid by the independent, third party loan servicer resulted in a realized gain on sale higher than what the Company would have realized had the
mortgage servicing rights and the rights to prepayment fees been retained, and the gain was for cash.

As previously reported, the Company was notified in writing by the New York Stock Exchange (the "NYSE") on September 12, 2000 (the "NYSE Notice") that the average closing price per share of the Company's Common Stock was below the
NYSE's minimum stock price requirement of $1.00 per share as of the thirty trading-day period ended July 19, 2000. Pursuant to the NYSE Notice, the Company had until December 29, 2000 to raise the thirty day average closing price of the Common
Stock above $1.00 per share or the NYSE would suspend the Company's listing and apply to the Securities and Exchange Commission ("SEC") for delisting. The closing price of the Common Stock on December 29, 2000 was $0.56 per share and the average closing
price for the thirty trading-day period ended December 29, 2000 was $0.92 per share. The Company submitted additional materials at that time and continued discussions with the NYSE. The closing price of the Common Stock has remained above $1.00 per share
since January 31, 2001 and the average closing price for the thirty trading-day period ended February 13, 2001 was $1.11 per share. The NYSE has informed the Company that, after giving consideration to these factors, it will continue to trade the Common
Stock of the Company through March 30, 2001. The NYSE has also informed the Company that it will continue to monitor events at the Company as well as the price of the Company's Common Stock and that compliance with the $1.00 per share price minimum for
the thirty trading-day period ended March 30, 2001 will be reevaluated at that time. There can be no assurance that the thirty day average closing price of the Common Stock will remain above $1.00 per share or that the Common Stock will not be suspended
by the NYSE. If the Common Stock were suspended by the NYSE, it would seriously impair the ability of Common stockholders to trade their shares.

On January 24, 2001, the Company renewed to January 23, 2002 an existing $200.0 million revolving warehouse facility and increased the capacity under the facility to $300.0 million. Included in this facility's renewal is a $40.0
million subline that provides for the funding of mortgage loans at closing.

In February 2001, the Company entered into a sublease involving approximately 44,800 rentable square feet at its headquarter office located at 350 South Grand Avenue, Los Angeles, California. The sublease will result in a reduction to
the Company's occupancy expenses of approximately $600,000 annually. No charge to earnings was incurred as a consequence of this sublease transaction. The Company was required by terms of the sublease to pledge approximately $1.9 million of cash to
guaranty the differential between the present values of its original lease payment streams and those called for under the sublease. As part of the Company's on-going cost savings program, the Company is evaluating other subleasing opportunities for space
it currently occupies that are subject to operating leases. If the Company agrees to sublease such space at lease rates significantly less than existing base lease terms or if the lease commitments are bought out as a consequence of a negotiated lease
termination, the Company could incur a significant charge to earnings.

General

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

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

8



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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 its core business strategy, which consists of: (i) increasing core loan production; (ii) maximizing opportunities in loan servicing; and (iii) becoming self-financing (i.e., the ability
to obtain sufficient lines of credit to provide financing for assets created by the Company and the reduction of reliance on the public equity and debt markets) through continuing to diversify funding sources and reduce its costs of production.

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

Maximize Opportunities in Loan Servicing. The Company intends to build slowly the size of its servicing portfolio to provide a stable and significant source of recurring revenue by continuing to increase loan originations,
selling a portion of its loan production through new securitizations and retaining the servicing in such securitizations. However, as a means to maximize profitability and cash flow from securitizations, the Company may, from time to time, securitize on a
servicing released basis through the sale for cash of the rights to service loans in a securitization.

Become Self Financing Through Continuing to Diversify Funding Sources and Reduce Its Costs of Production. The Company intends to continue to expand and diversify its funding sources by adding additional warehouse or
repurchase facilities, disposing of a portion of its loan production for cash in the whole loan market, selling residual interests created in securitizations through the Residual Facility until the expiration of that facility, and developing new sources
for working capital. The Company also intends to further reduce its costs of production primarily through increasing the economies of scale of its core retail and broker production, including Internet production, while at the same time identifying
opportunities for cost containment and/or continued reductions in the costs of production within the Company.

The strategies discussed above contain forward-looking statements. Such statements are based on current expectations and are subject to risks, uncertainties and assumptions, including those discussed under "Risk Factors." Should one or
more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. Thus, no assurance can be given that the Company will be able to
accomplish the above strategies.

Loan Origination. The Company originates mortgage loans nationally through its core retail and broker channels, including the Internet. The Company also purchases closed loans through correspondents, which it has materially
decreased since fiscal 1998. The Company underwrites and appraises every loan it originates and reviews appraisals and re-underwrites all loans it purchases.

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





|                  | Three Months EndedDecember 31, | Six Months Ended December 31,
|----------------- | ------------------------------ | -----------------------------
|                  | 2000                           | 1999                         
|                  | (In thousands)                
|Broker Network(1) | $ 299,136                      | $ 365,992                    
|Retail(2)         | 298,796                        | 202,574                      
|                  | Core retail and broker         | 597,932                      
|Correspondent     | 2,701                          | 12,286                       
|                  |                                |                              
|Total             | $ 600,633
=======              | $ 580,852 
=======           

____________________

(1)	Includes loans originated through telemarketing and the Internet, through an affiliation with certain Internet lending sites, of $19.8 million, and $35.4 million during the three and six months ended December 31, 2000,
respectively. There was no similar production during the three and six months ended December 31, 1999.

(2)	Includes loans originated through the Internet, through an affiliation with certain Internet lending sites, of $10.4 million, and $18.6 million during the three and six months ended December 31, 2000, respectively, and
$6.1 million during the three and six months ended December 31, 1999.

9



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Total loan production during the three months ended December 31, 2000 was $600.6 million, an increase of $82.5 million, or 15.9%, from the $518.1 million reported during the three months ended September 30, 2000, and an
increase of $19.7 million, or 3.4%, from the $580.9 million in loan production reported during the three months ended December 31, 1999. The Company's core retail and broker production was $597.9 million during the three months ended December 31, 2000, an
increase of $83.9 million, or 16.3%, from the $514.0 million reported during the three months ended September 30, 2000 and an increase of $29.3 million or 5.2% from the $568.6 million reported during the three months ended December 31, 1999. The Company's
core retail and broker production levels for the quarter were the highest in the Company's history; however, the Company's loan production levels during the March 2001 quarter may be lower than those reported during the quarter ended December 31, 2000,
due primarily to seasonality factors which have historically resulted in lower loan production during the March quarter.

During the three months ended December 31, 2000, retail production was $298.8 million, an increase of $66.6 million over the production levels reported during the three months ended September 30, 2000 and a $96.2 million increase over
retail production reported during the three months ended December 31, 1999. Broker production increased $17.3 million to $299.1 million during the three months ended December 31, 2000 over the $281.8 million reported during the September 2000 quarter, but
declined $66.9 million, or 18.3 from $366.0 million during the comparable three month period in 1999. The decline in broker production from a year ago was primarily due to certain pricing and credit changes made by the Company in its underwriting criteria
designed to improve credit quality and overall profitability. Correspondent production was $2.7 million, $4.1 million and $12.3 million during the three months ended December 31, 2000, September 30, 2000 and December 31, 1999, respectively. The
declines reflect the Company's previously reported decision to decrease its reliance on correspondent purchases for its loan production. In the latter part of the quarter ended December 31, 1999, the Company commenced originating retail loans through
the Internet, through an affiliation with certain Internet lending sites. Retail loans originated through the Internet during the three months ended December 31, 2000 increased to $10.4 million from $8.2 million during the three months ended September 30,
2000 and $6.1 million during the three months ended December 31, 1999. During the quarter ended June 30, 2000, the Company's broker channel commenced originating loans through telemarketing and the Internet, through an affiliation with certain
Internet lending sites. Loan originations from these sources were $19.8 million during the three months ended December 31, 2000 compared to $15.6 million during the three months ended September 30, 2000. Total loan production of $30.2 million
attributable to telemarketing and the Internet represents 5.0% of total loan production during the three months ended December 31, 2000. The Company expects Internet and telemarketing production to generate an increasing dollar amount and percentage of
total loan production over time.

Total loan production increased $14.4 million to $1.1 billion during the six months ended December 31, 2000 from production levels reported during the comparable six month period a year ago. The Company's core retail and broker
production increased $32.6 million, or 3.0% to $1.1 billion during the six months ended December 31, 2000. The increase was due principally to a $149.2 million increase in retail production, partially offset by a decrease of $116.5 million decline in
broker production due to pricing and changes in underwriting designed to improve credit quality and overall profitability. Correspondent production decreased by $18.2 million to $6.8 million during the six months ended December 31, 2000 from $25.0 million
during the six months ended December 31, 1999, reflecting the Company's previously reported decision to decrease reliance on this channel for loan production.

During the six months ended December 31, 2000, loans originated through telemarketing and the Internet, through affiliations with certain Internet lending sites was $54.0 million, of which $18.6 million and $35.4 million was originated
in the retail and broker channel, respectively. During the later part of the December 1999 quarter, the Company commenced originating retail loans through the Internet, through an affiliation with certain Internet lending sites, resulting in an aggregate
$6.1 million of loan production, with all of such production being originated in the retail channel.

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



|                      | December 31,
|--------------------- | ------------
|                      | 2000        
|Retail branch offices | 100         
|Broker offices        | 5           

The decline between December 31, 2000 and 1999 in the number of retail branch offices reflects the Company's decision, as part of its cost reduction efforts, to close unprofitable branches and, with respect to broker
offices, to regionalize its back office operations including the underwriting, loan processing and appraisal review functions while maintaining its national network of loan officers dealing

10



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with individual loan brokers within its markets across the country.

Loan Securitizations and Sales. As a fundamental part of its business and financing strategy, the Company sells 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 these facilities available for future fundings of mortgage loans.

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, 2000 and 1999 (in thousands):





|                                         | Three Months EndedDecember 31, | Six Months EndedDecember 31,
|---------------------------------------- | ------------------------------ | ----------------------------
|                                         | 2000                           | 1999                        
|Loans pooled and sold in securitizations | $ 471,455                      | $ 403,492                   
|Whole loan sales                         | 148,858                        | 184,617                     
|                                         |                                |                             
|Total loans securitized and sold         | $ 620,313
=======              | $ 588,109 
=======          



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. The
Company generally realizes higher gain on sale on securitization than it does on whole loan sales for cash. The higher gain on sale in securitizations transactions is attributable to the excess servicing spread and mortgage servicing rights associated
with retaining a residual interest and the servicing on the mortgage loans in the securitization, respectively, net of transactional costs. 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.

