##### Table of Contents

---



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



---



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 March 31, 2005
| | ---------------------------------------------



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 1-32340



---



AAMES INVESTMENT CORPORATION

(Exact name of registrant as specified in its charter)



---



|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|MARYLAND                                                       |  | 34-1981408                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)



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

(Address of Registrants principal executive offices including zip code)



(323) 210-5000

(Registrants telephone number,

including area code)



---





---



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 ̈No  x



Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2of the Exchange
Act).    Yes ̈No  x



At May 12, 2005 Registrant had 61,610,021 shares of common stock outstanding.



---



---

##### Table of Contents

TABLE OF CONTENTS



|                                |  |                                                                                                                |  |         
|------------------------------- |  | -------------------------------------------------------------------------------------------------------------- |  | --------
|Item No.                        |  |                                                                                                                |  | Page No.
|                               
|PART IFINANCIAL INFORMATION(1)
|                                |  |                                                                                                               
|Item 1                          |  | Financial Statements                                                                                           |  | 3       
|                                |  |                                                                                                               
|                                |  | Condensed Consolidated Balance Sheets at March 31, 2005 (Unaudited) and December 31, 2004 (Audited)            |  | 3       
|                                |  | Condensed Consolidated Income Statements for the three months ended March 31, 2005 and 2004 (Unaudited)        |  | 4       
|                                |  | Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2005 and 2004 (Unaudited) |  | 5       
|                                |  | Notes to Condensed Consolidated Financial Statements (Unaudited)                                               |  | 6       
|                                |  |                                                                                                               
|Item 2                          |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                          |  | 11      
|                                |  |                                                                                                               
|Item 3                          |  | Quantitative and Qualitative Disclosures About Market Risk                                                     |  | 11      
|                                |  |                                                                                                               
|Item 4                          |  | Controls and Procedures                                                                                        |  | 45      
|                               
|PART IIOTHER INFORMATION      
|                                |  |                                                                                                               
|Item 1                          |  | Legal Proceedings                                                                                              |  | 46      
|Item 2                          |  | Changes in Securities and Use of Proceeds                                                                      |  | 46      
|Item 3                          |  | Defaults Upon Senior Securities                                                                                |  | 46      
|Item 4                          |  | Submission of Matters to a Vote of Security Holders                                                            |  | 46      
|Item 5                          |  | Other Information                                                                                              |  | 46      
|Item 6                          |  | Exhibits                                                                                                       |  | 46      
|                                |  | Signature Page                                                                                                 |  | 50      



2



---

##### Table of Contents

|Item 1. | Financial Statement
s
|------- | ---------------------



AAMES
INVESTMENT CORPORATION AND SUBSIDIARIES



CONDENSED
CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)



|                                                                                                                           |  |               |           |   |                  |   |           |  
|-------------------------------------------------------------------------------------------------------------------------- |  | ------------- | --------- | - | ---------------- | - | --------- | -
|                                                                                                                           |  | March 31,2005 |           |   | December 31,2004 |  
|                                                                                                                           |  | (Unaudited)   |           |   | (Audited)        |  
|ASSETS                                                                                                                     |  |               |           |   |                  |   |           |  
|Cash and cash equivalents                                                                                                  |  | $             | 128,366   |   |                  | $ | 37,780    |  
|Loans held for sale, at lower of cost or market                                                                            |  |               | 383,478   |   |                  |   | 484,963   |  
|Loans held for investment, net                                                                                             |  |               | 2,862,407 |   |                  |   | 1,725,046 |  
|Advances and other receivables                                                                                             |  |               | 24,579    |   |                  |   | 22,740    |  
|Residual interests, at estimated fair value                                                                                |  |               | 18,862    |   |                  |   | 39,082    |  
|Deferred income taxes                                                                                                      |  |               | 28,401    |   |                  |   | 28,401    |  
|Equipment and improvements, net                                                                                            |  |               | 9,117     |   |                  |   | 8,840     |  
|Prepaid and other                                                                                                          |  |               | 20,931    |   |                  |   | 22,076    |  
|Derivative instruments, at estimated fair value                                                                            |  |               | 51,970    |   |                  |   | 31,947    |  
|                                                                                                                           |  |               |           |   |                  |   |           |  
|Total assets                                                                                                               |  | $             | 3,528,111 |   |                  | $ | 2,400,875 |  
|                                                                                                                           |  |               |           |   |                  |   |           |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                       |  |               |           |   |                  |   |           |  
|Financing on loans held for investment                                                                                     |  | $             | 2,258,106 |   |                  | $ | 1,157,470 |  
|Revolving warehouse and repurchase facilities                                                                              |  |               | 854,383   |   |                  |   | 809,213   |  
|Borrowings                                                                                                                 |  |               |          |   |                  |   | 7,680     |  
|Accounts payable and accrued expenses                                                                                      |  |               | 57,450    |   |                  |   | 63,242    |  
|Accrued dividends                                                                                                          |  |               |          |   |                  |   | 3,780     |  
|Income taxes payable                                                                                                       |  |               | 1,364     |   |                  |   | 1,864     |  
|                                                                                                                           |  |               |           |   |                  |   |           |  
|Total liabilities                                                                                                          |  |               | 3,171,303 |   |                  |   | 2,043,249 |  
|                                                                                                                           |  |               |           |   |                  |   |           |  
|Commitments and contingencies                                                                                              |  |               |           |   |                  |   |           |  
|Stockholders equity:                                                                                                      |  |               |           |   |                  |   |           |  
|Preferred Stock, par value $.01 per share; 160,000,000 shares authorized; none outstanding                                 |  |               |          |   |                  |   |          |  
|Common Stock, par value $.01 per share; 500,000,000 shares authorized; 61,421,757 shares and 61,360,271 shares outstanding |  |               | 614       |   |                  |   | 614       |  
|Additional paid-in capital                                                                                                 |  |               | 655,408   |   |                  |   | 655,437   |  
|Retained deficit                                                                                                           |  |               | (299,214  | ) |                  |   | (298,425  | )
|                                                                                                                           |  |               |           |   |                  |   |           |  
|Total stockholders equity                                                                                                 |  |               | 356,808   |   |                  |   | 357,626   |  
|                                                                                                                           |  |               |           |   |                  |   |           |  
|Total liabilities and stockholders equity                                                                                 |  | $             | 3,528,111 |   |                  | $ | 2,400,875 |  
|                                                                                                                           |  |               |           |   |                  |   |           |  



See accompanying notes
to condensed consolidated financial statements.



3



---

##### Table of Contents

AAMES INVESTMENT CORPORATION AND SUBSIDIARIES



CONDENSED CONSOLIDATED INCOME STATEMENTS

(UNAUDITED)

(In thousands, except per share data)



|                                                      |  |                             |        |   |      |   |         |  
|----------------------------------------------------- |  | --------------------------- | ------ | - | ---- | - | ------- | -
|                                                      |  | Three Months EndedMarch 31, |       
|                                                      |  | 2005                        |        |   | 2004 |  
|Interest income                                       |  | $                           | 51,768 |   |      | $ | 17,678  |  
|Interest expense                                      |  |                             | 11,916 |   |      |   | 6,579   |  
|                                                      |  |                             |        |   |      |   |         |  
|Net interest income                                   |  |                             | 39,852 |   |      |   | 11,099  |  
|Provision for loan losses                             |  |                             | 6,500  |   |      |   |        |  
|                                                      |  |                             |        |   |      |   |         |  
|Net interest income after provision for loan losses   |  |                             | 33,352 |   |      |   | 11,099  |  
|Noninterest income:                                   |  |                             |        |   |      |   |         |  
|Gain on sale of loans                                 |  |                             | 5,683  |   |      |   | 54,599  |  
|Loan servicing                                        |  |                             | 2,924  |   |      |   | 2,155   |  
|                                                      |  |                             |        |   |      |   |         |  
|Total noninterest income                              |  |                             | 8,607  |   |      |   | 56,754  |  
|                                                      |  |                             |        |   |      |   |         |  
|Net interest income and noninterest income            |  |                             | 41,959 |   |      |   | 67,853  |  
|Noninterest expenses:                                 |  |                             |        |   |      |   |         |  
|Personnel                                             |  |                             | 22,347 |   |      |   | 25,348  |  
|Production                                            |  |                             | 8,800  |   |      |   | 10,333  |  
|General and administrative                            |  |                             | 10,813 |   |      |   | 11,375  |  
|                                                      |  |                             |        |   |      |   |         |  
|Total noninterest expenses                            |  |                             | 41,960 |   |      |   | 47,056  |  
|                                                      |  |                             |        |   |      |   |         |  
|Income (loss) before income taxes                     |  |                             | (1     | ) |      |   | 20,797  |  
|Provision (benefit) for income taxes                  |  |                             | 765    |   |      |   | (93     | )
|                                                      |  |                             |        |   |      |   |         |  
|Net income (loss)                                     |  | $                           | (766   | ) |      | $ | 20,890  |  
|                                                      |  |                             |        |   |      |   |         |  
|Net income (loss) to common stockholders:             |  |                             |        |   |      |   |         |  
|Basic                                                 |  | $                           | (766   | ) |      | $ | 18,021  |  
|                                                      |  |                             |        |   |      |   |         |  
|Diluted                                               |  | $                           | (766   | ) |      | $ | 21,412  |  
|                                                      |  |                             |        |   |      |   |         |  
|Net income (loss) per common share:                   |  |                             |        |   |      |   |         |  
|Basic                                                 |  | $                           | (0.01  | ) |      | $ | 2.53    |  
|                                                      |  |                             |        |   |      |   |         |  
|Diluted                                               |  | $                           | (0.01  | ) |      | $ | 0.20    |  
|                                                      |  |                             |        |   |      |   |         |  
|Dividends per common share                            |  | $                           |       |   |      | $ |        |  
|                                                      |  |                             |        |   |      |   |         |  
|Weighted average number of common shares outstanding: |  |                             |        |   |      |   |         |  
|Basic                                                 |  |                             | 61,420 |   |      |   | 7,120   |  
|                                                      |  |                             |        |   |      |   |         |  
|Diluted                                               |  |                             | 61,420 |   |      |   | 104,800 |  
|                                                      |  |                             |        |   |      |   |         |  



See accompanying notes
to condensed consolidated financial statements.



4



---

##### Table of Contents

AAMES INVESTMENT CORPORATION AND SUBSIDIARIES



CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(In thousands)



|                                                                                                   |  |                             |            |   |      |   |            |  
|-------------------------------------------------------------------------------------------------- |  | --------------------------- | ---------- | - | ---- | - | ---------- | -
|                                                                                                   |  | Three Months EndedMarch 31, |           
|                                                                                                   |  | 2005                        |            |   | 2004 |  
|Operating activities:                                                                              |  |                             |            |   |      |   |            |  
|Net income (loss)                                                                                  |  | $                           | (766       | ) |      | $ | 20,890     |  
|Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |  |                             |            |   |      |   |            |  
|Provision for losses on loans held for investment                                                  |  |                             | 6,500      |   |      |   |           |  
|Depreciation and amortization                                                                      |  |                             | 791        |   |      |   | 1,041      |  
|Accretion of residual interests                                                                    |  |                             |           |   |      |   | (972       | )
|Deferred income taxes                                                                              |  |                             |           |   |      |   | (8,369     | )
|Changes in assets and liabilities:                                                                 |  |                             |            |   |      |   |            |  
|Loans held for sale originated                                                                     |  |                             | (1,361,616 | ) |      |   | (1,866,228 | )
|Proceeds from sale of loans held for sale                                                          |  |                             | 1,463,101  |   |      |   | 1,759,952  |  
|Decrease (increase) in:                                                                            |  |                             |            |   |      |   |            |  
|Advances and other receivables, net                                                                |  |                             | (1,839     | ) |      |   | (914       | )
|Residual interests                                                                                 |  |                             | 20,220     |   |      |   | 4,465      |  
|Prepaid and other                                                                                  |  |                             | 1,145      |   |      |   | (776       | )
|Derivative instruments                                                                             |  |                             | (20,023    | ) |      |   |           |  
|Increase (decrease) in:                                                                            |  |                             |            |   |      |   |            |  
|Accounts payable and accrued expenses                                                              |  |                             | (5,792     | ) |      |   | 579        |  
|Income taxes payable                                                                               |  |                             | (500       | ) |      |   | 7,385      |  
|                                                                                                   |  |                             |            |   |      |   |            |  
|Net cash provided by (used in) operating activities                                                |  |                             | 101,221    |   |      |   | (82,947    | )
|                                                                                                   |  |                             |            |   |      |   |            |  
|Investing activities:                                                                              |  |                             |            |   |      |   |            |  
|Increase in loans held for investment                                                              |  |                             | (1,143,861 | ) |      |   |           |  
|Purchases of equipment and improvements                                                            |  |                             | (1,068     | ) |      |   | (930       | )
|                                                                                                   |  |                             |            |   |      |   |            |  
|Net cash used in investing activities                                                              |  |                             | (1,144,929 | ) |      |   | (930       | )
|                                                                                                   |  |                             |            |   |      |   |            |  
|Financing activities:                                                                              |  |                             |            |   |      |   |            |  
|Reduction in borrowings                                                                            |  |                             | (7,680     | ) |      |   | (4,499     | )
|Payment of common stock dividends                                                                  |  |                             | (3,804     | ) |      |   |           |  
|Payment of preferred stock dividends                                                               |  |                             |           |   |      |   | (2,869     | )
|Financing on loans held for investment                                                             |  |                             | 1,100,636  |   |      |   |           |  
|Net proceeds from revolving warehouse and repurchase facilities                                    |  |                             | 45,170     |   |      |   | 96,590     |  
|Proceeds from exercise of common stock options                                                     |  |                             |           |   |      |   | 115        |  
|Payment of expenses related to equity issuance                                                     |  |                             | (28        | ) |      |   |           |  
|                                                                                                   |  |                             |            |   |      |   |            |  
|Net cash provided by financing activities                                                          |  |                             | 1,134,294  |   |      |   | 89,337     |  
|                                                                                                   |  |                             |            |   |      |   |            |  
|Net increase in cash and cash equivalents                                                          |  |                             | 90,586     |   |      |   | 5,460      |  
|Cash and cash equivalents at beginning of period                                                   |  |                             | 37,780     |   |      |   | 11,611     |  
|                                                                                                   |  |                             |            |   |      |   |            |  
|Cash and cash equivalents at end of period                                                         |  | $                           | 128,366    |   |      | $ | 17,071     |  
|                                                                                                   |  |                             |            |   |      |   |            |  



See accompanying notes
to condensed consolidated financial statements.



5



---

##### Table of Contents

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



Note 1.    General and Basis of Presentation



General



Aames
Investment Corporation (the Company or Aames Investment), a Maryland corporation, was incorporated on February 24, 2004. On November 5, 2004, Aames Investment completed a $297.5 million initial public offering of 35.0 million
common shares and a $39.5 million concurrent private placement of 5.0 million shares of common stock. Subsequently, on November 24, 2004, Aames Investment sold an additional 5.3 million shares of common stock in an over-allotment transaction. All of
the common shares sold were priced at $8.50 per share, less certain discounts.



On November 9, 2004, Aames Investment completed its reorganization with Aames Financial Corporation, formerly Aames Investments parent company, and with two of Aames Investments wholly owned subsidiaries,
each of which was created for the interim purpose of effecting the reorganization. As a result of the reorganization, the corporate successor of Aames Financial became a wholly owned subsidiary of Aames Investment, and changed its name to
Aames Financial Corporation. The reorganization transaction was accounted for as a recapitalization-restructuring of entities under common control with no change in accounting basis. The common shares of Aames Financial that were
previously publicly traded were fully redeemed and, accordingly, no longer trade on any public equity market. Aames Financials Series B, C and D Convertible Preferred Stock were also fully redeemed.



At March 31, 2005, Specialty Finance Partners (SFP), a
partnership controlled by Capital Z Financial Services Fund, II, L.P., a Bermuda partnership (together with SFP, Capital Z) and others affiliated with Capital Z together owned 14,109,528 shares, or approximately 23.0% of the
Companys common shares outstanding. Representatives of Capital Z currently have two seats on the Companys seven member Board of Directors.



Aames Investment expects to qualify as a real estate investment trust, or REIT, for U.S. federal income tax purposes when it files its December 31, 2004
tax return which are currently on extension. On a consolidated basis, Aames Financial and subsidiaries is the taxable REIT subsidiary of Aames Investment.



Aames Investments strategy to use its equity capital and funds borrowed under revolving warehouse and repurchase facilities to finance mortgage loan
originations, and to use on-balance sheet securitizations to finance its REIT portfolio of mortgage loans. Aames Financial is a fifty-year old mortgage banking company focused primarily on originating, selling and servicing mortgage loans through
both wholesale and retail channels under the name Aames Home Loan. Aames Investment will retain in its REIT portfolio a portion of these loans, largely hybrid/adjustable rate mortgage loans, which accounted for 80.5% of total mortgage
loan production during the three months ended March 31, 2005. Aames Investment will sell the remainder, including a majority of the fixed-rate mortgage loans originated, on a whole loan servicing-released basis to third parties.



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. Mortgage loans originated are extended on the basis of
equity in the borrowers property and the creditworthiness of the borrower.



Basis of Presentation



The condensed
consolidated financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the United States Securities and Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with accounting principles in the United States have been omitted.



The condensed consolidated financial statements include the accounts of the Company and all of its subsidiaries after eliminating all significant
intercompany transactions and reflect all normal, recurring adjustments which are, in the opinion of management, necessary to present a fair statement of the results of



6



---

##### Table of Contents

operations of the Company in conformity with accounting principles generally accepted in the United States for the interim periods reported. The results of
operations for the Company for the three months ended March 31, 2005 are not necessarily indicative of the results expected for the full calendar year.



Note 2.    Cash and Cash Equivalents



At March 31, 2005 and December 31, 2004, the Company had corporate cash and cash equivalents available of $128.4 million and $37.8 million, of which $29.5
million and $7.5 million were restricted, respectively. At March 31, 2005 and December 31, 2004, the Company had $65.0 million and $7.0 million of overnight investments, respectively.



The Company services mortgage loans in its portfolio of loans held for investment, in its securitization trusts, for others
on a long-term basis and services mortgage loans on an interim basis, which consist of loans held for sale and loans subserviced for others. In such capacity, certain funds are collected from borrowers and placed in segregated trust accounts which
totaled $60.5 million and $29.4 million at March 31, 2005 and December 31, 2004, respectively. These accounts and corresponding liabilities are not included in the accompanying consolidated balance sheets.