However, in a securitization the underlying securities are generally over-collateralized by the Company depositing a combination of mortgage loans with a principal balance exceeding the principal balance of the securities, and cash
into the securitization, which requires a cash outflow. The upfront over-collateralization and servicing advance obligations required on retaining the servicing in securitizations are generally cash flow negative to the Company in the early years of the
securitization. These negative cash flow considerations along with conditions in the securitization market precluded the Company from securitizing mortgage loans in certain recent quarters. The Residual Facility has strengthened the Company's ability to
include securitizations in its loan disposition strategy by reducing the negative cash flow aspects of securitization and by providing another source of cash to the Company through periodic sales of residual interests for cash. On December 19, 2000, the
Company completed a securitization of $471.5 million of mortgage loans and sold for cash its residual interest through the Residual Facility. At December 31, 2000, the remaining amount under the Residual Facility is approximately $40.8 million.

Loan Servicing. It is the Company's strategy to maximize opportunities in loan servicing. The Company believes that the business of loan servicing provides a more consistent revenue stream and is less cyclical than the
business of loan origination and disposition. The Company intends to slowly build and retain its servicing portfolio.

Historically, the Company retained the servicing on the loans it securitized; however, in recent quarters as means to maximize profitability and cash flow from securitizations, the Company has sold the servicing rights created in
securitizations for cash. In the securitization completed by the Company on December 19, 2000, the Company sold its servicing rights, together with the rights to prepayment fees because the price paid by the independent, third party servicer resulted in a
realized gain on sale higher than what the Company would have realized had the mortgage servicing rights and the rights to prepayment fees been retained, and the gain was for cash. The Company generally does not retain servicing on loans it sells in whole
loan sales for cash.

11



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The following table sets forth certain information regarding the Company's servicing portfolio at September 30, 2000 and 1999 and June 30, 2000 (in thousands):





|                             | December 31,   | June 30,      
|---------------------------- | -------------- | --------------
|                             | 2000           | 1999          
|Servicing portfolio          | $ 3,128,000(1) | $ 3,922,000(2)
|Serviced in-house            | $ 2,912,000    | $ 3,586,000   
|Percentage serviced in-house | 93.1%          | 91.4%         

___________________

(1)	Includes $488.5 million of loans subserviced for others by the Company on an interim basis and approximately $216.0 million of loans subserviced by others.

(2)	Includes $136.4 million of loans subserviced for others by the Company on an interim basis and approximately $336.0 million of loans subserviced by others.

(3)	Includes $280.2 million of loans subserviced for others by the Company on an interim basis and approximately $265.4 million of loans subserviced by others.

The Company has not added any new loans to the portfolio (excluding loans subserviced on an interim basis) during the past twelve months due to the Company's sale of $1.3 billion of loans in whole loan sales for cash and $931.5 million
of loans sold in securitizations during the twelve months ended December 31, 2000 with servicing released. The Company's loan servicing portfolio at December 31, 2000 decreased $432.0 million, or 12.1% to $3.1 billion from $3.6 billion
reported at June 30, 2000, reflecting loan servicing portfolio runoff during the period, partially offset by the $488.5 million of loans subserviced for others by the Company on an interim basis at December 31, 2000. The Company's loan servicing
portfolio at December 31, 2000 was $794.0 million below the $3.9 billion reported at December 31, 1999, reflecting loan service run-off during the past twelve months, partially offset by the $488.5 million subserviced for others on an interim
basis at December 31, 2000.

Moreover, subsequent to December 31, 2000, the Company transferred to the purchasers or their designated servicers the approximately $488.5 million of loans, which represented loans sold in whole loan sales and the December 
2000 securitization but subserviced by the Company at December 31, 2000 on an interim basis. The Company's servicing portfolio will continue to be impacted in the future by the Company's dispositions of its loan production through whole loan sales and
securitizations on a servicing released basis, which has resulted in a smaller servicing portfolio in spite of securitization activity. See "Risk Factors."

The Company has historically experienced delinquency rates that are higher than those prevailing in this industry due to its origination of lower credit grade loans. As previously reported, since fiscal 1998 the Company has
discontinued its bulk purchase of correspondent loans, increased its focus on higher credit grade loans and discontinued certain broker programs which the Company believes will cause delinquencies in the Company's servicing portfolio to decrease in the
future. Delinquent loans (by principal balance) decreased at December 31, 2000 to $440.9 million from $483.4 million at June 30, 2000 and $569.8 million at December 31, 1999. The delinquency rate at December 31, 2000 was 14.1% compared
to 13.6% at June 30, 2000 and 14.5% at December 31, 1999. Although the principal balance of delinquent loans at December 31, 2000 decreased compared to June 30, 2000, the delinquency rate increased due to a higher decrease in the size of the
Company's loan servicing portfolio. The delinquency rate at December 31, 2000 declined from the delinquency rate at December 31, 1999, despite the decline in the size of the servicing portfolio. This decline in delinquencies is due primarily to the
Company's strategy of increasing early collection intervention efforts on one payment delinquencies within applicable grace payment periods and to the inclusion of an increased percentage of higher credit grade loans in the Company's securitizations
completed in 1999. A decline in delinquencies generally reduces the Company's servicing advance obligations. The Company's strategy of dispositions through whole sales and securitizations will diminish growth of the servicing portfolio. A slow growing or
declining portfolio could cause delinquency rates to rise. See "Results of Operations-Revenue."

During the six months ended December 31, 2000, losses on loan liquidations increased to $49.5 million from $41.9 million in the comparable period a year ago due in part to acceleration of losses due to increased loss
mitigation efforts. The Company believes that while such efforts increase losses in the short-term, they reduce the size of the overall loss. In addition, credit losses incurred by the Company on liquidation were disproportionately higher for
correspondent loans purchased in bulk and included in the Company's earlier trusts than

12



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experienced upon liquidations of loans originated in the Company's core production channels. During the six months ended December 31, 2000, approximately 44.7% 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 23.8% of the Company's servicing portfolios when measured at July 1, 2000. The Company has eliminated its bulk purchase
program. The seasoning of the bulk purchased portfolio may continue to contribute disproportionately to loan losses during the current fiscal year. Moreover, the adverse market conditions that existed during the fall of 1998 and recent regulatory changes
in certain states have resulted in the tightening in underwriting guidelines by 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 losses typically occur months or years after a loan is originated, data relating to delinquencies, foreclosures and losses as a percentage of the current portfolio can understate the risk of future
delinquencies, losses or foreclosures. See "Certain Accounting Considerations-Accounting for Securitizations-Credit Losses."

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



|                                                                                               | Six Months Ended
December 31, | Year Ended June 30,
|---------------------------------------------------------------------------------------------- | ----------------------------- | -------------------
|                                                                                               | 2000                          | 1999               
|                                                                                               | (Dollars in thousands)       
|Percentage of dollar amount of delinquent loans to loans serviced (period end)(1)(2)(3)(4)     |                               |                    
|One month                                                                                      | 2.3%                          | 2.1%               
|Two months                                                                                     | 0.9%                          | 0.9%               
|Three or more months:                                                                          |                               |                    
|Not foreclosed(5)                                                                              | 9.2%                          | 9.4%               
|Foreclosed(6)                                                                                  | 1.7%                          | 2.1%               
|                                                                                               |                               |                    
|Total                                                                                          | 14.1%
=====                   | 14.5% 
=====       
|Percentage of dollar amount of loans foreclosed during the period to servicing portfolio(4)(8) | 1.4%                          | 1.9%               
|Number of loans foreclosed during the period                                                   | 681                           | 1,004              
|Principal amount of foreclosed loans during the period                                         | $ 47,876                      | $ 78,831           
|Number of loans liquidated during the period                                                   | 634                           | 622                
|Net losses on liquidations during the period(7)                                                | $ 49,472                      | $ 41,925           
|Percentage of annualized losses to servicing portfolio(4)(8)                                   | 2.9%                          | 2.2%               
|Servicing portfolio at period end                                                              | $ 3,128,000                   | $3,922,000         

__________________

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

(4)	The servicing portfolio used in the percentage calculations includes loans subserviced for others by the Company on an interim basis of $488.5 million, $136.4 million, $280.2 million, $84.0 million and
$82.0 million for the periods ended December 31, 2000, December 31, 1999, June 30, 2000, June 30, 1999 and June 30, 1998, respectively.

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

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

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

(8)	The percentages for periods subsequent to June 30, 1998 were calculated to reflect the dollar volume of loans foreclosed or annualized losses, as the case may be, to the average dollar amount of mortgage loans serviced by
the Company and any subservicers during the related periods indicated.

13



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Certain Accounting Considerations

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 or purchased to a separate 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 proceeds (including
premiums) from the sale, net of related transaction costs, and the allocated carrying amount of the loans sold. The allocated carrying amount is determined by allocating the original cost basis amount of loans (including premiums paid on loans purchased)
between the portion sold and any retained interests (residual interests), based on their relative fair values at the date of transfer. The residual interests represent, over the estimated life of the loans, the present value of the estimated 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 loan losses.
Each agreement that the Company has entered into in connection with its securitizations requires either the overcollateralization of the trust or the establishment of a reserve account that may initially be funded by cash deposited by the Company.

The Company determines the present value of the cash flows at the time each securitization transaction closes using certain estimates made by management at the time the loans are sold. These estimates include: (i) future rate of
prepayment; (ii) 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 residual interests are recorded at estimated fair value and are marked to market through a charge (or credit) to earnings. On a quarterly basis, the Company reviews the fair value of the residual interests by analyzing its
prepayment, 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 may have on its residual interests. The Company may adjust the value of the residual interests or take a charge to earnings related to the residual interests, as appropriate, to reflect a valuation or write-down of
its residual interests based upon the actual performance of the Company's residual interests as compared to the Company's key assumptions and estimates used to determine fair value. Although management believes that the assumptions to estimate the fair
values of its 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 fees, the loan-to-value ratios and the credit grades of the loans included in the securitization and other industry data. The rate of prepayment may be affected by a variety of economic and other factors.

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

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

14



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Certain historical data and key assumptions and estimates used by the Company in its December 31, 2000 and June 30, 2000 reviews of the residual interests were the following:



|               | December 31,2000                                                                                                         | June 30,2000  
|-------------- | ------------------------------------------------------------------------------------------------------------------------ | --------------
|Prepayments:   |                                                                                                                          |               
|               | Actual weighted average annual prepayment rate, as a percentage of outstanding principal balance of securitized loans    | 32.9%         
|               | Estimated peak annual prepayment rates, as a percentage of outstanding principal balance of securitized loans:           |               
|               | Fixed rate loans                                                                                                         | 22.3% to 29.5%
|               | Adjustable rate loans                                                                                                    | 36.7% to 46.3%
|               | Estimated weighted average life of securitized loans                                                                     | 3.1 years     
|Credit losses: |                                                                                                                          |               
|               | Actual credit losses to date, as a percentage of original principal balances of securitized loans                        | 3.3%          
|               | Future estimated prospective credit losses, as a percentage of original principal balances of securitized loans          | 1.3%          
|               | Total actual and estimated prospective credit losses, as a percentage of original principal balance of securitized loans | 4.6%          
|               | Total actual credit losses to date and estimated prospective credit losses (dollars in thousands)                        | $325,529      
|Discount rate  | 15.0%                                                                                                                    | 15.0%         



In its regular quarterly review of its residual interests during the three months ended December 31, 2000, 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 and other industry data and determined that no adjustment of its assumptions (rate of prepayment, credit loss and discount rate) was warranted. 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 of its residual interests,
the Company will adjust the fair value of the residual interests through a charge to earnings.

The residual interests created in the $931.5 million of securitizations consummated during the six months ended December 31, 2000 were sold for cash to CZI during the period. Consequently, such residual interests are no longer
owned by the Company and therefore are not subject to the Company's normal quarterly evaluation of assumptions and estimates as compared to actual performance.

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

The Company sold for cash to an independent, third party loan servicer the mortgage servicing rights on the loans included in the $931.5 million of securitizations consummated during the six months ended December 31, 2000.
Accordingly, no MSR was capitalized by the Company during the three and six months ended December 31, 2000.

Recent Accounting Pronouncements

In June 1998, the FASB issued Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." ("SFAS 133") SFAS No. 133 requires companies to record
derivatives on the balance sheet as assets and liabilities, measured at fair value. Gains and losses resulting from changes in the values of those derivatives would be accounted for in earnings. Depending on the use of the derivative and the satisfaction
of other requirements, special hedge accounting may apply. At June 30, 2000, the Company had no freestanding derivative instruments in place and had no material amounts of embedded derivative instruments. The Company adopted SFAS 133, as
amended, on July 1, 2000. Based upon the Company's application of SFAS No. 133, its adoption had no materially adverse effect on the Company's consolidated financial statements.

15



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Results of Operations-Three and Six Months Ended December 31, 2000 and 1999

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, 2000 and 1999 (in thousands):





|                                                                                         | Three Months EndedDecember 31,                                 | Six Months EndedDecember 31,
|---------------------------------------------------------------------------------------- | -------------------------------------------------------------- | ----------------------------
|                                                                                         | 2000                                                           | 1999                        
|Revenue:                                                                                 |                                                                |                             
|                                                                                         | Gain on sale of loans                                          | $ 18,708                    
|                                                                                         | Write-down of residual interests and mortgage servicing rights | -                           
|                                                                                         | Origination fees                                               | 12,415                      
|                                                                                         | Loan servicing                                                 | 4,210                       
|                                                                                         | Interest                                                       | 21,681                      
|                                                                                         |                                                                |                             
|Total revenue, including write-downs of residual interests and mortgage servicing rights | 57,014                                                         | 12,916                      
|                                                                                         |                                                                |                             
|Expenses:                                                                                |                                                                |                             
|                                                                                         | Compensation                                                   | 24,703                      
|                                                                                         | Production                                                     | 4,554                       
|                                                                                         | General and administrative                                     | 12,641                      
|                                                                                         | Interest                                                       | 13,580                      
|                                                                                         |                                                                |                             
|Total expenses                                                                           | 55,478                                                         | 59,261                      
|                                                                                         |                                                                |                             
|Income (loss) before provision for income taxes                                          | 1,536                                                          | (46,345)                    
|Provision for income taxes                                                               | 525                                                            | 1,350                       
|                                                                                         |                                                                |                             
|Net income (loss)                                                                        | $ 1,011
=====                                                  | $ (47,695) 
=======         



Revenue

Total revenue during the three months ended December 31, 2000 was $57.0 million, compared to $12.9 million during the three months ended December 31, 1999. Included in total revenue during the quarter ended December 31, 1999 was a
$35.2 million write-down of residual interests and mortgage servicing rights. Excluding the write-down, total revenue increased $8.9 million during the three months ended December 31, 2000 from the comparable period a year ago. This increase is due
primarily to increases in gain on sale of loans and origination fees, partially offset by decreases in loan servicing and interest income.

Total revenue during the six months ended December 31, 2000 was $116.9 million, compared to $73.9 million during the comparable period in 1999. Included in total revenue during the six months ended December 31, 1999 was a $35.2 million
write-down of residual interests and mortgage servicing rights. Excluding the write-down, total revenue increased $7.8 million during the six months ended December 31, 2000 from the comparable period a year ago. This increase is due primarily to increases
in gain on sale of loans, origination fees and loan servicing revenue, partially offset by a decline in interest income.

Gain on sale of loans during the three months ended December 31, 2000 increased $9.1 million to $18.7 million from the $9.6 million gain on sale of loans reported during the three months ended December 31, 1999. During the three months
ended December 31, 2000, the Company disposed of $620.3 million of mortgage loans, compared to $588.1 million of mortgage loan dispositions during the same period a year ago. During the three months ended December 31, 2000, the Company securitized $471.5
million of mortgage loans, an increase of

16



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$68.0 million over the $403.5 million of loans pooled and sold in the securitization during the three months ended December  31, 1999. However, during the three months ended December 31, 2000, loans sold in whole loan
sales for cash decreased by $35.7 million to $148.9 million from $184.6 million of whole loans sales for cash during the three months ended December 31, 1999. The increase in gain on sale of loans resulted primarily from higher gain on sale rates
recognized by the Company in the securitization and in whole loan sales during December 2000 quarter when compared to gain rates on the securitization and whole loan sale dispositions during the December 1999 quarter. To a lesser extent, the increase was
attributable to a $32.3 million increase in loan dispositions during the three months ended December 31, 2000 over the amount of loan dispositions during the comparable three month period in 1999. The gain rate on the $471.5 million securitization during
the three months ended December 31, 2000 was higher than the gain rate realized on the $403.5 million securitization which closed during the three months ended December 31, 1999 due primarily to higher excess spread, despite being partially offset by
$785,000 of expenses attributable to the Residual Facility and a $1.5 million hedge loss, neither of which were factors in the gain on sale associated with the December 1999 quarter's securitization. Also included in gain on sale during the three months
ended December 31, 2000 are the proceeds to the Company from the sale of the mortgage servicing rights and the rights to the prepayment fee income on the securitization which is recorded at a higher gain rate than for the quarter ended December 31, 1999
when the Company retained the mortgage servicing rights and the rights to prepayment fees. The gain on sale rates realized by the Company on whole loan sales for cash were generally higher during the three months ended December 31, 2000 compared to gain
rates on whole loan sales for cash during the comparable period a year ago due to a combination of pricing and underwriting changes made by the Company and generally better market conditions in the whole loan markets during that time when compared to the
market conditions existing during the three months ended December 31, 1999.

Gain on sale of loans increased $7.2 million to $38.6 million during the six months ended December 31, 2000 from $31.4 million during the six months ended December 31, 1999. During the six months ended December 31, 2000 and 1999, the
Company relied on a combination of securitizations and whole loan sales for cash as it loan disposition strategy. However, the mix in the composition of securitizations and whole loan sales for cash differed during each of the respective periods based
upon the Company's review of market conditions, profitability and cash flow needs. As a result of the Residual Facility, loans disposed through securitizations increased by $127.9 million to $931.5 million during the six months ended December 31, 2000
from $803.6 million during the six months ended December 31, 1999 while whole loan sales for cash declined by $120.4 million to $356.8 million during the six months ended December 31, 2000 from $477.2 million during the comparable period a year ago. The
increase in gain on sale of loans resulted primarily from higher gain rates recognized by the Company in its securitizations and whole loan sales for cash during the six months ended December 31, 2000 when compared to gain rates recognized on its loan
dispositions during the comparable period a year ago. To a much lesser extent, the increase in gain on sale during the six months ended December 31, 2000 from the same period a year ago is due to an $8.5 million increase in loan dispositions during the
six months ended December 31, 2000 over the level of loan dispositions reported a year ago. During the three and six months ended December 31, 2000, the Company, as it has from time to time, entered into forward interest rate swap agreements to hedge
interest rate exposure to its fix rate mortgage loan pipeline in anticipation of closing securitizations in each quarter within the six month period. Gain on sale during the six months ended December 31, 2000 is net of a $4.0 million hedge loss. There
were no hedge transactions in place during the six months ended December 31, 1999. Gain on sale of loans during the six months ended December 31, 2000 is also net of $1.5 million of expenses incurred on the Residual Facility which was not in place during
the six months ended December 31, 1999.

Origination fee revenue is primarily comprised of points and other fees charged by the Company on mortgage loans originated by the Company. Origination fee revenue is primarily a function of the volume of mortgage loans originated by
the Company through its retail channel and the weighted average points charged on such loans. Deferred origination fee revenue recognized during the period is attributable to the mix in the composition of loans being either securitized or sold in whole
loan sales in excess of the loans originated during the same periods. The recognition or deferral of deferred origination fee revenue during a period coincides with the recognition or deferral of deferred compensation expense during the same period. See
"Expenses-Compensation." Origination fee revenue during the three months ended December 31, 2000 was $12.4 million, an increase of $2.0 million, or 19.2% from $10.4 million during the three months ended December 31, 1999. Origination fee revenue
for the three months ended December 31, 2000 is net of $238,000 of origination fee revenue deferred to future periods. Origination fee revenue for the three months ended December 31, 1999 includes $508,000 of recognized deferred origination fee revenue
relating to prior periods' loan production. Net of the effects of the recognition or deferral of deferred origination fee revenue, during the three months ended December 31, 2000, origination fee revenue increased $2.8 million to $12.7 million from $9.9
million during the comparable period a year ago. The increase in origination fee revenue during the December 2000 quarter is attributable primarily to the increase in retail loan production during the period, partially offset by a decrease in average
points and fees per loan due to changes in the Company's pricing strategies that place a higher emphasis on coupon rates rather than points at origination, the Company's focus on higher credit-quality borrowers and recent regulatory changes that have
reduced the points and fees charged by the Company in certain states and for certain products.