Note 3.    Loans Held for Investment, Net



The following table summarizes loans held for investment, net at March 31,
2005 and December 31, 2004 (in thousands):



|                                |  |               |           |   |                  |   |           |  
|------------------------------- |  | ------------- | --------- | - | ---------------- | - | --------- | -
|                                |  | March 31,2005 |           |   | December 31,2004 |  
|Loans held for investment:      |  |               |           |   |                  |   |           |  
|Securitized                     |  | $             | 2,295,698 |   |                  | $ | 1,187,435 |  
|Not yet securitized             |  |               | 562,493   |   |                  |   | 531,261   |  
|Add: Net deferred loan fees     |  |               | 12,616    |   |                  |   | 8,250     |  
|Less: Allowance for loan losses |  |               | (8,400    | ) |                  |   | (1,900    | )
|                                |  |               |           |   |                  |   |           |  
|                                |  | $             | 2,862,407 |   |                  | $ | 1,725,046 |  
|                                |  |               |           |   |                  |   |           |  



Activity in the
allowance for loan losses during the periods presented was as follows:



|                               |  |                    |       |                  |   |      
|------------------------------ |  | ------------------ | ----- | ---------------- | - | -----
|                               |  | Three Months Ended
|                               |  | March 31,2005      |       | December 31,2004
|Balance, beginning of period   |  | $                  | 1,900 |                  | $ |     
|Provision                      |  |                    | 6,500 |                  |   | 1,900
|Charge-offs, net of recoveries |  |                    |      |                  |   |     
|                               |  |                    |       |                  |   |      
|                               |  | $                  | 8,400 |                  | $ | 1,900
|                               |  |                    |       |                  |   |      



7



---

##### Table of Contents

Note 4.    Basic and Diluted Net (Loss) Per Common Share



The following table sets forth information regarding basic and diluted net
income (loss) per common share for the periods presented (in thousands, except per share data):



|                                                                                                   |  |                             |        |   |      |   |         |  
|-------------------------------------------------------------------------------------------------- |  | --------------------------- | ------ | - | ---- | - | ------- | -
|                                                                                                   |  | Three Months EndedMarch 31, |       
|                                                                                                   |  | 2005                        |        |   | 2004 |  
|Basic net income (loss) per common share:                                                          |  |                             |        |   |      |   |         |  
|Net income (loss)                                                                                  |  | $                           | (766   | ) |      | $ | 20,890  |  
|Less: Accrued dividends on Series B, C and D Convertible Preferred Stock                           |  |                             |       |   |      |   | (2,869  | )
|                                                                                                   |  |                             |        |   |      |   |         |  
|Basic net income (loss) to common stockholders                                                     |  | $                           | (766   | ) |      | $ | 18,021  |  
|                                                                                                   |  |                             |        |   |      |   |         |  
|Basic weighted average number of common shares outstanding                                         |  |                             | 61,420 |   |      |   | 7,120   |  
|                                                                                                   |  |                             |        |   |      |   |         |  
|Basic net income (loss) per common share                                                           |  | $                           | (0.01  | ) |      | $ | 2.53    |  
|                                                                                                   |  |                             |        |   |      |   |         |  
|Diluted net income (loss) per common share:                                                        |  |                             |        |   |      |   |         |  
|Basic net income (loss) to common stockholders                                                     |  |                             | (766   | ) |      | $ | 18,021  |  
|Plus: Accrued dividends on Series B, C and D Convertible Preferred Stock                           |  |                             |       |   |      |   | 2,869   |  
|Interest on 5.5% Convertible Subordinated Debentures                                               |  |                             |       |   |      |   | 522     |  
|                                                                                                   |  |                             |        |   |      |   |         |  
|Diluted net income (loss) to common stockholders                                                   |  | $                           | (766   | ) |      | $ | 21,412  |  
|                                                                                                   |  |                             |        |   |      |   |         |  
|Basic weighted average number of common shares outstanding                                         |  |                             | 61,420 |   |      |   | 7,120   |  
|Plus: Incremental shares from assumed conversions of Series B, C and D Convertible Preferred Stock |  |                             |       |   |      |   | 85,061  |  
|5.5% Convertible Subordinated Debentures                                                           |  |                             |       |   |      |   | 824     |  
|Incremental shares from assumed exercise of:                                                       |  |                             |        |   |      |   |         |  
|Warrants                                                                                           |  |                             |       |   |      |   | 3,684   |  
|Common stock options                                                                               |  |                             |       |   |      |   | 8,111   |  
|                                                                                                   |  |                             |        |   |      |   |         |  
|Diluted weighted average number of common shares outstanding                                       |  |                             | 61,420 |   |      |   | 104,800 |  
|                                                                                                   |  |                             |        |   |      |   |         |  
|Diluted net income (loss) per common share                                                         |  | $                           | (0.01  | ) |      | $ | 0.20    |  
|                                                                                                   |  |                             |        |   |      |   |         |  



Note 5.    Pro
Forma Stock Based Compensation



Through June 30, 2004, the
Company compensated employees through the issuance of common stock options in accordance with the Aames Financial Corporation Stock Option Plan dated February 10, 1999, as amended (the 1999 Plan). The 1999 Plan provided for the issuance
of options to purchase shares of the Companys common stock to officers, key executives and consultants of the Company. The 1999 Plan was ultimately replaced by the 2004 Aames Investment Corporation Equity Incentive Plan (the 2004
EIP) on November 9, 2004. Awards under the 2004 EIP have been restricted stock awards. Since November 9, 2004, there are no longer any stock options outstanding.



8



---

##### Table of Contents

As permitted by Financial Accounting Standards Board Statement No. 123, Accounting for
Stock-Based Compensation (FASB No. 123), the Company recognized compensation expense using the intrinsic value method specified in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees. We do not expect that Financial Accounting Standards Board Statement No. 123R, Share-Based Payment will materially impact our financial statements upon adoption no later than in the fourth quarter of 2005. Had
compensation been recorded in accordance with FASB No. 123, the Companys net income and net income per common share data would have reflected the pro forma amounts indicated below (in thousands, except per share data):



|                                              |  |                              |  |      |       
|--------------------------------------------- |  | ---------------------------- |  | ---- | ------
|                                              |  | Three Months Ended March 31,
|                                              |  | 2005                         |  | 2004
|Net income (loss):                            |  |                              |  |      |       
|As reported                                   |  | N/A                          |  | $    | 20,890
|Pro forma                                     |  | N/A                          |  |      | 20,405
|Basic income (loss) to common stockholders:   |  |                              |  |      |       
|As reported                                   |  | N/A                          |  | $    | 18,021
|Pro forma                                     |  | N/A                          |  |      | 17,536
|Diluted income (loss) to common stockholders: |  |                              |  |      |       
|As reported                                   |  | N/A                          |  | $    | 21,412
|Pro forma                                     |  | N/A                          |  |      | 20,927
|Basic income (loss) per common share:         |  |                              |  |      |       
|As reported                                   |  | N/A                          |  | $    | 2.53  
|Pro forma                                     |  | N/A                          |  |      | 2.46  
|Diluted (loss) per common share:              |  |                              |  |      |       
|As reported                                   |  | N/A                          |  | $    | 0.20  
|Pro forma                                     |  | N/A                          |  |      | 0.20  



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



|                        |  |                                 |  |           |  
|----------------------- |  | ------------------------------- |  | --------- | -
|                        |  | Three Months Ended    March 31, | 
|                        |  | 2005                            |  | 2004      |  
|Dividend Yield          |  | N/A                             |  | 0.00      | %
|Expected Volatility     |  | N/A                             |  | 103.00    | %
|Risk-free interest rate |  | N/A                             |  | 2.99      | %
|Expected life of option |  | N/A                             |  | 4.5 years |  



The proforma stock
based compensation cost, net of tax effects, was $0.5 million during the three months ended March 31, 2004.



Note 6.    Income Taxes



Aames Investment has elected to be treated as a real estate investment trust, or REIT, for U.S. federal tax purposes. As a REIT, Aames Investment Corporation is not subject to federal income taxes at the parent
company level to the extent that it distributes its taxable income to its stockholders and complies with certain other requirements. Other requirements include distribution of at least 90% of the REITs taxable income, and meeting certain
percentage requirements for assets and income that effectively serve to focus the REITs investments into mortgage loans secured by real estate, including mortgage-backed securities and other qualifying investments. Holdings of non-real estate
and portfolio investments is limited, including no more than 20% of the value of Aames Investments total assets may consist of securities of one or more taxable REIT subsidiaries, discussed below. Aames Investment intends to distribute 100% of
its REIT taxable income; therefore, no provision for income taxes has been made.



9



---

##### Table of Contents

The taxable income of Aames Financial, the taxable REIT subsidiary, is subject to regular corporate
income taxes. Taxes are provided on substantially all income and expense items included in earnings, regardless of the period in which such items are recognized for tax purposes. The Company uses an asset and liability approach that requires the
recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Companys financial statements or tax returns. In estimating future tax consequences, the Company generally
considers all expected future events other than the enactment of changes in the tax law or rates.



During the three months ended March 31, 2005 and 2004, we recorded an income tax provision (benefit) of $0.8 million and $(0.1) million, respectively. Our
$0.8 million tax provision for the three months ended March 31, 2005 differed from an expected federal benefit of $-0- million calculated at the marginal federal tax rate of 35.0% due to the $8.4 million benefit related to the non-taxability of the
REIT earnings less the $9.9 million expense resulting from the increase in the tax valuation allowance, partially offset by the $0.7 million state tax benefit. Our $(0.1) million tax benefit for the three months ended March 31, 2004 differed from an
expected federal tax expense of $7.3 million calculated at the federal marginal rate of 35.0% due to the $7.4 million decrease in valuation allowance.



At March 31, 2005, we had recognized $28.4 million of deferred tax assets based upon our determination that it is more likely than not that we will
realize such assets in future periods. There was no change in our deferred tax assets from December 31, 2004.



The following table reconciles pretax accounting income of the parent company, Aames Investment, as determined for financial statement purposes to
estimated taxable income for the three months ended March 31, 2005 (in thousands):



|                           |  |                                   |        |  
|-------------------------- |  | --------------------------------- | ------ | -
|                           |  | Three Months Ended March 31, 2005 |       
|Pretax accounting income   |  | $                                 | 23,928 |  
|Add (subtract):            |  |                                   |        |  
|Tax basis adjustments, net |  |                                   | (6,887 | )
|                           |  |                                   |        |  
|Estimated taxable income   |  | $                                 | 17,041 |  
|                           |  |                                   |        |  



As previously
announced, on April 19, 2005, the Company declared a cash dividend of $0.27 per common share for the quarter ended March 31, 2005, which was paid on May 9, 2005, to stockholders of record as of April 29, 2005.



Note 7.    Reclassifications



Certain amounts related to March 31, 2004 have been reclassified to conform
to the March 31, 2005 presentation.



Note
8.    Commitments and Contingencies



Certain of our subsidiaries are defendants in Potteiger et. al. v. Aames Funding Corporation and Aames Financial Corporation, a collective action filed on approximately February 4, 2004 in the U.S. District Court of Minnesota, case
04-CV-65. Plaintiff, a former loan officer of ours, filed this action on behalf of himself and current and former loan officers employed by us, and seeks damages consisting of alleged unpaid overtime, statutory liquidated damages and attorneys
fees and costs. Plaintiff alleges that during his employment, he and other loan officers worked in excess of 40 hours per week and that we willfully failed to pay overtime in violation of the Federal Fair Labor Standards Act. We filed an answer
denying the claims and asserting various affirmative defenses. Initial discovery was recently completed and the matter is set for mediation in June 2005.



10



---

##### Table of Contents

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



On September 7, 2004, Aames Financial received a Civil Investigative Demand and Notice to Proceed from the Office of the
Attorney General of Iowa, that, although not alleging any wrongdoing, sought documents and data relating to its business and lending practices in Iowa. Aames Financial has cooperated and intends to cooperate fully with the Office of the Attorney
General of Iowa in this investigation. Because the investigation is at an early stage, Aames Financial cannot predict the outcome of the investigation and its effect, if any on its business in Iowa, which approximated 0.02% and 0.2% of total
mortgage loan production during the three months ended March 31, 2005 and the six months ended December 31, 2004.



In the ordinary course of its business, the Company is subject to various claims made against it by borrowers, private investors and others arising from,
among other things, losses that are claimed to have been incurred as a result of alleged breaches of fiduciary obligations, misrepresentations, errors and omissions of employees and officers of the Company, incomplete documentation and failures by
the Company to comply with various laws, such as consumer protection laws, employment laws and other federal and state laws, and regulations applicable to its business. The Company believes that liability with respect to any of these currently
asserted claims or legal actions is not likely to be material to the Companys consolidated financial position and results of operations; however, any claims asserted or legal action in the future may result in expenses which could have a
material adverse effect on the Companys consolidated financial position and results of operations.



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



Item 3.    Quantitative and Qualitative Disclosures About Market Risk



The following discussion includes Managements Discussion and Analysis of Financial Condition and Results of Operations and Quantitative and
Qualitative Disclosures about Market Risk. This section should be read in conjunction with Condensed Consolidated Financial Statements included in Item 1 of this Form 10-Q.



Special Note Regarding Forward-looking Information



This report may contain forward-looking statements under federal securities laws. These statements are based on
managements current expectations and beliefs and are subject to a number of trends and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. The risks and uncertainties that
may cause our performance and results to vary include: (i) changes in overall economic conditions and interest rates; (ii) an inability to originate subprime hybrid/adjustable mortgage loans; (iii) increased delinquency rates in our portfolio; (iv)
adverse changes in the securitization and whole loan market for mortgage loans; (v) declines in real estate values; (vi) limited cash flow to fund operations and dependence on short-term financing facilities; (vii) concentration of operations in
California, Florida, New York and Texas; (viii) extensive government regulation; (ix) intense competition in the mortgage lending industry; and (x) an inability to comply with the federal tax requirements applicable to REITs and effectively operate
within limitations imposed on REITs by federal tax rules. For a more complete discussion of these risks and uncertainties and information relating to the company, see the Form 10-K for the year ended December 31, 2004 and other filings with the SEC
made by the company pursuant to the Securities Exchange Act of 1934. Aames Investment expressly disclaims any obligation to update or revise any forward-looking statements in this report.



11



---

##### Table of Contents

General



Aames Investment, a mortgage real estate investment trust, or REIT, was formed in February 2004 to build and manage a portfolio of high yielding subprime
mortgage loans to offer its stockholders the opportunity for attractive dividend yields and earnings growth. In November 2004, we completed an initial public offering, and, concurrently with that offering, a reorganization with Aames Financial
Corporation, formerly our parent company. As a result of the reorganization, Aames Financial became a wholly owned subsidiary of ours. Aames Financial is a 50 year old mortgage banking company focused primarily on originating, selling and servicing
mortgage loans through both wholesale and retail channels under the name Aames Home Loan. Our strategy is to use our equity capital, including a portion of the net proceeds from our initial public offering, and funds borrowed under
revolving warehouse and repurchase facilities to finance our mortgage loan originations, and to use those financing services together with on-balance sheet securitizations to finance our REIT portfolio of mortgage loans. We retain in our REIT
portfolio some of our mortgage loan originations, largely hybird/adjustable rate mortgage loans or ARMs, which accounted for 80.5% of our loan production during the three months ended March 31, 2005. We sell the remainder, including a majority of
the fixed-rate mortgage loans that we originate, on a whole loan servicing-released basis to third parties.



We are taxed as a REIT for U.S. federal income tax purposes in connection with the filing of our December 31, 2004 federal income tax return, and Aames
Financial is our taxable REIT subsidiary, or TRS. As a REIT, we generally are not subject to U.S. federal income tax on the REIT income that we distribute to our stockholders. We distribute a majority of the earnings from our REIT portfolio of
mortgage loans to our stockholders, while growing our equity capital base by retaining a portion of Aames Financials earnings. The taxable income generated by Aames Financial is subject to regular corporate income tax. This includes Aames
Financials net interest income, gain on sale and fee income.



Business
Strategy



Our goal is to maximize stockholder value and
increase earnings by:



| |  |  | Building a portfolio of high yielding subprime mortgage loansand leveraging our equity to increase the size of our REIT portfolio and our returns while at the same time
managing our financing costs and the increased risk of loss associated with our leverage;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Continuing to improve our efficiency and loan quality and serving as a highly efficient originator. We intend to accomplish this by increasing the use of technology to
streamline further our loan origination and underwriting processes. We intend to rigorously apply and continuously improve our underwriting criteria and processes in order to minimize defaults and losses and by collecting comprehensive performance
data on our REIT portfolio to refine our underwriting guidelines and risk-based pricing;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | Servicing our loans to enhance the performance of our REIT portfolio, and growing our servicing operation with our REIT portfolio which will lower our per loan servicing
costs through economies of scale.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The strategies
discussed above contain forward-looking statements. Such statements are based on current expectations and are subject to risks, uncertainties and assumptions, including those discussed under Item 7. Managements Discussion and Analysis of
Financial Condition and Results of OperationsRisk Factors, included in our Annual Report on Form 10-K for the year ended December 31, 2004. 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 we will be able to accomplish the above strategies.



12



---

##### Table of Contents

Mortgage Portfolio Management



We invest in subprime one-to-four family, residential mortgage loans, operating as a long-term portfolio investor. We
purchase loans originated by our subsidiary, Aames Financial, that we anticipate holding on our balance sheet, largely hybrid/adjustable rate loans. Aames Financial retains the servicing rights to those loans.



To provide us with long-term financing for the portfolio of mortgage loans
that we hold on our balance sheet, we securitize substantially all of those loans through on-balance sheet transactions structured as financings rather than sales for both tax and financial accounting purposes. Accordingly, these loans will remain
on our consolidated balance sheet as an asset and the underlying bonds issued through the securitization will be reported as a liability on our consolidated balance sheet. Thus, we will record interest income generated by the mortgage loans and
recognize interest expense on the related financings over the life of the mortgage loan pool, rather than generate a gain or loss at the time of the securitization.



Managing Interest Rate Risk



Our hybrid/adjustable rate loans may have a fixed rate for two, three or five years prior to their first adjustment and may be financed with on-balance
sheet securitization debt with rates that adjust monthly. As a result, our net interest income and cash flow could be negatively impacted by changes in short-term interest rates. To counteract this possibility, we may hedge the aggregate risk of
interest rate fluctuations with respect to our borrowing index. We generally intend to hedge only the risk related to changes in the benchmark interest rate used in the variable rate index, usually a London Interbank Offered Rate, known as LIBOR, or
a U.S. Treasury rate.



To reduce these risks, we may enter into
interest rate cap agreements whereby, in exchange for a fee, we would be reimbursed for interest paid in excess of a certain capped rate. With respect to interest rate cap agreements any net payments under, or fluctuations in the fair value of,
these cap agreements will be recorded in current income.



Derivative financial instruments contain credit risk to the extent that the institutional counterparties may be unable to meet the terms of the agreements. We expect to minimize this risk by using multiple counterparties and limiting them
to major financial institutions with good credit ratings. In addition, we regularly monitor the potential risk of loss with any one party resulting from this type of credit risk. Accordingly, we do not expect any material losses as a result of
default by other parties.



REIT Compliance



We are a REIT, for U.S. federal income tax purposes. Aames Financial has
continued its operations as our primary mortgage origination and servicing subsidiary. To meet some of the REIT qualification requirements, we conduct our loan sales, as well as other servicing and origination functions, through Aames Financial, our
taxable REIT subsidiary. All loans are sourced, underwritten and processed by Aames Financial. We purchase the loans that we anticipate holding on our balance sheet, largely hybrid/adjustable rate loans, and Aames Financial sells the remainder of
the loans it originates, including a majority of its fixed-rate mortgage loans, to third parties. We are required to purchase loans from Aames Financial at fair market value and Aames Financial is subject to corporate income tax on any taxable gain
it recognizes on the sale.



U.S. federal income tax law
requires that a REIT distribute annually to its stockholders at least 90% of its taxable income, excluding the retained earnings of any taxable REIT subsidiary it owns. If we distribute all of our taxable income to our stockholders, we will not be
subject to U.S. federal income tax and will not record income tax (benefit) expense. We intend to make regular quarterly distributions of all or substantially all of our REIT taxable income to our common stockholders. Any taxable income generated by
Aames Financial will be subject to regular corporate income tax and Aames Financial will continue to record income tax (benefit) expense. However, we anticipate that Aames Financial will have substantially lower effective tax rates due to



13



---

##### Table of Contents

historical net operating loss carryforwards for U.S. federal income tax purposes. Subject to annual limitations, these losses are available to offset future
income. Aames Financial may retain any income it generates net of any tax liability it incurs on that income without affecting the REIT distribution requirements. If Aames Financial chooses to pay a dividend to us, the dividend could be included in
the REIT distribution. Any distributions that Aames Financial makes in the future will be at the discretion of its board of directors and will depend on, among other things, its actual results of operations and liquidity levels.



To qualify as a REIT, at least 75% or our assets must be qualified real
estate assets, government securities and cash and cash items and no more than 20% of the value may be comprised of stock and other securities of Aames Financial or other taxable REIT subsidiaries. The need to comply with these asset ownership
requirements may cause us to acquire other assets that are qualified real estate assets for purposes of these requirementsfor example, mortgage-backed securities on a leveraged basisthat are not part of our overall business strategy.



Mortgage Originations



We originate primarily subprime, one-to-four family residential mortgage
loans. These originations are significant to our financial results because we hold a majority of the loans we originate in our on-balance sheet portfolio of loans held for investment. The loans we originate that are not retained in our REIT
portfolio of loans held for investment are sold to the secondary markets.



Our 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. These types of borrowers generally pay higher mortgage loan origination fees and interest rates than those charged by conventional lending sources. We believe these borrowers continue to represent an
underserved niche of the residential mortgage loan market and present an opportunity to earn a superior return for the risk assumed. Our residential mortgage loans, which include fixed and hybrid/adjustable rate loans, are generally used by
borrowers to consolidate indebtedness, finance other consumer needs, or purchase homes. We believe that while our loan origination volume is affected by general levels of interest rates, because a majority of our loan originations are cash-out
refinancings and purchase money loans our loan origination volume is generally less cyclical than conventional mortgage lending which has a higher percentage of rate/term refinance loans.



Mortgage Loan Sales to Third Parties and Off-Balance Sheet Securitizations



Aames Financial will sell whole loans not retained for the REIT portfolio to
third parties to capture any gain on sale of these loans and to grow our equity capital base on a consolidated basis. Aames Financial does not currently sell loans in off-balance sheet securitizations; however, after our on-balance sheet portfolio
reaches its target level, Aames Financial may sell a portion of its loans in off-balance sheet securitizations depending on market conditions at that time. Aames Financial generally sells these loans within 45 days of funding and services these
loans during the period between origination and transfer of servicing to the buyer, which is generally within 90 days after the sale of the loan. Aames Financial generates income primarily from:



| |  |  | gain on sale income, which includes the premiums received on the sale of the loan,
| | - |  | ----------------------------------------------------------------------------------



| |  |  | net interest income earned on its loans prior to sale,
| | - |  | ------------------------------------------------------



| |  |  | points and fees charged to borrowers less any yield spread premiums paid to wholesale brokers during the loan origination process, and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------



| |  |  | loan servicing income.
| | - |  | ----------------------



Aames Financial uses the majority of the net proceeds of its loan sales to pay down its warehouse and repurchase facilities to increase capacity under
these facilities for future funding of mortgage loans. Proceeds we receive from financings on loans held for investment are also used to pay down our warehouse and repurchase facilities.