Origination fee revenue during the six months ended December 31, 2000 was $24.7 million, an increase of $2.9 million from the $21.8 million of origination fee revenue reported in the comparable six month period in 1999. Origination fee
revenue during the six months ended December 31, 2000 and 1999 includes $2.1 million and $2.2 million, respectively, of deferred origination fee revenue recognized during those periods which relate to prior periods' loan production. Net of the effects of
the recognition of deferred origination fee revenue, during the

17



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six months ended December 31, 2000 origination fee revenue increased $3.0 million to $22.6 million from $19.6 million during the comparable period a year ago. The increase in origination fee revenue during the six months
ended December 31, 2000 from levels in the comparable period a year ago is attributable to the increase in retail loan production during the 2000 period from the comparable period a year ago, partially offset by a decline in average points and fees per
loan charged at the time of origination. As previously reported, the Company changed its pricing strategies by placing a higher emphasis on coupon rates rather than points at origination and a focus on higher credit-quality customers.

Loan service revenue consists of prepayment fees, late charges and other fees retained by the Company, and servicing fees earned on securitized pools, reduced by the subservicing costs and amortization of the Company's MSRs. Loan
service revenue declined by $200,000 to $4.2 million in the three months ended December 31, 2000 from $4.4 million during the three months ended December 31, 1999. The decline is attributable to a $900,000 decrease in servicing fees, late
charges and prepayment fees during the three months ended December 31, 2000 from the comparable period a year ago due to the decline in the Company's servicing portfolio from a year ago. However, the decline in loan servicing revenue was partially offset
by a $100,000 decline in expenses incurred relating to the Company's servicing advance arrangements, discussed more fully below, and by a reduction of $600,000 in amortization of the Company's MSRs during the December 2000 quarter from the levels reported
during the same period a year ago. The Company had two arrangements in place in order to reduce its servicing advance obligations during the three months ended December 31, 2000 and during the three months ended December 31, 1999. In the first
arrangement, a loan servicing company purchased certain servicing related advances and agreed to make future servicing advances with respect to an aggregate of $388.0 million ($216.0 million at December 31, 2000) in principal amount of loans. In
the second arrangement, an investment bank purchased certain servicing related advances from the Company, and agreed to undertake the obligation to make a substantial portion of the Company's advance obligations on its securitization trusts. See
"General-Loan Servicing."

Loan servicing revenue increased by $341,000 to $8.5 million during the six months ended December 31, 2000 from $8.2 million during the comparable six months in 1999, despite a decline in the size of the Company's loan servicing
portfolio from a year ago. Servicing fees, late charges and prepayment fees declined $1.5 million during the six months ended December 31, 2000 from the comparable six month period a year ago. However, loan servicing revenue was positively impacted by an
$800,000 reduction in expenses incurred relating to the Company's servicing advance arrangements and by a $1.7 million reduction in amortization of the Company's MSR's during the six months ended December 31, 2000 from the levels reported during the
comparable six month period in 1999.

Interest income includes interest on loans held for sale, interest on short-term overnight investments and accretion income associated with the Company's residual interests. Interest income during the three months ended December 31,
2000 decreased by $2.1 million to $21.7 million from $23.8 million during the three months ended December 31, 1999. Interest income decreased by $2.8 million to $45.0 million during the six months ended December 31, 2000 from $47.8 million during the
comparable six month period in 1999. The decreases in interest income during the three and six months ended December 31, 2000 from the amounts reported during the comparable three and six month periods in 1999 were due primarily to declines of $2.7
million and $4.9 million, respectively, in accretion to the Company's residual interests. The Company's residual interests were at lower levels during the three and six months ended December 31, 2000 when compared to residual interest levels during the
same periods a year ago. Partially offsetting the decreases in accretion income were increases of $600,000 and $2.2 million, respectively, in interest income on loans held for sale during the three and six months ended December 31, 2000 from comparable
periods a year ago. The increases in interest income on loans held for sale were attributable to higher balances of loans held for sale having higher weighted average coupon rates during the three and six months ended December 31, 2000 compared to such
balances and rates during comparable periods in 1999.

Expenses

Total expenses declined $3.8 million to $55.5 million during the three months ended December 31, 2000 from $59.3 million during the three months ended December 31, 1999. Total expenses declined $4.1 million to $114.7 million
during the six months ended December 31, 2000 from $118.8 million during the comparable six month period a year ago. The declines in total expenses during the three and six months ended December 31, 2000 from the comparable three and six month periods
during 1999 are due to reductions in production and general and administrative expenses, partially offset by increases in compensation and interest expense.

Compensation expense, which includes incentives, is generally related to the Company's loan origination volume, as retail and broker account executives earn incentives on funded loans. Compensation expense during the three months ended
December 31, 2000 increased $2.3 million, or 10.3%, to $24.7 million from $22.4 million during the three months ended December 31, 1999. This increase was primarily due to $1.7 million of accrued bonus compensation awards related to senior management and,
to a lesser extent to $1.3 million of incentive compensation to retail loan account executives relative to the $96.2 million increase in retail loan origination volume during the three months ended December 31, 2000 from origination volumes in the
comparable quarter a year ago, partially offset by a $1.0 million decline in recognized deferred direct compensation costs. Compensation expense for the three months ended December 31, 2000 is net of $222,000 of direct compensation costs associated with
loans originated during the current period and pending disposition. Compensation expense for the three months ended December 31, 1999 includes $743,000 of deferred direct compensation costs associated with loans

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originated in prior periods that were disposed of in the securitization and whole loan sales consummated during the December 2000 quarter. Net of the recognition or deferral of deferred direct compensatory costs,
compensation expense during the three months ended December 31, 2000 increased $3.3 million to $24.9 million from $21.6 million during the three months ended December 31, 1999.

Compensation expense during the six months ended December 31, 2000 increased $5.3 million, or 11.6%, to $50.8 million from $45.5 million during the six months ended December 31, 1999. Compensation expense for the six months ended
December 31, 2000 and 1999 includes $2.3 million and $3.1 million, respectively, of recognized deferred direct compensation costs associated with loans originated in prior periods that were disposed of in either whole loan sales or in the securitizations
consummated during the periods. Compensation expense for the six months ended December 31, 1999 also includes $1.0 million of nonrecurring severance costs incurred during the period. Net of the effects of the recognition of deferred direct compensatory
costs, compensation expense during the six months ended December 31, 2000 increased $6.1 million to $48.5 million from $42.4 million during the comparable six month period from a year ago. The increase is primarily attributable to $4.2 million of
incentive compensation awards to retail and broker account executives relative to the $32.6 million of increased core retail and broker loan origination during the six months ended December 31, 2000 over origination volumes reported during the comparable
six months in 1999. To a lesser extent, the increase is attributable to $1.7 million of bonus compensation expense relative to other senior management and staffing level increases during the six months ended December 31, 2000 when compared to such levels
during the comparable six month period from a year ago.



Production expense, primarily advertising, outside appraisal costs, travel and entertainment, and credit reporting fees decreased $2.4 million, or 34.3%, to $4.6 million during the three months ended December 31, 2000, from
$7.0 million during the three months ended December 31, 1999. Production expense during the six months ended December 31, 2000 decreased $6.5 million, or 41.7%, to $9.1 million from $15.6 million during the six months ended December 31, 1999. The
decreases in production expense during the three and six months ended December 31, 2000 from the comparable periods in 1999 are due primarily to the Company's cost reduction efforts, which include reducing its advertising expenses by improving the
efficiency and penetration of its advertising strategies through the adoption of the decentralized marketing approach in its retail loan office network. Additionally, in December 1999, in an effort to further reduce production costs, the Company
commenced the practice of having prospective borrowers pay for appraisal costs prior to incurrence of the appraisal expense during the loan origination process whenever possible. Prior thereto, the Company did not charge customers for appraisals unless
and until their loans closed, and absorbed as a production expense appraisal costs incurred for loan applications where the prospective applicants' loans were not closed and funded. Production expense expressed as a percentage of total loan origination
volume for the three months ended December 31, 2000 was 0.76% compared to 1.2% during the comparable three month period in 1999. The decline is attributable to the 34.3% decrease in production expense coupled with a $19.8 million, or 3.4% increase in
total origination volume during the three months ended December 31, 2000 from the comparable three month period in 1999. Production expense expressed as a percentage of total loan origination volume for the six months ended December 31, 2000 was 0.81%
compared to 1.4% during the six months ended December 31, 1999. The decrease is attributable to the 41.7% reduction in production expense combined with the $14.4 million, or 1.3%, increase in total loan origination volume during the six months ended
December 31, 2000 from the origination volumes reported for the comparable six month period from a year ago.

General and administrative expenses decreased $4.4 million and $5.1 million to $12.6 million and $26.2 million during the three and six months ended December 31, 2000 from $17.0 million and $31.3 million during the comparable three and
six month periods during 1999. Included in general and administrative expenses during the three and six months ended December 31, 1999 was a $2.0 million write-down relating to its servicing advances at December 31, 1999. Net of the effects of this
charge, the decreases in general and administrative expenses during the three and six months ended December 2000 was $2.4 million and $3.1 million from the comparable periods a year ago and were primarily due to declines in professional, legal,
communication and occupancy expenses. Subsequent to December 31, 2000, the Company entered into a sublease involving approximately 44,800 rentable square feet at its headquarter office located at 350 South Grand Avenue, Los Angeles, California. The
sublease will result in a reduction to the Company's occupancy expenses of approximately $600,000 annually. No charge to earnings was incurred as a consequence of this sublease transaction. The Company was required by terms of the sublease to pledge
approximately $1.9 million of cash to guaranty the differential between the present values of its original lease payment streams and those called for under the sublease. As part of the Company's on-going cost savings program, the Company is evaluating
other subleasing opportunities for space it currently occupies that are subject to operating leases. If the Company agrees to sublease such space at lease rates significantly less than existing base lease terms or if the lease commitments are bought out
as a consequence of a negotiated lease termination, the Company could incur a significant charge to earnings.

Interest expense increased $700,000 and $2.2 million to $13.6 million and $28.6 million for the three and six months ended December 31, 2000, respectively, from $12.9 million and $26.4 million during the comparable three and six month
periods during 1999, respectively. The increase in interest expense during the three and six months ended December 31, 2000 from levels reported during the comparable 1999 periods resulted primarily from increased borrowings at higher interest rates under
various revolving warehouse and repurchase facilities to fund the origination and purchase of mortgage loans prior to their securitization or sale in the secondary market. Interest expense is expected to increase in future periods due to the Company's
continued reliance on external financing arrangements to fund its operations.