14



---

##### Table of Contents

Mortgage Loan Servicing



Aames Financial services residential mortgage loans for itself and for others, and loan servicing remains an integral part of our business operation.
We believe that maintaining contact with our borrowers is critical in managing credit risk and in borrower retention. Subprime borrowers are more likely to default on their obligations than conventional borrowers. By servicing our loans, we strive
to identify problems with borrowers early and take quick action to address these problems. Borrowers may be more motivated to refinance their mortgage loans either by improving their personal credit or due to a decrease in interest rates. By keeping
in close touch with borrowers, we can provide them with information about our products to encourage them to refinance with us. Mortgage servicing provides fee income for Aames Financial in the form of normal customer service and processing fees. We
recognized $2.9 million and $2.2 million in loan servicing fee income during the three months ended March 31, 2005 and 2004, respectively.



Critical Accounting Policies



Owning a Portfolio of Hybrid/Adjustable Rate Loans.



We have a portfolio of loans held for investment in addition to Aames Financials portfolio of loans held for sale. Accordingly, the presentation of
interest income and expense on these two portfolios has been modified from that which Aames Financial shows in its historical consolidated financial statements. We differentiate our interest income and expense into two components: Interest
incomeloans held for sale and Interest incomeloans held for investment. Interest expense is also differentiated between Interest expenseloans held for sale and Interest expenseloans held
for investment. We also record a provision for loan losses on loans held for investment, which increases our allowance for loan losses, based on an estimate of probable and inherent losses in our portfolio of loans held for investment.



Our investment portfolio of loans is shown on our balance
sheet as Loans held for investment. Prior to our REIT reorganization, all loans were shown as Loans held for sale, at lower of cost or market. Because Aames Financial intends to sell a portion of its loans, we continue to
show these loans as Loans held for sale, at lower of cost or market. Mortgage-backed bonds that we issue to finance our portfolio of loans held for investment are shown as Financings on loans held for investment. Warehouse
financing of our loans held for sale and loans held for investment but not yet securitized are shown as Revolving warehouse and repurchase facilities.



Upon implementing our new business plan, we employed two critical accounting policies, one of which is related to our
financing strategy of using on-balance sheet securitizations and one of which is related to our REIT conversion. These policies are:



| |  |  | Allowance for losses on mortgage loans held for investment; and
| | - |  | ---------------------------------------------------------------



| |  |  | Accounting for transfers and servicing of financial assets.
| | - |  | -----------------------------------------------------------



Allowance for Losses on Mortgage Loans Held for Investment.



For mortgage loans held for investment, we maintain an allowance for loan losses based on our estimate of losses inherent
and probable as of the balance sheet date. We evaluate the adequacy of this allowance quarterly, giving consideration to factors such as the current performance of the loans, historical performance of similar loans, credit characteristics of the
portfolio, the value of the underlying collateral and the general economic environment. In order to estimate an appropriate allowance for losses on loans held for investment, we estimate losses using static pooling, which stratifies the
loans held for investment into separately identified vintage pools. Using historic experience and taking into consideration the factors above, we estimate an allowance for loan losses, which we believe is adequate for probable and inherent losses in
the portfolio of mortgage loans held for investment. Provisions for losses are charged to our consolidated statement of operations. Charge-offs of mortgage loans held for investment are charged to the allowance. While we use available information to
recognize losses on loans held for investment, future additions to the allowance may be necessary based on changes in economic and other conditions.



15



---

##### Table of Contents

Accounting for Transfers and Servicing of Financial Assets.



We are generating a portfolio of loans held for investment through
on-balance sheet securitizations and must comply with the provisions of FASB Statement No. 140 Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, or FAS 140, related to each securitization. FAS
140 is an accounting pronouncement that sets forth the criteria applicable to determining whether a transfer of financial assets is to be treated as a sale or a secured financing under generally accepted accounting principles, or GAAP. We intend for
our on-balance sheet securitizations to be treated as secured financings and, accordingly, one of our critical accounting policies is compliance with the FAS 140 requirements necessary to obtain secured financing treatment for our securitizations.
In addition, our strategy of retaining mortgage loans in our securitization pools on our balance sheet will reduce the number of loans we sell during the period in which we are building our retained portfolio. This will reduce the total gain on sale
of loans until we build our retained portfolio and return to a pattern of selling loans.



Gain on Sale of Loans Held for Sale.



Our current loan disposition strategy relies on whole loan sales. We sell our loans in whole loan sale transactions on a cash basis. In whole loan sale transactions, the buyer acquires all future rights (including
mortgage servicing rights) to the loans, without recourse except for standard representations and warranties. Gains and losses on whole loan sales are recognized when we surrender control over the loans (generally on the settlement date) based upon
the difference between the proceeds received and the net carrying amount of the loans.



Accounting for Off-Balance Sheet Securitizations.



During the three months ended March 31, 2005, we did not dispose of any of our mortgage loans in off-balance sheet securitization transactions. Our retained residual interests relate to off-balance sheet
securitizations which closed prior to and during the year ended June 30, 2000. The following discusses critical accounting policies which arise only in the context of off-balance sheet securitization transactions.



In an off-balance sheet securitization, we convey loans to a special purpose
entity (such as a trust) in exchange for cash proceeds and a residual interest in the trust. The cash proceeds are raised through an offering of the pass-through certificates or bonds evidencing the right to receive principal payments and interest
on the certificate balance or on the bonds. The non-cash gain on sale of loans represents the difference between the 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 of the 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 credit losses. Each agreement that we have entered into in connection with our securitizations requires the
overcollateralization of the trust that may initially be funded by cash deposited by us. The amount and timing of the cash flows expected to be released from the securitization trusts considers the impact of the applicable delinquency and credit
loss limits specified in the securitization agreements.



We
determine 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.



Our
retained residual interests are recorded at estimated fair value and are marked to market through a charge (or credit) to earnings. On a quarterly basis, we review the fair value of our retained residual interests by



16



---

##### Table of Contents

analyzing our prepayment, credit loss and discount rate assumptions in relation to our actual experience and current rates of prepayment and credit loss
prevalent in the industry. Additionally, on a quarterly basis we evaluate the effects, if any, that increasing or decreasing interest rates may have on the retained residual interests. We may adjust the value of our retained residual interests or
take a charge to earnings related to the retained residual interests, as appropriate, to reflect a valuation or write-down, respectively, of our retained residual interests based upon the actual performance of the retained residual interests as
compared to our key assumptions and estimates used to determine fair value. Although we believe that the assumptions used to estimate the fair value of the retained residual interests are reasonable, there can be no assurance as to the accuracy of
the assumptions or estimates.



Rate of Prepayment.



The estimated life of the securitized loans depends on
the assumed annual prepayment rate which is a function of estimated voluntary (full and partial) and involuntary (liquidations) prepayments. The prepayment rate represents managements expectations of future prepayment rates based on prior and
expected loan performance, the type of loans in the relevant pool (fixed or adjustable rate), the production channel which produced the loan, prevailing interest rates, the presence of prepayment penalties, the loan-to-value ratios 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 including, but not limited to, a declining mortgage interest rate environment.



Credit Losses.



In determining the estimate for credit losses on loans securitized, we use
assumptions that we believe are reasonable based on information from our 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 agencies. On a quarterly basis, we re-evaluate our credit loss estimates.



Discount Rate.



In order to determine the fair value of the cash flow from the residual interests, we discount the cash flows based upon rates prevalent in the market.



We closely monitor our residual interests. If the actual rate
of prepayment and credit loss performance of loans in the securitized pools vary adversely in relation to the estimates and assumptions used to estimate fair value, we will adjust the fair value of the retained residual interests through a charge to
earnings. During the three months ended March 31, 2005 and 2004, the actual performance of our retained residual interests as compared to the key assumptions and estimates used to evaluate their carrying value did not result in write-downs.



We called two of the remaining seven securitization trusts on
February 15, 2005. No adjustments to the carrying value of the residual interests by calling these securitization trusts was deemed necessary. If we call any of the five remaining securitization trusts, we might be required to write down the value
of the residual interests relating to the called securitization trusts. We expect to call the five remaining securitization trusts during calendar year 2005.



17



---

##### Table of Contents

The following table summarizes certain information about the securitization trusts in which we retained a
residual interest at March 31, 2005 and December 31, 2004 (dollars in thousands):



|                                                                                                 |  |               |           |   |                  |   |           |  
|------------------------------------------------------------------------------------------------ |  | ------------- | --------- | - | ---------------- | - | --------- | -
|                                                                                                 |  | March 31,2005 |           |   | December 31,2004 |  
|Number of securitization trusts                                                                  |  |               | 5         |   |                  |   | 7         |  
|Aggregate principal balance of securitized loans at the time of the securitizations              |  | $             | 2,254,116 |   |                  | $ | 3,304,181 |  
|Outstanding principal balance of securitized loans                                               |  | $             | 106,522   |   |                  | $ | 224,345   |  
|Outstanding principal balance of pass-through certificates or bonds of the securitization trusts |  | $             | 82,086    |   |                  | $ | 172,552   |  
|Weighted average coupon rates of outstanding:                                                    |  |               |           |   |                  |   |           |  
|Securitized loans                                                                                |  |               | 10.43     | % |                  |   | 10.14     | %
|Pass-through certificates or bonds                                                               |  |               | 5.91      | % |                  |   | 6.01      | %



Certain historical
data and key assumptions and estimates used in our March 31, 2005 and December 31, 2004 review of the residual interests we retained were the following:



|                                                                                                                        |  |               |               |   |                  |   |               |  
|----------------------------------------------------------------------------------------------------------------------- |  | ------------- | ------------- | - | ---------------- | - | ------------- | -
|                                                                                                                        |  | March 31,2005 |               |   | December 31,2004 |  
|Prepayments:                                                                                                            |  |               |               |   |                  |   |               |  
|Actual weighted average annual prepayment rate, as a percentage of outstanding principal balances of securitized loans: |  |               |               |   |                  |   |               |  
|Fixed rate loans                                                                                                        |  |               | 36.6          | % |                  |   | 31.4          | %
|Adjustable rate loans                                                                                                   |  |               | 23.7          | % |                  |   | 25.4          | %
|Estimated annual prepayment rates, as a percentage of outstanding principal balances of securitized loans:              |  |               |               |   |                  |   |               |  
|Fixed rate loans                                                                                                        |  |               | 31.5% to 35.6 | % |                  |   | 31.3% to 37.5 | %
|Adjustable rate loans                                                                                                   |  |               | 31.2% to 35.0 | % |                  |   | 31.3% to 42.7 | %
|Estimated weighted average life of securitized loans                                                                    |  |               | 2.2 years     |   |                  |   | 2.0 years     |  
|Credit losses:                                                                                                          |  |               |               |   |                  |   |               |  
|Actual credit losses to date, as a percentage of original principal balances of securitized loans                       |  |               | 4.8           | % |                  |   | 4.7           | %
|Future estimated prospective credit losses, as a percentage of original principal balances of securitized loans         |  |               | 0.3           | % |                  |   | 0.5           | %
|Total actual and estimated credit losses, as a percentage of original principal balances of securitized loans           |  |               | 5.1           | % |                  |   | 5.2           | %
|Total actual credit losses to date and estimated prospective credit losses (dollars in thousands)                       |  | $             | 114,852       |   |                  | $ | 168,319       |  
|Weighted average discount rate                                                                                          |  |               | 13.7          | % |                  |   | 13.7          | %



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



The total actual and estimated credit losses, as a percentage of original principal balance of securitized loans, in each
securitization trust, ranged from 3.8% to 6.2% at March 31, 2005 and ranged from 3.8% to 6.5% at December 31, 2004. Actual and estimated credit losses vary between securitization trusts due to differing credit quality i.e., credit grade, production
channel and other factors we considered when evaluating credit loss estimates.



Accounting for Income Taxes.    We have elected to be taxed as a REIT for federal tax purposes which means that generally we are not subject to U.S. federal income taxes on the REIT income
that we distribute to our stockholders.



18



---

##### Table of Contents

Aames Financials taxable income is subject to regular corporate income tax. Taxes are provided on
substantially all income and expense items included in earnings of Aames Financial regardless of the period in which such items are recognized for tax purposes. We use an asset and liability approach that requires the recognition of deferred tax
assets and liabilities for the expected future tax consequences of events that have been recognized in our financing statements or tax returns. In estimating future tax consequences, we generally consider all expected future events other than the
enactment of changes in the tax law or rates.



Deferred income
tax assets and liabilities are recognized by Aames Financial to reflect the future tax consequences of net operating loss carry forwards and differences between the tax basis and financial reporting basis of assets and liabilities. We have
established a valuation allowance to reflect managements determination that it is not more likely than not that certain deferred tax assets will be realized. The realization of deferred tax assets is evaluated by management quarterly and
changes in realizability are reflected in the provision for income taxes.



Results of Operations



The following table
sets forth information regarding our results of operations during the three months ended March 31, 2005 and 2004 (in thousands):



|                                                                |  |                    |        |   |               |   |        |  
|--------------------------------------------------------------- |  | ------------------ | ------ | - | ------------- | - | ------ | -
|                                                                |  | Three Months Ended |       
|                                                                |  | March 31,2005      |        |   | March 31,2004 |  
|Interest income                                                 |  | $                  | 51,768 |   |               | $ | 17,678 |  
|Interest expense                                                |  |                    | 11,916 |   |               |   | 6,579  |  
|                                                                |  |                    |        |   |               |   |        |  
|Net interest income                                             |  |                    | 39,852 |   |               |   | 11,099 |  
|Provision for loan losses                                       |  |                    | 6,500  |   |               |   |       |  
|                                                                |  |                    |        |   |               |   |        |  
|Net interest income after provision loan losses for loan losses |  |                    | 33,352 |   |               |   | 11,099 |  
|Noninterest income:                                             |  |                    |        |   |               |   |        |  
|Gain on sale of loans                                           |  |                    | 5,683  |   |               |   | 54,599 |  
|Loan servicing                                                  |  |                    | 2,924  |   |               |   | 2,155  |  
|                                                                |  |                    |        |   |               |   |        |  
|Total noninterest income                                        |  |                    | 8,607  |   |               |   | 56,754 |  
|                                                                |  |                    |        |   |               |   |        |  
|Net interest income and noninterest income                      |  |                    | 41,959 |   |               |   | 67,853 |  
|Noninterest expense:                                            |  |                    |        |   |               |   |        |  
|Personnel                                                       |  |                    | 22,347 |   |               |   | 25,348 |  
|Production                                                      |  |                    | 8,800  |   |               |   | 10,333 |  
|General and administrative                                      |  |                    | 10,813 |   |               |   | 11,375 |  
|                                                                |  |                    |        |   |               |   |        |  
|Total noninterest expenses                                      |  |                    | 41,960 |   |               |   | 47,056 |  
|                                                                |  |                    |        |   |               |   |        |  
|Income (loss) before income taxes                               |  |                    | (1     | ) |               |   | 20,797 |  
|Provision (benefit) for income taxes                            |  |                    | 765    |   |               |   | (93    | )
|                                                                |  |                    |        |   |               |   |        |  
|Net income (loss)                                               |  | $                  | (766   | ) |               | $ | 20,890 |  
|                                                                |  |                    |        |   |               |   |        |  



19



---

##### Table of Contents

Interest Income and Interest Expense



Interest income.    Interest income includes interest earned on loans held for investment and
loans held for sale. To a lesser extent, interest income also includes interest on short-term overnight investments, discount accretion income recognized on our residual interests and the amortization of net deferred loan origination fees and costs
on mortgage loans held for investment. The following table summarizes the components of interest income during the three months ended March 31, 2005 and 2004 (in thousands):



|                                         |  |                             |        |      |   |       
|---------------------------------------- |  | --------------------------- | ------ | ---- | - | ------
|                                         |  | Three Months EndedMarch 31,
|                                         |  | 2005                        |        | 2004
|Interest earned on:                      |  |                             |        |      |   |       
|Loans held for investment                |  | $                           | 40,932 |      | $ |      
|Loans held for sale                      |  |                             | 7,866  |      |   | 16,650
|Overnight investments                    |  |                             | 220    |      |   |      
|Discount accretion on residual interests |  |                             |       |      |   | 972   
|Other interest income                    |  |                             | 2,750  |      |   | 56    
|                                         |  |                             |        |      |   |       
|                                         |  | $                           | 51,768 |      | $ | 17,678
|                                         |  |                             |        |      |   |       



During the December
2004 quarter and in connection with our formation as a mortgage REIT, we began to build a portfolio of loans held for investment which, at March 31, 2005, was comprised of mortgage loans with an unpaid principal balance of $2.9 billion. We did not
have a portfolio of loans held for investment at March 31, 2004. Our interest income increased $34.1 million to $51.8 million during the three months ended March 31, 2005 over $17.7 million during the three months ended March 31, 2004. The $34.1
million increase in interest income was due primarily to the $40.9 million of interest income earned on the portfolio of loans held for investment. To a lesser extent, the increase in interest income during the three months ended March 31, 2005 over
the comparable three month period a year ago was due to increases of $2.7 million and $0.2 million of miscellaneous interest income and interest income earned on overnight investments, respectively. Substantially all of the $2.7 million of other
interest income related to remittances to us from counterparties on in-the-money interest rate cap agreements used to hedge interest rate exposure to our REIT portfolio and related financings. Partially offsetting the increase in interest income
during the three months ended March 31, 2005 over the comparable three month period a year ago were declines of $8.8 million and $1.0 million in interest income on loans held for sale and discount accretion on our residual interests. Interest income
earned on loans held for sale declined due to our strategy of building a portfolio of loans held for investment which resulted in our holding a lower average balance of loans held for sale during the three months ended March 31, 2005 when compared
to the average balance of loans held for sale outstanding during the three months ended March 31, 2004, partially offset by higher weighted average coupon rates on loans held for sale during the March 2005 quarter when compared to such rates during
the March 2004 quarter. We have discontinued recognizing discount accretion income on our residuals in light of our expectation to call the remaining securitization trusts later in calendar 2005.



20



---

##### Table of Contents

Interest expense.    Interest expense includes interest borne on the balances
outstanding of financings on loans held for investment and revolving warehouse and repurchase facilities and borrowings. Interest expense also includes fair value adjustments to derivative instruments used to hedge interest rate risk on our
financings of mortgage loans held for investment, amortization of debt issuance expenses and debt discount on financings on mortgage loans held for investment and the amortization of commitment fees on revolving warehouse and repurchase facilities.
The following table summarizes the components of interest expense during the three months ended March 31, 2005 and 2004 (in thousands):



|                                                                                                                               |  |                                 |        |   |      |   |      
|------------------------------------------------------------------------------------------------------------------------------ |  | ------------------------------- | ------ | - | ---- | - | -----
|                                                                                                                               |  | Three Months Ended    March 31,
|                                                                                                                               |  | 2005                            |        |   | 2004
|Interest expense on:                                                                                                           |  |                                 |        |   |      |   |      
|Financings on loans held for investment                                                                                        |  | $                               | 12,170 |   |      | $ |     
|Revolving warehouse and repurchase facilities                                                                                  |  |                                 | 7,778  |   |      |   | 4,127
|Borrowings                                                                                                                     |  |                                 | 44     |   |      |   | 1,085
|Other:                                                                                                                         |  |                                 |        |   |      |   |      
|Mark to market on interest rate cap agreements designed to hedge interest rate risk on financings of loans held for investment |  |                                 | (9,532 | ) |      |   |     
|Amortization of commitment fees, debt issuance and debt discount                                                               |  |                                 | 1,195  |   |      |   | 1,209
|Bank charges and other                                                                                                         |  |                                 | 261    |   |      |   | 158  
|                                                                                                                               |  |                                 |        |   |      |   |      
|Total interest expense                                                                                                         |  | $                               | 11,916 |   |      | $ | 6,579
|                                                                                                                               |  |                                 |        |   |      |   |      



Interest expense
increased $5.3 million to $11.9 million during the three months ended March 31, 2005 over $6.6 million during the three months ended March 31, 2004. The increase in interest expense reported during the three months ended March 31, 2005 from levels
reported during the comparable three month period a year ago was primarily due to increases of $12.2 million and $3.7 million in interest expense on financings on loans held for investment and revolving warehouse and repurchase facilities,
respectively. At March 31, 2005, the unpaid principal balance of financings on loans held for investment was $2.3 billion. We had no financings on loans held for investment at March 31, 2004. During the three months ended March 31, 2005, average
borrowings and interest rates associated with our revolving warehouse and repurchase facilities used to fund loans held for sale and loans held for investment not yet securitized were higher than such average balances and interest rates during the
comparable three month period a year ago. These increases were offset partially by a $9.5 million credit to interest expense related to the positive mark to fair value at March 31, 2005 of open interest rate cap agreements in place to hedge interest
rate risk exposure on our financings on loans held for investment. In addition, interest expense on borrowings declined by $1.0 million during the three months ended March 31, 2005 from the comparable period a year ago due to the lower balance
outstanding of Aames Financials residual financing facility during the March 2005 quarter (during which it was fully redeemed) compared to the higher balance outstanding during the March 2004 quarter despite a higher interest rate applicable
to the obligation during the March 2005 quarter than during the March 2004 quarter as the interest rate was indexed to one-month LIBOR.



Interest expense is expected to increase in future periods due to our business strategy of financing our loans held for investment through warehouse and
repurchase facilities and on-balance sheet securitizations, our continued reliance on warehouse and repurchase facilities to fund mortgage loan production and expected continued upward pressure on the one-month LIBOR, the index used in our borrowing
arrangements, in coming quarters.



Other Income



Gain on Sale of Loans.    Gain on sale of loans
includes gain from whole loan sale transactions, recognized and deferred loan origination fees and costs, provisions for representation, warranty and other miscellaneous losses, gains and losses on derivative instruments and miscellaneous costs
related to loan sale activities. Gain on



21



---

##### Table of Contents

sale of loans is impacted by the timing and mix of loan origination and sales as net, pursuant to FAS 91, loan origination fees and costs related to mortgage
loans originated and held for sale are deferred and recognized in gain on sale of loans at the time the mortgage loans are sold. The deferral of net loan origination fees and costs was not material to our consolidated financial statements at and
during the three months ended March 31, 2004. The components of gain on sale of loans during the three months ended March 31, 2005 and 2004 are summarized in the following table (in thousands):



|                                                        |  |                             |       |   |      |   |        |  
|------------------------------------------------------- |  | --------------------------- | ----- | - | ---- | - | ------ | -
|                                                        |  | Three Months EndedMarch 31, |      
|                                                        |  | 2005                        |       |   | 2004 |  
|Gain on loan sale                                       |  | $                           | 4,583 |   |      | $ | 71,472 |  
|Loan origination fees and costs, net                    |  |                             | 2,097 |   |      |   | (8,349 | )
|Provision for representation, warranty and other losses |  |                             | (785  | ) |      |   | (8,391 | )
|Miscellaneous costs                                     |  |                             | (212  | ) |      |   | (133   | )
|                                                        |  |                             |       |   |      |   |        |  
|Gain on sale of loans                                   |  | $                           | 5,683 |   |      | $ | 54,599 |  
|                                                        |  |                             |       |   |      |   |        |  



Gain on sale of loans
decreased $48.9 million, or 89.6%, to $5.7 million during the three months ended March 31, 2005 from $54.6 million during the comparable three month period a year ago. The $48.9 million decrease was due primarily to a $66.9 million decrease in gain
on sale from whole loan sale transactions, partially offset by an increase of $10.5 million in net loan origination fees and costs, and a $7.6 million decrease in the provision for representation, warranty and other miscellaneous losses.



The $66.9 million decrease in gain on sale was due primarily to our
strategy of retaining the majority of our hybrid/adjustable rate loan production in our REIT portfolio which resulted in a $1.4 billion, or 81.8%, decrease in mortgage loan sales to third parties during the three months ended March 31, 2005 from
mortgage loan sales to third parties during the comparable three month period a year ago. Because we sold only fixed rate first-lien loans and second-lien loans to third parties during the March 2005 quarter, gain on sale also declined due to lower
gain on sale rates realized on whole loan sales during the three months ended March 31, 2005 compared to such rates during the comparable 2004 period. Due to the change in the mix in the composition of loans originated and sold during three months
ended March 31, 2005 from the same period a year ago, realized net loan origination fees were $2.1 million during the March 2005 quarter compared to realized net loan origination costs of $8.3 million during the three months ended March 31, 2004.
During the three months ended March 31, 2005, realized net loan origination fees were $2.1 million compared to realized net loan origination costs of $8.3 million during the three months ended March 31, 2004. Due to the change in the mix in the
composition of loans originated and sold during the three months ended March 31, 2005 from the same period a year ago. Finally, during the three months ended March 31, 2005, we charged $0.8 million to gain on sale of loans for estimated contractual
representation and warranty obligations on loans previously sold and for loans held for sale that are delinquent, have collateral deficiencies or have other attributes that affect their sale potential. This $7.6 million decrease from the $8.4
million provided during the three months ended March 31, 2004 was due principally to fewer loans having been sold in whole loan sales during the three months ended March 31, 2005 when compared to the same three month period a year ago.



Loan Servicing.    Loan servicing revenue
consists of prepayment fees, late charges and other fees we retain and servicing fees earned on securitized pools, reduced by subservicing costs related to servicing advance arrangements. See Critical Accounting Policies. Loan servicing
revenue increased $0.7 million to $2.9 million during the three months ended March 31, 2005 from $2.2 million during the three months ended March 31, 2004. The increase was primarily due to an increase in late and prepayment fees of $1.7 million
partially offset by decreases of $0.9 million and $0.2 million in servicing and beneficiary demand fees, respectively.



Total Operating Expenses



General.    Total operating expenses decreased $5.1 million to $42.0 million during the three months ended March 31, 2005 from
$47.1 million during the three months ended March 31, 2004. The decrease in total



22



---

##### Table of Contents

expenses during the three months ended March 31, 2005 from total expenses during the comparable period in 2004 was attributable to decreases of $3.0 million,
$1.5 million and $0.6 million in personnel expense, production, and general and administrative expense, respectively.



Personnel.    Personnel expense includes salaries, payroll taxes and medical and other employee benefits. Personnel expense
also includes commissions that are generally related to our loan origination volume, as retail and broker account executives earn incentives on funded loans. Pursuant to FAS 91, direct personnel costs incurred on mortgage loans originated but not
yet sold are deferred to future periods and recognized as a charge to gain on sale at the time the mortgage loans are sold.



The following table summarizes the components of personnel expense during the periods presented (in thousands):



|                                    |  |                              |         |   |      |   |         |  
|----------------------------------- |  | ---------------------------- | ------- | - | ---- | - | ------- | -
|                                    |  | Three Months Ended March 31, |        
|                                    |  | 2005                         |         |   | 2004 |  
|Compensation                        |  | $                            | 35,682  |   |      | $ | 43,229  |  
|Net deferred loan origination costs |  |                              | (16,620 | ) |      |   | (21,328 | )
|Medical and other benefits          |  |                              | 2,711   |   |      |   | 3,019   |  
|Other                               |  |                              | 574     |   |      |   | 428     |  
|                                    |  |                              |         |   |      |   |         |  
|Total personnel expense             |  | $                            | 22,347  |   |      | $ | 25,348  |  
|                                    |  |                              |         |   |      |   |         |  



Personnel expense
decreased $3.0 million during the three months ended March 31, 2005 from personnel expense during the comparable three-month period a year ago. The $3.0 million decrease was comprised of decreases of $7.5 million and $0.3 million in compensation and
medical and other benefits, respectively, partially offset by a $4.7 million decrease in net deferred loan origination costs and a $0.1 million increase in miscellaneous personnel expense. The $7.5 million decrease in compensation resulted from a
$5.5 million decline in commissions, bonuses and incentives, coupled with a $2.0 million decrease in management bonus incentives. The $5.5 million decrease in commissions, bonuses and incentives during the three months ended March 31, 2005 from
those reported during the comparable three month period during 2004 was due to the $504.6 million, or 27.0%, decrease in total loan originations reported during the three months ended March 31, 2005 when compared to the same three month period a
year ago. Net deferred personnel costs on mortgage loans originated but not yet sold decreased $4.7 million during the three months ended March 31, 2005 over those reported a year ago due primarily to the mix in the composition of loans originated
and sold during the 2005 period when compared to those originated and sold during the 2004 period. The $0.3 million decrease in health, medical and other benefit costs during the three months ended March 31, 2005 from the amount reported during the
comparable period a year ago was attributable to decreased staff levels.



Production.    Production expense decreased $1.5 million, or 14.8%, to $8.8 million during the three months ended March 31, 2005 from $10.3 million during the three months ended March 31,
2004. The $1.5 million decrease in production expense was due primarily to a $0.4 million decrease in advertising expense, a $0.7 million decrease in appraisal costs, a $0.1 million decrease in travel and entertainment expenses, coupled with a $0.3
million decrease in sales incentives relative to the $504.6 million, or 27.0%, decrease in our loan production volumes during the three months ended March 31, 2005 from production volumes during the three months ended March 31, 2004.



Production expense when expressed as a percentage of total loan origination
volume for the three months ended March 31, 2005 increased to 0.7% from 0.6% at March 31, 2004 primarily due to a larger decrease in loan production than in production expense during the three months ended March 31, 2005 from amounts reported during
the three months ended March 31, 2004.



General and
Administrative.    General and administrative expense decreased $0.6 million, or 0.5%, to $10.8 million during the three months ended March 31, 2005 from $11.4 million during the three months ended March



23



---

##### Table of Contents

31, 2004. The $0.6 million decrease in general and administrative expense was due primarily to decreases of $0.2 million, $0.5 million and $0.3 million in
professional, communication and depreciation expenses, respectively. These decreases were partially offset by increases of $0.3 million and $0.2 million in occupancy and corporate related insurance respectively.



During the three months ended March 31, 2005 and 2004, we paid total rent of
$2.8 million and $2.4 million, respectively, and received total sublease payments of $0.1 million during both the three months ended March 31, 2005 and 2004.



Financial Condition



Loans Held for Sale.    Our portfolio of loans held for sale decreased to $383.5 million at March 31, 2005 from $485.0 million
at December 31, 2004 due primarily to total loan sales and transfers of mortgage loans to loans held for investment exceeding total loan originations during the three months ended March 31, 2005.



Loans Held for Investment, Net.    At March 31,
2005, our portfolio of loans held for investment, net was $2.9 billion, an increase of $1.2 billion over the $1.7 billion portfolio of loans held for investment at December 31, 2004. During the three months ended March 31, 2005, we completed a $1.2
billion on-balance sheet securitization. At March 31, 2005, the portfolio of loans held for investment was comprised of $2.3 billion and $0.6 billion of loans securitized and loans not yet securitized, respectively. In comparison, at December 31,
2004, the $1.7 billion portfolio of loans held for investment was comprised of $1.2 billion and $0.5 billion of securitized loans held for investment and loans held for investment not yet securitized, respectively.



The portfolio of loans held for investment at March 31, 2005 and December 31,
2004 of $2.9 billion and $1.7 billion, respectively, were net of an $8.4 million and $1.9 million allowance for loan losses, respectively. During the three months ended March 31, 2005, we recorded a provision for loan losses of $6.5 million and no
loan charge-offs were recorded.



Advances and Other
Receivables.    Advances and other receivables are comprised of interest and servicing advances, servicing and miscellaneous fees, cash due from the off-balance sheet securitization trusts, accrued interest receivable and
other miscellaneous receivables. The level of servicing advances, in any given period, depends upon portfolio delinquencies, the level of real estate owned and loans in the process of foreclosure, and the timing and remittance of cash collections on
mortgage loans in the securitization trusts. We fund advances on a recurring basis not otherwise covered by our financing arrangements and recover those advances on a periodic basis.



Advances and other receivables increased $1.9 million to $24.6 million at March 31, 2005 from $22.7 million at December 31,
2004. The increase was due primarily to increases of $7.0 million and $1.3 million in advances, accrued interest and other receivables and principal and interest advances, respectively, partially offset by decreases of $6.2 million and $0.3 million
in interest and servicing advances and cash due from securitization trusts, respectively.



The $7.0 million increase in accrued interest and other receivables at March 31, 2005 over the balance at December 31, 2004 is due primarily to a $5.6 million increase in accrued interest relative to the increase in
the balance of loans held for investment together with a $1.4 million increase in amounts due from counterparties. The $1.3 million increase in principal and interest advances is due to the advances made to bond holders in our on-balance sheet
securitizations. The $6.2 million decrease in interest and servicing advances at March 31, 2005 from December 31, 2004 was primarily due to recoveries of prior advances as a result of the call of two of our off-balance sheet securitizations. The
$0.2 million decline in cash due from securitization trusts at March 31, 2005 from December 31, 2004 is due primarily to a decline in estimated cash flows on lower residual balances at March 31, 2005 when compared to the balance at December 31,
2004.



Residual
Interests.    Residual interests decreased to $18.9 million at March 31, 2005 from $39.1 million at December 31, 2004, reflecting $20.2 million of cash received from the securitization trusts. Of the $20.2 million



24



---

##### Table of Contents

of cash received from the securitization trusts, $18.3 million was received in connection with our calling two securitization trusts during the three months
ended March 31, 2005. We have elected not to recognize discount accretion on the remaining residual interests in light of our expectation to call our remaining five securitization trusts during calendar 2005.



Equipment and Improvements, Net.    Equipment and
improvements, net, increased to $9.1 million at March 31, 2005 from $8.8 million at December 31, 2004 reflecting capitalization of new equipment and improvement acquisitions outpacing depreciation and amortization during the three months ended March
31, 2005.



Prepaid and Other
Assets.    Prepaid assets decreased to $20.9 million at March 31, 2005 from $22.1 million at December 31, 2004. The decrease was due to decreases of $2.8 million, $0.6 million, $0.4 million and $3.7 million in licensing,
permit and performance bond desposits, unamortized commitment fees on revolving warehouse and repurchase facilities, prepaids, security deposits and other deferred charges, and defunded loans, respectively, offset partially by increases of $6.3
million in unamortized debt issuance costs related to the on-balance sheet securitization.



Derivative Financial Instruments.    At March 31, 2005, we have notional amounts of $4.2 billion compared to $2.5 billion at December 31, 2004 of interest rate cap agreements in place to
hedge rate risk exposure to our portfolio of mortgage loans held for investment and related financings. We carry out derivative financial instruments at estimated fair value which at March 31, 2005 was $52.0 million compared to $31.9 million at
December 31, 2004. Included in interest expense during the three months ended March 31, 2005, was a $9.5 million credit related to the mark-to-market of our interest rate cap agreements at March 31, 2005. At and during the three months ended March
31, 2004, we did not have any hedge instruments in place.



Financing on Loans Held for Investment.    Amounts outstanding under our financing on loans held for investment increased to $2.3 billion at March 31, 2005 from $1.2 billion at December 31, 2004 resulting from the
on-balance sheet securitization that closed during the quarter ended March 31, 2005.



Borrowings.    On March 15, 2005, we fully repaid the remaining balance outstanding under Aames Financials residual financing facility which, at December 31, 2004, was $7.7 million.



Revolving Warehouse and Repurchase
Facilities.    Amounts outstanding under revolving warehouse and repurchase facilities increased to $854.4 million at March 31, 2005 from $809.2 million at December 31, 2004 primarily as a result of increased reliance on the
facilities to fund loans held for investment prior to their securitization. Proceeds from whole loan sales and securitizations are used first to reduce balances outstanding under our revolving warehouse and repurchase facilities, and then used to
satisfy corporate operating requirements.



MORTGAGE PORTFOLIO MANAGEMENT



On February 24, 2005, we completed a securitization
totaling $1.2 billion, our second securitization as a REIT. This securitization was structured as an on-balance sheet securitization for accounting purposes under SFAS No. 140. Prior to our reorganization, Aames Financials securitizations were
structured as sales for both tax and financial accounting purposes. We did not complete any securitizations during the three months ended March 31, 2004. Once we have built our REIT portfolio to its target range, we expect net interest income from
our portfolio of mortgage loans to generate a substantial portion of our earnings.



We expect to purchase most of Aames Financials mortgage loan originations while we build our REIT portfolio. We have not established a limit on the amount of leverage we may incur, but generally we plan to
leverage our stockholders equity 10 to 14 times. Once we have built our REIT portfolio to its target range, we anticipate purchasing a smaller portion of Aames Financials originations to maintain our target leverage ratio. Aames
Financial will then sell the remainder of its loan originations, including a portion of its hybrid/adjustable rate mortgage loans, to third parties in the secondary market.



25



---

##### Table of Contents

A significant risk to our operations that relates to our REIT portfolio management is the risk that
interest rates on our assets will not adjust at the same time or amount as the rates on our liabilities adjust. This is because the interest on the underlying hybrid/adjustable rate mortgage loans is based on fixed rates payable on the underlying
loans for the first two or three years from origination while the holders of the applicable securities are generally paid based on an adjustable one-month LIBOR-based yield. Moreover, even after the initial fixed period, our loans generally adjust
every six months and are subject to periodic rate caps, whereas the bonds adjust monthly based primarily on LIBOR. Therefore, an increase in one-month LIBOR generally reduces the net interest income we receive from our securitized loan portfolio. We
attempt to mitigate a portion of this net interest margin variability by purchasing derivative financial instruments referred to as interest rate cap agreements. In addition, the net interest income we receive from securitizations will be reduced if
there are a significant amount of loan defaults or loan prepayments, especially on loans with interest rates that are high relative to the rest of the securitized mortgage loan pool.



We do not use formalized hedge accounting for our derivative financial instruments as set forth in generally accepted
accounting principles in the United States. Instead, we are required to record the change in the value of the derivatives as a component of earnings even though they may reduce our interest risk. In times where short-term rates drop significantly,
the value of our interest rate caps will decrease; in times where short-term rates increase, the value of the interest rate caps will increase. The interest rate caps are designed to exchange the cost of our variable rate liabilities to fixed rates
for the first two years of its estimated duration thereby better matching our interest-bearing fixed rate assets.



INVESTMENT AND OPERATIONAL POLICIES



Our investment strategy is subject to change if and when our board of directors determines that a change is in our stockholders best interest.
Neither stockholder approval nor notification is required prior to changing our investment strategy.



Mortgage Loans



In
general, our strategy is to build a portfolio of mortgage loans primarily originated by Aames Financial. Our mortgage loans are generally underwritten in accordance with the categories and criteria described in our underwriting guidelines. See
Underwriting Standards.



Mortgage-backed Securities



Our current REIT portfolio consists of mortgage loans
originated by Aames Financial that collateralize mortgage-backed securities and mortgage loans originated by Aames Financial that will collateralize future mortgage-backed securitizations.



If we change our investment strategy, the new strategy may entail more risk
than our current investment strategy. Alternative strategies that our board of directors may choose to put in place include:



| |  |  | purposefully exposing the value of our holdings to changes in interest rates or changes in the difference between short- and long-term rates; or
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | holding mortgage-backed securities with a credit rating lower than AAA or mortgage-backed securities collateralized by mortgage loans originated by and purchased from third parties.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Leverage Policy



We employ a leverage strategy by securitizing existing mortgages in
transactions that we believe will be treated as borrowings for accounting and tax purposes. We generally intend to borrow approximately 10 to 14 times the amount of our consolidated equity capital, although our actual debt to equity ratio may vary
from time to time depending on market conditions and other factors that our management and board of directors deem



26



---

##### Table of Contents

relevant. In general, our credit facilities limit our total debt-to-equity ratio to a level of 15.0 to 1.0. However, each of our credit facility lenders
disregards nonrecourse financing, including the bonds underlying our on-balance sheet securitizations, in computing our adjusted leverage ratio which is limited to 5.5 to 1.0. Our actual total and adjusted leverage ratios were 8.9 to 1.0 and 2.6 to
1.0 at March 31, 2005, respectively.



Hedging Policy



To mitigate the adverse effects from interest increases on our mortgage
loans held for sale or investment, we use several tools and risk management strategies to monitor and address interest rate risk. We believe that these tools allow us to monitor and evaluate our exposure to interest rates and to manage the risk
profile of our mortgage loan portfolio in response to changes in market conditions. As part of our interest rate risk management process, we have used derivative financial instruments, such as interest rate cap agreements, interest rate swap
agreements, Treasury futures and options on interest rates. We can also use other hedging instruments including mortgage derivative securities, when necessary. Hedging strategies also involve transaction and other costs. Because we use derivative
financial instruments more than we did prior to the REIT reorganization, the aggregate costs to us of entering into contracts for these instruments is significantly higher than in the past.



We currently use derivative financial instruments such as interest rate cap
agreements. It is not our policy to use derivatives to speculate on interest rates. These derivative instruments have an active secondary market and are intended to provide supplemental income and cash flow to offset potential reduced interest
income and cash flow in certain interest rate environments. We report our derivative financial instruments on our consolidated balance sheets at their fair value with any changes in fair value reported as either a charge or credit to the
consolidated statement of operations.



Financing Policy



We may raise funds through additional equity offerings, debt financings,
retention of cash flow, or a combination of these methods subject to Internal Revenue Code provisions regarding distribution requirements and taxability of undistributed REIT taxable income. If our board of directors decides to raise additional
equity capital, it has the authority to issue additional common or preferred stock, in any manner and on terms it deems appropriate, up to the amount authorized in our articles of incorporation without stockholder approval.