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Income Taxes

During the three and six months ended December 31, 2000, the Company recorded income tax provisions of $525,000 and $561,000, respectively, and such provisions relate principally to tax provisions on estimated excess inclusion
income on the Company's REMIC trusts incurred during the periods and, to a lesser extent, to miscellaneous state tax obligations. During the three and six months ended December 31, 1999, the Company recorded income tax provisions of $1.4 million and $1.9
million and such provisions relate primarily to the Company's estimated tax on excess inclusion income on its REMIC trusts. The investment in the Company by Capital Z in fiscal 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 decreased to $231.7 million at December 31, 2000 from $398.9 million at June 30, 2000. The decline is due to the Company's $931.5 
million of securitizations and $356.8 million of whole loan sales in the secondary markets during the six months ended December 31, 2000, partially offset by the Company's loan production during the period.

Accounts Receivable. Accounts receivable, representing servicing fees, servicing, advances and other receivables, increased to $74.5 million at December 31, 2000 from $52.7 million at June 30, 2000. The $21.8
million increase in accounts receivable at December 31, 2000 from June 30, 2000 is primarily attributable to a $16.6 million increase in servicing advances, net of recoveries, to the Company's securitized trusts. To a lesser extent, the increase
is attributable to a $5.2 million net increase in other receivables represented primarily by proceeds due the Company from counterparties to the residual interest sale and the sale of servicing rights in the December 2000 securitization. The level of
servicing related advances, in any given period, is dependent upon portfolio delinquencies, the levels of REO and loans in the process of foreclosure and the timing of cash collections.

Residual Interests. Residual interests decreased to $279.9 million at December 31, 2000 from $291.0 million at June 30, 2000 reflecting $33.5 million of cash received from the securitized trusts, partially
offset by $21.6 million of accretion during the six months ended December 31, 2000. During the six months ended December 31, 2000, the Company did not retain the residual interests in the $931.5 million of securitizations consummated during the
period which were sold for cash to CZI.

Mortgage Servicing Rights, Net. Mortgage servicing rights, net, decreased to $9.1 million at December 31, 2000 from $12.3 million at June 30, 2000 reflecting amortization during the six months ended December
31, 2000. During the six months ended December 31, 2000, the Company did not capitalize any mortgage servicing rights. The Company sold for cash the servicing rights on the mortgage loans in the $931.5 million of securitizations which closed during the
period. All of the Company's $356.8 million of loan sold in whole loan sales for cash were sold with servicing released.

Equipment and Improvements, Net. Equipment and improvements, net, increased to $11.7 million at December 31, 2000 from $10.5 million at June 30, 2000 reflecting the capitalization of new equipment and improvement
acquisitions, partially offset by depreciation and amortization during the six months ended December 31, 2000.

Prepaid and Other Assets. Prepaid and other assets decreased to $11.9 million at December 31, 2000 from $14.7 million at June 30, 2000, primarily reflecting amortization during the six months ended December 31,
2000 outpacing the capitalization of eligible expenses incurred for financing and other arrangements entered into by the Company during the six months ended December 31, 2000.

Borrowings. Amounts outstanding under borrowings at December 31, 2000 remained unchanged from the $275.5 million outstanding at June 30, 2001. In January 2001, the Company reduced its borrowings by making a regularly
scheduled $5.7 million sinking fund payment on its 10.5% Senior Notes.

Revolving Warehouse Facilities. Amounts outstanding under revolving warehouse and repurchase facilities decreased to $209.4 million at December 31, 2000 from $375.0 million at June 30, 2000, primarily as the
result of the decrease in loans held for sale due to whole loan sales and the securitizations during the six months ended December 31, 2000, partially offset by borrowings to fund the Company's loan production during the period. Proceeds from whole loan
sales and securitizations are used to reduce balances outstanding under the Company's revolving warehouse and repurchase facilities.

Liquidity and Capital Resources

The Company had cash and cash equivalents of approximately $21.4 million at December 31, 2000. The Company's operations require continued access to short-term and long-term sources of cash. The Company's primary operating cash
requirements include: (i) the funding of mortgage loan originations and purchases prior to their securitization and sale, (ii) fees, expenses and hedging costs, if any,

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incurred in connection with the securitization and sale of loans, (iii)  cash reserve accounts or over-collateralization 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) the securitization and sale of mortgage loans and related servicing rights, (iii) sales
of residual interests under the Residual Facility and (iv) the monetization of the Company's servicing advances. The Company historically also 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 two most recent fiscal years, the Company does not expect access to those capital resources in the foreseeable future. See "-Risk Factors-If we are unable to maintain adequate financing sources or outside sources of cash are not sufficient, our earnings and financial position will suffer and jeopardize our ability to operate as a going concern."

Warehouse and Repurchase Facilities. The Company generally relies on revolving warehouse and repurchase facilities to originate and purchase mortgage loans and hold them prior to securitization or sale. At December 31, 2000, the
Company had committed revolving warehouse and repurchase facilities in the amount of $684.1 million (excluding the $15.9 million outstanding on the $35.0 million non-revolving subline described more fully below). On January 24, 2001, the
Company renewed an existing $200.0 million revolving warehouse facility and increased the capacity under the facility to $300.0 million. Included in this facility's renewal is a $40.0 million subline that provides for the funding of mortgage loans at
closing. Of the $784.1 million of committed revolving warehouse and repurchase facilities currently available to the Company at February 1, 2001, $200.0 million, $300.0 million and $300.0 million expire on May 31, 2001, October 31, 2001 and January 23,
2002, respectively.

The Company has access to certain warehouse and repurchase facilities which advanced up to 100% of the principal balance of the mortgage loans to the Company. However, as a result of the difficult current market conditions which began
in the quarter ended December 31, 1998, and the Company's recent financial performance, including the prices the Company has received in recent whole loan sales, certain of the Company's warehouse and repurchase lenders advance less than 100% of the
principal balance of the mortgage loans, requiring the Company to use working capital to fund the remaining portion of the principal balance of the mortgage loans.

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

The Securitization and Sale of Mortgage Loans. The Company's ability to sell loans originated and purchased by it in the secondary market through securitizations and whole loan sales is necessary to generate cash proceeds to pay
down its warehouse and repurchase facilities and fund new originations and purchases. The ability of the Company to sell loans in the secondary market on acceptable terms is essential for the continuation of the Company's loan origination and purchase
operations. See "Risk Factors-An interruption or reduction in the securitization and whole loan market would hurt our financial performance."

During the three months ended December 31, 2000, the Company securitized $471.5 million of loans and sold $148.9 million of loans in whole loan sales compared to $403.5 million of loans securitized and $184.6 million of loans sold in
whole loan sales, in the comparable three month period a year ago. The Company securitized $931.5 million of loans and sold $356.8 million of loans in whole loan sales during the six months ended December 31, 2000 compared to $803.6 million and $477.2
million of securitized loan and whole loan sale dispositions, respectively, in the comparable six month 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 as a credit enhancement to support the sale of the senior
interests. The terms of the securitization trusts generally require that all excess cash flow otherwise payable to the Company during the early months of the trusts be used to increase the cash reserve accounts or to repay the senior interests in order to
increase overcollateralization to specified maximums. Overcollateralization requirements for certain pools increase up to approximately twice the level otherwise required when the delinquency rates or realized losses for those pools exceed the specified
limit. As of December 31, 2000, the Company was required to maintain an additional $94.2 million in overcollateralization amounts as a result of the level of its delinquency rates and realized losses above that which would have been required to be
maintained if the applicable delinquency rates and realized losses had been below the specified limits. Of this amount, at December 31, 2000, $73.4 million remains to be added to the overcollateralization amounts from future spread income on the loans
held by these trusts.

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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. On August 31, 2000, the Company entered into the Residual Facility with 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) September 30, 2002, (ii) the full utilization of the $75.0 million amount of the Residual Facility, or
(iii) a termination event, as defined in the Residual Facility. The Company believes that the Residual Facility will assist the Company by strengthening its ability to include securitizations in its loan disposition strategy through reducing the
negative cash flow aspects of securitizations and by providing another source of cash to the Company through periodically converting residual interests into cash.

On December 19, 2000, the Company sold a $16.2 million residual interest to CZI pursuant to the Residual Facility for cash. At December 31, 2000, the remaining amount available under the Residual Facility is approximately $40.8
million. It is the Company's expectation to periodically sell to CZI residual interests created in future securitizations as a means of enhancing its working capital on a periodic basis.

Monetization of Servicing Advances. The Company has historically relied on working capital lines to help it fund its servicing advance obligations. In April 1999, the Company reduced its servicing advance obligations by
engaging a loan servicing company to subservice two of the Company's securitization trusts, pursuant to which the loan servicing company assumed the obligations to make all future advances on those two trusts. The Company also sold to the loan servicing
company the outstanding servicing advances on those two trusts for approximately $17.0 million. In June 1999, February 2000 and January 2001 in order to further reduce its servicing advance obligations, the Company entered into an arrangement
with an investment bank pursuant to which the bank purchased certain cumulative advances and undertook the obligation to make a substantial portion of the Company's advance obligations on its securitization trusts.

Working Capital Financing Facilities. On February 11, 2000, the Company secured a $35.0 million non-revolving subline (outstanding balance at December 31, 2000 was $15.9 million) to a warehouse facility secured by
certain of its residual interests and certain other collateral which the Company drew down on February 11, 2000 to provide working capital. As part of the transaction, Capital Z, the Company's largest shareholder, agreed to provide certain credit
enhancements to the lender for a portion of the subline, for which the Company paid Capital Z a $1 million fee.

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 June 10, 2000 and in the first of a two phase $50.0 million equity investment by SFP, a partnership controlled by Capital Z (the "Supplemental Investment"), the Company received $34.7 million
of additional capital. In return, the Company issued (i) 40.8 million shares of Series C Convertible Preferred Stock at a price of $0.85, which reflected the average closing market price for the five trading days prior to closing phase one
and (ii) warrants to purchase 5.0 million shares of Series C Convertible Preferred Stock at $0.85 per share. Net proceeds to the Company, after issuance expenses, were $34.4 million. Subsequently, on July 12, 2000, in the second
phase of the Supplemental Investment, the Company received $15.3 million of additional capital. In return, the Company issued 18.0 million shares of Series D Convertible Preferred Stock at a price of $0.85. At the same time, the 40.8 
million shares of Series C Convertible Preferred Stock and the warrants to purchase 5.0 million shares of Series C Convertible Preferred Stock issued in phase one were canceled and the Company issued an equivalent number of share and
warrants of Series D Convertible Preferred Stock in replacement thereof. Net proceeds to the Company, after issuance expenses, were $14.3 million.