Currently, our borrowings consist primarily of funds borrowed under revolving
warehouse and repurchase facilities and financings on loans held for investment. Borrowings going forward may be in the form of bank borrowings, secured or unsecured, and publicly or privately placed debt instruments, purchase money obligations to
the sellers of assets, long-term, tax-exempt bonds or other publicly or privately placed debt instruments, financing from banks, institutional investors or other lenders, and securitizations, including collateralized debt obligations, any of which
may be unsecured or secured by mortgages or other interests in the assets. This indebtedness may entail recourse to all or any part of our assets or may be limited to the particular assets to which the indebtedness relates.



We enter into collateralized borrowings only with institutions that we
believe are financially sound and that are rated investment grade by at least one nationally recognized statistical rating organization.



MORTGAGE ORIGINATIONS



As at March 31, 2005 Aames Financial originated loans in 47 states through its retail and wholesale channels. Its wholesale channel operated five regional
wholesale operations centers throughout the United States and originated loans through a nationwide network of approximately 4,400 independent mortgage brokers who submit mortgage loans to it. Its retail channel had a network of 94 retail branch
offices directly serving borrowers throughout the United States.



27



---

##### Table of Contents

The following table shows our total originations by retail and wholesale channels for the three months
ended March 31, 2005 and 2004 (in thousands):



|          |  |                    |           |            |                |   |   |   |            |  |       |  
|--------- |  | ------------------ | --------- | ---------- | -------------- | - | - | - | ---------- |  | ----- | -
|          |  | Three Months Ended |          
|          |  | March 31, 2005     |           |            | March 31, 2004 |  
|          |  | $                  |           | % of Total |                |   | $ |   | % of Total | 
|Retail    |  | $                  | 516,558   |            | 37.9           | % |   | $ | 586,527    |  | 31.4  | %
|Wholesale |  |                    | 845,058   |            | 62.1           |   |   |   | 1,279,701  |  | 68.6  |  
|          |  |                    |           |            |                |   |   |   |            |  |       |  
|Total     |  | $                  | 1,361,616 |            | 100.0          | % |   | $ | 1,866,228  |  | 100.0 | %
|          |  |                    |           |            |                |   |   |   |            |  |       |  



A significant risk to
our mortgage originations operations is liquidity riskthe risk that we will not have the financing facilities and cash available to fund and hold loans prior to their sale or securitization. We maintain committed borrowing facilities with
large banking and investment institutions to reduce this risk.



Our Retail
Channel



We generate applications for loans through our
retail loan office network principally through a direct response marketing program, which relies primarily on the use of direct mailings to homeowners, telemarketing and Internet generated leads and through referrals from our customers, real estate
agents and others. We generate customer leads for the retail network based upon models that we have derived and commercially developed customer lists. Our direct mail invites prospective borrowers to call us to apply for a loan. We also generate
leads through several commercially available Internet sites as well as through our own retail Internet web site Aames.net. We believe that our marketing efforts establish name recognition and serve to distinguish us from our competitors.
We continually monitor the source of our applications to determine the most effective methods and manner of marketing. Whether generated through direct mail or the Internet, leads are generally followed up with telephone calls to potential
customers. On the basis of an initial screening conducted at the time of the call, our loan officers at the local retail loan office make a determination of whether the customer and the property generally meet our lending criteria. The loan officer
may complete the application over the telephone or schedule an appointment with the retail loan office most conveniently located to the customer or in the customers home, depending on the customers needs.



The retail loan officer assists the applicant in completing the loan
application, arranges for an appraisal, orders a credit report from an independent, nationally recognized credit reporting agency and performs various other tasks in connection with the completion of the loan package. The loan package is
underwritten for loan approval on a centralized basis. If we approve the loan package, the loan is funded. Our loan officers are trained to structure loans that meet the applicants needs while satisfying our lending guidelines.



We continually monitor our retail operations in the markets in which we
operate and evaluate existing and potential retail offices on the basis of selected demographic statistics, marketing analyses and other criteria that we have developed in order to further enhance our mortgage loan production capabilities. As
previously disclosed, as part of this evaluation process, we have closed 11 retail branches in April 2005 in markets where it was not financially feasible to continue to service the market area in this manner. However, we continue to service these
areas through our wholesale channel and the Internet.



Our Wholesale Channel



During the three months ended March 31, 2005, we
originated loans through our network of approximately 4,400 independent wholesale mortgage brokers throughout the United States, none of which accounted for more than 5.0% of total wholesale originations.



The brokers role is to identify the applicant, assist in completing the
loan application, gather necessary information and documents, submit the application requesting the interest rate and terms of the loan, and serve as



28



---

##### Table of Contents

our liaison with the borrower through the lending process. We review and underwrite the applications submitted by the broker in accordance with our
underwriting guidelines and then approve or deny the application. If the loan is approved, we approve or counter the requested interest rate and other terms of the loan and, upon acceptance by the borrower and satisfaction of all conditions imposed
by us, we fund the loan. Because brokers conduct their own marketing and employ their own personnel to complete loan applications and maintain contact with borrowers, originating loans through our wholesale network allows us to increase our loan
volume without incurring the higher marketing and employee costs associated with retail originations.



Because mortgage brokers generally submit loan files to several prospective lenders simultaneously, competitive pricing, consistent underwriting, quick
response times and personal service are critical to successfully producing loans through independent mortgage brokers. To meet these requirements, we strive to provide quick response time to the loan application (generally within 24 hours). In
addition, the loans are processed and underwritten in regional offices, and loan consultants, loan processors and underwriters are available to answer questions, assist in the loan application process and facilitate ultimate funding of the loan.



We use telemarketing and the Internet to increase our
wholesale loan production and further penetrate the subprime home equity wholesale market through our Broker Direct program. Through Broker Direct, we make outbound telemarketing calls to brokers that have been inactive for the past 90
days and brokers who are not currently doing business with us or are outside the geographic areas served by the loan officers. We also obtain leads through our wholesale Internet web site AamesDirect.com.



The following table presents certain information about our mortgage loan
production at or during the three months ended March 31, 2005 and 2004 and December 31, 2004:



|                                                    |  |                                     |           |   |                                                       |   |           |   |  |   |           |  
|--------------------------------------------------- |  | ----------------------------------- | --------- | - | ----------------------------------------------------- | - | --------- | - |  | - | --------- | -
|                                                    |  | At or During the Three Months Ended |           |   | At or During the Three Months Ended December 31, 2004 |  
|                                                    |  | March 31,2005                       |           |   | March 31,2004                                         |   |          
|Retail loan production:                             |  |                                     |           |   |                                                       |   |           |   |  |   |           |  
|Total dollar amount (in thousands)                  |  | $                                   | 516,558   |   |                                                       | $ | 586,527   |   |  | $ | 574,625   |  
|Number of loans                                     |  |                                     | 3,718     |   |                                                       |   | 4,677     |   |  |   | 4,431     |  
|Average loan amount                                 |  | $                                   | 138,934   |   |                                                       | $ | 125,407   |   |  | $ | 129,683   |  
|Average initial LTV                                 |  |                                     | 75.88     | % |                                                       |   | 77.85     | % |  |   | 75.82     | %
|Weighted average interest rate(1)                   |  |                                     | 7.53      | % |                                                       |   | 7.26      | % |  |   | 7.36      | %
|Retail branch offices at period end                 |  |                                     | 94        |   |                                                       |   | 95        |   |  |   | 96        |  
|Wholesale loan production:                          |  |                                     |           |   |                                                       |   |           |   |  |   |           |  
|Total dollar amount (in thousands)                  |  | $                                   | 845,058   |   |                                                       | $ | 1,279,701 |   |  | $ | 1,134,911 |  
|Number of loans                                     |  |                                     | 6,028     |   |                                                       |   | 8,630     |   |  |   | 7,841     |  
|Average loan amount                                 |  | $                                   | 140,189   |   |                                                       | $ | 148,285   |   |  | $ | 144,741   |  
|Average initial LTV                                 |  |                                     | 81.25     | % |                                                       |   | 81.68     | % |  |   | 81.19     | %
|Weighted average interest rate(1)                   |  |                                     | 7.60      | % |                                                       |   | 7.17      | % |  |   | 7.46      | %
|Regional wholesale operations centers at period end |  |                                     | 5         |   |                                                       |   | 5         |   |  |   | 5         |  
|Total loan production:                              |  |                                     |           |   |                                                       |   |           |   |  |   |           |  
|Total dollar amount (in thousands)                  |  | $                                   | 1,361,616 |   |                                                       | $ | 1,866,228 |   |  | $ | 1,709,536 |  
|Number of loans                                     |  |                                     | 9,746     |   |                                                       |   | 13,307    |   |  |   | 12,272    |  
|Average loan amount                                 |  | $                                   | 139,710   |   |                                                       | $ | 140,244   |   |  | $ | 139,304   |  
|Average initial LTV                                 |  |                                     | 79.21     | % |                                                       |   | 80.47     | % |  |   | 79.38     | %
|Weighted average interest rate(1)                   |  |                                     | 7.57      | % |                                                       |   | 7.20      | % |  |   | 7.43      | %

---

|(1) | Calculated with respect to the interest rate at the time we originated or purchased the mortgage loan.
|--- | ------------------------------------------------------------------------------------------------------



29



---

##### Table of Contents

Total Loan Production



Total loan production during the three months ended March 31, 2005 decreased $347.9 million, or 20.4%, to $1.4 billion from the $1.7 billion reported
during the three months ended December 31, 2004 and decreased $504.6 million, or 27.0%, from the $1.9 billion of total loan production reported during the three months ended March 31, 2004. As previously reported, many subprime lenders responded to
increases in short term interest rates by narrowing the spreads above such rates charged on their loans and by offering interest-only loans in an attempt to minimize increases in borrowers monthly payments. These marketplace changes negatively
impacted our mortgage loan origination volume during the three months ended March 31, 2005 when compared to mortgage loan production volumes during the comparable three month period a year ago. Loan origination volume during the March quarter has
historically been negatively impacted by seasonality factors.



We expect the current interest rate environment to continue to negatively impact our mortgage loan origination volume in the current quarter.



Our total retail production was $516.6 million during the three months ended March 31, 2005, a decrease of $58.1 million or 10.1%, from total retail
production reported during the three months ended December 31, 2004, and a decrease of $70.0 million, or 11.9% from total retail production during the three months ended March 31, 2004. During the three months ended March 31, 2005, the number of
retail loans originated declined by 713, or 16.1%, from the number of loans originated during the three months ended December 31, 2004, and declined by 959, or 20.5%, from the number of loans originated during the three months ended March 31, 2004.
The decrease in the number of loans originated during the three months ended March 31, 2005 compared to the three months ended December 31, 2004 and March 31, 2004, was partially offset by increases in the average dollar amount of our retail loan
originated of $9,251.00 and $13,527.00 over the average dollar amount of our retail loans originated during the three months ended December 31, 2004 and March 31, 2004, respectively.



Our total wholesale production decreased $289.9 million, or 25.5%, to $845.1 million during the three months ended March 31,
2005 from $1.1 billion of total wholesale production during the three months ended December 31, 2004 and decreased $434.6 million or 34.0%, from the total wholesale production reported during the three months ended March 31, 2004. During the three
months ended March 31, 2005, the number of wholesale loans declined by 1,813, or 23.1%, from the number of loans originated during the three months ended December 31, 2004, and declined by 2,602, or 30.2%, from the number of loans originated during
the three months ended March 31, 2004. During the three months ended March 31, 2005, the average dollar amount of our wholesale loan originated decreased $4,552.00 and $8,096.00 from the average dollar amount of our wholesale loans originated during
the three months ended December 31, 2004 and March 31, 2004, respectively.



The following table summarizes certain information about our mortgage loan production by purpose and property type during the three months ended March 31, 2005 and 2004 and December 31, 2004 (in thousands):



|                        |  |                    |           |                    |                |   |             |                   |                    |  |       |             |  |                    |           |  |       |  
|----------------------- |  | ------------------ | --------- | ------------------ | -------------- | - | ----------- | ----------------- | ------------------ |  | ----- | ----------- |  | ------------------ | --------- |  | ----- | -
|                        |  | Three Months Ended |          
|                        |  | March 31, 2005     |           |                    | March 31, 2004 |   |             | December 31, 2004 |                   
|                        |  | LoansFunded        |           | Percentageof Total |                |   | LoansFunded |                   | Percentageof Total |  |       | LoansFunded |  | Percentageof Total |          
|Purpose:                |  |                    |           |                    |                |   |             |                   |                    |  |       |             |  |                    |           |  |       |  
|Cash-out refinance      |  | $                  | 799,342   |                    | 58.7           | % |             | $                 | 1,146,498          |  | 61.4  | %           |  | $                  | 1,019,194 |  | 59.6  | %
|Purchase money          |  |                    | 519,656   |                    | 38.2           |   |             |                   | 616,352            |  | 33.0  |             |  |                    | 636,722   |  | 37.3  |  
|Rate/term refinance     |  |                    | 42,618    |                    | 3.1            |   |             |                   | 103,378            |  | 5.6   |             |  |                    | 53,620    |  | 3.1   |  
|                        |  |                    |           |                    |                |   |             |                   |                    |  |       |             |  |                    |           |  |       |  
|                        |  | $                  | 1,361,616 |                    | 100.0          | % |             | $                 | 1,866,228          |  | 100.0 | %           |  | $                  | 1,709,536 |  | 100.0 | %
|                        |  |                    |           |                    |                |   |             |                   |                    |  |       |             |  |                    |           |  |       |  
|Property type:          |  |                    |           |                    |                |   |             |                   |                    |  |       |             |  |                    |           |  |       |  
|Single family residence |  | $                  | 1,194,927 |                    | 87.8           | % |             | $                 | 1,630,242          |  | 87.4  | %           |  | $                  | 1,510,413 |  | 88.4  | %
|Multi-family residence  |  |                    | 94,399    |                    | 6.9            |   |             |                   | 136,211            |  | 7.3   |             |  |                    | 111,322   |  | 6.5   |  
|Condominiums            |  |                    | 72,290    |                    | 5.3            |   |             |                   | 99,775             |  | 5.3   |             |  |                    | 87,801    |  | 5.1   |  
|                        |  |                    |           |                    |                |   |             |                   |                    |  |       |             |  |                    |           |  |       |  
|                        |  | $                  | 1,361,616 |                    | 100.0          | % |             | $                 | 1,866,228          |  | 100.0 | %           |  | $                  | 1,709,536 |  | 100.0 | %
|                        |  |                    |           |                    |                |   |             |                   |                    |  |       |             |  |                    |           |  |       |  



30



---

##### Table of Contents

The following table shows our loan originations by geographic region during the three months ended March
31, 2005 and 2004 and December 31, 2004 (dollars in thousands):



|                                                                   |  |                    |           |                    |                |   |             |                   |                    |  |       |             |  |                    |           |  |       |  
|------------------------------------------------------------------ |  | ------------------ | --------- | ------------------ | -------------- | - | ----------- | ----------------- | ------------------ |  | ----- | ----------- |  | ------------------ | --------- |  | ----- | -
|                                                                   |  | Three Months Ended |          
|                                                                   |  | March 31, 2005     |           |                    | March 31, 2004 |   |             | December 31, 2004 |                   
|State of Mortgage Property                                         |  | LoansFunded        |           | Percentageof Total |                |   | LoansFunded |                   | Percentageof Total |  |       | LoansFunded |  | Percentageof Total |          
|California                                                         |  | $                  | 372,922   |                    | 27.4           | % |             | $                 | 617,210            |  | 33.1  | %           |  | $                  | 523,701   |  | 30.6  | %
|Florida                                                            |  |                    | 296,851   |                    | 21.8           |   |             |                   | 364,132            |  | 19.5  |             |  |                    | 345,653   |  | 20.2  |  
|New York                                                           |  |                    | 93,558    |                    | 6.9            |   |             |                   | 151,579            |  | 8.1   |             |  |                    | 103,796   |  | 6.1   |  
|Texas                                                              |  |                    | 111,392   |                    | 8.2            |   |             |                   | 119,119            |  | 6.4   |             |  |                    | 129,579   |  | 7.6   |  
|Other Western States (AZ, CO, HI, ID, MT, NV, NM, OR, UT, WA, WY)  |  |                    | 139,291   |                    | 10.2           |   |             |                   | 193,433            |  | 10.4  |             |  |                    | 184,520   |  | 10.8  |  
|Midwestern States (IL, IN, IA, KS, MI, MN, MO, NE, ND, OH, SD, WI) |  |                    | 95,226    |                    | 7.0            |   |             |                   | 168,125            |  | 9.0   |             |  |                    | 140,751   |  | 8.2   |  
|Other Northeastern States (CT, DE, ME, MD, MA, NH, NJ, PA, RI)     |  |                    | 145,853   |                    | 10.7           |   |             |                   | 139,870            |  | 7.5   |             |  |                    | 161,677   |  | 9.5   |  
|Other Southeastern States (AR, GA, KY, LA, MS, NC, OK, TN, VA, WV) |  |                    | 106,523   |                    | 7.8            |   |             |                   | 112,760            |  | 6.0   |             |  |                    | 119,859   |  | 7.0   |  
|                                                                   |  |                    |           |                    |                |   |             |                   |                    |  |       |             |  |                    |           |  |       |  
|Total                                                              |  | $                  | 1,361,616 |                    | 100.0          | % |             | $                 | 1,866,228          |  | 100.0 | %           |  | $                  | 1,709,536 |  | 100.0 | %
|                                                                   |  |                    |           |                    |                |   |             |                   |                    |  |       |             |  |                    |           |  |       |  



The following table
summarizes certain information by interest rate about our mortgage loan production during the three months ended March 31, 2005 and 2004 and December 31, 2004 (dollars in thousands):



|              |  |                    |           |           |                |   |   |                   |           |  |       |   |  |           |           |  |       |  
|------------- |  | ------------------ | --------- | --------- | -------------- | - | - | ----------------- | --------- |  | ----- | - |  | --------- | --------- |  | ----- | -
|              |  | Three Months Ended |          
|              |  | March 31, 2005     |           |           | March 31, 2004 |   |   | December 31, 2004 |          
|              |  | $                  |           | % ofTotal |                |   | $ |                   | % ofTotal |  |       | $ |  | % ofTotal |          
|Hybrid:       |  |                    |           |           |                |   |   |                   |           |  |       |   |  |           |           |  |       |  
|Traditional   |  | $                  | 947,520   |           | 69.6           | % |   | $                 | 1,396,112 |  | 74.8  | % |  | $         | 1,252,757 |  | 73.3  | %
|Interest Only |  |                    | 148,807   |           | 10.9           |   |   |                   |          |  |      |   |  |           | 91,203    |  | 5.3   |  
|              |  |                    |           |           |                |   |   |                   |           |  |       |   |  |           |           |  |       |  
|              |  |                    | 1,096,327 |           | 80.5           |   |   |                   | 1,396,112 |  | 74.8  |   |  |           | 1,343,960 |  | 78.6  |  
|Fixed Rate    |  |                    | 265,289   |           | 19.5           |   |   |                   | 470,116   |  | 25.2  |   |  |           | 365,576   |  | 21.4  |  
|              |  |                    |           |           |                |   |   |                   |           |  |       |   |  |           |           |  |       |  
|              |  | $                  | 1,361,616 |           | 100.0          | % |   | $                 | 1,866,228 |  | 100.0 | % |  | $         | 1,709,536 |  | 100.0 | %
|              |  |                    |           |           |                |   |   |                   |           |  |       |   |  |           |           |  |       |  



31



---

##### Table of Contents

LOAN PRODUCTION BY BORROWER RISK CLASSIFICATION



The following table sets forth our loan production under the Super Aim guidelines during the three months ended March 31,
2005 and 2004 (dollars in thousands):



LOAN ORIGINATIONS
DURING THE THREE MONTHS ENDED MARCH 31, 2005



|             |  |                                |           |           |     |   |                      |     |                             |      |   |                                    |    |  
|------------ |  | ------------------------------ | --------- | --------- | --- | - | -------------------- | --- | --------------------------- | ---- | - | ---------------------------------- | -- | -
|Credit Grade |  | AggregateDollar Amountof Loans |           | % ofTotal |     |   | Average Credit Score |     | WeightedAverageInterestRate |      |   | Weighted AverageLoan-to-ValueRatio |   
|A+           |  | $                              | 1,045,216 |           | 77  | % |                      | 627 |                             | 7.4  | % |                                    | 80 | %
|A            |  |                                | 135,323   |           | 10  |   |                      | 584 |                             | 7.6  |   |                                    | 77 |  
|A-           |  |                                | 57,664    |           | 4   |   |                      | 557 |                             | 8.0  |   |                                    | 75 |  
|B            |  |                                | 76,578    |           | 5   |   |                      | 559 |                             | 8.4  |   |                                    | 76 |  
|C            |  |                                | 37,533    |           | 3   |   |                      | 552 |                             | 9.0  |   |                                    | 70 |  
|C-           |  |                                | 9,302     |           | 1   |   |                      | 550 |                             | 10.4 |   |                                    | 64 |  
|             |  |                                |           |           |     |   |                      |     |                             |      |   |                                    |    |  
|Total        |  | $                              | 1,361,616 |           | 100 | % |                      | 613 |                             | 7.6  | % |                                    | 79 | %
|             |  |                                |           |           |     |   |                      |     |                             |      |   |                                    |    |  



LOAN ORIGINATIONS
DURING THE THREE MONTHS ENDED MARCH 31, 2004



|             |  |                                |           |           |     |   |                      |     |                             |     |   |                                    |    |  
|------------ |  | ------------------------------ | --------- | --------- | --- | - | -------------------- | --- | --------------------------- | --- | - | ---------------------------------- | -- | -
|Credit Grade |  | AggregateDollar Amountof Loans |           | % ofTotal |     |   | Average Credit Score |     | WeightedAverageInterestRate |     |   | Weighted AverageLoan-to-ValueRatio |   
|A+           |  | $                              | 1,341,449 |           | 72  | % |                      | 625 |                             | 7.0 | % |                                    | 82 | %
|A            |  |                                | 242,310   |           | 13  |   |                      | 591 |                             | 7.2 |   |                                    | 80 |  
|A-           |  |                                | 105,960   |           | 5   |   |                      | 562 |                             | 7.6 |   |                                    | 78 |  
|B            |  |                                | 118,208   |           | 6   |   |                      | 562 |                             | 8.0 |   |                                    | 77 |  
|C            |  |                                | 47,070    |           | 3   |   |                      | 554 |                             | 8.6 |   |                                    | 71 |  
|C-           |  |                                | 11,063    |           | 1   |   |                      | 540 |                             | 9.8 |   |                                    | 67 |  
|D            |  |                                | 168       |           | NM  |   |                      | 503 |                             | 6.7 |   |                                    | 71 |  
|             |  |                                |           |           |     |   |                      |     |                             |     |   |                                    |    |  
|Total        |  | $                              | 1,866,228 |           | 100 | % |                      | 611 |                             | 7.2 |   |                                    | 80 |  
|             |  |                                |           |           |     |   |                      |     |                             |     |   |                                    |    |  

---

NM = Not Meaningful



The following table presents certain information about our loan production by
credit score range during the three months ended March 31, 2005 and 2004 (dollars in thousands):



LOAN ORIGINATIONS DURING THE THREE MONTHS ENDED MARCH 31, 2005



|                   |  |                    |           |           |     |   |                             |     |   |                                   |    |  
|------------------ |  | ------------------ | --------- | --------- | --- | - | --------------------------- | --- | - | --------------------------------- | -- | -
|Credit Score Range |  | CurrentLoanBalance |           | % ofTotal |     |   | WeightedAverageInterestRate |     |   | WeightedAverageLoan-to-ValueRatio |   
|Above 700          |  | $                  | 88,485    |           | 7   | % |                             | 7.0 | % |                                   | 79 | %
|661-700            |  |                    | 176,452   |           | 13  |   |                             | 7.0 |   |                                   | 79 |  
|621-660            |  |                    | 371,222   |           | 27  |   |                             | 7.3 |   |                                   | 81 |  
|581-620            |  |                    | 329,911   |           | 24  |   |                             | 7.4 |   |                                   | 80 |  
|541-580            |  |                    | 230,475   |           | 17  |   |                             | 8.1 |   |                                   | 79 |  
|540 and below      |  |                    | 163,907   |           | 12  |   |                             | 8.6 |   |                                   | 74 |  
|Not available      |  |                    | 1,164     |           | NM  |   |                             | 8.2 |   |                                   | 84 |  
|                   |  |                    |           |           |     |   |                             |     |   |                                   |    |  
|                   |  | $                  | 1,361,616 |           | 100 | % |                             | 7.6 | % |                                   | 79 | %
|                   |  |                    |           |           |     |   |                             |     |   |                                   |    |  



32



---

##### Table of Contents

LOAN ORIGINATIONS DURING THE THREE MONTHS ENDED MARCH 31, 2004



|                   |  |                                |           |           |     |   |                             |     |   |                                   |    |  
|------------------ |  | ------------------------------ | --------- | --------- | --- | - | --------------------------- | --- | - | --------------------------------- | -- | -
|Credit Score Range |  | AggregateDollar Amountof Loans |           | % ofTotal |     |   | WeightedAverageInterestRate |     |   | WeightedAverageLoan-to-ValueRatio |   
|Above 700          |  | $                              | 122,334   |           | 7   | % |                             | 6.6 | % |                                   | 79 | %
|661-700            |  |                                | 239,961   |           | 13  |   |                             | 6.8 |   |                                   | 82 |  
|621-660            |  |                                | 466,311   |           | 25  |   |                             | 7.0 |   |                                   | 81 |  
|581-620            |  |                                | 424,989   |           | 23  |   |                             | 7.1 |   |                                   | 81 |  
|541-580            |  |                                | 363,860   |           | 19  |   |                             | 7.6 |   |                                   | 81 |  
|540 and below      |  |                                | 246,350   |           | 13  |   |                             | 8.1 |   |                                   | 76 |  
|Not available      |  |                                | 2,423     |           | NM  |   |                             | 7.6 |   |                                   | 81 |  
|                   |  |                                |           |           |     |   |                             |     |   |                                   |    |  
|                   |  | $                              | 1,866,228 |           | 100 | % |                             | 7.2 | % |                                   | 80 | %
|                   |  |                                |           |           |     |   |                             |     |   |                                   |    |  

---

NM = Not Meaningful



Quality Control



Our quality control program is intended to monitor and improve the overall quality of loan production generated by our
retail channel and wholesale channel and identify and communicate to management existing or potential underwriting and loan packaging problems or areas of concern. The quality control file review examines compliance with our underwriting guidelines
and federal and state regulations. This is accomplished by focusing on:



| |  |  | the accuracy of all credit and legal information;
| | - |  | -------------------------------------------------



| |  |  | a collateral analysis which may include a desk review of the original appraisal;
| | - |  | --------------------------------------------------------------------------------



| |  |  | employment and/or income verification; and
| | - |  | ------------------------------------------



| |  |  | legal document review to ensure that the necessary documents are in place.
| | - |  | --------------------------------------------------------------------------



MORTGAGE LOAN SALES TO THIRD PARTIES AND OFF-BALANCE SHEET SECURITIZATIONS



Aames Financial uses the net proceeds of its loan sales to pay down its warehouse and repurchase facilities to increase
capacity under these facilities for future funding of mortgage loans. Proceeds we receive from financings on loans held for investment are also used to pay down our warehouse and repurchase facilities.



The following table sets forth information regarding our whole loan sales to
third parties during the periods presented (in thousands):



|                 |  |                    |         |               |   |          
|---------------- |  | ------------------ | ------- | ------------- | - | ---------
|                 |  | Three Months Ended
|                 |  | March 31,2005      |         | March 31,2004
|Whole loan sales |  | $                  | 320,638 |               | $ | 1,763,435
|                 |  |                    |         |               |   |          



Our whole loan sales
to third parties during the three months ended March 31, 2005 decreased $1.4 billion, or 81.8%, to $320.6 million from $1.8 billion of total dispositions reported during the comparable three month period a year ago. The decline in loan sales into
the secondary markets during the three months ended March 31, 2005 from the sales during the comparable three month period during 2004 was due to our retaining a significant portion of our loan production to build a REIT portfolio of loans held for
investment.



In prior quarters, when we disposed of loans in
off-balance sheet securitization transactions, each agreement that we entered into in connection with those securitizations required either the overcollateralization of the trust or the establishment of a reserve account that may initially have been
funded by cash we deposited. If



33



---

##### Table of Contents

delinquencies or losses exceed certain established limits, as applicable, certain additional credit-enhancement aspects of the trust are triggered. In a
securitization credit-enhanced by a monoline insurance policy, any further losses experienced in excess of the established overcollateralization amount by holders of the senior interests in the related trust will be paid by the insurer under such
policy. To date, there have been no claims on any monoline insurance policy obtained in any of our securitizations.



Changes in the secondary mortgage markets, the current interest rate environment and the current economic climate could affect our current strategy of
selling loans to third parties in whole loan sales and our loan disposition strategies going forward could include off-balance sheet securitizations as well as whole loan sales for cash.



MORTGAGE LOAN SERVICING



We currently have in place an experienced subprime mortgage loan servicing team and a highly scalable servicing platform. Aames Financials servicing
platform has received a SQ3 rating from Moodys and a RPS3-rating from Fitch. We have over 85 servicing employees and a portfolio of approximately $3.7 billion. We believe that with our current servicing management and systems, our servicing
platform is capable of servicing a portfolio of approximately $7.0 billion.



In addition to our REIT portfolio, our servicing portfolio consists of loans serviced on an interim basis, including loans held for sale and loans sold to others and subserviced on an interim basis, and to a lesser
extent mortgage loans securitized prior to 2000 for which we retained servicing, and loans sold to others and subserviced on a long-term basis. Servicing includes collecting and remitting loan payments, accounting for principal and interest,
contacting delinquent borrowers, managing borrower defaults and liquidating foreclosed properties. We do not retain servicing on loans we sell to third party in whole loan sales for cash.



The following table sets forth information regarding our servicing portfolio at the periods indicated (in thousands):



|                                                                       |  |               |           |   |               |   |           |                  |  |   |           |  
|---------------------------------------------------------------------- |  | ------------- | --------- | - | ------------- | - | --------- | ---------------- |  | - | --------- | -
|                                                                       |  | March 31,2005 |           |   | March 31,2004 |   |           | December 31,2004 | 
|Mortgage loans serviced:                                               |  |               |           |   |               |   |           |                  |  |   |           |  
|Loans held for investment                                              |  | $             | 2,858,192 |   |               | $ |          |                  |  | $ | 1,718,696 |  
|Loans serviced on an interim basis                                     |  |               | 625,211   |   |               |   | 1,892,135 |                  |  |   | 771,830   |  
|Loans subserviced for others on a long-term basis                      |  |               | 119,908   |   |               |   | 182,467   |                  |  |   | 129,016   |  
|Loans in off-balance sheet securitization trusts                       |  |               | 106,522   |   |               |   | 260,743   |                  |  |   | 224,345   |  
|                                                                       |  |               |           |   |               |   |           |                  |  |   |           |  
|serviced in-house                                                      |  |               | 3,709,833 |   |               |   | 2,335,345 |                  |  |   | 2,843,887 |  
|Loans in off-balance sheet securitization trusts subserviced by others |  |               |          |   |               |   | 59,727    |                  |  |   |          |  
|                                                                       |  |               |           |   |               |   |           |                  |  |   |           |  
|Total servicing portfolio                                              |  | $             | 3,709,833 |   |               | $ | 2,395,072 |                  |  | $ | 2,843,887 |  
|                                                                       |  |               |           |   |               |   |           |                  |  |   |           |  
|Percentage serviced in-house                                           |  |               | 100.0     | % |               |   | 97.5      | %                |  |   | 100.0     | %
|                                                                       |  |               |           |   |               |   |           |                  |  |   |           |  



Our total loan
servicing portfolio at March 31, 2005 increased $865.9 million, or 30.5%, to $3.7 billion from $2.8 billion at December 31, 2004 due primarily to a $1.1 billion increase in servicing of loans held for investment, partially offset by declines in
loans serviced on an interim basis, loans serviced in off-balance sheet securitization trusts and loans subserviced for others on a long-term basis of $146.6 million, $117.8 million and $9.1 million, respectively. The decline in loans serviced on an
interim basis reflects the decrease in loans held for sale at March 31, 2004 from December 31, 2004 and, to a lesser extent, the transfer of sold loans to new servicers by whole loan buyers. Our portfolio of mortgage loans in off-balance sheet
securitization trusts serviced in-house declined due primarily to our call of two off-balance sheet securitization trusts which caused the portfolio of mortgage loans in securitization trusts to decline by $103.5 million and, to a lesser extent, to
portfolio run-off.



34



---

##### Table of Contents

Four of our remaining five securitization trusts with a mortgage loan principal balance of $54.4 million at March 31, 2005 were callable at March 31, 2005.
We expect to call all five remaining securitizations with a mortgage loan principal balance of $106.5 million at March 31, 2005 during calendar 2005. The decline in loans subserviced for others on a long-term basis was due to loan portfolio run-off.



Our total servicing portfolio at March 31, 2005 increased $1.3
billion over the $2.4 billion servicing portfolio at March 31, 2004. The increase is attributable primarily to our current strategy of building a portfolio of loans held for investment offset partially by a decline in loans serviced on an interim
basis which was attributable to a decline in loans held for sale and interim servicing for others at March 31, 2005 compared to March 31, 2004. Loans subserviced for others on a long-term basis resulted from our sale of loans from older off-balance
sheet securitization trusts called during the fiscal year ended June 30, 2004 for which we agreed to continue service on a long-term basis.



We receive a servicing fee for loans in our securitization trusts based on a percentage of the unpaid principal balance of each loan serviced. We collect
servicing fees out of the borrowers monthly payments. In addition, as servicer we generally receive all late fees and assumption charges paid by borrowers on loans that we service directly, as well as other miscellaneous fees for performing
various loan servicing functions.



Our agreements with the
securitization trusts typically require us, in our role as servicer, to advance interest (but not principal) on delinquent loans to the holders of the senior interests in the related securitization trusts. The agreements also require us to make
certain servicing advances (e.g., for property taxes or hazard insurance) unless we determine that those advances would not be recoverable. Each agreement that we have entered into in connection with our securitizations requires either the
overcollateralization of the trust or the establishment of a reserve account that may initially be funded by cash deposited by us. If delinquencies or losses exceed certain established limits, as applicable, additional credit-enhancement
requirements of the trust are triggered. In a securitization credit-enhanced by a monoline insurance policy, losses in excess of the established overcollateralization amount by holders of the senior interests in the related trust will be paid by the
insurer under such policy. To date, there have been no claims on any monoline insurance policy obtained in any of our securitizations.



In addition, the agreements governing securitizations credit-enhanced by monoline insurance typically provide that we may be terminated as servicer by the
monoline insurance company (or by the trustee with the consent of the monoline insurance company) upon certain events of default, including our failure to perform our obligations under the servicing agreement, the rate of over 90-day delinquent
loans (including properties acquired by foreclosure and not sold) exceeding specified limits, losses on liquidation of collateral exceeding certain limits, any payment being made by the monoline insurance company under its policy, and events of
bankruptcy or insolvency. Pursuant to an agreement relating to one of our off-balance sheet securitization trusts, the monoline insurer requires us to maintain a specified net worth and level of liquidity in order to be able to continue to service
the loans in that securitization trust. Previously, we did not satisfy the net worth test and, as a result, the monoline insurer could have terminated us as a servicer with respect to that securitization trust. The monoline insurer waived our
failure to satisfy the net worth test and none of our servicing rights were terminated. At March 31, 2005, we met the specified net worth test. In addition, under our 1999 securitization trust, we were appointed as a servicer on a term-to-term
basis, and the monoline insurer has the right not to renew the term at any time. None of our servicing rights have been terminated.



At March 31, 2005, all of our remaining five off-balance sheet securitizations with mortgage loans having an aggregate unpaid principal balance of $106.5
million had exceeded delinquency and loss triggers which provides cause for the monoline insurers to terminate us as servicer. To date we have not been terminated as servicer.



Collections, Delinquencies and Foreclosures



We send borrowers a monthly billing statement approximately 10 days prior to the monthly payment due date. Although borrowers generally make loan
payments within 10 to 15 days after the due date (the grace



35



---

##### Table of Contents

period), if a borrower fails to pay the monthly payment within this grace period, we begin collection efforts by notifying the borrower of the
delinquency. In the case of borrowers with certain credit characteristics or with a poor payment history with us, collection efforts begin immediately after the due date. We continue to make contact with the borrower to determine the cause of the
delinquency and to obtain a commitment to cure the delinquency at the earliest possible time.



As a general matter, if efforts to obtain payment have not been successful, a pre-foreclosure notice will be sent to the borrower immediately after the due date of the next subsequently scheduled installment (five
days after the initial due date for loans with certain credit characteristics), providing 30 days notice of impending foreclosure action. During the 30-day notice period, collection efforts continue and we evaluate various legal options and
remedies to protect the value of the loan, including arranging for extended repayment terms, accepting a deed-in-lieu of foreclosure, entering into a short sale (a sale for less than the outstanding principal amount) or commencing foreclosure
proceedings. If no substantial progress has been made in collecting delinquent payments from the borrower, foreclosure proceedings will begin. Generally, we will begin foreclosure proceedings when a loan is 80 to 100 days delinquent, depending upon
credit considerations, borrower bankruptcy status and state regulations.



We monitor our servicing and collection practices to insure they comply with applicable laws and regulations and meet industry standards.



Subprime mortgage loans generally have higher delinquency rates than those prevailing in the mortgage industry. As a
subprime mortgage lender, we have historically experienced delinquency rates that are higher than those prevailing in the mortgage industry due to the origination of lower credit grade mortgage loans. Set forth below are our delinquency rates
compared to delinquency rates for subprime mortgage loans (seasonally adjusted) and all mortgage loans (seasonally adjusted) according to the National Delinquency Survey of the Mortgage Bankers Association of America. Delinquent loans are loans for
which more than one payment is due.



|                        |  |              |   |  |                 |   |  |      |  
|----------------------- |  | ------------ | - |  | --------------- | - |  | ---- | -
|                        |  | At March 31, |   |  | At December 31, |  
|                        |  | 2005         |   |  | 2004            |   |  | 2004 |  
|Aames Financial         |  | 2.4          | % |  | 3.4             | % |  | 2.5  | %
|Subprime Mortgage Loans |  | NYA          | % |  | 11.2            | % |  | 9.9  | %
|All Mortgage Loans      |  | NYA          | % |  | 4.3             | % |  | 4.2  | %

---

NYA = Not yet announced



Our delinquency rates have declined since 2004 due in part to the fact that
the loans in our portfolio of seasoned mortgage loans in off-balance sheet securitization trusts became a smaller part of our servicing portfolio, and loans in our on-balance sheet portfolio together with loans serviced on an interim basis,
consisting largely of newly originated loans, have become the largest part of our servicing portfolio.



36



---

##### Table of Contents

The following table sets forth delinquency information relating to our servicing portfolio as of or for
the periods indicated (in thousands):



|                                                                             |  |                                    |   |  |                                  |   |  |                  |  
|---------------------------------------------------------------------------- |  | ---------------------------------- | - |  | -------------------------------- | - |  | ---------------- | -
|                                                                             |  | At or During theThree Months Ended |   |  | At or During theSix Months Ended |  
|                                                                             |  | March 31,2005                      |   |  | March 31,2004                    |   |  | December 31,2004 |  
|Percentage of dollar amount of delinquent loans serviced (period end)(1)(2): |  |                                    |   |  |                                  |   |  |                  |  
|One month                                                                    |  | 0.5                                | % |  | 0.4                              | % |  | 0.3              | %
|Two months                                                                   |  | 0.3                                | % |  | 0.2                              | % |  | 0.2              | %
|Three or more months                                                         |  |                                    |   |  |                                  |   |  |                  |  
|Not foreclosed(3)                                                            |  | 1.4                                | % |  | 2.5                              | % |  | 1.8              | %
|Foreclosed(4)                                                                |  | 0.2                                | % |  | 0.3                              | % |  | 0.2              | %
|                                                                             |  |                                    |   |  |                                  |   |  |                  |  
|Total                                                                        |  | 2.4                                | % |  | 3.4                              | % |  | 2.5              | %
|                                                                             |  |                                    |   |  |                                  |   |  |                  |  
|Percentage of total dollar amount of delinquent loans in:                    |  |                                    |   |  |                                  |   |  |                  |  
|Loans held for investment                                                    |  | 1.1                                | % |  |                                 | % |  | 0.2              | %
|Loans serviced on an interim basis                                           |  | 4.2                                | % |  | 0.7                              | % |  | 1.5              | %
|Loans subserviced for others on a long-term basis                            |  | 5.5                                | % |  | 1.7                              | % |  | 4.8              | %
|Loans in off-balance sheet securitization trusts serviced:                   |  |                                    |   |  |                                  |   |  |                  |  
|In-house                                                                     |  | 23.2                               | % |  | 15.8                             | % |  | 22.5             | %
|By others                                                                    |  |                                   | % |  | 39.8                             | % |  |                 | %

---

|(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 us including loans serviced on an interim basis.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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



Delinquent loans, by principal balance of the total servicing portfolio, increased to $89.7 million at March 31, 2005 from
$71.0 million at December 31, 2004 and $80.7 million at March 31, 2004. The delinquency rate at March 31, 2005 was 2.4% compared to 2.5% at December 31, 2004 and 3.4% at March 31, 2004. The delinquency rate at March 31, 2005 declined from the
delinquency rate at December 31, 2004 and March 31, 2004 due to the fact that newly originated loans were added to our portfolio of loans held for investment and consequently loans in our portfolio of mortgage loans in off-balance sheet
securitization trusts, which currently contains the majority of delinquent loans, became a smaller part of our total servicing portfolio. A decline in delinquencies generally reduces our servicing advance obligations. We expect our delinquency rate
to increase in future periods once our on-balance sheet portfolio of mortgage loans reaches its target level, the loans in the on-balance sheet portfolio become more seasoned, and fewer new loans are added to the on-balance sheet portfolio.