The Company has filed a registration statement with the SEC to distribute to the holders of the Company's Common Stock and Series C Convertible Preferred Stock, in the form of a dividend of nontransferable subscription rights to
purchase shares of Series D Convertible Preferred Stock for $0.85 per share. The number of shares offered in the Rights Offering to Nonaffiliated Stockholders will be approximately 19.8 million shares of Series D Convertible Preferred
Stock. The registration statement has not been declared effective by the SEC. The Company has not commenced a distribution of any such rights. The Company is reviewing the proposed rights offering and may or may not go forward with the rights offering.

As previously reported, in August 2000, the Company issued $1.3 million of preferred stock to certain current and former management investors, and consultants to the Company.

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The Company has previously raised $127.9 million through the sale of preferred stock in several phases to Capital Z and its designees, certain members of the Company's management and holders of the Company's common
stock. The Company raised $76.8 million in February 1999, $25.0 million in August 1999 and $25.0 million ($4.2 million in a rights offering and $20.8 million from Capital Z pursuant to their standby commitment) in
October 1999. In October 1999, the Company also issued $1.1 million of preferred stock to certain management investors. In connection with the sale of stock to Capital Z, the Company also issued warrants to affiliates and employees of an
affiliate of Capital Z to purchase an aggregate of 500,000 shares of the Company's common stock for $5.00 per share.

In December 1991, July 1993, June 1995 and October 1996, the Company effected public offerings and in April 1998 effected a private placement of its common stock with net proceeds to the Company aggregating
$217.0 million. In the private placement, the Company also issued warrants to purchase an aggregate additional 1.3 million shares (as adjusted) of the Company's common stock at an exercise price of $38.35 (as adjusted), subject to customary
anti-dilution provisions. The warrants are exercisable only upon a change in control of the Company and expire in April 2001.

In March 1995, the Company completed an offering of its 10.5% Senior Notes due 2002 with net proceeds to the Company of $22.2 million. In February 1996, the Company completed an offering of its 5.5% Convertible
Subordinated Debentures due 2006 with net proceeds to the Company of $112.0 million. In October 1996, the Company completed an offering of its 9.125% Senior Notes due 2003 with net proceeds to the Company of $145.0 million. Under the
agreements relating to these debt issuances, the Company is required to comply with various operating and financial covenants including covenants which may restrict the Company's ability to pay certain distributions, including dividends. At December 31,
2000, the Company did not have the ability to pay such distributions and does not expect to have the ability to pay dividends for the foreseeable future.

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 generally not included in the indebtedness limitations. Securitization obligations are generally not included in the indebtedness limitations. As a result of the net loss for the fiscal year
ended June 30, 2000, the Company is restricted from incurring additional indebtedness as defined in the Indenture. The Company's repurchase and warehouse facilities also contain limits on the Company's ability to incur additional indebtedness.
Further, until the Company receives investment grade ratings for the notes issued under the Indenture, the amount of assets allocable to post-September 1996 securitizations which the Company may pledge to secure debt is limited by the Indenture to
75% of the difference between such post-September 1996 residuals and servicing advances and $225.0 million. The Company pledged substantially all of its previously unencumbered residual interests in order to secure the subline. The Company does
not anticipate having additional residual interests available to finance in the near term. This could restrict the Company's ability to borrow to provide working capital as needed in the future.

If the Company's access to warehouse lines, working capital or the securitization or whole loan markets are restricted, the Company may have to seek additional equity. Further, if available at all, the type, timing and terms of
financing selected by the Company will be dependent upon the Company's cash needs, the availability of other financing sources, limitations under debt covenants and the prevailing conditions in the financial markets. There can be no assurance that any
such sources will be available to the Company at any given time or that favorable terms will be available. As a result of the limitations described above, the Company may be restricted in the amount of loans that it will be able to produce and sell. This
would negatively impact profitability and jeopardize the Company's ability to continue to operate as a going concern.

Risk Management

At December 31, 2000, the Company had $50.0 million of forward interest rate swap contracts in place to hedge exposure to its inventory and pipeline of fixed rate loans held for sale. Included in gain on sale of loans for the three
and six months ended December 31, 2000 are charges to earnings of $1.7 million and $4.0 million, respectively, reflecting the Company's mark to the estimated fair value of interest rate swap contracts in place during those periods. 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 contract or charges to earnings on future derivative contracts into which the Company may enter.

Financial Instruments

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 or sale of such loans, the Company is exposed to interest rate risk. The majority of loans are securitized or sold within 90 days
of origination or purchase. However, a portion of the loans are held for sale or securitization for as long as 12 months (or longer in very limited circumstances) prior to securitization or sale. If interest rates rise during

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the period that the mortgage loans are held, for securitized loans the spread between the weighted average interest rate on the loans to be securitized and the pass-through interest rates on the securities to be sold (the
latter having increased as a result of market rate movements) would narrow, and reduce the Company's related gain on sale upon securitization. For loans sold in whole loan sales, if interest rates rise while the loans are held, the gain on sale recognized
by the Company may be reduced.

From time to time, the Company mitigates exposure to rising interest rates through swap agreements with third parties that sell United States Treasury securities not yet purchased, forward interest rate swap contracts and the purchase
of Treasury Put Options. These hedging activities help mitigate the risk of absolute movements in interest rates but they do not mitigate the risk of a widening in the spreads between pass-through certificates and U.S. Treasury securities with comparable
maturities. Derivatives are recorded at fair value on the Company's balance sheet. Gains and losses on derivatives are recorded in earnings as realized or incurred. The Company's risk management activities do not qualify for special hedge accounting. The
Company did not have any hedge or similar instruments in place at or during the three months ended December 31, 1999. Included in gain on sale of loans during the three months ended December 31, 2000 is $1.7 million of hedge losses. Of the $1.7
million, $1.5 million was realized on $195.0 million of forward interest rate swap contracts in place during the December 2000 quarter and which closed on December 19, 2000. Included in gain on sale of loans during the six months ended December 31, 2000
is $4.0 million of hedge losses. The Company entered into the forward interest rate swap contracts to mitigate interest rate exposure to its inventory and pipeline of fixed rate loans held for sale prior to the December 2000 securitization. At December
31, 2000, the Company had $50.0 million of forward interest rate swap contracts in place to mitigate interest rate exposure prior to the sale of its inventory and pipeline of fixed rate mortgage loans held for sale. Included in gain on sale during
the three months ended December 31, 2000, is a $184,000 charge to earnings reflecting the Company's mark to the estimated fair value of the contracts at December 31, 2000.

Residual Interests and MSRs. The Company had residual interests of $279.9 million and $291.0 million outstanding at December 31, 2000 and June 30, 2000, respectively. The Company also had MSRs outstanding at
December 31, 2000 and June 30, 2000 in the amount of $9.1 million and $12.3 million, respectively. Both of these instruments are recorded at estimated fair value at December 31, 2000 and June 30, 2000. The Company values these assets
based on the present value of future revenue streams net of expenses using various assumptions. The discount rate used to calculate the present value of the residual interests and MSRs was 15.0% at December 31, 2000 and June 30, 2000. The weighted
average life of the mortgage loans used for valuation was 3.1 years at December 31, 2000 and June 30, 2000.

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

Fair Value of Financial Instruments. The Company's financial instruments recorded at contractual amounts that approximate market or fair value primarily consist of loans held for sale, accounts receivables and revolving
warehouse and repurchase facilities. As the amounts are short term in nature and/or generally bear market rates of interest, the carrying amounts of these instruments are reasonable estimates of their fair values. The carrying amount of the Company's
borrowings approximate fair value when valued using available quoted market prices.

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

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

Warehousing Exposure. The Company utilizes warehouse and repurchase facilities to facilitate the holding of mortgage loans prior to securitization. As of December 31, 2000, the Company had total committed revolving warehouse and
repurchase facilities available in the amount of $684.1 million (net of $15.9 million outstanding on a $35.0 million subline); the total amounts outstanding related to these facilities was $209.4 million at December 31, 2000. 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 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.

24



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Risk Factors

Our Common Stock could be delisted which would affect the liquidity of our Common Stock and our Preferred Stock.

The Common Stock is currently traded on the New York Stock Exchange under the symbol "AAM." However, we cannot assure you that the Common Stock will remain listed on the New York Stock Exchange. We have received a notice from the New York Stock
Exchange that, due to the fact that the 30-day average trading price of our Common Stock was below $1.00, we do not meet the requirements to maintain an ongoing listing on the New York Stock Exchange. Pursuant to the notice, the Company had until
December 29, 2000 to raise the thirty day average closing price of the Common Stock above $1.00 per share or the NYSE would suspend the Company's listing and apply to the Securities and Exchange Commission for delisting. The closing price of the
Common Stock on December 29, 2000 was $0.56 per share and the average closing price for the thirty trading-day period ended December 29, 2000 was $0.92 per share. The Company submitted additional materials at that time and continued discussions with the
NYSE. The closing price of the Common Stock has remained above $1.00 per share since January 31, 2001 and the average closing price for the thirty trading-day period ended February 13, 2001 was $1.11 per share. The NYSE has informed the Company that,
after giving consideration to these factors, it will continue to trade the Common Stock of the Company through March 30, 2001. The NYSE has also informed the Company that it will continue to monitor events at the Company as well as the price of the
Company's Common Stock and that compliance with the $1.00 per share price minimum for the thirty trading-day period ended March 30, 2001 will be reevaluated at that time. There can be no assurance that the thirty day average closing price of the Common
Stock will remain above $1.00 per share or that the Common Stock will not be suspended by the NYSE. If the Common Stock were suspended by the NYSE, it would seriously impair the ability of Common stockholders to trade their shares.  In addition, if the
Common Stock were to be delisted the liquidity of the Company's various classes of preferred stock would be affected because you would no longer be able to convert shares preferred stock into a listed security.

If we are unable to maintain adequate financing sources or outside sources of cash are not sufficient, our earnings and financial position will suffer and jeopardize our ability to operate as a going concern.

We operate on a negative cash flow basis, which means our cash expenditures exceed our cash earnings. Therefore, we need continued access to short- and long-term external sources of cash to fund our operations. Without continued access to cash, we
may be restricted in the amount of mortgage loans that we will be able to produce and sell, and our ability to operate as a going concern would be jeopardized.

We use cash primarily for:

- mortgage loan originations and purchases before their securitization or sale in the secondary market;
- fees and expenses incurred for the securitization of mortgage loans;
- cash reserve accounts or overcollateralization required in the securitization of loans;
- tax payments generally due on recognition of non-cash gain on sale recorded in the securitizations of mortgage loans;
- ongoing administrative and other operating expenses;
- interest and principal payments under our revolving warehouse and repurchase facilities and other existing indebtedness;
- delinquent interest and other servicing related expenses we advance on the mortgage loans in our servicing portfolio; and
- investments in technology initiatives and other capital improvements.

We receive cash primarily from the following sources:

- Revolving Borrowings.
- Sale of Mortgage Loans.
- Sale of Residual Interest Assets Created in Securitizations.
- Sale of Accounts Receivable.

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Our right to service loans may be terminated because of the high delinquencies and losses on the mortgage loans in our servicing portfolio, which will hurt our earnings.

The value of our right to service most of our approximately $3.1 billion mortgage loan servicing portfolio (at December 31, 2000) is an asset on our balance sheet called mortgage servicing rights. If we were to lose the right to service some or
all of the mortgage loans in our portfolio, we would be required to write down or write off our mortgage servicing rights, which would decrease our earnings and decrease our net worth and the value of your investment.

Most of our securitization transactions are insured by certain commercial insurance companies called monoline insurers. The policies issued by the monoline insurers protect the securitization bondholder against certain losses. The agreement that we
generally enter into with the monoline insurer allows the monoline insurer to terminate us as the servicer in certain cases. For example, we could be terminated as the servicer for any transaction if the dollar amount or percentage of mortgage loans that
are more than a certain number of days past due (usually 60 days, 90 days or more) or if the losses on mortgage loans in a particular securitization transaction are over a specified limit. Also, our agreement with the monoline insurer for the
securitization transactions we completed in 1999 and 2000 automatically terminates us periodically unless the monoline insurer renews our servicing right.

As of December 31, 2000, we are over the limit for delinquent mortgage loans we service for 10 of the securitization transactions and we are over the limit for losses for those same 10 securitization transactions plus four additional securitization
transactions.  The monoline insurers have the right to terminate us as the servicer for these securitization transactions as well as the securitization transactions from 2000 and 1999.

None of our servicing rights have been terminated so far, and our monoline insurers have not indicated that they plan to terminate us. However, the monoline insurers do have the right to terminate us at any time with respect to those securitization
transactions described above. If we are terminated, we would be required to write-down or write-off our mortgage servicing rights.

High delinquencies or losses on the mortgage loans in our servicing portfolio may decrease our cash flows.

In a securitization transaction, the excess spread is initially used to over-collateralize the bonds by paying down the principal balance of the bonds below the principal balance of the mortgage loans collateralizing the bonds in the
securitization transaction. Once the bonds are over-collateralized to a certain amount, we start receiving the excess spread. If the mortgage loans are more delinquent or if the loss on mortgage loans is greater than expected, the excess spread that we
are supposed to receive from the securitization transaction is diverted to over-collateralize the bonds further.

In addition, when borrowers do not make their required mortgage loan payments or do not pay their real estate taxes or insurance premiums on loans that we service, we are required to advance those payments out of our working capital.

High losses on the mortgage loans in our servicing portfolio may hurt our earnings.

All of the mortgage loans are secured by residential property. If borrowers do not repay their loans, we recover the principal and unpaid interest and any servicing expenses incurred by us by foreclosing on the loans and selling the properties. If
the value of the property collateralizing a loan is not sufficient to cover the principal amount of the loan and related interest and servicing expenses in the event of foreclosure of that loan and sale of the mortgaged property, we suffer a loss.

High loan loss levels may affect our net earnings. During the period of time we hold mortgage loans before we sell them, the entire loan loss reduces our earnings. For mortgage loans we have sold in a securitization transaction, we apply certain
assumptions to estimate losses to determine the amount of non-cash gain on sale that we record at the closing of a securitization transaction. If actual loan losses exceed our estimated losses, we may be required to write down our residual interests which
would hurt our earnings and decrease our net worth and the value of your investment.

The mortgage loans are subject to higher risks of loss, which may hurt our earnings.

We make many of our mortgage loans to borrowers in lower credit grades. In addition, many of the mortgage loans we make have an adjustable interest rate feature. Both low credit grade mortgage loans and adjustable interest rate mortgage loans are
more likely to result in a loss. Low credit grade mortgage loans are more likely to become delinquent and result in a foreclosure loss because the borrowers on these loans have a history of late payment or non-payment. Adjustable interest rate mortgage
loans are more likely to become delinquent and result in a foreclosure loss because the borrower is qualified for the loan at a reduced interest rate and the amount of the payment in most cases will increase over time. If the payment amounts increase,
borrowers may have difficulty making their payments. When loan loss rates are higher than we expected, our earnings can be hurt.

26



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If the mortgage loans we service pay off faster than expected, our earnings will be hurt.

When we close a securitization transaction, we record the value of the residual interest asset based upon the present value of the excess spread that we expect to receive from the mortgage loans until they are repaid. In order to estimate the
present value of the expected excess spread, we estimate (among other factors) how quickly the mortgage loans in the securitization transaction will pay off, which we call the prepayment rate. An increase in the actual rate the mortgage loans pay off
would reduce the number of loans that we service and the income we earn from servicing. If the actual rate the mortgage loans pay off is higher than we expected, we are required to write-down the residual interest that we recorded when we closed the
securitization transaction.

Our earnings may be hurt by increases or decreases in interest rates.

An increase in long-term interest rates could, among other things:

- decrease the demand for consumer credit in general; and
- reduce the average size of mortgage loans that we make, by decreasing demand for refinancing lower-rate first mortgage loans and increasing demand for second mortgage loans.

An increase in short-term interest rates could, among other things,

- increase our borrowing costs, most of which are tied to those rates;
- reduce our excess spread and the income recognized in a securitization. In addition, during the time the securitization bonds are outstanding, adjustable rate mortgage loans adjust based on an index or adjustment period different from the index and
adjustment period for bonds issued in a securitization. Adjustable rate mortgage loans are also subject to interest rate caps, which limit the amount the interest rate can change during any given period and over the life of the loans. If interest rates
increase, the interest rates on the bonds issued in a securitization transaction could increase faster, without limitation by caps, than the interest rates on our adjustable rate mortgage loans in the securitization, and reduce the price paid for loans we
made at lower interest rates in whole loan sales of mortgage loans.

A decline in long-term or short-term interest rates could increase the prepayment rate. Any of these changes in interest rates could hurt our earnings.

An interruption or reduction in the securitization and whole loan market would hurt our financial performance.

In order for us to continue our mortgage loan origination and purchase operations, we must be able to sell the mortgage loans we make in the securitization and whole loan markets. We use the cash proceeds from these sales to pay down our warehouse
and repurchase facilities and make new mortgage loans. The value of our mortgage loans depends on a number of factors, including general economic conditions, interest rates and governmental regulations. In addition, we rely on institutional purchasers,
such as investment banks, financial institutions and other mortgage lenders, to purchase our mortgage loans in the whole loan market and the bonds issued in securitization transactions. We cannot be sure that the purchasers will be willing to purchase
mortgage loans on satisfactory terms or that the market for such loans will continue. Adverse changes in the securitization and whole loan markets may affect our ability to securitize or sell our mortgage loans for acceptable prices within a reasonable
period of time, which would hurt our earnings.

If we are unable to sell a significant portion of our mortgage loans on at least a quarterly basis, our earnings would be hurt.

We earn income on our mortgage loans when they are sold. Our strategy is to sell all of the mortgage loans we make at least quarterly. However, market and other considerations could affect the timing of the sale of our mortgage loans. If we are
not able to sell all of the mortgage loans that we make during the quarter in which the loans are made, we would likely not be profitable for that quarter.

Changes in the volume and cost of our broker loans may decrease our loan production and hurt our earnings.

We depend on independent mortgage brokers for many of our mortgage loans, called broker loans. A significant portion of our loan production is made up of broker loans. Our earnings and financial condition could be hurt by a decrease in the volume
or an increase in the cost of our broker loans. A decrease in volume or an increase in the cost of broker loans could result from competition from other lenders and purchasers of broker loans. The independent mortgage brokers are not obligated by contract
or otherwise to do business with us and negotiate with many lenders for each prospective borrower. We compete with these other lenders for the independent brokers' business on pricing, service, loan fees, costs and other factors.

27



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Our competitors in the mortgage banking market are often larger and have greater financial resources than we do, which will make it difficult for us to successfully compete.

We face intense competition in the business of originating, purchasing and selling mortgage loans. Competition among industry participants can take many forms, including convenience in obtaining a mortgage loan, customer service, marketing and
distribution channels, amount and term of the loan, mortgage loan origination fees and interest rates. Many of our competitors are substantially larger and have considerably greater financial, technical and marketing resources and lower costs of capital
than we do. In the future, we may also face competition from government-sponsored entities, such as FannieMae and FreddieMac. These government-sponsored entities may enter the subprime mortgage market and target potential customers in our highest credit
grades, who constitute a significant portion of our customer base. Additional competition may lower the rates we can charge borrowers and increase the cost to purchase mortgage loans, which would decrease our earnings on the sale or securitization of
these loans. Increased competition may also reduce the volume of our mortgage loan originations and mortgage loan sales and increase the demand for our experienced personnel and the potential that such personnel will leave for competitors.

Because a significant amount of the mortgage loans we service are in California and Florida, our operations could be hurt by economic downturns or natural disasters in those states.

At December 31, 2000, 22.7% and 11.6% of the mortgage loans we serviced were collateralized by residential properties located in California and Florida, respectively. Because of these concentrations in California and Florida, declines in those
residential real estate markets may reduce the values of the properties collateralizing the mortgage loans, increase foreclosures and losses and hurt our earnings.

California historically has been vulnerable to certain natural disaster risks, such as earthquakes and erosion-caused mudslides. Florida historically has been vulnerable to certain other natural disasters, such as tropical storms and hurricanes. Since
such natural disasters are not typically covered by the standard hazard insurance policies maintained by borrowers, the borrowers have to pay for repairs due to such disasters. Uninsured borrowers may not repair the property or may stop paying their
mortgage loans if the property is damaged. This would cause increased foreclosures and decrease our ability to recover losses on properties affected by such disasters, and hurt our earnings.

The risks associated with our business increase in any economic slowdown or recession.

Foreclosures and resulting losses generally increase during economic slowdowns or recessions. Periods of economic slowdown or recession may also reduce real estate values. Any decline in real estate values reduces the ability of borrowers to use
their home equity to borrow money, and may reduce the demand for our mortgage loans. Declines in real estate values also increase losses in the event of foreclosure.