The following table summarizes the unpaid principal balance of
delinquent loans at the periods presented in the total servicing portfolio (in thousands):



|                                                           |  |               |        |               |   |                  |  |   |       
|---------------------------------------------------------- |  | ------------- | ------ | ------------- | - | ---------------- |  | - | ------
|                                                           |  | March 31,2005 |        | March 31,2004 |   | December 31,2004
|Loans held for investment                                  |  | $             | 32,388 |               | $ |                 |  | $ | 2,856 
|Loans serviced on an interim basis                         |  |               | 25,999 |               |   | 12,600           |  |   | 11,459
|Loans subserviced for others on a long-term basis          |  |               | 6,555  |               |   | 3,173            |  |   | 6,229 
|Loans in off-balance sheet securitization trusts serviced: |  |               |        |               |   |                  |  |   |       
|In-house                                                   |  |               | 24,721 |               |   | 41,144           |  |   | 50,408
|By others                                                  |  |               |       |               |   | 23,744           |  |   |      
|                                                           |  |               |        |               |   |                  |  |   |       
|                                                           |  | $             | 89,663 |               | $ | 80,661           |  | $ | 70,952
|                                                           |  |               |        |               |   |                  |  |   |       



37



---

##### Table of Contents

During the three months ended March 31, 2005, net losses on loan liquidations decreased to $2.1 million
from $4.5 million during the comparable three month period during 2004. A majority of the foreclosures handled occurred in connection with delinquent mortgage loans in off-balance sheet securitization trusts serviced by us. Of the $2.1 million of
net losses on loan liquidations during the three months ended March 31, 2005, $1.1 million and $1.0 million related to mortgage loans in the off-balance sheet securitization trusts and to mortgage loans held for sale, respectively. We expect net
losses on loan liquidations to increase in future periods once our on-balance sheet portfolio of mortgage loans reaches its target level, the loans in the on-balance sheet portfolio become more seasoned, and fewer new loans are added to the
on-balance sheet portfolio.



The following table sets forth
foreclosure and loss information relating to our servicing portfolio for the periods indicated (in thousands):



|                                                             |  |                                    |           |   |                                  |   |           |                  |  |   |           |  
|------------------------------------------------------------ |  | ---------------------------------- | --------- | - | -------------------------------- | - | --------- | ---------------- |  | - | --------- | -
|                                                             |  | At or During the ThreeMonths Ended |           |   | At or During theSix Months Ended |  
|                                                             |  | March 31,2005                      |           |   | March 31,2004                    |   |           | December 31,2004 | 
|Percentage of dollar amount of loans foreclosed during       |  |                                    |           |   |                                  |   |           |                  |  |   |           |  
|The period to loans serviced (period end)(1)(2):             |  |                                    | 0.1       | % |                                  |   | 0.2       | %                |  |   | 0.1       | %
|Number of loans foreclosed during the period                 |  |                                    | 42        |   |                                  |   | 61        |                  |  |   | 68        |  
|Principal amount of foreclosed loans during the period       |  | $                                  | 2,351     |   |                                  | $ | 4,659     |                  |  | $ | 3,585     |  
|Number of loans liquidated during the period                 |  |                                    | 69        |   |                                  |   | 125       |                  |  |   | 163       |  
|Net losses on liquidations during the period from(3):        |  |                                    |           |   |                                  |   |           |                  |  |   |           |  
|Loans held for investment                                    |  | $                                  |          |   |                                  | $ |          |                  |  | $ |          |  
|Loans serviced on an interim basis                           |  |                                    | 963       |   |                                  |   | 878       |                  |  |   | 1,224     |  
|Loans in off-balance sheet securitization trusts serviced:   |  |                                    |           |   |                                  |   |           |                  |  |   |           |  
|In-house                                                     |  |                                    | 1,141     |   |                                  |   | 2,253     |                  |  |   | 5,554     |  
|By others                                                    |  |                                    |          |   |                                  |   | 1,387     |                  |  |   |          |  
|Percentage of annualized losses to servicing portfolio(1)(2) |  |                                    | 0.3       | % |                                  |   | 0.6       | %                |  |   | 0.5       | %
|Servicing portfolio at period end                            |  | $                                  | 3,710,000 |   |                                  | $ | 2,395,000 |                  |  | $ | 2,844,000 |  

---

|(1) | The delinquency and foreclosure percentages are calculated on the basis of the total dollar amount of mortgage loans serviced by us.
|--- | ------------------------------------------------------------------------------------------------------------------------------------

|(2) | The percentages were calculated to reflect the dollar volume of loans foreclosed or annualized losses, as the case may be, to the average dollar amount of mortgage loans serviced by
us and any subservicer during the related periods indicated.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Represents losses, net of gains, on properties sold through foreclosure or other default management activities during the periods indicated.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------



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.



Liquidity and Capital Resources



Our operations require access to short-term and long-term sources of cash.



Our primary sources of liquidity are expected to be:



| |  |  | fundings under revolving warehouse and repurchase facilities;
| | - |  | -------------------------------------------------------------



| |  |  | fundings from financings on loans held for investment;
| | - |  | ------------------------------------------------------



| |  |  | our current equity capital;
| | - |  | ---------------------------



| |  |  | the proceeds from the sale of mortgage loans;
| | - |  | ---------------------------------------------



38



---

##### Table of Contents

| |  |  | the proceeds from monetization of the overcollateralization in our off-balance sheet securitization trusts; and
| | - |  | ---------------------------------------------------------------------------------------------------------------



| |  |  | the proceeds from the issuance of additional debt and equity securities.
| | - |  | ------------------------------------------------------------------------



Our primary operating cash requirements include:



| |  |  | the funding of mortgage loan originations and purchases prior to their securitization and sale;
| | - |  | -----------------------------------------------------------------------------------------------



| |  |  | interest and principal payments on financings on loans held for investment;
| | - |  | ---------------------------------------------------------------------------



| |  |  | interest and principal payments and liquidity requirements under our revolving warehouse and repurchase facilities, and other borrowings;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | dividend payments on our common stock;
| | - |  | --------------------------------------



| |  |  | advances in connection with our servicing portfolio;
| | - |  | ----------------------------------------------------



| |  |  | overcollateralization requirements in connection with on-balance sheet securitizations;
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | fees, expenses and hedging costs, if any, incurred in connection with the securitization and sale of loans; and
| | - |  | ---------------------------------------------------------------------------------------------------------------



| |  |  | ongoing administrative, operating, and tax expenses.
| | - |  | ----------------------------------------------------



Warehouse and Repurchase Facilities.    We borrow substantial sums of cash on a regular basis to originate mortgage loans and
to hold loans in our REIT portfolio prior to securitization. Therefore, we rely on revolving warehouse and repurchase facilities to finance the origination and holding of mortgage loans prior to securitization or sale. At March 31, 2005, we had
total revolving warehouse and repurchase facilities in the amount of $3.0 billion, of which $2.9 billion and $0.1 million were committed and uncommitted, respectively. At March 31, 2005, amounts outstanding under our facilities were $854.4 million
leaving us with approximately $2.1 billion of available borrowing capacity under the facilities. Of the $3.0 billion of revolving warehouse and repurchase facilities available at March 31, 2005, $700.0 million, $300.0 million, $500.0 million, $500.0
million, $700.0 million and $300.0 million mature on August 4, 2005, September 30, 2005, October 20, 2006, January 17, 2006, February 4, 2006 and March 24, 2006, respectively. While no assurance can be made, we expect to renew these warehouse
facilities on the same or similar terms at or prior to their maturity.



Certain of the warehouse and repurchase facility lenders advance less than 100% of the principal balance of the mortgage loans, requiring the use of working capital to fund the remaining portion of the principal balance of the mortgage
loans. The revolving warehouse and repurchase facility agreements contain provisions requiring us to meet certain periodic financial covenants, including, among other things, minimum liquidity, stockholders equity, leverage, and net income
levels. The facility agreements also contain customary representations and warranties.



Fundings from Financings on Loans Held for Investment.    Our ability to generate fundings from financings on loans held for investment is necessary to generate cash proceeds to pay down our
revolving warehouse and repurchase facilities which fund loans held for investment prior to their on-balance sheet securitization.



Proceeds from the Sale of Mortgage Loans.    Our ability to sell loans we originate in the secondary market through off-balance
sheet securitizations and whole loan sales is necessary to generate cash proceeds to pay down our revolving warehouse and repurchase facilities and fund new mortgage loan originations. Our ability to sell loans in the secondary market on acceptable
terms is essential for the continuation of our loan origination operations.



During the three months ended March 31, 2005 and 2004, we sold $320.6 million and $1.8 billion of mortgage loans in whole loan sales for cash to the secondary market. The $1.4 billion decline in whole loan sales
during the three months ended March 31, 2005 from whole loan sales during the comparable three month period a year ago is due to our retaining a significant portion of our mortgage loan production to build our portfolio of loans held for investment.



39



---

##### Table of Contents

Monetization of Overcollateralization in Our Portfolio of Mortgage Loans in Securitization
Trusts.    We had retained residual interests in five securitizations trusts which had overcollateralization balances of $24.4 million at March 31, 2005. Of these five securitization trusts, four trusts with
overcollateralization of $11.1 million, were callable at March 31, 2005 by us in our capacity as servicer of the mortgage loans underlying the securitization trusts. When we call the securitization trusts, we receive a majority of the
overcollateralization balance from the called trusts in a combination of mortgage loans in the trust and in cash. On February 15, 2005, we called two of the six off-balance sheet securitization trusts that were callable and which had $103.5 million
of unpaid principal of mortgage loans and $24.8 million of overcollateralization. We currently anticipate calling the four trusts that were callable at March 31, 2005 during calendar 2005, and calling the remaining securitization trust during
calendar 2005 when it becomes callable.



For our existing
securitizations, overcollateralization requirements for certain pools increase up to approximately twice the level otherwise required when the delinquency rates or realized losses for those pools exceed the specified limit. At March 31, 2005, an
additional $10.7 million of overcollateralization was required to be maintained because the level of delinquency rates and realized losses of mortgage loans was in excess of specified delinquency rates and realized losses in certain off-balance
sheet securitization trusts. At March 31, 2005, we were required to maintain overcollateralization amounts of $21.5 million in such off-balance sheet securitization trusts, which included the $10.7 million. In our securitizations structured as a
real estate mortgage investment conduit, or REMIC, the recognition of non-cash gain on sale has a negative impact on our cash flow since we are required to pay federal and state taxes on a portion of these amounts in the period recognized although
we do not receive the cash representing the gain until later periods as the cash flows are received and applicable reserve or overcollateralization requirements are met.



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



Monetization of
Residual Interests and Servicing Advances.    As previously reported, on June 30, 2003, we borrowed $74.1 million through Aames Financials residual financing facility of which $49.2 million was secured by all of our
residual interests. We pledged certain of our existing servicing advances to collateralize $24.9 million of Aames Financials residual financing facility. On March 15, 2005, the Financing Facility was fully repaid and the previously secured
positions in our residual interests and servicing advances were released by the lender.



Cash Flow.    The following summarizes our material cash flow activities during the three months ended March 31, 2005 and 2004.



Our principal operating activities which effect our net cash provided by or used in such activities in any period are (i)
the increase or decrease in loan production which causes an increase in the use of cash and a decrease in the use of cash, respectively; and, (ii) the increase or decrease in the level of loan sales which causes an increase or decrease in cash
provided, respectively.



During the three months ended March
31, 2005, our net cash provided by operating activities was $101.2 million, an increase of $184.2 million, over the $82.9 million of net cash used in operating activities during the three months ended March 31, 2004. The increase in net cash
provided by operating activities was due primarily to a $504.6 million decrease in cash used in the origination of mortgage loans held for sale during the three months ended March 31, 2005 compared to the three months ended March 31, 2004. The
increase in net cash provided by operating activities was partially offset by a $296.9 million decrease in cash provided by the sale of mortgage loans during the three months ended March 31, 2005 from such cash flows during the three months ended
March 31, 2004. To a lesser extent, the increase in net cash provided by operating activities during the three months ended March 31, 2005 over net cash used in operating activities during the comparable three months ended March 31, 2004 was
negatively impacted by a $1.9 million change in other assets and liabilities coupled with a decline in net income.



40



---

##### Table of Contents

During the three months ended March 31, 2005, our net cash used in investing activities increased $1.1
billion over such cash used during the comparable three month period during 2004 and was attributable to our strategy of building a REIT portfolio of loans held for investment. As we continue to build a REIT portfolio of loans held for investment,
we will continue to use cash in that investing activity. Once the REIT portfolio of loans held for investment is stabilized at a level we deem appropriate, cash used in this investing activity will decline. Cash used in investing activities related
to purchases of equipment and improvements is not expected to vary materially from historical trends.



The primary financing activity affecting net cash provided by or used in our financing activities are increases and decreases in the level of financings
of loans held for investment and in the level of borrowings under our revolving warehouse and repurchase agreements. In addition, financing activities also include capital related cash flows. During the three months ended March 31, 2005, our net
cash provided by financing activities was $1.1 billion, an increase of $1.0 billion, over the $0.1 million of net cash provided by financing activities during the three months ended March 31, 2004. The increase in net cash provided by financing
activities during the three months ended March 31, 2005 over net cash provided by financing activities during the comparable three month period in 2004 was primarily attributable to the $1.1 billion increase in financing on loans held for
investment, partially offset by increases in net cash used in financing activities of $51.4 million and $3.2 million related to redemptions in revolving warehouse and repurchase facilities and in borrowings, respectively, during the three months
ended March 31, 2005 over the same period a year ago.



As a
financial institution, our lending and borrowing functions are integral parts of our business. When evaluating sources and uses of cash, we consider cash used to increase our assets and borrowings used to finance those assets, separately from our
operating cash flows. Our most significant use of cash is for the acquisition of loans held for sale which are funded primarily through borrowings under our revolving warehouse and repurchase facilities. In accordance with U.S. GAAP, purchases of
loans held for sale, net of sales of such loans, are required to be included in our consolidated statements of cash flows as a component of net cash provided by or used in operating activities. Borrowings used to fund such loans, or repayment of
such borrowings, are required to be included in the consolidated statements of cash flows as a component of net cash provided by or used in financing activities. The amount of net purchases of loans held for sale included as a component of net cash
provided by operating activities was $101.5 million during the three months ended March 31, 2005. The amount of net purchases of loans held for sale included in net cash used in operating activities was $106.2 million during the three months ended
March 31, 2004. Excluding the purchase and sale activity for loans held for sale, we provided $0.3 million of cash in our operating activities during the three months ended March 31, 2005 and, excluding such activity, our operating activities
provided $23.4 million of cash during the three months ended March 31, 2004.



At March 31, 2005, we had net operating liquidity of $161.5 million, which consisted of $98.9 million of unrestricted cash and cash equivalents, plus approximately $62.6 million of cash that could be immediately
raised through the pledging of unencumbered and eligible loans held for sale as collateral pursuant to committed revolving warehouse and repurchase facilities. We currently believe that our net operating liquidity level is sufficient to satisfy our
operating requirements and to meet our obligations in a timely and cost-efficient manner.



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



41



---

##### Table of Contents

Contractual Obligations



The following table summarizes our material contractual obligations as of March 31, 2005 (in millions):



|                                              |  |       |         |                 |   |          |  |          |         |                  |   |       |  |   |      
|--------------------------------------------- |  | ----- | ------- | --------------- | - | -------- |  | -------- | ------- | ---------------- | - | ----- |  | - | -----
|                                              |  | Total |         | Less Than1 year |   | 1-3Years |  | 3-5Years |         | More Than5 Years
|Financing on loans held for investment        |  | $     | 2,261.7 |                 | $ | 555.2    |  | $        | 1,313.2 |                  | $ | 142.8 |  | $ | 250.5
|Revolving warehouse and repurchase agreements |  |       | 854.4   |                 |   | 854.4    |  |          |        |                  |   |      |  |   |     
|Operating leases, net                         |  |       | 47.3    |                 |   | 7.8      |  |          | 19.8    |                  |   | 12.0  |  |   | 7.7  
|Purchase and other obligations                |  |       | 0.2     |                 |   | 0.2      |  |          |        |                  |   |      |  |   |     
|                                              |  |       |         |                 |   |          |  |          |         |                  |   |       |  |   |      
|Total                                         |  | $     | 3,163.6 |                 | $ | 1,417.6  |  | $        | 1,333.0 |                  | $ | 154.8 |  | $ | 258.2
|                                              |  |       |         |                 |   |          |  |          |         |                  |   |       |  |   |      



Our revolving
warehouse and repurchase agreements contain terms which require us to meet periodic financial covenants and other contractual obligations as on-going conditions to borrow under the warehouse and repurchase agreements. If we are unable to comply with
the financial covenants or the other contractual obligations going forward, or if we are unable to obtain subsequent amendments or waivers, if required, the lenders can declare default events. If we do not cure the default events, the lenders are
entitled to liquidate the residential mortgage loans which collateralize borrowings under the revolving warehouse and repurchase facilities to recover funds advanced.



Off-Balance Sheet Arrangements



We are a party to various transactions that have off-balance sheet components. In connection with loan sales that were treated as off-balance sheet
securitization transactions, there were $106.5 million in loans owned by off-balance sheet trusts as of March 31, 2005. The trusts have issued securities or bonds secured by these loans. We have no obligation to provide funding support to either the
third party investors or the off-balance sheet trusts. The third party investors or the trusts generally have no recourse to us and have no ability to require us to repurchase their loans other than for non-credit-related recourse that can arise
under standard representations and warranties.



Risk Management



At March 31, 2005, we had notional amounts of $4.2
billion of interest rate cap agreements in place to hedge interest rate risk exposure to our portfolio of mortgage loans held for investment and related financings. Interest expense during the three months ended March 31, 2005 includes a $9.5
million credit related to the mark-to-market of these interest rate cap agreements. Also, included in interest income during the three months ended March 31, 2005 was $2.6 million of income related to remittances to us from counterparties on
in-the-money interest rate cap agreements used to hedge interest rate exposure on our portfolio of loans held for investment and related financings. At and during the three months ended March 31, 2004, we did not have any hedge instruments in place.



We continually monitor the interest rate environment and our
hedging strategies. However, there can be no assurance that our earnings would not be adversely affected during any period of unexpected changes in interest rates or prepayment rates, including charges to earnings on future derivative contracts into
which we may enter.



Interest Rate Sensitivity



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 and securitization of such loans, we are exposed to interest rate risk. The majority of loans are securitized or sold within 90 days of origination. However, a small portion of the loans are held for sale or
securitization for as long



42



---

##### Table of Contents

as 12 months (or longer, in very limited circumstances) prior to securitization or sale. If interest rates rise during the period that the mortgage loans are
held, the spread between the weighted average interest rate on the loans to be securitized and the pass-through interest rates on the securities to be sold (the latter having increased as a result of market rate movements) would narrow. Upon
securitization, this would result in a reduction of our related gain on sale. We are also exposed to rising interest rates for loans originated or purchased which are held pending sale in the whole loan market. From time to time, we mitigate
exposure to rising interest rates through the use of interest rate caps, forward interest rate swap agreements or other hedging activities. These hedging activities help mitigate the risk of absolute movements in interest rates.



Rate Sensitive Assets



Residual Interests.    We had residual interests of $18.8 million at March 31, 2005 and $39.1
million at December 31, 2004. These instruments were recorded at estimated fair value at March 31, 2005. We valued these assets based on the present value of future revenue streams, net of expenses, using various assumptions. The weighted average
discount rate used to calculate the present value of the residual interests was 13.7% at both March 31, 2005 and December 31, 2004. The weighted average life of the mortgage loans used for valuation at March 31, 2005 and December 31, 2004 was 2.2
years and 2.0 years.



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



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



Interest Rate Risk.    We are exposed to on-balance sheet interest rate risk related to our loans
held for investment, our loans held for sale and our residual interests. We are exposed to off-balance sheet interest rate risk related to loans which we have committed to originate or purchase.



Warehousing Exposure.    We utilize warehouse and
repurchase financing facilities to facilitate the holding of mortgage loans prior to securitization. At March 31, 2005 and December 31, 2004, we had total revolving warehouse and repurchase facilities available in the amount of $3.0 billion and $2.6
billion, respectively. At March 31, 2005 and December 31, 2004, amounts committed under such facilities were $2.9 billion and $2.5 billion, respectively. The total amount outstanding related to these facilities was $854.4 million and $809.2 million
at March 31, 2005 and December 31, 2004, respectively. Drawings available to us under the facilities were $2.1 billion and $1.8 billion at March 31, 2005 and December 31, 2004, respectively. 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
or sold to institutional investors. As these amounts are short term in nature and/or generally bear market rates of interest, the contractual amounts of these instruments are reasonable estimates of their fair values.