We may be required to repurchase mortgage loans or indemnify investors if we breach representations and warranties, which would hurt our earnings.

We are required under agreements governing our securitization transactions and whole loan sales to repurchase or replace mortgage loans which do not conform to representations and warranties we make at the time of sale concerning breaches of
fiduciary obligations, misrepresentations, errors and omissions of our employees and officers, incomplete documentation and failures to comply with various laws and regulations applicable to our business. In addition, we may be obligated, in certain whole
loan sales, to buy back mortgage loans if the borrower defaults on the first payment of principal and interest due. Such repurchase obligations could hurt our earnings and have a material adverse effect on our financial position.

If we are unable to comply with mortgage banking rules and regulations, our ability to make mortgage loans may be restricted, which would hurt our earnings.

Our operations are subject to extensive regulation, supervision and licensing by federal, state and local governmental authorities. Our operations are also subject to various laws, regulations and judicial and administrative decisions. These rules
and regulations, among other things, impose licensing obligations on us, establish eligibility criteria for mortgage loans, prohibit discrimination, govern inspections and appraisals of properties and credit reports on mortgage loan applicants, regulate
collection, foreclosure and claims handling, investment and interest payments on escrow balances and payment features, mandate certain disclosures and notices to borrowers and, in some cases, fix maximum interest rates, fees and mortgage loan amounts.
Failure to comply with these requirements can lead to loss of approved status, certain rights of rescission for mortgage loans, class action lawsuits and administrative enforcement action.

Because our business is highly regulated, the laws, rules and regulations applicable to us are subject to regular modification and change. There are currently proposed various laws, rules and regulations which, if adopted, could negatively impact our
operations and our earnings.

28



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Changes in the mortgage interest deduction could decrease our loan production and hurt our financial performance.

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

We will be unable to pay dividends on our capital stock for the foreseeable future.

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

The concentrated ownership of our voting stock by our controlling stockholder may have an adverse effect on your ability to influence the direction we will take.

At December 31, 2000, entities controlled by Capital Z beneficially owned senior preferred stock representing 47.2% of our combined voting power in the election of directors and 91.4% of the combined voting in all matters other than the election
of directors. Representatives or nominees of Capital Z have five seats on our nine person Board of Directors, and as current members' terms expire Capital Z has the continuing right to appoint and elect four directors and nominate one additional director.
As a result of its beneficial ownership and Board representation, Capital Z has, and will continue to have, sufficient power to determine our direction and policies. Also because of its ownership percentage, Capital Z may unilaterally force the conversion
into Common Stock of all shares of Series B Convertible Preferred Stock, the Series C Convertible Preferred Stock or the Series D Convertible Preferred Stock.

29



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PART II-OTHER INFORMATION

Item 1. Legal Proceedings-None

Item 2. Changes in Securities-None

Item 3. Defaults upon Senior Securities-None

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



|(a) | The Company held its 2000 Annual Meeting of Stockholders (the "Meeting") on November 8, 2000.      
|--- | ---------------------------------------------------------------------------------------------------
|(b) | The following Series B Directors were elected at the Meeting to serve one year terms:              
|    | Steven M. Gluckstern(1)                                                                            
|    | Adam M. Mizel                                                                                      
|    | Mani A. Sadeghi                                                                                    
|    | Robert A. Spass                                                                                    
|    | The following Class I Common Stock directors were elected at the Meeting to serve three-year terms:
|    | David H. Elliott                                                                                   
|    | A. Jay Meyerson                                                                                    
|    | The following directors continued in office after Meeting:                                         
|    | Eric C. Rahe                                                                                       
|    | Georges C. St. Laurent, Jr.                                                                        
|    | Cary H. Thompson                                                                                   

____________________

(1) Mr. Gluckstern subsequently resigned his position on the Board of Directors and was replaced by Joseph R. Tomei.



(c)	At the Meeting, stockholders voted on (1) an amendment to the Company's Certificate of Incorporation to eliminate the effect, if any, of the planned offering of rights by the Company to purchase Series D Convertible Preferred Stock (the "Rights
Offering") on the conversion ratio of the Company's Series B Convertible Preferred Stock, Series C Convertible Preferred Stock and Series D Convertible Preferred Stock (the "Anti-Dilution Amendment Proposal"); (2) a proposal to increase the number of
shares of the Company's Preferred Stock which have been designated as shares of Series D Convertible Preferred Stock and to authorize the issuance of shares of Series D Convertible Preferred Stock in the Rights Offering (the "Series D Authorization and
Issuance Proposal"); (3) an amendment to the Company's Amended and Restated 1999 Stock Option Plan (the "Plan") to increase the number of shares of the Company's Common Stock authorized for issuance under the Plan from 12.0 million to 22.0 million; (4)
the election of four Series B Directors; (5) the election of two Class I Common Stock Directors; (6) the ratification of the appointment of Ernst & Young LLP as the Company's independent accountants for the fiscal year ending June 30, 2001. The
results of the voting were as follows:



|    | Matter                                                         | Votes For   | Votes Against | Withheld | Abstentions | Broker Non-Votes
|--- | -------------------------------------------------------------- | ----------- | ------------- | -------- | ----------- | ----------------
|(1) | Anti-Dilution Amendment Proposal                               |             |               |          |             |                 
|    | -All Stockholders                                              | 106,036,642 | 165,494       | -        | 72,510      | -               
|    | -Class Vote: Series B, Series C and Series D Convertible Stock | 105,142,385 | 17,328        | -        | 3,410       | -               
|    | -Class Vote: Series B Preferred Stock Only                     | 26,704,000  | -             | -        | -           | -               
|    | -Class Vote: Series C Preferred Stock Only                     | 19,026,622  | 17,328        | -        | 3,410       | -               
|    | -Class Vote: Series D Preferred Stock Only                     | 59,411,763  | -             | -        | -           | -               

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|    | Matter                                                                                      | Votes For   | Votes Against | Withheld | Abstentions | Broker Non-Votes
|--- | ------------------------------------------------------------------------------------------- | ----------- | ------------- | -------- | ----------- | ----------------
|    |                                                                                             |             |               |          |             |                 
|(2) | Series D Authorization and Issuance Proposal                                                |             |               |          |             |                 
|    | -All Stockholders                                                                           | 106,002,804 | 204,397       | -        | 67,445      | -               
|    | -Class Vote: Series B, Series C and Series D Convertible Stock                              | 105,145,308 | 15,645        | -        | 2,170       | -               
|(3) | Amendment to the Plan                                                                       | 105,918,950 | 289,295       | -        | 66,401      | -               
|(4) | Election of Series B Directors (Series B Preferred Stock Only)                              |             |               |          |             |                 
|    | -Steven M. Gluckstern                                                                       | 26,704,000  | -             | -        | -           | -               
|    | -Mani A. Sadeghi                                                                            | 26,704,000  | -             | -        | -           | -               
|    | -Adam M. Mizel                                                                              | 26,704,000  | -             | -        | -           | -               
|    | -Robert A. Spass                                                                            | 26,704,000  | -             | -        | -           | -               
|(5) | Election of Class I Common Stock Directors (Common Stock and Series B Preferred Stock Only) |             |               |          |             |                 
|    | -David H. Elliott                                                                           | 5,277,405   | -             | 94,423   | -           | -               
|    | -A. Jay Meyerson                                                                            | 5,279,337   | -             | 92,491   | -           | -               
|(6) | Ratification of Independent Accountants                                                     | 110,881,760 | 63,022        | -        | 58,722      | -               



Item 5. Other Information-None

Item 6. Exhibits and Reports on Form 8-K

(a)	Exhibits: See Exhibit Index

(b)	The Company filed the following Current Reports on Form 8-K during the quarter ended December 31, 2000:



|(1) | The Company filed a Current Report on Form 8-K on September 22, 2000 (dated September 5, 2000) reporting the consummation of a Residual Forward Sale Facility.                                                     
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | The Company filed a Current Report on Form 8-K on October 2, 2000 (dated September 28, 2000) reporting fiscal year-end financial results.                                                                          
|(3) | The Company filed a Current Report on Form 8-K on October 16, 2000 (dated September 30, 2000) providing statistical data on certain securitization trusts.                                                         
|(4) | The Company filed a Current Report on Form 8-K on November 1, 2000 (dated October 31, 2000) reporting financial results for the first fiscal quarter.                                                              
|(5) | The Company filed a Current Report on Form 8-K on December 14, 2000 (dated December 7, 2000) reporting the pricing of a securitization transaction and providing statistical data on certain securitization trusts.
|(6) | The Company filed a Current Report on Form 8-K on December 21, 2000 (dated December 19, 2000) reporting the closing of a securitization transaction.                                                               
|(7) | The Company filed a Current Report on Form 8-K on December 22, 2000 (dated December 21, 2000) providing statistical data on certain securitization trusts.                                                         
|(8) | The Company filed a Current Report on Form 8-K on January 26, 2001 (dated December 31, 2000) providing statistical data on certain securitization trusts.                                                          



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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, 2001 | By:                        

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EXHIBIT INDEX





|Exhibit No | Description of Exhibit                                                                                                                                                                                                                                                                                     
|---------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.1(a)    | Third Amendment, dated as of October 31, 2000, to the Second Amended and Restated Master Repurchase Agreement Governing Purchases and Sales of Mortgage Loans, dated as of April 28, 2000, between Aames Capital Corporation, a subsidiary of
the Registrant, ("ACAC") and Lehman Commercial Paper, Inc.(1)
|10.1(b)    | Fourth Amendment, dated as of November 30, 2000, to the Second Amended and Restatement Master Repurchase Agreement Governing Purchases and Sales of Mortgage Loans, dated as of April 28, 2000, between ACC and Lehman
Commercial Paper, Inc.(2)                                                           
|10.2       | Historical Advance Purchase Agreement, dated as of January 5, 2001, between ACC and Steamboat Financial Partnership I, L.P.(2)                                                                                                                                                                             
|10.3(a)    | Warehouse Loan and Security Agreement, dated as of February 10, 2000 as Amended and Restated to and Including January 24, 2001, by and between ACC Aames Funding Corporation and Greenwich Capital Financial
Products, Inc.(2)                                                                             
|10.3(b)    | Guaranty, dated as of January 24, 2001, between Registrant and Greenwich Capital Financial Products, Inc., with respect to Exhibit 10.3(a)(2)                                                                                                                                                              
|11         | Computation of Per Share Loss(2)                                                                                                                                                                                                                                                                           

______________



|(1) | Incorporated by reference from Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000 and filed with the Commission on November 14, 2000.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Filed herewith.