43



---

##### Table of Contents

The following tables illustrate the timing of the maturities of our interest rate sensitive assets and
liabilities at March 31, 2005 and December 31, 2004 (in thousands):



At March
31, 2005:



|                                                                        |  |                   |           |   |                       |   |          |          |  |          |         |          |   |            |  |       |         |  |   |         |  |   |          
|----------------------------------------------------------------------- |  | ----------------- | --------- | - | --------------------- | - | -------- | -------- |  | -------- | ------- | -------- | - | ---------- |  | ----- | ------- |  | - | ------- |  | - | ---------
|Description                                                             |  | Zero tosix months |           |   | Six monthsto one year |   |          | 1-2Years |  | 3-4Years |         | 5-6Years |   | Thereafter |  | Total
|Interest-sensitive assets:                                              |  |                   |           |   |                       |   |          |          |  |          |         |          |   |            |  |       |         |  |   |         |  |   |          
|Cash and cash equivalents                                               |  | $                 | 128,366   |   |                       | $ |         |          |  | $        |        |          | $ |           |  | $     |        |  | $ |        |  | $ | 128,366  
|Loans receivable held for sale, net                                     |  |                   | 383,478   |   |                       |   |         |          |  |          |        |          |   |           |  |       |        |  |   |        |  |   | 383,478  
|Loans held for investment, net                                          |  |                   | 332,336   |   |                       |   | 379,763  |          |  |          | 743,067 |          |   | 562,334    |  |       | 369,458 |  |   | 475,449 |  |   | 2,862,407
|Interest rate cap contracts                                             |  |                   | 51,970    |   |                       |   |         |          |  |          |        |          |   |           |  |       |        |  |   |        |  |   | 51,970   
|                                                                        |  |                   |           |   |                       |   |          |          |  |          |         |          |   |            |  |       |         |  |   |         |  |   |          
|Total interest-sensitive assets                                         |  |                   | 896,150   |   |                       |   | 379,763  |          |  |          | 743,067 |          |   | 562,334    |  |       | 369,458 |  |   | 475,449 |  |   | 3,426,221
|Interest-sensitive liabilities:                                         |  |                   |           |   |                       |   |          |          |  |          |         |          |   |            |  |       |         |  |   |         |  |   |          
|Revolving warehouse and repurchase facilities                           |  |                   | 854,383   |   |                       |   |         |          |  |          |        |          |   |           |  |       |        |  |   |        |  |   | 854,383  
|Financings on loans held for investment                                 |  |                   | 255,267   |   |                       |   | 299,919  |          |  |          | 592,302 |          |   | 433,949    |  |       | 286,928 |  |   | 393,355 |  |   | 2,261,720
|                                                                        |  |                   |           |   |                       |   |          |          |  |          |         |          |   |            |  |       |         |  |   |         |  |   |          
|Total interest-sensitive liabilities                                    |  |                   | 1,109,650 |   |                       |   | 299,919  |          |  |          | 592,302 |          |   | 433,949    |  |       | 286,928 |  |   | 393,355 |  |   | 3,116,103
|Excess of interest-sensitive assets over interest-sensitive liabilities |  |                   | (213,500  | ) |                       |   | 79,844   |          |  |          | 150,765 |          |   | 128,385    |  |       | 82,530  |  |   | 82,094  |  |   | 310,118  
|                                                                        |  |                   |           |   |                       |   |          |          |  |          |         |          |   |            |  |       |         |  |   |         |  |   |          
|Cumulative net interest-sensitivity gap                                 |  | $                 | (213,500  | ) |                       | $ | (133,656 | )        |  | $        | 17,109  |          | $ | 145,494    |  | $     | 228,024 |  | $ | 310,118 |  | $ | 310,118  
|                                                                        |  |                   |           |   |                       |   |          |          |  |          |         |          |   |            |  |       |         |  |   |         |  |   |          



At December 31, 2004:



|                                                                        |  |                    |          |   |                        |   |          |           |  |          |         |          |   |            |  |       |         |  |   |         |  |   |          
|----------------------------------------------------------------------- |  | ------------------ | -------- | - | ---------------------- | - | -------- | --------- |  | -------- | ------- | -------- | - | ---------- |  | ----- | ------- |  | - | ------- |  | - | ---------
|Description                                                             |  | Zero to six months |          |   | Six months to one year |   |          | 1-2 Years |  | 3-4Years |         | 5-6Years |   | Thereafter |  | Total
|Interest-sensitive assets:                                              |  |                    |          |   |                        |   |          |           |  |          |         |          |   |            |  |       |         |  |   |         |  |   |          
|Cash and cash equivalents                                               |  | $                  | 37,780   |   |                        | $ |         |           |  | $        |        |          | $ |           |  | $     |        |  | $ |        |  | $ | 37,780   
|Loans receivable held for sale, net sale                                |  |                    | 484,963  |   |                        |   |         |           |  |          |        |          |   |           |  |       |        |  |   |        |  |   | 484,963  
|Loans held for investment, net                                          |  |                    | 150,567  |   |                        |   | 223,516  |           |  |          | 608,267 |          |   | 341,716    |  |       | 138,475 |  |   | 262,505 |  |   | 1,725,046
|Interest rate cap contracts                                             |  |                    | 31,947   |   |                        |   |         |           |  |          |        |          |   |           |  |       |        |  |   |        |  |   | 31,947   
|                                                                        |  |                    |          |   |                        |   |          |           |  |          |         |          |   |            |  |       |         |  |   |         |  |   |          
|Total interest-sensitive assets                                         |  |                    | 705,257  |   |                        |   | 223,516  |           |  |          | 608,267 |          |   | 341,716    |  |       | 138,475 |  |   | 262,505 |  |   | 2,279,736
|Interest-sensitive liabilities:                                         |  |                    |          |   |                        |   |          |           |  |          |         |          |   |            |  |       |         |  |   |         |  |   |          
|Financing facility                                                      |  |                    | 7,680    |   |                        |   |         |           |  |          |        |          |   |           |  |       |        |  |   |        |  |   | 7,680    
|Revolving warehouse and repurchase facilities                           |  |                    | 809,213  |   |                        |   |         |           |  |          |        |          |   |           |  |       |        |  |   |        |  |   | 809,213  
|Financings on loans held for investment                                 |  |                    | 104,942  |   |                        |   | 155,785  |           |  |          | 423,947 |          |   | 225,845    |  |       | 78,897  |  |   | 170,320 |  |   | 1,159,736
|                                                                        |  |                    |          |   |                        |   |          |           |  |          |         |          |   |            |  |       |         |  |   |         |  |   |          
|Total interest-sensitive liabilities                                    |  |                    | 921,835  |   |                        |   | 155,785  |           |  |          | 423,947 |          |   | 225,845    |  |       | 78,897  |  |   | 170,320 |  |   | 1,976,629
|Excess of interest-sensitive assets over interest-sensitive liabilities |  |                    | (216,578 | ) |                        |   | 67,731   |           |  |          | 184,320 |          |   | 115,871    |  |       | 59,578  |  |   | 92,185  |  |   | 303,107  
|                                                                        |  |                    |          |   |                        |   |          |           |  |          |         |          |   |            |  |       |         |  |   |         |  |   |          
|Cumulative net interest- sensitivity gap                                |  | $                  | (216,578 | ) |                        | $ | (148,847 | )         |  | $        | 35,473  |          | $ | 151,344    |  | $     | 210,922 |  | $ | 303,107 |  | $ | 303,107  
|                                                                        |  |                    |          |   |                        |   |          |           |  |          |         |          |   |            |  |       |         |  |   |         |  |   |          



44



---

##### Table of Contents

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



45



---

##### Table of Contents

PART IIOTHER INFORMATION



|Item 1. | Legal Proceedings
|------- | -----------------



Certain of our subsidiaries are defendants in Potteiger et. al. v. Aames Funding Corporation and Aames Financial Corporation, a collective action
filed on approximately February 4, 2004 in the U.S. District Court of Minnesota, case 04-CV-65. Plaintiff, a former loan officer of ours, filed this action on behalf of himself and current and former loan officers employed by us, and seeks damages
consisting of alleged unpaid overtime, statutory liquidated damages and attorneys fees and costs. Plaintiff alleges that during his employment, he and other loan officers worked in excess of 40 hours per week and that we willfully failed to
pay overtime in violation of the Federal Fair Labor Standards Act. We filed an answer denying the claims and asserting various affirmative defenses. Initial discovery was recently completed and the matter is set for mediation in June 2005.



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



In September 2004, we received a Civil Investigative Demand and Notice to Proceed from the Office of the Attorney General of Iowa, that, although not
alleging any wrongdoing, sought documents and data relating to our business and lending practices in Iowa. We have cooperated and intend to continue to cooperate fully with the Office of the Attorney General of Iowa in this investigation. Because
the investigation is at an early stage, we cannot predict the outcome of the investigation and its effect, if any on our business in Iowa, which approximated 0.02% and 0.2% of total mortgage loan production during the three months ended March 31,
2004 and the six months ended December 31, 2004.



In the
ordinary course of business, we are defendants in or parties to a variety of legal actions. Certain of such actions involve claims relating to the Companys loan origination and collection efforts, alleged violations of employment laws, unfair
trade practices, and other federal and state laws. In our opinion, the resolution of any of these pending incidental matters is not expected to have a material adverse effect on our consolidated financial position and results of operations.



|Item 2. | Changes in Securities and Use of ProceedsNone
|------- | ----------------------------------------------



|Item 3. | Defaults upon Senior SecuritiesNone
|------- | ------------------------------------



|Item 4. | Submission of Matters to a Vote of Security HoldersNone
|------- | --------------------------------------------------------



|Item 5. | Other InformationNone
|------- | ----------------------



|Item 6. | Exhibits
|------- | --------



46



---

##### Table of Contents

EXHIBIT INDEX



|            |  |                                                                                                                                                                                                                                                                                                                                                                    
|----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                                                        
|            | 
|2.1         |  | Form of Agreement and Plan of Merger (incorporated by reference to Exhibit 2.1 to Amendment No. 3 to the registration statement on Form S-11 (333-113890) filed with the SEC on September 7,
2004 (Amendment No. 3 to S-11)).                                                                                                                                    
|            | 
|3.1         |  | Articles of Amendment and Restatement (incorporated by reference to Exhibit 3.1 to the Aames Investment Corporation Annual Report on Form 10-K for the fiscal year ended December 31, 2004 (the
2004 10-K)).                                                                                                                                                     
|            | 
|3.2         |  | Bylaws (incorporated by reference to Exhibit 3.2 to Amendment No. 2 to the registration statement on Form S-11 (333-113890) filed with the SEC on July 22, 2004 (Amendment No. 2 to
S-11)).                                                                                                                                                                      
|            | 
|4.1         |  | Common Stock Certificate (incorporated by reference to Exhibit 4.1 to Amendment No. 3 to S-11).                                                                                                                                                                                                                                                                    
|            | 
|10.1        |  | Amended and Restated Aames Investment Equity Incentive Plan (incorporated by reference to Exhibit 10.1 to the 2004 10-K).                                                                                                                                                                                                                                          
|            | 
|10.2        |  | Registration Rights and Governance Agreement dated November 1, 2004 among Specialty Finance Partners, Capital Z Management LLC and Aames Investment (incorporated by reference to Exhibit 10.2
to the 2004 10-K).                                                                                                                                                  
|            | 
|10.3        |  | Employment Agreement dated November 3, 2004 among Aames Investment Corporation, Aames Financial Corporation and A. Jay Meyerson (incorporated by reference to Exhibit 10.3 to the 2004
10-K).*                                                                                                                                                                     
|            | 
|10.4        |  | Form of Aames Investment Corporation Indemnification Agreement with directors and executive officers (incorporated by reference to Exhibit 10.4 to the 2004 10-K).*                                                                                                                                                                                                
|            | 
|10.5(a)     |  | Master Repurchase Agreement dated as of August 5, 2004 among Bear Stearns Mortgage Capital Corporation, Aames Capital Corporation, Aames Investment Corporation, and Aames Funding Corporation
(incorporated by reference to Exhibit 10.5 to Amendment No. 8 to the registration statement on Form S-11 (333-113890) filed with the SEC on October 27, 2004).      
|            | 
|10.5(b)     |  | Amendment No. 1 dated March 18, 2005 to Master Repurchase Agreement dated August 5, 2004 among Bear Stearns Mortgage Capital Corporation, Aames Capital Corporation, Aames Investment
Corporation, and Aames Funding Corporation (incorporated by reference to Exhibit 10.5(b) to the 2004 10-K).                                                                  
|            | 
|10.6        |  | Stock Purchase Agreement dated November 1, 2004 by and among Aames Investment Corporation, Friedman, Billings, Ramsey Group, Inc., Aames Financial Corporation, Aames TRS, Inc. and Aames
Newco, Inc. (incorporated by reference to Exhibit 10.6 to Amendment No. 10 to the registration statement on Form S-11 333-113890 filed with the SEC on October 29, 2004).
|            | 
|10.7        |  | Registration Rights Agreement dated November 1, 2004 by and between Aames Investment Corporation, Inc. and Friedman, Billings, Ramsey Group, Inc. (incorporated by reference to Exhibit 10.7 to
the 2004 10-K).                                                                                                                                                    
|            | 
|10.8(a)     |  | Master Loan and Security Agreement among Aames Capital Corporation, Aames Funding Corporation and Morgan Stanley Bank dated October 21, 2004 (incorporated by reference to Exhibit 10.8(a) to
the Aames Investment Corporation Quarterly Report on Form 10-Q for the quarter ended September 30, 2004 (the September 2004 10-Q)).                                
|            | 
|10.8(b)     |  | Amendment No. 1 dated as of October 28, 2004 to the Master Loan and Security Agreement among Aames Capital Corporation, Aames Funding Corporation and Morgan Stanley Bank dated October 21,
2004 (incorporated by reference to Exhibit 10.8(b) to the September 2004 10-Q).                                                                                        
|            | 
|10.8(c)     |  | Amendment No. 3 dated as of January 7, 2005 to the Master Loan and Security Agreement among Aames Capital Corporation, Aames Funding Corporation and Morgan Stanley Bank dated October 21, 2004
(incorporated by reference to Exhibit 10.8(c) to the 2004 10-K).                                                                                                   
|            | 
|10.8(d)     |  | Amendment No. 4 dated as of March 14, 2005 to the Master Loan and Security Agreement among Aames Capital Corporation, Aames Funding Corporation and Morgan Stanley Bank dated October 21, 2004
(incorporated by reference to Exhibit 10.8(d) to the 2004 10-K).                                                                                                    



47



---

##### Table of Contents

|            |  |                                                                                                                                                                                                                                                                                                                                     
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                         
|            | 
|10.9(a)     |  | Master Loan and Security Agreement dated as of July 22, 2003 between Aames Capital Corporation and Citigroup Global Markets Realty Corp. (incorporated by reference to Exhibit 10.36(a) to the
Aames Financial Corporation Form 10-K for the year ended June 30, 2003).                                                             
|            | 
|10.9(b)     |  | Amendment No. 3 dated as of December 16, 2003 to the Citigroup Loan and Security Agreement (incorporated by reference to Exhibit 10.36(d) to the Aames Financial Corporation Form 10-Q for the
quarter ended December 31, 2003).                                                                                                    
|            | 
|10.9(c)     |  | Amendment No. 4 dated as of April 30, 2004 to the Citigroup Loan and Security Agreement (incorporated by reference to Exhibit 10.20(f) to the Aames Financial Corporation Form 10-K for the
year ended June 30, 2004).                                                                                                              
|            | 
|10.9(d)     |  | Amendment No. 5 dated as of September 30, 2004 to the Citigroup Loan and Security Agreement (incorporated by reference to Exhibit 10.9(f) to the September 2004 10-Q).                                                                                                                                                              
|            | 
|10.9(e)     |  | Amendment No. 6 dated as of October 26, 2004 to the Citigroup Loan and Security Agreement (incorporated by reference to Exhibit 10.9(g) to the September 2004 10-Q).                                                                                                                                                                
|            | 
|10.9(f)     |  | Amendment No. 7 dated as of October 31, 2004 to the Citigroup Loan and Security Agreement (incorporated by reference to Exhibit 10.9(f) to the 2004 10-K).                                                                                                                                                                          
|            | 
|10.10       |  | Warehouse Loan and Security Agreement dated as of February 10, 2000 as Amended and Restated to and including February 4, 2005 among Aames Investment Corporation, Aames Capital Corporation,
Aames Funding Corporation and Greenwich Capital Financial Products, Inc. (incorporated by reference to Exhibit 10.10 to the 2004 10-K).
|            | 
|10.11       |  | Master Repurchase Agreement Governing Purchases and Sales of Mortgage Loans dated as of January 18, 2005 between Lehman Brothers Bank, FSB, Aames Capital Corporation and Aames Investment
Corporation (incorporated by reference to Exhibit 10.11 to the 2004 10-K).                                                               
|            | 
|10.12(a)    |  | Revolving Credit and Security Agreement dates as of July 1, 2003 among Aames Capital Corporation, Aames Funding Corporation and Countrywide Warehouse Lending (incorporated by reference to
Exhibit 10.35(a) to the Aames Financial Corporation Form 10-K for the year ended June 30, 2003).                                        
|            | 
|10.12(b)    |  | Amendment No. 3 to Revolving Credit and Security Agreement dated as of November 4, 2004 among Aames Capital Corporation, Aames Funding Corporation and Countrywide Warehouse Lending
(incorporated by reference to Exhibit 10.12(b) to the 2004 10-K).                                                                              
|            | 
|10.12(c)    |  | Commitment Letter dated December 1, 2003 for the Revolving Credit and Security Agreement among Aames Capital Corporation, Aames Funding Corporation and Countrywide Warehouse Lending
(incorporated by reference to Exhibit 10.35(d) to the Aames Financial Corporation Form 10-Q for the quarter ended December 31, 2003).         
|            | 
|10.12(d)    |  | Amendment No. 3 to the Countrywide Commitment Letter dated as of July 30, 2004 (incorporated by reference to Exhibit 10.18(f) to the Aames Financial Corporation Form 10-K for the year ended
June 30, 2004).                                                                                                                       
|            | 
|10.12(e)    |  | Amendment No. 4 to Revolving Credit and Security Agreement dated as of March 25, 2005 among Aames Capital Corporation, Aames Funding Corporation and Countrywide Warehouse
Lending.                                                                                                                                                 
|            | 
|10.13       |  | Office Lease dated as of September 15, 1998, between Colonnade Wilshire Corp. and Aames Financial Corporation for the premises located at 3731 Wilshire Boulevard, Los Angeles, California
(incorporated by reference to Exhibit 10.12 to the Aames Financial Corporation Form 10-K for the year ended June 30, 1999).              
|            | 
|10.14(a)    |  | Office Building Lease dated as of August 7, 1996 between Aames Financial Corporation and California Plaza IIA, LLC for the premises located at 350 S. Grand Avenue, Los Angeles, California
(incorporated by reference to Exhibit 10.13(a) to the Aames Financial Corporation Form 10-K for the year ended June 30, 1997).          



48



---

##### Table of Contents

|            |  |                                                                                                                                                                                                                                                                                                                            
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                
|            | 
|10.15       |  | Office Building Lease dated as of September 13, 2002 between Aames Financial Corporation and Jamboree LLC for the premises located at 3347 and 3351 Michelson Drive, Irvine, California
(incorporated by reference to Exhibit 10.18 to the Aames Financial Corporation Form 10-K for the fiscal year ended June 30, 2002.).
|            | 
|10.16       |  | Director Compensation Plan Summary (incorporated by reference to Exhibit 99.1 to the Aames Investment Corporation Current Report on Form 8-K/A dated March 23, 2005 filed with the SEC on March
31, 2005).*                                                                                                                
|            | 
|10.17       |  | 2005 Executive Management Incentive Compensation Plan Summary (incorporated by reference to the Exhibit 10.17 to the 2004 10-K).*                                                                                                                                                                                          
|            | 
|11.1        |  | Computation of Basic and Diluted Net Income per Common Share.                                                                                                                                                                                                                                                              
|            | 
|31.1        |  | Certification of A. Jay Meyerson pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                
|            | 
|31.2        |  | Certification of Ronald J. Nicolas, Jr. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                         
|            | 
|32.1        |  | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                   

---

|* | Indicates a management contract or compensatory arrangement.
|- | ------------------------------------------------------------



49



---

##### Table of Contents

SIGNATURES



Pursuant to the
requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



|                    |  |  |  |                              |  |                          |  |                                                                              
|------------------- |  |  |  | ---------------------------- |  | ------------------------ |  | -----------------------------------------------------------------------------
|                    |  |  |  | AAMES INVESTMENT CORPORATION
|                    |  |  | 
|Dated: May 13, 2005 |  |  |  | By:                          |  | /S/    JON D.
VAN DEUREN
|                    |  |  |  |                              |  |                          |  | Jon D. Van Deuren Executive Vice
PresidentFinance andChief Financial Officer



50